Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation, Third Quarter 2019 Earnings Conference Call and Webcast.All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]It is now my pleasure to turn the floor over to Emily Mohr of Investor Relations. Please go ahead.

Thank you, Sandy, and thank you everyone for participating in Chimera's third quarter earnings conference call. Before we begin I'd like to review the Safe Harbor statement.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 factor section in our most recent quarterly 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 President and Chief Executive Officer, Matthew Lambiase.

Good morning and welcome to the third quarter 2019 Chimera earnings call. Joining me on the call I have 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 a few brief comments. Mohit will then discuss the core changes in the portfolio and Rob will review the financial results. Afterwards, we will open up the call for questions.Chimera recorded a 3.9% total economic return for the third quarter and a 12.5% economic return for the first nine months of 2019. I believe these results are solid given the continued volatility in the fixed income market.In the third quarter, the 10-year treasury fell 35 basis points and ended the quarter at 1.66%, while one month LIBOR closed the quarter at 2.02%.Negative interest rates in Europe and Japan continue to distort reality and drive money into the U.S. Bond market in search of return. The latest example of craziness was Republican Greece issuing three month bills at a negative yield, a result that would've been unthinkable just a few years ago.The U.S. repo funding markets also exhibited significant volatility in the quarter. In September, overnight repo rates spiked higher due to several technical reasons, and the secured overnight financing rate ended the quarter at 2.35%.The elevated rates and unusual market action resulted in the fed reserve adding substantial liquidity to the repo market. Their action was well received and at largely calmed market jitters.Chimera’s funding costs remain elevated in the period. In fact, our cost of agency repo borrowing at the end of the third quarter of 2019 was strikingly similar to our cost of borrowing at the third quarter of 2018, and that's surprising considering that we've had two federal fund rate cuts…

Thank you, Matt. Due to the rate volatility and lower interest rate, Agency RMBS underperformed this quarter. Spreads widened and duration shortened, impacting our hedged liability.This quarter we terminated 3.3 billion notional of interest rate swaps to adjust our portfolio duration and better positioned the portfolio for further rate movements. The construction of our total portfolio is such that nearly 70% of our investments have either explicitly payment protection or exhibit low sensitivity to interest rate movements.These investments include $3 billion in Agency CMBS, $12.7 billion of seasoned low loan balance securitized loans and $2.9 billion of legacy Non-Agency RMBS. The Agency CMBS carry explicit prepayment penalties, which provide call protection and portfolio durability and lower rate environments.While our seasoned loan portfolio benefits from implicit prepay protection, due to their age, well loan balances and general non-client mortgage characteristics, and prepayments on our legacy non-Agency RMBS portfolio continues to perform very well.The remainder of our portfolio $7.8 billion in Agency RMBS has experienced an increase in prepayment rates due to low interest rate environment. As we have received pay-downs in our agency pass-throughs, we have been reinvesting in residential mortgage credits through both loan purchases the non-Agency RMBS.Overall we had a very productive quarter in our portfolio. We reduced our Agency CMBS holdings by $670 million, mostly due to pay downs. We increased our capital allocation to credit by purchasing $1.1 billion in reperforming mortgage loans for our warehouse and finally we added $67 million in residential transition loans, sometimes referred to as fix-and-flip loans.Chimera closed three loan securitizations this quarter. We securitized and consolidated 372 Million of CIM 2019-R1 with the re-performing loan previously purchased and held in our warehouse. The underlying loans had 160,000 average loan size, with a weighted average coupon of 4.55%.The loans were a 153…

Thanks Mohit. I'll review the financial highlights for the third quarter of 2019. GAAP book value at the end of the third quarter was $16.38 per share and our economic return on GAAP book value was 3.9% based on the quarterly change in book value and the third quarter dividend per common share. GAAP net income for the third quarter was $88 million or $0.47 per share.On a core basis, net income for the third quarter was $94 million or $0.50 per share. Economic net interest income for the third quarter was $138 million. For the third quarter, the yield on average interest-earning asset was 5.3%, our average cost of funds was 3.4% and our net interest spread was 1.9%. Total leverage for the third quarter was 5.7:1, while recourse leverage ended the quarter at 3.8:1.For the quarter our economic net interest return on equity was 13.9%, and our GAAP return on average equity was 10.7%. Expenses for the third quarter, excluding servicing fees and transaction expenses were $19 million, in line with last quarter.That concludes our remarks, and we’ll now open the call for questions.

