Chimera Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation fourth quarter and fiscal year end 2020 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Victor Falvo, Head of Capital Markets, to begin.

Thank you, Lori, and thank you, everyone, for participating in Chimera's fourth quarter earnings conference call. Before we begin, I'd like to review the Safe Harbor Statements. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risks factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimer in our earnings release in addition to our quarterly and annual filings. During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our CEO and Chief Investment Officer, Mohit Marya.

Thank you, Vic. Good morning and welcome to the fourth quarter 2020 earnings call for Chimera Investment Corporation. Joining me on the call today are Cholera Yarlagada, our President and Chief Operating Officer, Rob Colligan, our Chief Financial Officer, and Vic Falvo, our Head of Capital Markets. After my remarks, Rob will review the financial results, and then we will open the call for questions. Before we begin, in November, we announced the retirement of Matt Lambiase. Matt founded and led Chimera since 2007. Under his leadership, Chimera grew to a $3.8 billion mortgage rate and paid more than $5.2 billion in dividends to shareholders. Matt was a great leader, friend, and mentor for everyone in our company. We want to thank him, and we all wish Matt the best of success in his future. This quarter, Chimera continued its path of book value re-appreciation. Throughout the year, we worked diligently on the liability side of our balance sheet to enhance liquidity and strengthen our cash position. These actions enabled us to retain our high-yielding credit portfolio and benefit from the improvements in asset prices that started in the second half of 2020. MR's book value improved nearly 4% in the fourth quarter and over 16% since the middle of the year. This improved book value, combined with the company's dividend policy, has generated a 6% economic return for the fourth quarter and a 22% economic return since June 30th of 2020. The housing market is robust across America. The Federal Reserve has been very supportive of agency mortgage-backed securities with open market purchases for its own portfolio. The Fed's purchases have helped lenders offer low mortgage rates to homeowners for new home purchases, as well as lowering the cost of homeownership for those that desire to refinance. The National Association of Realtors recently reported that in December, contract closing for existing homes increased to an annualized pace of 6.76 million units. This is the strongest pace we have seen since late 2006. Housing inventories are low, demand is strong, and mortgage rates are at all time historic lows. These are all indicators for continued performance in the housing and residential mortgage credit. Chimera has a unique and differentiated residential credit portfolio amongst mortgage REITs. At year end, our GAAP investment portfolio included 12.6 billion mortgage loans and 2.5 billion of non-agency RMBS. Over 90% of the loans and non-agency securities on our balance sheet were originated prior to 2010. With strong underlying housing fundamentals and the prospects of a post-pandemic economic recovery, we believe our seasoned mortgage portfolio of loans and non-agency RMBS is uniquely positioned to perform well. The securitization market has demonstrated depth and resiliency in the past year and is a key component of our company's liability management. Spreads on securitized mortgage loans widened as the pandemic began in the spring of 2020. Subsequently, these spreads have grown tighter and closed the year at historically low levels. Securitization enables us to finance our mortgage loans for longer term by transferring them from our loan warehouse into mortgage trusts as we sell senior notes in each deal. This process helps the company to accomplish the desired asset liability mix while providing long-term non-recourse financing. For the full year, we sponsored seven re-performing loan securitizations, two prime jumbo securitizations, one agency-eligible investor loan securitization, and one non-performing loan securitization. In total, Chimera sponsored $4.2 billion in 11 separate securitized deals for the calendar year 2020 and we retained $655 million in subordinate notes. Securitization is Chimera's primary source of financing for our loan portfolio, and as of year end, securitized debt represented more than 60% of Chimera's liabilities. We firmly believe that retention of subordinate notes from Chimera-sponsored deals provide the best levered returns available in the market. Secondarily, we utilize repo and other forms of secured financing for warehouse loans and subordinate notes as we seek to enhance our portfolio returns. Since the onset of the pandemic, we have taken aggressive actions to reduce Chimera's financing risk by lengthening and strengthening our secured credit facilities. At year-end, we have 3.2 billion credit-related secured financings, which is 37% less than we were financing at year-end 2019. The average maturity of our credit-related financing is 15 months and $2 billion, or roughly two-thirds are either non-mark-to-market or limited mark-to-market. In April, we issued convertible debt. Concurrent with our offering, the company entered into a capped call transaction. During the fourth quarter of 2020, we exercised a capped call option, and the company elected to receive a settlement of approximately 4.7 million shares for our common stock. which were then retired. The retirement of these shares reduces the company's share count, benefiting the book value and future returns of our company. Last night, our board of directors increased the size of our outstanding common stock repurchase authorization to $250 million. This provides a valuable tool for our team as we evaluate the merits of new leverage investment opportunities relative to the potential benefit of common stock repurchase.