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Edited Transcript of CIM earnings conference call or presentation 1-May-19 1:00pm GMT

Q1 2019 Chimera Investment Corp Earnings Call

NEW YORK May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Chimera Investment Corp earnings conference call or presentation Wednesday, May 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emily Mohr

Chimera Investment Corporation - IR Officer

* Matthew J. Lambiase

Chimera Investment Corporation - President, CEO & Director

* Mohit Marria

Chimera Investment Corporation - CIO

* Robert Colligan

Chimera Investment Corporation - CFO

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Conference Call Participants

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* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Eric J. Hagen

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* James Young

West Family Investments, Inc. - VP & Investment Analyst

* Joshua Hill Bolton

Crédit Suisse AG, Research Division - Research Analyst

* Matthew Philip Howlett

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Trevor John Cranston

JMP Securities LLC, Research Division - Director and Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) It is now my pleasure to turn the floor over to Emily Mohr of Investor Relations. Please go ahead.

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Emily Mohr, Chimera Investment Corporation - IR Officer [2]

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Thank you, Lori, and thank you, everyone, for participating in Chimera's first 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 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 following 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 President and Chief Executive Officer, Matthew Lambiase.

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Matthew J. Lambiase, Chimera Investment Corporation - President, CEO & Director [3]

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Good morning, and welcome to the First Quarter 2019 Chimera Investment Corporation's Earnings Call. Joining me on the call this morning are Mohit Marria, our Chief Investment Officer; Rob Colligan, our Chief Financial Officer; Choudhary Yarlagadda, our Chief Operating Officer; and Victor Falvo, Chimera's Head of Capital Markets. I'll make some brief comments, then Mohit and Rob will review the portfolio and financial results for the quarter. We will open up the call for questions afterward.

Chimera posted a solid 4.8% total economic return for the first quarter comprised of a $0.50 dividend and a $0.25 increase in book value in the period. In January, we took the opportunity to add capital by issuing $200 million of preferred stock. This issue Series D has an 8% fixed coupon for the first 5 years and then converts into floating coupon adjusting quarterly at 3-month LIBOR plus 533 basis points. The Series D preferred is callable at the company's discretion any time after the 5-year fixed rate period.

Over the past 2.5 years, Chimera has issued $930 million of preferred stock, which has helped us grow our investment portfolio and lower the company's overall cost of capital. The first quarter of 2019 was another volatile period for the fixed income markets, largely due to the actions of the Federal Reserve. In late March, the Fed stated that it was done raising rates for the rest of 2019. This statement came as a surprise to most market participants who are still trying to understand the logic of the rate increase in December. Chairman Powell noted in his comments it's a great time to be patient, and this sent an all-clear signal to the market to buy bonds.

Other post-meeting comments from the Fed officials sent the bond market higher in price and the yield on the 10-year treasury fell to 2.37% after being at 2.76% at the beginning of March. The positive sentiment for U.S. treasury bonds was further compounded when German manufacturing data showed that their economy, the bellwether of Europe, was starting to slow, which pushed German 10-year bond yields into negative territory. Negative yields in both Germany and Japan started to raise the specter of a global economic slowdown and the fear that the Federal Reserve may have overtightened interest rates and may need to cut in the future.

Several economists and analysts have all begun to call for U.S. recession later in 2019 or early 2020. It's a curious time when unemployment is at record lows and an economic growth seems to be modest but solidly positive.

There appears to be a disconnect between equity investors who are driving the stock market to record levels and bond investors who are accepting low interest rate and a flat yield curve.

The current interest rate environment is less than ideal for our strategy. The U.S. treasury yield curve is relatively flat, and the LIBOR curve is slightly inverted with the 3-month LIBOR rate at 2.58% and 10-year interest rate swaps at 2.53%.

The shape of the yield curve is negatively impacting many financial companies by keeping short-term borrowing costs high and portfolio reinvestment rates low. The longer the yield curve maintains the shape, the harder it will become to maintain net interest spreads. While we're not immune from the effects of a flat yield curve, we do believe that it's most likely a short-term anomaly. Historically, the yield curve is normally positively sloped and, in the past, has only inverted for a relatively short period of time during economic transition.