[Operator Instructions] Your first question comes from the line of Doug Harter of Credit Suisse.

Thanks. You were active in both, kind of new production and legacy loans kind of in the quarter and post quarter end. Can you just talk about the relative attractiveness of each of those types of assets?

Sure, good morning Doug. This is Mohit. I’ll start with the RPL transaction that we did in July of this year. As stated on prior calls, we continue to find attractive loans at the credit box that we were comfortable with and we’re able to term finance them in the securitizations market. That was what we did in July.We did a $340 million and issued debt at 3.05% and now have a term debt out and we’ve embedded a three year call in it, to the extent to know the deal delivers over the next three years and – you know the performance improved and/or rates continue to remain low; we financed that again. But the lever returns on a retained piece off of that investment with some leverage on our double digits.On the new issue side as it relates to the investor loans and jumbo loans, again the investments there are a much smaller given sort of the better leverage and the credit profile of that collateral type. But again, lever returns there on the retained piece, so they are also double digits. So they are both attractive. It keeps us in the mix on both, the re-performing season side on the loan purchases in addition to acquiring newly originated collateral.

And then Mohit it seems like the pace of activity in the third quarter and then of course third quarter has materially picked up on the re-performing side. Can you talk about what has changed or is it just more product gain to the market as that led to this pick-up in activity?

Sure. I think you know we – the loan activity is you know throughout the year, GSE’s are the primary seller. A lot of our activity has been focused on I’d say non-GSE sources. We've acquired loans from multiple parties, so the aggregation risk or the aggregation amount is taken just a longer bit of time and a lot of that has culminated in Q3 and in Q4. GSEs are going to be a continued source for us in the future, but I guess that some of the other bank sellers and dealer balance sheets are needed to be unwound. You know we were the beneficiary of those sales.And like I said, from the time we commit to the trade to the time it funds, between the diligence and stuff we have to do, there's a four to eight week period, that’s all that takes. So, on our Q2 earnings call we’ve mentioned our commitments for Q3 and a lot of that happened late in the quarter.So you'll see the full effect into Q4 and then the acquisitions we've committed to post quarter end here will probably settle, you know in no early deals and you’ll see the full impact in Q1 and then as we build these warehouse lines, we have securitization activity that we will do on the heels of that, which will reduce our borrowing cost and improve the returns on the retained pieces.

Thank you, Mohit.

Your next question comes from the line of Kenneth Lee of RBC Capital Markets.

Hi, thanks for taking my questions. I’m just curious and you touched upon this within the prepared remarks, but wondering whether there was any impact from the volatility within the repo markets and in the quarter and whether there's any impact there for you guys?

No, we didn't have much of an impact. The disruption or the volatility picked up late in September. We had rolled most of our balances over at quarter end by that time. But that volatility was only exhibited for a few days and has subsequently stabilized, and the fed has made announcements in the purchase of T-Bills or providing reverse repo, but they haven't done in a decade to stabilize that, especially as we head into Q4 in the year end. As you recall last year, we had seen a similar spike in Q4 for the turn and like – I think they want to make sure that doesn't repeat itself this year.

Yeah, and I would just say that we don’t – just as a matter of fact we don't roll our paper over overnight and it was generally an overnight phenomenon. It was very short term funding. We usually put the paper, our repos out longer than overnight. I would say that in the period, repo rates were elevated in general and have started to come down after the quarter.

Got you, very helpful. And just one quick follow-up if I can, and you touched upon this within the prepared remarks in terms of adjusting the hedging relative to adjusting the duration. I wonder if you could just share with us what kind of assumptions you have regarding either the fed policy or interest rates in terms of your hedging positions. Thanks.

