Chimera Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation third quarter 2021 earnings conference call-in 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 and the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press the pound key. We ask that while posing your question, you pick up your headset to allow for optimal sound quality. It is now my pleasure to turn the floor over to Victor Falvo, head of capital markets. Please go ahead.

Thank you, operator. And thank you, everyone, for participating in Chimera's third quarter 2021 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 on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factors section of 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 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.

Thanks, Vic. Good morning, and welcome to the third quarter 2021 earnings call for Chimera Investment Corporation. Joining me on the call today are Chodri Yarlagada, our President and Chief Operating Officer, Subra Viswanathan, our Chief Financial Officer, Kelly Cortman, our Chief Accounting Officer, and Vic Falvo, our Head of Capital Markets. After my remarks, Subra will review the financial results, and then we will open the call up for questions. This quarter and throughout the year, we have continued to bolster our liability structure through securitization activity and improvements made to our repo facilities, both in rate and tender. And for the year, we have re-securitized 13 of our legacy re-performing deals totaling roughly $6 billion. Securitization has enabled Chimera to lock in long-term non-mark-to-market financing while insulating our high-yield risk retention assets from voluntary prepayments. Actions taken this year have made a significant impact on the earnings and have reduced the cost of financing for our loan portfolio on non-agency RMBS by 140 basis points since year end. We expect the many actions taken on our liability structure to have a positive impact on our earnings available for distributions for many quarters into the future. Interest rates rallied to start the third quarter, while the yield on 10-year Treasuries initially falling by 25 basis points. The rally failed to hold up, and the market rhetoric picked up about concerning higher inflationary expectations. The Federal Reserve provided clarity to the markets about their potential unwind of quantitative easing, and despite intra-quarter volatility, the 10-year ended the quarter at 1.49% yield. virtually where it began in July. The housing market continued to trend towards higher home prices with the case index showing year-over-year national home price appreciation of nearly 20%, the largest gain in more than 30 years. We expect positive HPA to continue in the near term as mortgage rates remain low, housing inventory remains tight, and the economy continues to emerge from the global pandemic. Investor demand for spread product remains strong this quarter, with spreads on U.S. high-grade and high-yield indices hovering near all-time tights. These market conditions have yielded positive benefits for a Chimera securitization business, while resulting in considerable price appreciation of our residential loan portfolio and overall improvement of the company's book value. This quarter, we continued execution of our call optimization strategy. In July, we called our smelty 2017-RP2 securitization, which carried a 4% cost of debt. Subsequently, we sponsored $450 million CIM 2021-R5 with re-performing loans, of which approximately $180 million was from the previously called deal and the remainder provided from our loan warehouse. We sold 383 million senior securities representing 85% of the capital structure with a 1.99 average cost of debt, approximately 200 basis points below the cost of the previous Schmulte financing. We retained for investments 67 million subordinate notes and interest-only securities from the deal. This securitization becomes callable by Chimera anytime beginning August 2024. We also sponsored 435 million CIM 2021-INV1, our first agency-eligible investor loan securitization of 2021. We created and sold 408 million in securities, representing a 94% advance rate. This deal is not consolidated on our balance sheet. However, Chimera invested 27 million in subordinate and interest-only securities. The investor loan deal was rated by Moody's and Kroll, and Chimera retained a 10% cleanup call. While we have made many long-term improvements to our liability structure, this quarter we made a significant amount of new asset purchases for our investment portfolio. This quarter, we purchased and settled 583 million re-performing loans with a 3.63 rated average coupon. The loans have an average balance of 241,000 and are 15-year seasons. In early October, we securitized 354 million CIM 2021-R6 with re-performing loans from our loan warehouse. We sold $336 million in notes, representing a 95% advance rate, the highest advance rate we have received on re-performing loans to date. The average cost of debt for the R6 deal is 1.53%. Camaro retained an $18 million investment in subordinate notes and interest-only securities. The R6 deal was rated by Fitch and DBRS and will be callable beginning September 2026. We continue to expand our business purpose loan segment of our portfolio. This quarter, we purchased $115 million in business purpose loans with an 8.4% gross coupon and a 6.7 coupon net of servicing and asset management. These loans have compelling fundamental investment characteristics and are very short-duration assets. We currently finance business-purpose loans in our loan warehouse, which produces an attractive net interest spread for the portfolio with a very low duration risk. This quarter's BPL purchase bring our year-to-date total to more than $318 million and continue to seek additional opportunity to purchase additional business-purpose loans and expand upon this business. This quarter, we also committed to purchase 148 million on re-performing loans for our portfolio. These loans have a 4.2 weighted average coupon and are 178 month seasons. The average loan balance is expected to be around 175,000. These loans did not settle prior to quarter end. However, we expect to settle these loans in the fourth quarter for future securitizations. In total, this quarter, we committed to purchasing nearly $850 million in loans, which highlights KMR's continued ability to acquire desired mortgage assets through many economic and interest rate cycles. We have accumulated and maintained a large portfolio of seasonally performing loans over the last seven years. These assets continue to produce high yields for the portfolio while demonstrating a consistency in prepayments over many economic and interest rate cycles. As we have stated in the past, the delinquencies and default rates on our loan portfolio have outperformed our original expectations, and over the last 12 months, despite the pandemic, delinquencies have continued to improve. The homeowner and our loans have demonstrated resiliency over time, with many benefiting from the recent strength of the housing market. Mortgage securitization has been a primary component of our business model for more than a decade. We have utilized loan securitization to help manage both our liquidity risk and mark-to-market risk as our primary source of financing. Over the last six years, most of our securitizations were structured with explicit call options, which has enabled us to take advantage of favorable market conditions available so far in 2021. With the current strength of our balance sheet, we believe we can continue to seek new opportunities and grow our portfolio as the country begins to normalize and eventually exit from the COVID pandemic. We strive to be best-in-class asset and liability managers in the mortgage REIT industry. Our primary objective is to provide our shareholders with a stable and sustainable dividend while managing our assets and liability risk to the best of our abilities to minimize book value volatility into the future. I will now turn the call over to Subra to review the financial results for this quarter.