As I stated on previous earnings calls, the end of the Fed tightening cycle can be tumultuous as the market transitions to new economic expectations. This year, many bond investors have been trying to get ahead of this transition and are currently betting that the economic data will start to show a slowdown and the Federal Reserve will start cutting rates later in 2019 or early 2020. While we would be happy with that outcome as it would lead to lower borrowing costs and much better operating environment, we continue to manage our portfolio over a long horizon, and we remain prudent with hedge positions, should interest rates unexpectedly rise.

Our core portfolio of residential mortgage credit continues to perform well. The U.S. housing market fundamentals have moderated somewhat but remained positive for our legacy portfolio. The March S&P Case-Shiller National Home Price Index showed a positive 4.23% increase year-over-year, which was down from 6.18% a year earlier. We believe that a 4.23% increase is healthy and other data, such as housing starts, existing home sales and new home sales look healthy to us as well.

The stronger U.S. employment statistics reinforce our belief that the housing market is on solid ground and that the current dip in interest rates will only increase demand and affordability.

We've been successful finding new investment opportunities and continue to believe that residential mortgage credit offers some of the best risk/reward profiles available in the entire fixed income market.

Last night, Our Board of Directors announced a $0.50 per share common dividend for the quarter and reinforced their earlier statement for their intention to pay $2 for common share for 2019.

And with that, I'll turn the call over to Mohit to discuss the portfolio activity in the quarter.

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Mohit Marria, Chimera Investment Corporation - CIO [4]

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Thank you, Matt. In the first quarter of 2019, we saw a reversal of what occurred in Q4: equity markets rebounded as did credit spreads. In addition, the Federal Reserve in March retreated from their tightening bias over the past 2 years as concerns over global growth and lack of inflation took center stage.

With the Fed on pause, U.S. treasury rates continued their decline in Q1 and now have decreased over 80 basis points on 10-year treasuries over the past 5 months. Short end rates, however, decreased less, leading to an inversion of the yield curve between 3-month and 10-year treasuries.

Quarter-over-quarter, our Agency portfolio was largely unchanged, decreasing by about $300 million to $8.7 billion. Although the portfolio is similar in size to the previous quarter, the faster prepayment expectations caused by the decrease in treasury rates has substantially reduced the duration of these holdings. As a result of the changes in prepayment expectations, we have made a substantial reduction in our interest rate swap hedge position to better match the shorter duration of our Agency pass-through portfolio.

As we mentioned last quarter, Agency CMBS has widened substantially, and we were seeking to add to our position. But the government shutdown for the first 6 weeks of the year had limited our ability to increase the portfolio meaningfully. We added roughly $187 million in Agency CMBS construction loans through our portfolio in the quarter bringing our total to $3.1 billion.

Bears mentioning that unlike residential Agency pass-throughs, our Agency CMBS call protection which is extremely beneficial from a hedging perspective as rates have moved substantially over the past 5 months. In our residential credit portfolio, we were able to take advantage of wider spreads early in the quarter by adding some nonagency securities.

In addition, we also acquired about $112 million of residential transition loans in the portfolio. These loans have a weighted average coupon of 7.23% and a weighted average LTV of 70%. Due to the short nature of these loans, we do not currently intend to securitize them.

Lastly, this quarter, we priced our second securitization backed by investor loans. We Priced $382 million of CIM 2019-INV1. These loans on this deal have a weighted average coupon of 5.35%, have a 69% weighted average LTV and the weighted average loan size of approximately $294,000. Chimera retained a $41 million investment in this deal.

To summarize our activity, it was a relatively light quarter for changes to the portfolio. Given the current market volatility, shape of the yield curve and the recent shift in Federal Reserve policy, we believe it is prudent to exercise patience with the investment and portfolio growth. We continue to have ample liquidity in our Agency portfolio and continue to seek out loan opportunities and credit investments.

I will now turn the call over to Rob to review the financial results.

