Q4 2024 Chimera Investment Corp Earnings Call
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Speaker Change: Greetings and welcome to Cai married investment Corporation fourth quarter, and full year 2024 earnings conference call.
At this time all participants are in a listen only mode.
Speaker Change: Question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference. Please press star zero on your telephone keypad.
Victor Falvo: As a reminder, this conference is being recorded it is now my pleasure to introduce your host Victor Falvo <unk> head of capital markets and Investor Relations. Thank you you may begin.
Victor Falvo: Thank you operator, and thank you everyone for participating in <unk> fourth quarter and full year of 2024 earnings conference call.
Victor Falvo: Before we begin I'd like to review the Safe Harbor statements.
Victor Falvo: During this call we will be making forward looking statements which are predictions.
Speaker Change: Jackson's or other statements about future events.
Speaker Change: 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.
Speaker Change: Actual events and results may differ materially from these forward looking statements.
We encourage you to read the forward looking statements disclaimers in our earnings release, and our quarterly and annual filings.
Speaker Change: During the call today, we may also discuss non-GAAP financial measures.
Speaker Change: Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures. Additionally.
Speaker Change: Additionally, the content of this conference call may contain time sensitive information that is accurate only as of this earnings call. We.
Speaker Change: We do not undertake and specifically disclaim any obligation to update or revise this information.
Speaker Change: I will now turn the conference over to our President and Chief Executive Officer, So cordis.
Speaker Change: Good morning, and welcome to Chimera investment Corporation's fourth quarter 2024 earnings call joining.
Speaker Change: Joining me on the call are Jack Mcdowell, our Chief investment Officer, Sue <unk>, our Chief Financial Officer.
Speaker Change: <unk>, our chief risk and credit officer and.
Speaker Change: Big Falbo, our head of capital markets and Investor Relations.
Speaker Change: After my remarks, Subra will review the financial results and then Jack will review our portfolio before opening the call for questions.
Speaker Change: Okay.
Speaker Change: 2024, it was another year of reversals. The first part of the year Saga continued progress on reducing inflation and long term rates improved from a high of four 7% in April to three 6% in September.
Speaker Change: However.
Speaker Change: The second half of the year saw inflation reduction stall and the fed with the softening labor market reduced the fed fund rate by 100 basis points over their final three meetings of the year.
Speaker Change: Long term rates did not react as expected for the first time in seven rate cutting cycles dating back to the 19 eighties. The 10 year rose, finishing the year at four 6% up 100 basis points. Despite the fed cuts.
Speaker Change: During the fourth quarter of 2020 for the term premium for the 10 year treasuries increased by 75 basis points, which reflects the market's uncertainty about future rates, the political environment and the underlying strength of the.
Speaker Change: Carnaby.
Speaker Change: The housing market continued to face various challenges and unevenness due to many factors, including interest rates affordability and long term supply demand issues.
Speaker Change: The average 30 year fixed rate.
Speaker Change: Sure.
Speaker Change: Fixed rate mortgage started the year at six 6%.
Speaker Change: Peaked at seven 2% in May and dropped to six 1% in September leading to a modest uptick in activity before ending the year at six 9%.
Speaker Change: Unsurprisingly home sales suffered in 2024 sales of previously owned homes declined for the third consecutive year to the lowest level since the 19th 1995, reflecting what we believe to be the continuation of the lock in effects.
Speaker Change: New home construction was up slightly from 2023.
Speaker Change: But new homes for sale that are under construction peaked in March and were slightly down from that peak in December.
Speaker Change: The number of completed new homes for sale hit its highest level in December since 2009.
Speaker Change: The new home inventory represents eight and a half months supply, which is above the balanced market of six months.
Speaker Change: But completed new homes were estimated to sell and two eight months, reflecting what we believe to be strong demand for newly built homes, which is supportive of the RTL market.
