Greetings, and welcome to the Chimera Investment Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Victor Falvo, Head of Capital Markets. Thank you. Please go ahead.

Thank you, operator, and thank you, everyone, for participating in Chimera's fourth quarter and full year 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 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 CEO, Phillip Kardis.

Good morning, and welcome to the Chimera Investment Corporation's fourth quarter and full year 2022 earnings call. Joining me on the call are Choudhary Yarlagadda, our President and Chief Investment Officer; Dan Thakkar, our Co-Chief Investment 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 for questions. Let me begin by briefly introducing myself. As many of you may know, from our internalization in 2015, until I became CEO in December 2022, I served as the company's Chief Legal Officer and Corporate Secretary. Prior to that, I was a partner in a major law firm and, among other things, was the company's outside counsel from its IPO until I joined as Chief Legal Officer. What you may not know is that I have a broad range of experience before I became a partner in a law firm, from serving on Capitol Hill and the executive branch to a Defense Analyst at a think tank, to a Fortune 50 company, to being a doctoral student in Economics. My career as a lawyer was primarily structuring very complex financial transactions. That structuring experience carried over into my work at the company, where I've been heavily involved in all aspects of the company's business, including serving on the investment and valuation committees as well as being involved in structuring its transactions. I'm not a regulatory attorney. I'm not a litigation attorney. My appointment as CEO is not the result of any regulatory or a litigation issue at the company, but rather driven by my transactional and strategic experience. Also, let me note that, while I have the transactional and strategic experience, I am not the Chief Investment Officer. We view the…

Thank you, Phil. I will review Chimera's financial highlights for the fourth quarter and full year 2022. GAAP book value at the end of the fourth quarter was $7.49 per share, and our economic return on GAAP book value was 3.8% based on the quarterly change in book value and the fourth quarter dividend per common share. Our economic return for the full year was negative 27.3%. GAAP net income for the fourth quarter was $79 million or $0.34 per share. And GAAP net loss for the full year was $587 million or $2.51 per share. On an earnings available for distribution basis, net income in the fourth quarter of approximately $0.11 per diluted common share and $0.16 per diluted common share after excluding a one-time severance expense related to the separation of our former CEO. And for the full year, earnings available for distribution, was $256 million or $1.08 per share. Our economic net interest income for the fourth quarter was $77 million and $436 million for the full year. For the fourth quarter, the yield on average interest-earning assets was 5.5%. Our average cost of funds was 3.9%, and our net interest spread was 1.6%. Total leverage for the fourth quarter was 4:1 times, while recourse leverage at the end of the quarter was 1.3:1. For the year, our economic net interest return on equity was 14.7%, and our GAAP return on average equity was negative 16.7%. And lastly, our full year 2022 expenses, excluding servicing fees and transaction expenses, were $72 million, modestly up from the previous year. That concludes our remarks. We will now open the call for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] The first question is coming from Bose George of KBW. Please go ahead.

Hey guys. This is actually Mike Smyth on for Bose. So, you mentioned that you intend to rebuild the Agency MBS and CMBS portfolios. Just wondering how big do you envision this kind of getting as a percentage of capital? And then what's the timeline for getting there?

Hi, this is Phil. Thanks for the question. There isn't a specific time line. We'll look at the opportunities in the market for both. And depending on kind of relative value, we'll start moving into those assets. As to the size, I think what we'll be looking at is a minimum of which we think is a minimum size of portfolio to be effective in this space or to be efficient, but the actual size will depend on kind of the size of our credit portfolio and where we see the future going in terms of possible investments. So, we're not going to pay to get to 10% or 25%. We're going to look at it in a more holistically at a time.

Great. Thanks. And then on the loan purchases, I was wondering, are you able to purchase the loans and kind of securitize it roughly at the same time to kind of avoid the risk of holding those loans on balance sheet and funding it with repo?

That's correct. That is our intent there. It could be the case that we -- because of timing that we end up warehousing them for a week or so, but the intent on when we purchase these is to settle right into securitization.

Great. And then maybe just one more. You noted that the purchases would be accretive. Can you just kind of walk through what's the expected ROE? And kind of what does this assume in terms of structural leverage? And does it assume any repo leverage on the retained pieces?

Yes. We think it's -- we're talking about something in the mid-teens for returns, and that would include leverage on the retained pieces.

Great. Thanks a lot for taking the questions.

You bet.

Thank you. The next question is coming from Trevor Cranston of JMP Securities. Please go ahead.

Hey thanks. Good morning. You guys talked about broadening out the types of loan purchases you're going to be making more so beyond the traditional RPLs as we go forward. Between the new categories of non-QM and BPL, for example, can you just talk about where you see a bigger opportunity in terms of how much supply of loans is available and the returns that you think you can get on those investments? Thanks.