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Robert Colligan, Chimera Investment Corporation - CFO [5]

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Thanks, Mohit. I'll review the financial highlights for the first quarter of 2019. GAAP book value at the end of the first quarter was $16.15 per share, and our economic return on GAAP book value was 4.8%, based on the quarterly change in book value and the first quarter dividend per common share.

GAAP net income for the first quarter was $101 million. On a core basis, net income for the first quarter was $106 million or $0.57 per share, down slightly from last quarter. Economic net interest income for the first quarter was $151 million compared to $154 million last quarter. For the first quarter, the yield on average interest-earning assets was 5.5%. Our average cost of funds was 3.4%, and our net interest spread was 2.1%.

Total leverage for the first quarter was 6:1 while recourse leverage ended the quarter at 3.9:1. For the quarter, our economic net interest return on equity was 16%, and our GAAP return on average equity was 12%.

Expenses for the first quarter, excluding servicing fees and deal expenses, were $20 million, up from the fourth quarter, primarily related to compensation expenses. We accelerated the cost of equity-based compensation in the first quarter as some employees have become retirement eligible. In future years, grants awarded to these employees in the first quarter will be immediately expensed and compensation expense may be lower in the second, third, and fourth quarter. For 2019, compensation may be $12 million to $13 million per quarter for the remainder of this year, although our compensation is now based on Chimera's financial performance relative to our peers and will be adjusted each quarter based on relative return on equity and total economic return.

That concludes our remarks, and we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Eric Hagen of KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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I'm glad you guys addressed the prepay element of the portfolio. I assume that pertain mostly to the Agency portfolio though. I mean, how should we think about prepays for the second quarter, in particular, for the securitized loan portfolio?

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Mohit Marria, Chimera Investment Corporation - CIO [3]

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Sure. Eric, this is Mohit. Yes, most of the prepayment expectation changes are based on the changes in the Agency portfolio. The nonagency in the loan portfolio continue to prepay where they've historically prepaid in the high single digits, and we don't expect that to change even with the move in rates as those borrowers have had a refi incentive for a long time but with limited options to refi, which is what makes the loan portfolio very attractive.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Yes, yes. So I think the yield in the securitized loan portfolio narrowed by, I think I have it in front of me, 20 basis points. I guess that wasn't driven by prepays. What was the driver of that?

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Mohit Marria, Chimera Investment Corporation - CIO [5]

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I think, again, the yields on the loan portfolio, as we run them on a quarterly basis, the cash flows, some of the assumptions have changed. I think, again, as these loans flush through the pipelines and we have about 8% to 9% delinquent, some of the severities experienced were a little bit higher than we expected, and that change is reflected in the new cash flow assumptions causing to a slight downtick in the yields.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [6]

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Got it. Okay. And would you...

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Robert Colligan, Chimera Investment Corporation - CFO [7]

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I'd say the other -- the only other thing is, obviously, as we add to the portfolio, some of the newer assets may have a slightly lower yield than what we had in the past. The older portfolios that we bought several years ago, given the rate curve at that time, had a little bit higher yield than what we're finding in the market right now.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [8]

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Got it. Yes, I imagine some of it was due to mix, the mix shift. So thanks for clarifying that. The second question, just how comfortable are you guys with the amount of preferred in the capital structure right now? I mean, I think leverage for the overall business is pretty contained, I mean, around 6x, but I guess, that doesn't really address the leverage on common stockholders. So how do you kind of think about your capacity overall to run with perhaps more preferred? Or I guess, are you comfortable with the overall level that you have right now?

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Robert Colligan, Chimera Investment Corporation - CFO [9]

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Yes, sure, I'll start on that one. Yes, the preferred markets have been good for us. I think the markets have been open. It's lowered our overall cost of capital. It is, not to be cute, our preferred way of raising capital, and I think it's helped us broaden the investor base as well. I think we have a much broader retail and institutional investor base than we did before we started issuing preferreds. And I think that in the short term at least that would probably be our go to if we needed additional capital.

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Operator [10]

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Your next question comes from the line of Doug Harter of Crédit Suisse.