Speaker Change: On the positive side home prices continue to increase between the third quarter 2023, and the third quarter of 2024 U S home prices rose four 3%. According to the Fhfa's housing price index.
Speaker Change: We believe that this house price appreciation is positive for existing portfolio due to further improvement in homeowners equity.
Speaker Change: Another positive development for our business was credit spreads for asset backed securities and other securitized products.
Speaker Change: Residential credit performance was particularly strong in 2024, driven by robust fundamentals due to low defaults rising home prices and record levels of homeowners equity.
Speaker Change: In addition to.
Speaker Change: Nickel indicators were strong as non agency MBS gross issuance ended at approximately 137 billion.
Speaker Change: Doubling from 2020 three's issuance levels of 71 billion.
Speaker Change: Investor demand was very strong and credit spreads tightened in 2024, especially at the bottom of the capital structure with credit curve flattening significantly.
Speaker Change: Yes.
Speaker Change: So what did all of this mean for our strategy in 2024, and what will it mean for 2025.
Speaker Change: In 2024, we managed our portfolio to increase liquidity and diversified sources of income.
Speaker Change: <unk> with that strategy, we deployed $209 million of proceeds from our equity raise in December 2023, and our two senior debt raises in 2024, we.
Speaker Change: We invested in floating rate agency Cmos, we believe these investments provide an attractive return while serving as a source of liquidity as we seek to deploy capital and bones or other investments as we did for the Palisades acquisition.
Speaker Change: We invested in subordinate tranches of newly issued third party mortgage securitizations backed by re performing mortgage loans and small balance commercial loans, we purchased residential transition loans, you purchased our pls and securitize them into <unk> 'twenty 'twenty four or one in the fourth quarter, we committed to purchase non QM.
Speaker Change: Loans, which we securitized this year.
Speaker Change: And finally in December we closed the acquisition of the Palisades group.
Speaker Change: A U S based alternative asset manager specializing in residential real estate credit.
Speaker Change: Founded in 2012, Palisades manages and invest on behalf of third parties and our residential real estate assets across the broad spectrum of credit products.
Speaker Change: Through this acquisition, we began providing third party investment management and advisory services, which represents a new fee based source of income and we believe the ability to grow our income on a capital light basis.
Speaker Change: What are our plans for 2025, we.
Speaker Change: We continue to approach portfolio management in a disciplined manner and we are expecting to operate in an uncertain environment.
Speaker Change: 2025, we expect to continue to diversify our portfolio increase liquidity and grow our fee based income revenue stream.
While we will continue to look for opportunities to acquire and serve securitized mortgage loans, we expect to grow our agency MBS portfolio.
Speaker Change: In addition to supporting our regulatory compliance we believe the agency MBS portfolio will provide diversification more stable dividends and a source of liquidity for opportunities this take asset and business acquisitions and provide in periods of volatility protection.
Speaker Change: Okay.
Speaker Change: By growing our agency portfolio, where we are returning to our roots as a hybrid REIT.
Speaker Change: We intend to also look to potential opportunities to acquire mortgage servicing rights, which we believe will help hedge our loan portfolio as well as provide a diverse source of income for our dividends.
Speaker Change: With the Palisades acquisition, we have embarked on our strategy of enhancing returns to our shareholders through diversification of revenue.
Speaker Change: Palisades Advisory services as the asset manager.
Speaker Change: Of our most recent securitization and we expect to add them to our future securitizations, including the re securitization of our existing deals.
Speaker Change: We believe that combining palisades platform with ours will allow us to drive efficiency and performance across the portfolio.
Speaker Change: Lastly, we've begun to see those investments of our of the fee base fee for service based income. It's early in the process, but we continue to believe the acquisition will be accretive to earnings.
Speaker Change: As we move into 2025 and beyond we will look to expand and grow our non discretionary investment asset management and advisory services and continue to look for opportunities to grow through a combination of organic and external growth.