Sure. I mean as Matt said in his prepared remarks, you know we expect one, potentially two rate cuts between now and year end. We’ll find out about one of them later this afternoon. You know I think we’ve taken a proactive approach this year in reducing our hedges to better balance the duration of the agency holdings, as well as our credit holdings. To the extent there was another change, we’ll adjust the hedges accordingly, but I think we're in a good spot currently.

Got you. Thank you very much.

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

Hey, good morning guys. Thanks. In the agency segment can you just tease part for us the amount of leverage you’d run on the pass-through portfolio versus the commercial segment?

Hey Eric. You know I think the leverage we run against both is somewhere – they were both agency products with some other financing terms. I think the leverage there just looking at that on an isolation is about 10 to 11:1.

Okay. So just to be clear it’s the same in both.

Both yeah. I mean when we look at it in the aggregate, not sort of broken up given they have some more financing terms. They are both fungible in similar capacity.

Eric, I'll just add. You know when you look at what's available in the market, the haircuts for Agency CMBS and Agency pass-throughs are very similar. The one thing if you're digging into balance sheet, on the Agency CMBS or construction site we do have the commitments on the balance sheet and they do fund over time. So in that payable for securities purchase, it's not as if we put them all in the balance sheet and we got carried right away. There's a little bit of a timing component where the assets are on the balance sheet, not yet on repo until we fund them over a period of time.

That's right. On an absolute dollar term obviously the pass-through portfolio is much larger, but from a percentage basis and on a leverage basis if you look at them individually, I think it would be both 10x to 11x.

Got it, okay, great. That's helpful color, thank you. And can you remind us on the prepay accounting, on the Agency RMBS, if you guys amortize premium through core earnings as it comes in or do you make a lifetime speed assumption and back out the catch up out of core. I'm just trying to gauge if there’s a direction of core if and when prepaid speeds slow down. Thanks.

Sure. We don't make an adjustment for what some call a retrospective model. So if we have a material pick up or slow down in speeds, we don't make an adjustment for that. The only other thing that I'll mention though is the majority of our agencies are now carried at fair value through earnings, so the majority of our agency pass-throughs you know don't have that catch-up attribute to it.So I would say roughly 10% of our agencies that we bought before 2017 still have that retrospective catch-up, but the majority of them as rates move and speeds pick-up, you know those adjustments would just be prospective over time and we will make – just to get back to your original question, we don't make any adjustments to the core for that change in speed.

Okay, great. That's helpful, thank you. And then the lower yield quarter-over-quarter in the credit segment is I think 6.8% from 7.1%. Was that because of credit sensitive assumptions that were changed during the quarter or is it just new investments that are coming into the portfolio at a lower yield than what was rolling off.

Yes, it’s the newer investments, the $1.1 billion of loans we acquired at lower yields, that’s where the market is and obviously with some of the pay-downs on the higher yielding assets that are rolling off.

Great, okay. And then the swaps that you guys terminated in the quarter, when did you take those off and what was the pay rate on those. And it looks like you basically replaced everything that you virtually took off. So what's the pay rate on the overall swap book now?

The pay rate of what we took off, I don't have; I could get that number for you. The portfolio currently stands at, in total about $4.4 billion of notional swaps. The pay rate is 260 and the receive rate is 222 as of the end of the quarter.

And just judging by your book value performance, I sense that you guys took off those swaps relatively early in the third quarter, is that fair?

Yeah, we took some off in July and we took some off in early August.

Super! Thank you, guys. Thanks for the comments.

Thank you.

Your next question comes from the line of Stephen Laws of Raymond James.

Hi, good morning. You know thinking about the repo balance, trying to quantify that. I think you had $9 billion resetting within 30 days. Clearly we’re 30 days past the quarter end and I think LIBOR has dropped around 25 basis points. Is it fair to look at that and expect that entire amount rolled down by about 25 basis points or how should we think about the repo cost resetting here is the first month or two of this quarter?