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Joshua Hill Bolton, Crédit Suisse AG, Research Division - Research Analyst [11]

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This is just actually Josh on for Doug. First off, was there any material impact of the tightening of the spread that we saw between 3-month LIBOR and 1-month repo on earnings in the quarter?

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Mohit Marria, Chimera Investment Corporation - CIO [12]

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Hey, Josh. This is Mohit again. No, in fact, for the majority of Q1, our repo rates were reflective of higher given that Fed went in late December. I think we are going to see the benefit of the downtick in 3-month LIBOR more reflective in Q2 as opposed to Q1. I think our weighted average repo cost for Q1 was north of 270, 271, roughly.

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Joshua Hill Bolton, Crédit Suisse AG, Research Division - Research Analyst [13]

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Got it. And then can you guys give any update on how you're thinking about how book values trended since March 31?

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Mohit Marria, Chimera Investment Corporation - CIO [14]

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Yes, I think, on the credit side, spreads are a little bit firmer, so supportive of book value. Loan pricing remains well bid. So that's also supportive of book value. On the Agency side, given the rally, mortgages have lagged a little bit. So I would say book value is flat to maybe slightly up.

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Operator [15]

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Your next question comes from the line of Trevor Cranston of JMP Securities.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director and Senior Research Analyst [16]

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I was wondering if you could talk a little bit more about new investment opportunities. You commented that you had liked Agency CMBS last quarter but were only able to add a little bit. I was curious if you guys still find any value there. And also, if you could maybe talk about opportunities on the credit side in terms of securities versus loans and what you're seeing there.

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Mohit Marria, Chimera Investment Corporation - CIO [17]

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Sure. I'll start with the Agency CMBS side. Yes, we still find those -- that asset class attractive. I think it's just the size of that market is relatively small. Annual originations tend to be anywhere between $12 billion to $18 billion. So aggregating that takes a little bit longer. Over the 4 years we've been in this space, we've built a portfolio from 0 to $3.1 billion in the aggregate. And Q2, from what we've noticed historically, has been a slower origination period. So we think that could be a challenge to add assets here, but to the extent they come to market, we will do so.

As I mentioned in the opening remarks, the benefit of adding that asset is the call protection that they offer. Unlike the shortening we experienced on our Agency portfolio, the CMBS portfolio had a less material impact on the duration given the prepay penalties associated with those assets. On the nonagency side, we still think there's attractive opportunities there, it's just the level of competition that exists. Loans, there were over $10 billion of loan sales in Q1. We went after some, but we're not as aggressive as some others.

We still feel that both the GSEs have plenty to go there. And to the extent they meet our return hurdles, we will go after those assets. On the legacy CUSIP side, that's a bit of a challenge, the shrinking space. As I mentioned on our Q1 call, given where spreads ended on the new issue side at the end of Q4, we were able to take advantage of some of that spread widening early on. But as the market stabilized, those spreads came in quite materially and rates rallied, so the all-in yield available on those assets didn't look as attractive as it did in early Jan, but we're hoping, again, we'll pick our spots to add assets judiciously if -- that meet our return hurdles.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director and Senior Research Analyst [18]

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Great. That's helpful. And then just one follow-up comment. You were talking -- when you're talking about LIBOR in the repo market and where the repo rate was at the end of the quarter, I think you show around 273. Have you guys seen any change in where repo is pricing since March 31?

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Mohit Marria, Chimera Investment Corporation - CIO [19]

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Yes. I mean, I think 1 month, 2 months, 3 months are relatively flat and they've come in from the 273 to the 265, 264 area, and that sort of will be reflective in Q2. I don't know how we're going to see the full impact, given some stuff was on longer term when we put it on in Q1. But you will see that 273 tick down in Q2. And we think given the change in the Fed rhetoric, that number should gravitate lower towards where 1-month LIBOR is.

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Operator [20]

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Your next question comes from the line of Matthew Howlett of Nomura.

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Matthew Philip Howlett, Nomura Securities Co. Ltd., Research Division - Research Analyst [21]

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Just getting back a little the credit versus Agency mix shift. It sounds like you still sort of predominantly positioned were more Agency MBS, I mean, certainly in those Ginnie Mae side. So sort of can we look at overall leverage moving higher as you add those assets going forward? And will that continue until you see just sort of better opportunities to add credit?

