Chimera Investment Corporation

Greetings and welcome to the Chimera Investment Corporation fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Victor Falvo, head of capital markets. Thank you. Please go ahead.

Thank you operator and thank you everyone for participating in Chimera's fourth quarter and full year 2022 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 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, Phil Curtis.

Good morning and welcome to the Chimera Investment Corporation's fourth quarter and full year 2022 earnings call. Joining me on the call are Chaudhry Nralagada, our President and Chief Investment Officer, Dan Thacker, our Co-Chief Investment Officer, Subra Viswanathan, our Chief Financial 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 for questions. Let me begin by briefly introducing myself. As many of you may know from our internalization in 2015, until I became CEO in December, 2022, I served as the company's chief legal officer and corporate secretary. Prior to that, I was a partner in a major law firm and among other things was the company's outside counsel from its IPO until I joined as chief legal officer. What you may not know is that I have a broad range of experience before I became a partner in a law firm, from serving on Capitol Hill and the executive branch, to a defense analyst at a think tank, to a Fortune 50 company, to being a doctoral student in economics. My career as a lawyer was primarily structuring very complex financial transactions. That structuring experience carried over into my work at the company where I've been heavily involved in all aspects of the company's business, including serving on the investment and valuation committees, as well as being involved in structuring its transactions. I'm not a regulatory attorney. I'm not a litigation attorney. My appointment as CEO is not the result of any regulatory or litigation issue at the company, but rather driven by my transactional and strategic experience. Also, let me note that while I have the transactional and strategic experience, I am not the chief investment officer. We view the return to our past, where the roles of CEO and CIO were separate, as critical to our success. Separating these roles will enable us to better focus on our long-term vision while staying keenly focused on investment opportunities and our portfolio. Now, before turning to our vision, let me hit the highlights of the fourth quarter and of the year. As you know, 2022 was challenging for us, especially during the last four months. Headline inflation peaked around 9.1% and the Fed raised its benchmark rate from near zero to a range of 4.25 to 4.5% by year end. As a student of economic history, and being old enough to have lived through the late 1970s and 1980s, the Fed falling behind inflation and rushing to catch up had a familiar ring. I remember when my wife and I purchased our first home in the late 1980s. We were happy with a rate around 9.5% because we had taken out an even more expensive second just to qualify for the first. But we understood the value of that home as an asset. Not only was the story familiar, but the impact on the company was expected. We saw our weighted average recourse borrowing costs increased to about 6.6% by year end, compared to about 2.3% for the prior year. We saw our earnings available for distribution decline to $1.08 for the year and to 11 cents for the fourth quarter, due primarily to a one-time hit for severance for our former CEO, and a 250 million fixed-rate non-mark-to-market financing we entered into to enhance our liquidity while protecting us from the impact of increasing interest rates on those assets. Including those two events, our EAD for the quarter would have been approximately 20 cents. During the latter half of the year, we entered several long-term non-mark-to-market facilities. We looked into the future. and we believe the statements by the Fed that they were going higher for longer and decided to take the prudent action of extending some of our financing into 2024 and beyond to a point where we felt more comfortable that the Fed would be done raising and would begin cutting. Such financing is, of course, more expensive than short-term financing, but it reduces our need for hedges to protect against margin calls which frees up cash for other purposes. Also, we know that we are building up significant equity in our securitizations, as my wife and I were with our first home, and protecting our retained subordinate bonds with such financing is in the long-term best interest of our shareholders, even at the expense of higher rates. But there were many positives during the fourth quarter. In addition to lengthening the term of our financings, We acquired approximately 463 million of prime jumbo loans into a long-term financing facility, which is effectively fixed rate and non-mark-to-market. We believe the returns on this investment are accretive to our shareholders. We were able to reduce our mortgage loan mark-to-market exposure by approximately 100 million by sponsoring the SIEM 2022 NR1 securitization. Also, Our book value per common share increased to $7.49 at the end of the fourth quarter. The good news continued during January as we were able to access the securitization market and terminated four of our securitizations and issued two new securitizations, reducing recourse borrowing by approximately $139 million and releasing approximately $90 million in equity. We also committed to purchase approximately $700 million of re-performing loans, which we intend to settle into securitizations and believe the returns on these investments are accretive to our shareholders. We were also able to purchase additional business purpose loans and ended January with $365 million in cash. Finally, so far in February, we have committed to purchase approximately $200 million of non-QM loans which again, we believe will be accretive to our shareholders. So where do we go from here? Our mission is simple, to deliver attractive risk adjusted returns to our shareholders by being the best in class credit mortgage REIT. We believe our assets are very strong. We still have approximately 900 million of legacy non-agency RMBS on our balance sheet that continues to generate double digit yields for our portfolio. As of year end, we had approximately 11.4 billion fair value of mortgage loans, including RPLs, held for investment. These loans serve as the cornerstone of our business. The largest component of our loan portfolio is re-performing loans. These loans are very seasoned and, since purchase, have demonstrated consistent to improving metrics regarding both credit performance and prepayment histories. We have successfully securitized and resecuritized these loans throughout the years. Over time, these securitizations deliver and have historically provided opportunities for Chimera to release equity. Chimera uses this equity for either redeployment into new assets, retirement of debt, or distributions to shareholders through dividends. We view this ability to extract equity from our investments as a key differentiator for Chimera amongst its peers and can be a significant source of capital for deployment. We continue to see interesting and accretive opportunities in RPLs, non-QM, BPLs, and jumbo prime mortgages. While our focus during the past few years has been on RPLs, we expect to continue to diversify our loan purchases. In addition, we historically have had robust portfolios of agency RMBS and agency CMBS. We intend to rebuild these portfolios over time, both for their returns and for the liquidity to support our credit portfolio. Since REITs can't retain earnings, we often find ourselves able to raise equity during periods where the returns on credit assets are not attractive. Likewise, When the opportunities in credit are attractive, as they are now, it can be challenging to raise capital. We see these agency portfolios as a way for us to balance out these periods. We can grow our agency portfolios and use the increased liquidity to purchase credit assets when attractive or to support our financing of our credit assets during more challenged markets. While these portfolios will support our core business, we will manage these portfolios appropriate leverage and hedging to generate current income and to maintain book value to support both our dividend and our investment in credit assets. This is not a new strategy for us. We successfully used it from internalization until the pandemic. During that period, our combined agency RMBS and CMBS portfolio ranged from a low of about $4 billion to a high of slightly more than $12 billion depending on the opportunities to invest in credit assets. Now, we do think 2023 presents challenges. We saw a lot of positives in January and believe there are still positive trends. Nevertheless, we also see some dark clouds. Getting inflation down to 2%, if possible, is going to take some time. According to a recent Wall Street Journal article, the service industry's healthcare, hospitality, and so forth, account for 36% of all private sector payrolls. By the same token, the tech-heavy information sector accounts for only 2%. These service industries have accounted for approximately 63% of all private sector job gains over the past six months, and the labor demand in these industries remains strong. Accordingly, we believe the Fed, when it says, rates will go higher for longer. And we believe we have positioned ourselves to handle that outcome. We're also mindful of the second cloud, liquidity volatility arising from debt ceiling shenanigans. We're keeping our eye on our financing and role dates with respect to this cloud. Finally, there is the known unknown of geopolitical turmoil, Russia, China, Iran, and North Korea in particular. The impact of such turmoil is unknown, but between our long-term financing, hedging, and cash positions, we believe we are positioned to handle a variety of stress scenarios. Despite these clouds, I am optimistic about our future. We have a great team, outstanding assets, and a clear vision. I would now like to turn to Subra to give a more detailed overview of our financial results.