Speaker Change: In addition, we plan on investing in technology that allows us to enhance and expand our asset management capabilities and drive operational efficiencies.
Speaker Change: We expect to source of funds for the portfolio diversification and growth initiatives to come from our existing portfolio as rich as we returned to a re lever strategy.
Speaker Change: We have issued call notices on all of our outstanding in our Securitizations and we expect to re securitize the loans in the next couple of months.
Speaker Change: In addition, we expect to call some of our our Securitizations in 2025, we will also look for opportunities to raise capital in the core.
Speaker Change: Capital markets.
Speaker Change: Finally, we continue to seek opportunities to finance our retained notes from Securitizations with long term limited or non mark to market financing facilities.
Speaker Change: As we have discussed in the past we've had we had an expensive non mark to market facility coming due in January 2025, we were able to enter into a new larger facility with better terms and greater than 400 basis point reduction in rate.
Speaker Change: By increasing the size of the facility our interest expense is flat, but we were able to receive approximately $62 million to deploy in new investments.
Speaker Change: Our goal is to build a durable more diversified portfolio and implement growth initiatives that are designed to provide stable and growing sources of income that will benefit our current stock price relative to our book value.
Speaker Change: We feel good about our business and we're finding new opportunities.
Speaker Change: And we increased our quarterly dividend by 12% to 2024.
Speaker Change: And lastly, we believe the acquisition of Palisades will further strengthen or expand our business and provide additional opportunities for growth for our shareholders.
Speaker Change: I will now turn the call over to Subra to review our financial results.
Subra: Thank you Phil I will review <unk> financial highlights for the fourth quarter of 2024.
Subra: GAAP net loss for the fourth quarter was $168 3 million or $2 seven per share and GAAP net income for the full year was $90 3 million or $1 10 per share.
Subra: GAAP book value at the end of the fourth quarter was $19 72 per share.
Subra: For the quarter, our economic return on GAAP book value was negative 10, 1%.
Subra: Based on the quarterly change in book value and a fourth quarter dividend per common share.
Subra: And for the full year, our economic return was a positive four 4%, which includes $1 in Florida, a sense of dividends declared in 2024.
Subra: On an earnings available for distribution basis net income for the fourth quarter was $30 4 million or 37 cents per share and net income for the full year was $121 million or.
Subra: $1 48 per share.
Subra: Our economic net interest income for the fourth quarter was $69 2 million.
Subra: For the fourth quarter the yield on average interest, earning assets was 6% our average cost of funds was four 5% and our net interest spread was one 5%.
Subra: Total leverage for the fourth quarter was four to one while recourse leverage ended the quarter at 1.2 to one.
Subra: For hedging financing and liquidity the company ended the year with $610 million in total cash and unencumbered assets at year end, we had $2 2 billion floating rate exposure on our outstanding repo liabilities are floating our total floating rate obligations net of hedges was $1 2 billion.
Subra: Yes.
Subra: We had $1 3 billion in either <unk> or limited Mark to market features on our outstanding repo agreements, representing 48% of our secured recourse funding.
Subra: We had $1 5 billion pay fixed interest rate swaps at a weighted average pay fixed rate of 356% with a weighted average maturity of less than one year the.
Subra: The company also had a long position and 500 million swaption on a one day pay fixed interest rate swap with a rate of 345%. The company executed this option in January.
Subra: In January we closed on since 2025, I, one securitization as part of our strategy to mitigate securitization execution risk on certain securitizations at year end, we were shocked two year treasury futures contracts to protect the net interest spread of 795.
Subra: This short position was closed out in January for the fourth quarter of 2020 for economic net interest income return on equity was 10, 5%.
Subra: Our GAAP return on average equity was negative 22, 3% and our return on average equity was seven 2% and lastly compensation general administrative and servicing expenses were marginally lower year over year, while excluding expenses related to the palisades.
Subra: Acquisition.