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Mohit Marria, Chimera Investment Corporation - CIO [22]

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Again, I think with what's happened in the rates market and sort of the negative convexity at the all-in level or rates we're at now, levered agencies look marginal. I think if we can find credit opportunities, we would definitely be going after those. We still -- like I had mentioned earlier, the GSEs have some loans to sell. They're going be out with another $10 billion in Q2, and we're hoping that again, given what's happened to the securitization market on the new issue side, coupled with the rate rally that the all-in cost of issuing debt will be beneficial and it was a leg up in sort of going after the loans a little more aggressively than we did in Q4 and Q1.

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Matthew Philip Howlett, Nomura Securities Co. Ltd., Research Division - Research Analyst [23]

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So in other words -- these are largely reperforming or nonperforming loans. And what you're saying is sort of...

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Mohit Marria, Chimera Investment Corporation - CIO [24]

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Reperforming loans.

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Matthew Philip Howlett, Nomura Securities Co. Ltd., Research Division - Research Analyst [25]

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Reperforming loans. If I hear what you're saying is that the ability to securitize at these market rates basically improved that levered returns on the side of securitization, and that offsets some of the higher loan prices that may come out on these packages?

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Mohit Marria, Chimera Investment Corporation - CIO [26]

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That's correct. I think if you look back sort of where our spreads have been on the new issue side, in Q1 of 2018, spreads were on rated stuff, maybe swaps plus 55 to 60 and on the nonrated stuff maybe 20 basis points to 25 basis points wider than that. We ended the year at -- on the rated stuff at swaps plus 1.25% and on the nonrated stuff at swap plus 1.60%. And as you look at where you could do those transactions now, they've come in from 1.25% on the rated side to 1.05%-ish roughly, so maybe they're in about 20 bps. And on the nonrated side, like I said, again, pick 20, so maybe around swap plus 1.25% to 1.30%. That 25 to 30 basis points of spread tightening equates to about a point in change on the execution of the overall loan package, and that sort of gives you some wiggle room to sort of get higher levered returns on the equity piece that you would retain.

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Matthew Philip Howlett, Nomura Securities Co. Ltd., Research Division - Research Analyst [27]

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Great. That's helpful. And then just any way to quantify the total size of these packages? I mean, for the remainder of the year, is it $20 billion that could come out from Fannie, Freddie? Is it higher than that?

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Mohit Marria, Chimera Investment Corporation - CIO [28]

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No. I think, again, some of that supply/demand, the agencies -- or the GSEs will see based on sort of what -- how much cash is on the sidelines, but I don't think they really intend to upsize unless demand seriously picks up. I think we are looking at about $4 billion to $5 billion between the 2 GSEs on a quarterly basis, so that's $20 billion over the course of the year in supply coming from them. In addition to them, there's going to be some bank selling of loans as well. I think you could see anywhere between $25 billion to $30 billion of RPL loans come to market in 2019.

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Matthew Philip Howlett, Nomura Securities Co. Ltd., Research Division - Research Analyst [29]

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Great. And then just last question. I think I saw your -- it looked like your nonagency repo cost ticked down. If I had that correctly, are the banks lowering the spread on that product given the sort of improvement in credit quality? Just to know whether you're seeing anything on some of the recourse debt you're applying to some of your credit assets from the banks.

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Mohit Marria, Chimera Investment Corporation - CIO [30]

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That's the case. I think spreads on nonagency repos have come in considerably over the last 2 years and continue to edge down. There's plenty of cash on the sidelines that wants these assets. I mean, agencies are funding at LIBOR plus 15, 20, while credit assets are funding at LIBOR plus, call it, anywhere between 125 to 150. In addition to that, we've been able to extend our repos without any give up in the rate as well. So we've extended from 3 months, 6 months. So in some cases we've done trades over 2 years. So that's also beneficial to the portfolio.

