Chimera Investment Corporation

Good day, ladies and gentlemen, and welcome to the Chimera Investment Corporation second quarter earnings call. Our host for today's call is Victor Falvo. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would like to now turn the call over to your host. Mr. Falvo, you may begin.

Thank you, Operator. And thank you, everyone, for participating in Chimera's second quarter 2024 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 disclaimers in our earnings release and 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, the most comparable GAAP measures. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of date of this earning 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 President and Chief Executive Officer, Phil Curtis.

Good morning, and welcome to Chimera Investment Corporation's second quarter 2024 earnings call. Joining me on the call are Subra Viswanathan, our Chief Financial Officer, Dan Thacker, our Chief Investment Officer, and Vic Falvo, our Head of Capital Markets and Investor Relations. After my remarks, Subra will review the financial results and then we'll open the call for questions. Throughout the quarter we experienced some headwinds, but by the end of July we have accomplished what I would call a period of firsts. This quarter we successfully completed our first unsecured debt offering and received an inaugural investment grade rating on the debt. We made our first large agency investment since before the pandemic. We have a long history of agency investments, and this provides us with meaningful income and liquidity. We committed to purchase a pool of RPLs, and at the end of July, sponsored our first RPL securitization since May 2023. And most importantly for our shareholders, we raised the dividend for the first time since March 2021. Last quarter, we noted that four main themes had emerged as we began the second quarter. Inflation was still higher than the Federal Reserve's desired rate. Economic data continued to indicate a strong economy. Long-term interest rates may not have peaked, and interest rates would experience increased volatility. Looking back over the quarter, market volatility was substantial, with 10-year Treasury yields starting the quarter at 4.2%, rising to 4.7% by late April and dropping back to 4.4% by the end of June. The second quarter GDP significantly beat expectations, indicating that the economy remained strong. But there were signs that the economy was beginning to weaken. The labor market continued to cool, and inflation is now trending in the right direction, with the Fed's preferred inflation measure rising 2.5% in June. leading us to believe that while we expect interest rates to remain volatile over the near term, long-term rates appear to have peaked, and the economy may be heading towards more normalized inflation and perhaps a weaker economic environment. Last week, the Fed held interest rates constant as expected, and at its press conference, Chairperson Powell suggested that a September cut could be on the table if inflation continues to slow down. However, he also emphasized that the Fed would make decisions meeting by meeting based on the totality of the data and balance of risks. After his comments, the nonfarm payroll number released last week came in much weaker than expected as unemployment rate ticked up to 4.3% and almost three-year high. While it's only a single month of data, the yield on the 10-year Treasury has dropped to around 3.9%. and it is looking increasingly likely that the Fed is going to cut interest rates in September. The housing market remains resilient. National home prices have continued to rise, though at a more moderate pace. The home equity buildup, which has occurred across America in the last several years, has been beneficial for our loan portfolio. We consolidate on our balance sheet over 109,000 loans with an average balance of $108,000. The weighted average loan of our portfolio is over 15 years, and we estimate that the overall current LTV of our loan portfolio through amortization and HPA to be approximately 46%. Despite higher interest rates over the quarter and intra-quarter yield volatility, our book value was relatively flat for the period, and this quarter we raised our dividend from 33 to 35 cents, a 6% increase. In May, we issued 65 million of 9% unsecured senior notes. These notes will mature in five years and are callable in whole or in part at the company's option on or after May 15th, 2026. After the offering, the company received a BBB investment grade rating from Egan Jones, a nationally recognized statistical rating organization. Our ability to issue unsecured debt helps us to further diversify our capital structure and provide long-term financing for a mortgage credit portfolio. The proceeds from the debt raise were immediately deployed into the purchase of approximately 377 million of agency CMO floaters. This investment is meant to generate income and provide liquidity until we eventually deploy the proceeds in loans or non-agency subordinate securities. We kept our recourse leverage low on the agency floaters, and we expected to generate low double-digit returns. In agencies, we also purchased 65 million of a guaranteed senior SLST securities, and we expect to generate low to mid-teen returns on this investment. Throughout the quarter, we made new credit investments as well. We purchased 16 million non-agency subordinate bonds, with an average coupon of 10.7% at a discount to their par value, and we expect to generate low double-digit returns on an unlevered basis. Combined with the purchases made in the first quarter, we purchased a total of 67 million of high-yield subordinate bonds on an unlevered basis. And lastly, this quarter, we committed to purchase re-performing loans that settled simultaneously in July into SIM 2024 R1. a rated securitization. Securities issued by the securitization had an aggregate principal balance of approximately $352 million were sold in a private placement to institutional investors. These senior securities represented approximately 75% of the capital structure. We retained subordinate notes and certain interest-only securities with an aggregate principal balance of approximately $116 million. The deal was structured with a 30% cleanup call. Our average cost of the debt for this securitization is 5.7%. Loans for the securitization had a weighted average coupon of 5.6% and a weighted average loan size of $228,000. And we're 86 months seasoned on average. Following on SIM 2024 R1, we expect to continue to acquire and securitize mortgage loans as well as further implement the company's call optimization strategy on our securitizations. The timing of these resecuritizations is impacted by many factors, including credit performance, prepayment speeds, interest rates, and market volatility. As we navigate the current market conditions, we're focused on maintaining low recourse leverage and managing our liquidity with a proper balance of both cash and unencumbered securities. Our credit portfolio continued to perform well in the quarter. with the credit performance of our portfolio continuing to be within or better than our original investment expectations on mortgage delinquencies, default rates, and recoveries. In summary, we've been able to access the capital markets and acquire accretive assets. We've started buying and securitizing loans and will continue to look for opportunities to acquire and securitize additional loans. We were able to restart agency RMBS for income generation as well as for providing liquidity. And finally, we were able to raise our dividends. We are pleased with our performance for the first half of the year, and we remain optimistic about our future. I would now like to turn to Subra to give a more detailed overview of our financial results.