Well, first, we really like BPLs. We think the returns are very good, and we like the short duration. At times, it can be challenging to acquire that in size, but we're always looking for opportunities there. And so -- but in the non-QM, it's something that we traditionally haven't played in. But in terms of some forms of investor loans and the like in that category, we're now finding to be attractive. And opportunities are coming our way, and we're -- we think we'll be buying more of that on a go-forward basis.

Okay, got it. And then a question on the dividend. I mean, the fourth -- so fourth quarter earnings, excluding the onetime stuff, it seems to have still trended downwards as cost of funds has increased. Can you maybe just talk about how you guys are thinking about the dividend given that trend and maybe any other considerations that the Board takes into account beyond just the EAD metric when you guys are setting the dividend? Thanks.

Sure. Thanks. EAD is one of the metrics. It's not the only metric. And at times, it's a good measure for certain aspects, but not 100% foolproof. So I think the Board looks at a variety of factors, including the total cash that the portfolio is generating, some of which just is not captured in the EAD metric. We also bear in mind, as I mentioned, that we have equity in our securitizations. And so depending on the timing and what our needs are, we may tap that from time to time. So we have all those factors go into it when we think about -- or when the Board thinks about the dividend. And so they were -- given where the portfolio is, they were comfortable with declaring the first quarter dividend at 2023 despite where EAD is at the present moment.

Okay. Appreciate the comments. Thank you.

Sure. No problem.

[Operator Instructions] The next question is coming from Lee Cooperman of Omega Family Office. Please go ahead.

Thank you very much. I'll just make an observation. You said you're a student of history. Any student of history would know interest rates were going up. Why weren't you not hedged earlier than now?

That is something that, in hindsight, though, the company should have done. I mean that -- we're right now relooking on a go-forward basis. I mean, we have had a change in leadership. We do have a vision of where we're going. We do have a structure and a strategy with respect to hedging versus our longer term financing. And so that's where we are. I am a student of history. But to be frank, that is in our past, and what we're focusing on is fixing it and moving forward.

All right. So it was a question that was previously asked, but you talked around, and the way you want to run the company was a reasonable return on equity for us to generate on our $7.49 of book value.

It's really our dividend return, 10%, 12%-ish range.

Well, 10% return on equity wouldn't do it. 10% return on equity would be a $0.75 dividend that would imply a cut.

This is Subra. Historically, the dividend yields on our stock has been around 10% to 12%, and that's where we expect our dividend to -- where our investments are currently yielding, and that's where we see the dividends to be as the return on capital to be expected from the stock.

So what are you saying then? Return on equity determines the distributable income, which will determine the dividend. So you're saying that the return on equity should be 10% to 12%?

Yeah.

Right. Okay. That would imply the dividend is kind of iffy at this level, that should we assume our shareholders that there's a good chance the dividend might be reduced in the next 12 months, or do you think the dividend is likely maintained?

No. I think, right now, we feel where the dividend where our portfolio is, in terms of throwing off cash and the new investments we're making. It's hard to predict where the future is in terms of the markets and potential dark clouds that we talked about. But right now, we feel good about that $0.23 dividend.

Thank you. And I assume, given the balance sheet, you have plenty of capital to run the business. You don't need new additional capital.

Yes, we have plenty of capital to run the business as it's currently constructed. But as we mentioned in terms of growing the other portfolios and investment opportunities, just to be straight, we're not going to shy away from raising money if that money is raised at a rate that's appropriate for us to reinvest in the assets. So if we see a positive return to that capital, we won't shy away from raising additional funds.

Yes. Equity, would you consider equity financing at these levels?

I would consider equity financing, depending on the investment opportunities at the time that we could access the market, yes.

So you would sell stock at a discount to book value?

No, I didn't say that. I said that, we will raise capital…

I'm asking. I'm asking. I'm asking. Look, let me tell you what my view is. Wall Street has created a lot of companies in this BDC, MLP, REIT space. Their only work would the stock sell at a premium to NAV. Because what happens is, you sell stock, you buy assets, you raise your dividend. You sell stock, you buy assets, you raise your dividend. When you go to a discount to NAV, its game over. It's only the smart guy is that basically, either merge to become more efficient to generate synergies or basically buy back stock at discount. The idea of selling stock at a discount to book value makes absolutely no sense, and we should consider winding up to the affairs of the company and giving back the money to shareholders and say we made a mistake. Our stock has been a disaster.

Yes. I mean, we don't disagree with that. I mean, our intent would be to raise at book. I mean the reason I would -- I pause for a second, it depends in terms of what the opportunity is. And if we feel that that it's massively accretive, we would at least consider it, but that's not our going-in position.

Very good. Thank you. Good luck.

Thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. Kardis for closing comments.

I'd like to thank everybody for joining our earnings call and frankly, my first earnings call. It's been a pleasure to have the opportunity to speak to you, and I look forward to doing so in the future. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.