Chimera Investment Corporation

Hey, ladies and gentlemen, and welcome to the Chimera Investment second quarter 2023 earnings call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Victor Falvo, head of capital markets. Sir, the floor is yours.

Thank you, operator. And thank you, everyone, for participating in Chimera's second quarter 2023 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 investor presentation 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 Chief Executive Officer, Phil Curtis.

Thank you, Vic. Good morning, and welcome to the Chimera Investment Corporation's second quarter 2023 earnings call. Joining me on the call are Chaudhry Yarlagada, our President and Co-Chief Investment Officer, Dan Thacker, our Co-Chief Investment Officer, Subra Viswanathan, our Chief Financial Officer, and Vic Valvo, our Head of Capital Markets. After my remarks, Subra will review the financial results and then we'll open the call for questions. We continue to be active during the second quarter through securitizations, stock repurchase, and liability management. We completed five securitizations during the second quarter, totaling nearly $1.4 billion. Let me describe our quarterly securitization activity at a high level. In April, we sponsored SIEM 2023 I-1. a rated securitization of non-QM investor loans totaling approximately $236 million. Approximately 87% of the capital structure was sold in a private placement to institutional investors. We retained a subordinate interest in securities with an aggregate principal balance of approximately $31 million and certain interest-only securities. Our average cost of debt of this securitization is 6.6%. We retain an option to call the securitized mortgage loans at any time beginning in April of 2026. In May, we sponsored SIM 2023 R4, a rated securitization of seasoned, re-performing residential mortgage loans, totaling 394 million. We sold approximately 75% of the capital structure in a private placement to institutional investors. Chimera retained subordinate interest in securities with an aggregate principal balance of approximately $97 million in certain interest-only securities. Our average cost of debt of this securitization is 5.4%, and we retained an option to call the securitized mortgage loans at any time beginning in April of 2028. In June, we sponsored SIM 2023 I2, Our second rated securitization of non-QM investor loans this year, totaling approximately $239 million. Approximately 85% of the capital structure was sold in a private placement to institutional investors. We retained interest in securities with an aggregate principal balance of approximately $36 million in certain interest-only securities. Our average cost of debt of this securitization is 7%. We retain an option to call the securitized mortgage loan to any time beginning in July 2026. We expect double-digit returns on the retained securities for these three securitizations. Regarding re-securitization, we terminated two existing trusts, CIM 2017-7 and CMLTI 2019-E. In addition to the loans from these two deals, Chimera added approximately 104 million loans from our warehouse facility. We then issued SIM Trust 2023 R3 and SIM Trust 2023 NR2. These re-securitizations allowed us to, one, avoid a step-up rate increase on the senior debt of one of these term-related trusts. Two, convert short-term repo funding into long-term non-recourse fixed-rate financing. And three, to recapture approximately $43 million in cash from the terminated trusts. Primarily as a result of our securitization activity this quarter, we reduced our recourse financing, primarily loan warehouse facilities, by more than $500 million. And in total, through the first half of the year, we reduced our recourse financing by approximately $750 million. As short-term rates continued to increase this quarter, we prepared for a higher, for a longer rate environment. We added an additional $500 million one-by-one swaption, bringing our total swaption position to $1.5 billion, with an average pay fixed interest rate of 3.56%. These swaptions give us optionality to hedge Our NIM, if rates remain elevated through 2024 and into mid 2025. In addition, our board reauthorized our stock buyback plan and increased it to 250 million in the middle of June. Thereafter, we were able to repurchase more than 5.8 million shares for approximately 33 million at an average price of $5.66. The share repurchase was accretive to our shareholders. Our book value per share decreased by 12 cents or 1.6% quarter over quarter. The net change in book value plus dividends paid on our common shares resulted in an 80 basis point total economic return for the quarter and a 2.8% total economic return for the first half of 2023. Looking ahead, while we believe it is likely the Fed will raise rates one more time this year, we believe the rate cycle is nearing an end. Inflation is coming down slowly, while the economy and job market remain strong. The Fed's own staff no longer predicts a recession in 2023, and the Fed may well engineer a soft landing. We are also buoyed by residential credit, which performed strongly during the quarter, as well as by the strength of the housing market in spite of affordability issues. What does that mean for us? As we've discussed in the past, Our portfolio continues to perform well. Our EAD challenges are primarily related to our costs of financing, not the credit quality of our portfolio. Once rates moderate and begin their decline, our portfolio is positioned to benefit. We expect that this rate moderation and stability will allow us to refinance some of our more expensive financings, which will be positive to our earnings. On the other hand, to the extent that rates stay elevated for longer, we have $1.5 billion in swaptions, which we can exercise to support our interest margins into 2025. We continue to see interesting investment opportunities, and we think with the proposed bank capital regulations that additional investment opportunities will arise over the second half of 2023. We will continue to evaluate those opportunities along with our stock price relative to our book value with respect to continued stock repurchases. We have a number of tools in our toolkit from reducing our financing costs to repurchasing our stock to making accretive investments to drive shareholder value. We remain optimistic about our future. I would now like to turn to Subra to give a more detailed overview of our financial results.