Yes, I mean I think again as we ended Q3 December, as we mentioned there was an uptick in sort of financing rates overnight. As we mentioned we had rolled most of it into October already, but yes, given the downtick in LIBOR, we are seeing that you know reflect in the repo rates we’re getting. I would say -- [Cross Talk] for basis points, but I would say financing on agency products, the stuff that we’re rolling short is probably in the very low two’s. [Cross Talk]

That's helpful color, thank you. You know following up on the loan side, on the loan sourcing, you know can you talk about the sourcing agreements you have in place for whole loans and business purpose loan. Some others have looked at acquisitions. Would you bring in-house or would you do something like that to create your own pipeline or maybe you know any additional color you can provide on the sourcing agreement from the whole loan sides you have in place?

Sure. So on the new issue side, on the investor and jumbo stuff we have partnerships with you know some conduits that originate and then we just have an agreement to sort of acquire those loans and term finance them through securitizations. We have former business relationships on the fix-and-flip residential transition loans where you know we are comfortable with the origination and the underpinning guidelines and the performance of the loans that we require.You know, I get that – I think that pipeline is growing as those businesses are growing and have those the need to require an originator, again if it becomes necessary or more capital is needed for the originator to grow their business, we would be happy to sort of look at that. But I think we're sourcing collateral and pretty attractively currently.

Yeah, I’d just add to that. I think we're pretty happy with the amount of products that we're seeing that we can put through our securitization process, and the quality of it, the pricing that we're seeing is pretty good. And I don't think there's a reason for us in the short term to do anything different than we are currently doing. I think we are seeing quite a bit of products and we think the markets are open for securitization right now, and I think we're in a good spot.

Great! And finally, maybe if you could touch on the commercial agency security stats, but again, I know there's limited volume there, but it looks like that portfolio is basically flat sequentially. Are you seeing new investment opportunities there? Is it just not as attractive relative to other opportunities you're seeing or maybe touch on how we should think that – how we should think about that basket as we move forward, either growing or remaining the same size.

You know, I would say it's an interesting idiosyncratic market. It's relatively small and you see originations come in squarts basically, and I think the last quarter we really didn't see a tremendous amount of paper that we wanted to bid on, and to add to the portfolio. And I think, we think at the current level it’s a good position for us and I don't think we have a big axe to drive, to bid up the market and buy a lot more.

Yeah, that's right, and I get that. I think give the opportunity that we’ve found on the credit side and our belief in the housing and sort of macro-economic conditions, I think the returns there are very compelling to deploy capital.

Great! I appreciate your comments this morning. Thank you.

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

Thanks for taking my question. You know I think as you mentioned $5.4 billion of securitization that is callable in 2020. I just wanted to get a sense of what the financing rate is on those deals and where do you think the market is today?

Sure. So I’ll talk about where the market is today. As we mentioned we completed three securitizations this year – not this year, in Q3. The one that will mimic what's being callable in 2020 is the 2019 R1 deal, which is our traditional reperforming deal. That deal was non-rated and as I mentioned in the opening remarks, we were able to finance the debt at a cost basis of 3.05%.I think again, depending on where rates are and they’ve exhibited a lot of volatility year-over-year, the rates remain here. I think there's plenty of cash from a senior investor side that needs to be deployed, and there's going to be a grab for assets and we think that financing costs, term financing costs should be in a similar context.We also obviously have the ability to go down the rated past, and that could bring financing costs in a little bit more. So it's just a balance between cost and cost of benefit analysis on what's the best way to term those securitizations at.As far as where those are currently being financed, on the aggregate and this is not exclusively just to the $5.4 billion that’s callable next year, but our entire secured debt portfolio on the loan side, as a you know financing cost around the 4.49 coupon. So it’s going to be a material pick-up to – if the economic and rates remain where they are to refinance those assets.

Right, so it trended down and reported – the 4.2 came down from, I think it was 4.4 last quarter. On that funding class, that should continue coming down as you call and resecuritize these deals. Is that the trend that sort of we should expect [Cross Talk].

That's what we're hoping. Those are the things we evaluate. You know there’s an equity takeout component and are reducing the financing component, and given the sort of change in the rate sentiment and what the fed is doing, I think – you know and if all else remains equal, we would expect financing costs to be coming down.