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Operator [31]

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Your next question comes from the line of Eric Hagan of KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [32]

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Thanks for the follow-up. As a follow-up to that last question, have haircuts changed for nonagency products as well? I mean, I think you're clear that the rate has come down. But has the level of haircut also dropped?

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Mohit Marria, Chimera Investment Corporation - CIO [33]

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It has. I think as the performance of the assets materialize, haircuts have come in from 35%, down to 20% depending on the asset type. And in some cases on the prime jumbo side, even inside of that; around 10%.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [34]

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Well, great. Thanks for the numbers there. And then I seem to look back on my notes every from 90 days ago, and I feel like this is kind of my broken record question about how much debt -- how much securitized debt is callable over the next, call it, 12 to 18 or 24 months? Can you guys give us that number?

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Mohit Marria, Chimera Investment Corporation - CIO [35]

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So for the remainder of this year, we have 1 deal in Q4 that becomes callable, which is the CIM 2016-4. 2020, we'll have more optionality. We have our 2016, 1, 2, 3 deals which have 4-year calls in them at time they were issued, all of those become callable late Q1, early Q2. And I think the securitized debt on those is probably north of about $1.5 billion that becomes callable, I guess, in the early part of 2020, and then we have some deals later that will also become callable. So 2020, could potentially could -- big refi year depending on where rates are and where the market is at that point in time.

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Matthew J. Lambiase, Chimera Investment Corporation - President, CEO & Director [36]

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And it's our option, just wanted to make sure.

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Mohit Marria, Chimera Investment Corporation - CIO [37]

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Correct, yes. None of these are mandatory calls. They were optional calls at our discretion to the extent the markets cooperate.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [38]

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Right. And just to kind of put a value on those options or just think about it mentally, in merit, you kind of pairing together your opening remarks about the Fed and how expectations have changed there. I mean, the option to call those bonds wouldn't -- there's not as much urgency to call those bonds, given changes in the Fed rate expectations over the next couple of years. Am I kind of thinking about that right? In other words the cost of funds in the portfolio is sort of reflective of where it should be if fed funds don't change. That's kind of what I'm trying to say.

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Mohit Marria, Chimera Investment Corporation - CIO [39]

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Yes, but I think it's going to be a combination of what the Fed is doing, what type of -- I mean, these deals have de-levered. So we own a larger portion of the equity. If we can optimize that leverage back structurally, that's going to be beneficial to us, even if rates are unchanged or the cost of that debt is unchanged. So it's going to be a balancing act between maintaining optimal leverage and maintaining the all-in sort of financing cost.

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Operator [40]

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Your next question comes from the line Brock Vandervliet of UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [41]

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I was just wondering more generally given the change in the rate environment that you called out whether, any new asset classes that you haven't really participated on in to date might be sort of coming on your radar given the change of the environment, whether it's MSR or something else that might pencil here where it hasn't really in the past.

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Matthew J. Lambiase, Chimera Investment Corporation - President, CEO & Director [42]

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We, as Mohit said on the -- in his remarks, we had started looking into and purchased a small amount of the fix and flip or transition loans. We think they're kind of interesting in this marketplace. And I think that the levered returns on them look pretty attractive. I would also say that we still like mortgage credit here. We actually think there's still upside in residential loans, especially these reperforming loans. I think the housing market is very good. And I think if you looked at interest from pure total return, I don't think there is, at this moment, any reason why you wouldn't continue to try to add to that portfolio. So we like it. It's just right now for us it's trying to find the paper that meets our return hurdles, and we have been successful doing that. So I really don't see us having any drift away from the portfolio that we currently have.

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Mohit Marria, Chimera Investment Corporation - CIO [43]

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That's right. And I think to reinforce, we look at all the different asset types available from an investable landscape standpoint. As some of these products are relatively new post-crisis such as these transition fix and flip loans, as that market has grown, the origination volumes have grown. It's created the opportunity to add something more meaningfully that could impact the portfolio as opposed to taking smaller sizes of $5 million and $10 million. So I think as the opportunity set on the origination feathers grown, we've added that to the portfolio to complement our current holdings.

