Good day, ladies and gentlemen, and welcome to the Chimera Investment's Third Quarter 2022 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. 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 third quarter 2022 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 will 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 CEO and Chief Investment Officer, Mohit Marria.

Good morning and welcome to the third quarter 2022 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our President and Chief Operating Officer; Subra Viswanathan, our Chief Financial Officer; and Vic Falvo, our Head of Capital Markets. After my remarks, Subra will review the financial results, and then we will open the call up for questions. Before we begin, I would like to congratulate all the Chimera employees and members of our Board or Directors past and present, as we celebrate our 15th anniversary as a New York Stock Exchange listed company. I'm very proud of the team we have built and very much appreciate all their contributions to the company. While elevated market volatility in the third quarter has led to higher rate and wider spreads, putting further pressure on our book value. We believe this has created several opportunities for Chimera on both sides of the balance sheet. In particular, to the end of October, we've been able to increase our cash position, increase the amount of non-mark-to-market financing, and either added or committed to add new investments to our portfolio. It has been a busy period for us, which I will discuss in more detail in a moment. But first let me describe the overall market and how that translates to our portfolio and expectations. The capital markets have been volatile this year, buffeted by global complex, higher inflation, a rapidly rising interest rate environment and a weakening U.S. economy. Inflation which Federal Reserve officials have believed to be transitory in nature last year, has turned out to be persistent with the Consumer Price Index reaching 8.3% on a year-over-year basis in September. As a result, the Federal Reserve raised interest rates 75 basis points at each of their July…

Thank you, Mohit. I will review Chimera's financial highlights for the third quarter of 2022. GAAP book value at the end of third quarter was $7.44 per share. And our economic return on GAAP book value was negative 13% based on the quarterly change in book value, and a third quarter dividend per common share. GAAP net loss for the third quarter was $205 million or $0.88 per share. Our earnings available for distribution basis, net income for the third quarter was $63 million or $0.27 cents per share. Our economic net interest income for the third quarter was $104 million. For the third quarter, the yield on average interest earning assets was 5.5%. Our average cost of funds was 3% and our net interest spread was 2.5%. Total leverage for the third quarter was 3.9:1, while recourse leverage ended the quarter at 1.1:1. For the quarter, our annualized economic net interest return on average equity was 14.8%, and our annualized GAAP return on average equity was negative 26.5%. And lastly, our third quarter expenses, excluding servicing fees and transaction expenses were $15 million, consistent with previous quarter. That concludes our remarks, we will now open the call for questions.

[Operator Instructions] And our first question comes from Kenneth Lee from RBC Capital Market. Go ahead, Kenneth.

Hey, good morning, and thanks for taking my question. Lot going on in terms of the financing side between the extending the non-mark-to-market and the rate swaps, you've been entering into. Just wondering if you could talk a little bit about how you think funding costs could trend over the near term given all these changes? And importantly, how responsive would funding costs be to rising rates? Thanks.

Good morning, Ken. This is Mohit, that's a good question. As we enter 2022, the expectations of the Fed from where it started to where it was going to end was the magnitude of about three to four rate hikes, obviously, as we mentioned in the opening remarks, that have gone much further, and yesterday went an additional 75 basis points for the Fed funds rate to be at 4%. And as a result of how quickly the expectations were, the Feds going to change is why we started laddering into swaps and hedges to protect our financing cost over the last two quarters and even post quarter round. So, the vast majority of our recourse borrowings are floating rate nature. So any adjustments in the index on the Fed funds rate translates into an increase in financing costs. But these hedges will lock in over the next two, three years of locked in rate with the spread that is finance on. But from a spread perspective, in terms of the asset, we're looking to finance, there is still ample cash at those spreads to finance those assets. So it's more the benchmark rate as opposed to the spread. That's a bigger concern for us.

Got you. Very helpful there. And appreciate -- just one follow up, if I may appreciate the discussion on the RPLs and realizing that much the residential are very seasoned. But one of the things is talk about the potential impact of a slowing housing market and potential home price declines in terms of resi loan valuations or non-agency valuations. Thanks.

Sure. So, the big differentiator for us on our loan portfolio is the vast seasoning that the portfolio has the origination and LTV was 83%. So if you assume that 85% of the portfolio was originated prior to 2007, there's been 15 years of natural amortization, coupled with some pretty strong HPA. So we think the updated or HPI adjusted amortized adjusted LTV on the portfolio is closer to 50%. So from a credit performance standpoint, that gives you a lot of equity to play with. And if you look at the average loan balance of $102,000, the monthly mortgage payment is sub $800 a month. And if you just compare that to the change in mortgage rate from the start of the year to now, for a $400,000 mortgage, that mortgage payment adjustment would be $900. So these borrowers have gone through different interest rate cycle different credit events. So we think, you know, there's going to be really not a material change, given the lack of housing alternatives that these borrowers have.