Subra: Transaction expenses, but significantly lower during the year due to reduced securitization activity. In 2024. However, these expenses increased in fourth quarter by $4 7 million, primarily from expenses related to the <unk> acquisition.
Subra: I will now turn the call over to Jack to review our portfolio.
Subaru: Subaru and good morning, everyone I'm excited to be here before diving into the portfolio I'd like to start with a brief introduction and share a little bit about my background my entire career going back to late 19 nineties has been dedicated to mortgage credit and structured products I began on the sell side focusing on mortgage and ask.
Subaru: It backed securitization, where I worked on both deal execution and security structuring I then spent nearly eight years on the buy side, both before and after the financial crisis, acquiring structuring and leading teams responsible for managing residential credit risks.
Subaru: It'll over 12 years ago, I Cofounded Palisades with a core objective of providing clients with access to diversified opportunities across the mortgage credit spectrum through a variety of asset and investment management activities core to that objective was building a team of highly motivated individuals and fostering the challenging and.
And rewarding work culture, we're incredibly proud of what we built and we're even more excited to now be part of the Chimera team. It has now been just over two months since the acquisition in early December I'm happy to report that the integration is progressing well and collaboration between the teams has been strong I want to extend a special thanks.
Subaru: To the entire team primary professionals as they have worked tirelessly and patiently over the last eight weeks to integrate the teams into a single cohesive unit and I'm deeply grateful for their efforts.
Subaru: Moving on to the portfolio as Bill mentioned the fourth quarter was marked by a significant rise in interest rates and was also the first full quarter. Since early 2022, where we had a positively sloping yield curve the spread between the 10 year and two year treasury widened by 19 basis points compared to the third quarter at the same.
Subaru: Time agency MBS spreads move slightly wider while non agency credit spreads tightened while this rate environment provided compelling investment opportunities. It also negatively impacted our GAAP book value on a mark to market basis. It's important to note that the change in book value was a direct result of the changes in interest.
Subaru: First rates and credit spreads and not the result of any unexpected credit deterioration in fact credit performance remained strong across our various loan products and we expect to further enhance our asset level credit risk management capabilities with the Palisades acquisition recall, our loan portfolio is primarily <unk>.
They ask using non recourse term securitization. This allows us to isolate credit risk while locking in our net interest margin and supporting our dividend paying ability, while non recourse securitization financing provides structural leverage advantages compared to recourse debt. It can also introduce book value volatility.
During periods of sharp rate movements and since we anticipate this question will come up in Q&A through the end of business yesterday, we estimate our GAAP book value has increased approximately 3% due to rate and spread movements since year end.
Subaru: During the quarter, we purchased $129 million of short duration residential transition loans and were net sellers of $452 million in agency Cmos and we ended the year with a $12 $3 billion investment portfolio, consisting of $10 7 billion of residential loans.
Subaru: $1 1 billion of non agency, MBS and $519 million of agency MBS.
Subaru: Our residential loan book includes $9 6 billion of seasoned legacy re performing loans $566 million of loans collateralized by investment properties $389 million of prime jumbo and $213 million of residential transition loans.
Subaru: Our seasoned re performing loan portfolio, which makes up the vast majority of our GAAP assets, where on average originated over 17 years ago and a delever considerably as a result of years of principal amortization and rising home values.
Subaru: The portfolio's average loan balance is approximately 99000 with an estimated loan to value ratio of 40% credit performance remained stable with serious delinquencies effectively flat quarter over quarter at nine 1% and down from nine 9% in the same period last year.
Subaru: Average interest rate on the portfolio sits right at 6% or just about 100 basis points below today's 30 year fixed mortgage rate of six 9%.
Subaru: Given elevated mortgage rates prepayments have remained range bound for the last two years and that continued in Q4 with speeds holding in the 6% to 7% range.
Subaru: While our portfolio has limited exposure to the southern recent southern California wildfires, our thoughts are with all of the affected families and individuals in those communities, including many of our close friends and colleagues as far our exposure, while preliminary and subject to change using property level longitude and latitude.