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Operator [44]

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Your next question comes from the line of Jim Young of West Family Investments.

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James Young, West Family Investments, Inc. - VP & Investment Analyst [45]

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Could you just clarify some of the details for your new compensation package? What are the drivers and parameters that are -- will determine the overall comp level?

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Robert Colligan, Chimera Investment Corporation - CFO [46]

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Sure, Jim. This is Rob. There's 2 main drivers: one is return on equity and the other is total economic return. So there are consistent measures that will be calculated for our company compared to the peers and the mortgage REIT index. And wherever we perform based on relative performance of the peers is how we'll get paid. So towards the top, we have paid more. If we are middle or bottom, we'll get paid less. The old compensation contracts were based on static hurdles. So we think this makes sure that we're executing well and competitive versus the peers.

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James Young, West Family Investments, Inc. - VP & Investment Analyst [47]

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Okay. And who is in your overall comp group?

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Robert Colligan, Chimera Investment Corporation - CFO [48]

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Sure. So we're using the mortgage REIT index, the 30 companies or so that are in that index.

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Operator [49]

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Your next question comes from the line of [Jim Delisle], a private investor.

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Unidentified Participant, [50]

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There's been a lot of wringing of hands and gnashing of teeth about the creeping rate of repo financing of agencies and treasuries above the IOER. You say it kind of backed off a little bit after subsequent to March 31. But do you have any thoughts as to if there's any particular change in supply-demand and the organized funding rate that has caused this to happen?

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Matthew J. Lambiase, Chimera Investment Corporation - President, CEO & Director [51]

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It's kind of a mystery, actually. The interest on excess reserves should be closer to Fed funds rate, you'd think. I don't have a good reason why it's where it is, and where the money markets are trading. People have said that there might be something to do with the dollar shortage in the emerging markets in China specifically that they don't have an enough dollars to -- it's a very strange phenomena going on in the front end of the yield curve and the funding curves, and I just think it's got to be temporary. There have been a couple of research analysts out saying that the Fed is going to take some action to get things back in line. I only believe that it's temporary.

I would say for our funding purposes we're not seeing any diminution of people willing to fund our positions. In fact, we're taking on new lenders on a regular basis. People are very eager to lend against nonagencies. They're very eager to lend against agency mortgage-backed securities. And the credit markets and specifically the funding markets for these assets are amazingly liquid at the moment. So it's a little bit of a distortion in rates we are seeing in the front end, but you got to think that it's going to be a temporary. At least, I believe it's going to be temporary.

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Unidentified Participant, [52]

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And as a follow-up, would you say that, as you've seen the Agency/guaranteed repo rate crawl higher against these other benchmarks, the nonguarantee -- nongovernment guaranteed rates have tightened up a little bit to guaranteed rates such as their overall plan is not as much?

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Robert Colligan, Chimera Investment Corporation - CFO [53]

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That's right, [Jim]. As mentioned earlier, the spreads on the credit side of the book have come in quite materially over the course of the last 2 years and continue to grind in as the housing market is robust and the performance of the legacy securities as well as the new issue stuff performs better than expectation. So those spreads are reflective of that.

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Unidentified Participant, [54]

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And your Ginnie project, your various project loans, how do you finance those? What kind of term do you generally put on those? And where do they trade in terms of financing in the financing market, the relatively short-term as opposed to long-term securitized financing market relative to agencies?

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Robert Colligan, Chimera Investment Corporation - CFO [55]

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We actually finance right on the top of agencies. And their Ginnie guaranteed, as you said, so they have a similar haircut and similar financing rate and you could go out 1, 2, 3 months longer if you need be, but the rate is indifferent as is the haircut.

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Operator [56]

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Thank you. I'll now turn the call to Matthew Lambiase for any additional or closing remarks.

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Matthew J. Lambiase, Chimera Investment Corporation - President, CEO & Director [57]

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Well, thank you for joining us on the First Quarter 2019 Chimera Investment Corporation's Earnings Call. And we look forward to speaking to you on the second quarter's call. Thank you.

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Operator [58]

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Thank you for participating in today's conference call. You may now disconnect.