CHIMERA INVESTMENT CORP Q1 FY2025 earnings call

• Strong quarter for Chimera: Earnings available for distribution improved by 11%, book value increased by 7.4%, economic return was 9.2%.
• First full quarter into acquiring Palisades: Integration was fast and seamless. Third-party loans under management by Palisades Advisory Services up 43% YOY to nearly $24 billion. Combined assets now near $37 billion.
• Balance sheet moves: Exercised call rights on non-Remic securitizations, issued 2 new securitizations unlocking $187 million. Acquired and securitized $288 million in non-QM loans, acquired $149 million of agency specified pools, settled $100 million residential transition loans. Refinanced 2 key non-mark to market facilities, extracting over $100 million in additional cash.
• Portfolio positioning: Building capabilities, diversifying revenue. Continuing to grow third-party loans under management. Adding agency RMBS asset for delivery returns, liquidity, and flexibility. Strong balance sheet and liquidity entering April.

Third-party loans under management by Palisades Advisory Services are up 43% year-over-year, including an increase of $1.5 billion during the first quarter to nearly $24 billion. When combining on balance sheet assets with assets managed for others, Chimera is at nearly $37 billion. GAAP net income for the first quarter was $145.9 million, or $1.77 per share. GAAP book value at the end of the first quarter was $21.17 per share. Economic net interest income for the first quarter was $72.3 million. Yield on average interest earning assets was 5.9%, average cost of funds was 4.4%, net interest spread was 1.5%. Total leverage was 3.9 to 1, recourse leverage ended at 1.2 to 1. Ended the quarter with $697 million in total cash and unencumbered assets.

• Stay focused on diversifying the portfolio, growing recurring fee income, adding liquidity, and looking for opportunities to add accretive platforms.
• Expect to deploy capital selectively into agency MBS at attractive entry points but remain cautious given ongoing macro uncertainty.
• Focus on constructing a durable portfolio supporting attractive risk-adjusted returns, with agency MBS and MSRs as areas of emphasis.

• Market volatility: Impact on book value and capital deployment. April volatility led to market dislocation but liability structure limited margin calls to less than $20 million.
• Interest rate risk: Hedging strategies and impact on net interest spread. Hedges rolling off in second quarter affecting exposure to floating rate liabilities.
• Credit spread risk: Widening credit spreads affecting loan values. Need to monitor and manage credit risk in different asset classes.
• Potential higher delinquency rates: Monitoring non-QM portfolios as delinquency starts to trend upwards, but currently not highly concerned about significant risk in portfolio.

Q: When you said book value was flat to slightly down, so far in the second quarter, can you put some numbers around what slightly down might mean?

A: As of Tuesday, down about 40 basis points.

Q: How should we think about the timing to deploy that extra $187 million of investment capital that you freed up with the re-securitization? And how are you thinking about the dividends?

A: Deployed about a third to 40% of the capital so far, focusing on building liquidity bucket and deploying into agency MBS. Dividend determination is premature given market volatility, will be considered in next month or so.

Q: Looking at the third-party business, outlook for growth potential over the next year or two?

A: Bullish on growth potential, depends on mortgage market, growing within existing clients and adding new clients.

Q: Have you guys basically seeing credit spreads fully recover from the widening in the early part of April or can you take us through kind of the moving parts of the flat book value?

A: Seen some retracement of credit spreads from wide, about halfway. Book value impacted by both assets and liabilities; deterioration of loan value from wider credit spreads offset by change in securitized debt.

Q: In terms of book value going forward, after the hedges roll off in the second quarter, what is your portfolio duration going to look like?

A: Hedging strategy doesn't have much impact on book value volatility. Adding agency component and MSRs helps balance duration volatility in credit book.

Q: What's the right way to maybe think about the sensitivity to higher delinquency rates from here; between the RPL portfolio and non-QM and other opportunities?

A: Delinquencies in RPL portfolios are stable around average levels. Monitoring non-QM delinquency trends but not highly concerned about significant risk in portfolio currently. Repo facilities are structural, not giving out advance rate, done through banking relationships, and have non-mark-to-market or limited mark-to-market features with limited margin calls during volatility.