Great, okay, we’ll look for that. And then let me just get back to the pipeline you mentioned and looking at 2020. I mean you're doing this sort of a mixture today of re-performing and kind of new issue jumbo investor loans. If we look out in 2020, I mean there’s a comment by one of your competitors that the RPL market is just shrinking from the GSEs naturally, because their liquid books are running off or coming down, and then you look at obviously the QM patch, which is not until ‘21, but you know we're getting set up here for GSE reform. There's a lot of talk that they've just got to price themselves at the investor loan market and we're doing something like $60 billion a year.I mean what can you tell in terms of 2020 deals. Do you expect to be an equal mix of those two? Do you think it will start moving more toward these non-QM type GSE loans that are going to come out? Anything you can give on sort of how to look at it in terms of the acquisitions next year on the credit side?

Sure. Again, I'll start with the RPL. Outside of the $5.4 billion that we have already owned that we can refinance and grow earnings, I think and speaking for the GSEs, although shrinking, they're still going to have north of $20 billion plus of RPL loans that are going to come out for bid next year, so that's still ample supply of loan to be absorbed by the market.And in addition to that, over the last two years, we've built this relationship network of doing newly originated stuff, whether it's jumbo, whether it's investor, even on the non-QM side, even though we haven't been active we've looked at loan packages. Just the numbers didn't make sense where we would have cared.But whether it's the QM patch going away and creating more opportunity for private capital to be deployed in the mortgage market, we have those relationships, we see those assets and if the numbers work, we would do that.I think as you've seen from 2018 to 2019, we've done three investor deals, we did two last year, we did one jumbo deals, we've completed one this year. So I think on the new issue side, new origination side, we would continue to hopefully that upticks, and the lower the GSE footprint, the better it is and the better opportunities are for Chimera.

And so just thinking – you guys have done a great job in capital allocation and capital management, so you just think about it as, that agency book could continue to be a source of capital or clearly you have a very strong balance sheet where you could access more term debt or more preferred debt. Just thinking about it, if these opportunities do arise and they are more than you thought, would you look at sort of that agency book as a source of capital?

Yes, Matt I think that’s exactly right. I think we’ll definitely look to our agency portfolio and the run-off there and redeploy it, and I guess the issue really is that the agencies run-off and it takes time to put. So we always have this timing differential between the capital coming in through normal run-off and that's putting it out into securitized residential mortgage credit, and so that's what we're really managing to, and I think Mohit has done an pretty good job managing that over the course of the quarter.I think when you look at our pipeline, the residential mortgage credit that we have to securitize and you think about our agency pay-downs over the next say four months, I think we're doing a pretty good job trying to match the two of them. I mean you know that would be perfect, but we are actively thinking about the agencies as the source of capital for the credit part.

Great! Thanks a lot, guys.

Your next question comes from Steve Delaney of JMP Securities.

Good morning and thanks. Matt, just beat me to the 2020 loan mix question, so good for him. I won't make you repeat that guys. But maybe closer in, I believe you mentioned a $1.7 billion you know whole loan sort of credit pipeline that you are looking at. Could you just roughly talk about the mix within that $1.7 billion, sort of the near-term deployment? Thank you.

Yes, hey Steve. As far as the credit profile of the assets or the loans we're bringing in, it will be very similar to the assets and the loans we currently have in the pipeline. Perhaps you wrote down some numbers here. So the average WACC of these loans are going to be you know around the 5 area, the LTVs are going to be in the mid-high '80s, the average loan balance is going to be in the 150,000 and this is all seasonally performing, so that’s $1.7 billion committed, it's not.

That’s not jumbo, that's not our investor loan programs, that's all $1.7 billion of RPLs, season re-performing loans.

Got it. That's the product you guys really know well and had been concentrating on here for the last couple of years.

And the product that's really been performing really well for us.

So just to follow-up real quick on your conversation with Matt, when you look at the whole sort of BPL, I mean I think we can split this. There’s so of acronyms, whether it's FNF, SFR, you know you can go crazy. But we've got what I would call the whole NQM thing on the residential owner occupied, and I'm just throwing everything else in a bucket called BPL business purpose. I don't know how you all see that, but there are so many subtleties.Kind of the – go ahead, I'm sorry. I cut you off.