Got you. Very helpful there. Thanks again.

And our next question comes from Trevor Cranston from JMP Securities. Go ahead, Trevor.

Hey, thanks. Good morning. Can you guys talk a little bit about how the high level of volatility in the rates markets has impacted your investment appetite, just given the risks that there could be a big move in rates and spreads, between the time period when you acquire loans and when securitization takes place?

Hey, Trevor. Again, a good question and one we've addressed on sort of other calls as well. Like our approach is not to necessarily aggregate loans in many bulk size that we buy bulk production and warehousing them to transfer servicing and ultimately to securitize. So the period of time from committing to a trade to funding a trade securitization. We sort of look at it from a 60 to 90-day basis from a tournament perspective. So we try to limit how much exposure we have to spreads and rates adjusting now this year has been unique given how quickly rates have moved in Q3, the two year moved 130 basis points, the five year moved 100 basis points and the 10 year moved 90ish basis points. So, it made it a bit challenging environment on top of the amount of issuance in the new issue market. But again, we do take warehousing risk, and use that as much as possible. But the quick turnaround that I just mentioned.

Okay, got it. And then in the post quarter update, you mentioned the $476 million of loans. I think you call that they were going to be placed into a long term non-mark-to-market structure. Can you explain exactly what that is? And why you are used to utilizing that person's securitization?

Sure, so as you just touched upon and I have just mentioned to the prior question, given the challenges within the new issued market currently, like we acquire these loans, where we have also locked in a five-year tenure financing arrangement, which will be on a non-mark-to-market basis, achieving a similar advanced rate that you would get via securitization. So we thought this was a better outcome to produce better returns for the company.

Okay. And our structures like that something that you think could be, more available in the near term, new issue market doesn't necessarily look as attractive?

Yes, I mean, I think, again, given the challenges, the new issue market is facing these structures could become more commonplace. And if -- and when the market returns on the securitization front, we will sort of balance that out on a go forward basis.

Okay, got it. And last thing. Can you provide an update on book value quarter today?

Sure. I mean, again, we've had this question the last two quarters. And each time we've sort of presented it, it's been various vastly different by like five quarters ended. Since the end of the quarter, rates have moved about 30 basis points parallel across the curve. Spreads are marginally wider. I would suspect book value to be down between 2% to 3% since quarter end.

Okay. Thank you.

[Operator Instructions] And our next question comes from Bose George from KBW. Go ahead.

Hey, guys, it's actually Mike Smith on for Bose. My first question is, can you provide an update on your asset acquisition pipeline and kind of the overall level of competition in the space? Wondering if any of your loan origination partners have stepped away kind of given the uptick in volatility? And then as a follow up, can you just remind us how many loan origination partners you have? And then, if any are shutting doors for or facing solvency issues, just kind of given the moving rates? Thank you.

Sure, Mike. As far as sourcing assets, it's not a problem. I think, as we've sort of highlighted, we've been defensive, trying to maintain low leverage while adding accretive assets. Since the start of the year, we required $1.6 billion of loans, and obviously, we've also done five securitizations to fund a lot of those transactions. We are going to bid loans to where the securitization exit is, and or where we can find other long term sources of financing for those loans. We don't have a full agreement with anybody we buy, to what makes the most economic sense from an ROE perspective for the company. So again, we have no commitment with any particular originators in terms of sourcing on a flow basis, any assets. We have, everybody at our beck and call to sort of pick and choose the collateral that we like. So hopefully that answers your question.

Yes, that's helpful. Thank you. And then maybe just one more. Can you talk a little bit about where levered ROEs are on new investments? And then kind of, how you're thinking about the balancing act between going on offense buying back stock and maintaining a strong liquidity position?

Sure, so let me start with the ROE question. And as we mentioned, on the loans that are looking to settle here in Q4, the $476 million, we mentioned double digit returns on that investment. I think the vast majority of the mortgage ecosystem can produce pretty attractive, levered returns. But given the backdrop of higher rates, still, beating inflation, and Fed being active, we're going maintain a pretty disciplined approach to deploying capital. I think maintaining liquidity is the biggest focus here. As we have done throughout the year, we started the year with 1.0 turns of recourse leverage. We're at 1.1 now, and rates have moved to the tune of 300 to 400 basis points across the curve. But at the same time, we want to be justice in deploying accretive capital, given how attractive some investments look. But on the aggregate, leverage returns should be in the mid-teens, at least for us to sort of deploy capital. And we see plenty of opportunities there as it stands now.

Great, thanks a lot for taking the questions.

And there appear to be no further questions. At this time. I would now like to turn it over to management for any closing remarks.

Thank you, operator. And thank you everyone for joining us on our call today. We look forward to speaking to you next year.

Thank you, this does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.