No, go ahead, I'm sorry.

So, I guess what I'm trying to say as you look at those two and lets just split it kind of between more the investor loans and more the NQM, do you have a sense for which one of those your likely going to find the most opportunity as we look out over the next year or two?

I mean, I think that the non-QM sector and again depending on how you define it, has had tremendous growth over the last two years and it’s projected to grow even more with the QM patch going away. On the business purpose side, again that has had growth. The durations on that product are significantly shorter than the non-QM, which is already sure to begin with.

Indeed!

You know the average maturity on a business purpose loan ranges between 12 months to 24 months. We think given the rate environment and the volatility created, we wanted to just have short duration assets and we've aggregated the portfolio now through Q3 of $144 million.We have very attractive coupon. The net WACC on that portfolio is 7.25, and that's very attractive as a cash target for us.The non-QM side, like I said has seen tremendous growth. I think you know the pricing there is a little challenged, but as rates stabilize and prepayment stabilize on that product, we would continue to look at it and we have sources to find that. It's just like the pricing has been a little bit challenged for us.

Got it. Yes, probably more eyes on that product than on the BPL. This was very helpful. Thank you for the color guys.

Thank you, Steve.

[Operator Instructions]. Your next question comes from the line of Lee Cooperman of Omega Family Office.

Yes hi, thanks. I don't have the technical knowledge that some of these folks on the call have. So, let me just ask you some simple top-down questions. How much dry powder do we have which we've not employed where we could earn a spread or are we fully employed?And secondly, as you look at this $0.50 number in the quarter, which match the dividend, do you think that represents normalized earnings or below normalized earnings? How do you see the quarter being representative of recurring earning powder, below recurring earning powder, above recurring earnings powder?And the third question I'd ask is the effect on rising rates, one of these days in our lifetime rates are going to go up. I assume it's going to be sooner than most people think, but what's our exposure to rising rates?

Well, I think Lee we're a levered company, so we don't keep an awful lot of dry powder around, but I would frame it like this. We have quite a bit of agency mortgage-backed securities on our balance sheet and we look at them as an asset class that we would go to if we found good credit investments.I think right now the way we feel about the mortgage, residential mortgage credit market is that there’s still good upside. I think with so many people working and with home pricing appreciation still going on, I think that we can buy these re-performing seasoned loan packages and we can finance them. That calls into the securitizations, and if the collateral continues to improve, we'll have I think upside in the future and yield today an upside in the future.And for us it's finding those investments is the hard part. That's why Mohit has done such a great job and the team has done such a great job to find residential mortgage credit investments. And what we're doing is we're taking – I guess our dry powder is our agency portfolio, and I'd say there I think we've got plenty of dry powder to deploy into residential mortgage credit when we find it.So I think from a credit, from a dry powder or money that we need to make investments for the foreseeable future, it’s going to come from that agency book and I don't think – and I think we have got plenty of capacity in our balance sheet to do that.

Well, you guys have done a terrific job in running the company. So I interpret what you said is you don't think the $2 run rate of earnings that we have now represents peak earning power, you'd hope to enlarge upon that over the coming years.

Well, I mean, yeah. Let's just say, this is an abnormal market and I think anybody that sits here and tells you that this is a very easy fixed income market to operate a levered mortgage strategy in, they'd be just not frank.This is a very tough market and we are very focused on maintaining and making sure that our book value stays constant. We don't want to bet the ranch to make a few pennies and then lose the dollar in book value. So it's always trying to balance those two risks, and I think we feel like we're in a good spot right now with the earnings.

Good, thank you very much. Every time, I'm on this call I congratulate you guys on doing a very fine job and I continue to have that view. Thank you.

Thank you.

Thank you. Appreciate your support.

There are no further questions at this time. I will now turn the floor back over to Matt for any closing or additional comments.

I'd just like to thank everybody for joining us on the third quarter 2019 Chimera earnings call. We're hoping for less volatility and looking forward to speaking to you in the New Year. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.