Subaru: Coordinates, we have 36 properties located within a 5000 square foot buffer zone of the wildfire boundaries for these properties have confirmed damage. We have two confirmed cases of affected borrowers requesting assistance as a result of having to relocate due to smoke damage.
Subaru: Our asset management team continues to actively monitor developments and remain in close coordination with our mortgage loan servicing partners to ensure impacted borrowers receive support communication is fluid and our exposure is properly mitigated.
Subaru: While some areas affected remain inaccessible or close to the public. We currently do not expect any material economic impact on our portfolio from these events.
Subaru: I'll speak briefly about portfolio financing, we ended the year with $7 1 billion of nonrecourse securitized financing collateralized by our residential loan portfolio. Additionally, we had $2 8 billion of secured recourse liabilities collateralized by a combination of loans some of our retained interest in.
Subaru: Securitizations as well as our non agency and agency MBS portfolios.
Subaru: Of our $2 8 billion of secured repo $2 2 billion or 77% was floating rate and importantly, nearly half are one 3 billion was non mark to market or limited mark to market. Our average repo funding cost declined by 22 basis points during the quarter due in part to federal.
Subaru: Reserve policy easing.
Subaru: During the year, our recourse financing increased by $392 million with over 90% of the increase attributable to the growth in the agency CMO portfolio.
Subaru: Subsequent to year end in January we closed our first securitization of 2025 effectively financing $287 million of Investor loans. These loans carry a seven 9% average interest rate and average credit score of 748, and an average loan to value ratio of 64%.
We ended up selling $276 million of senior securities, representing 96% of the capital structure at a five 8% cost of funds with strong demand from institutional investors across the capital structure, and we retained $12 million in subordinate and interest only securities.
Subaru: With respect to our interest rate hedges, we maintained hedges primarily for the purpose of reducing risk related to our floating rate liabilities in order to maintain our AAD and dividend paying ability.
Subaru: We ended the year with $1 5 billion of active interest rate swaps with a weighted average pay fixed rate of 356% effectively locking in a fixed rate on approximately 69% of our floating rate liabilities or 56%, including our floating rate preferred equity in.
Subaru: In addition in January we further optimized our liability hedges by exercising a $500 million swaption with a fixed pay rate of 345% shorting $50 million of swap futures and purchasing a 1 billion dollar two year interest rate cap at a 395% strike.
Subaru: Moving onto the topic of portfolio construction.
Subaru: Enjoy a stable portfolio of seasoned well equity <unk> and consistently paying re performing loans. However to echo Phil's opening remarks, we are committed to and excited about the opportunity to use that foundation to further develop a resilient and diversified investment portfolio capital for this diversification diverse.
Subaru: Suffocation effort can be sourced organically from our cash and unencumbered assets portfolio pay downs and also from equity capital that is embedded in our deleverage securitization, where we retain the right to call or redeem the senior securities.
Subaru: As we elect to exercise these call rights, we can either sell the loans or refinance them into a new securitization in each case. This has the effect of unlocking capital that will give us the ability to redeploy into complementary investments.
Credit fundamentals and housing finance are strong and optimism is priced into many asset classes. We are focused on making purposeful allocations in areas that we believe will enhance our portfolio construction diversification risk profile and supplement our overall risk adjusted return.
Subaru: Currently the areas of focus that we believe have the potential to enhance the long term durability of our portfolio include possible allocations to agency MBS mortgage servicing rights and perhaps continue to increase our allocation to short duration high yielding residential transition loans.
Subaru: The agency allocation is intended to provide balance to the portfolio with a more liquid asset base relative to the less liquid subordinate securities. We retained from our securitization programs that liquid portion of the portfolio will allow us to pivot quickly into credit opportunities and we can dynamically ratchet up the agency.
Subaru: Allocation to capture relative value opportunities when they emerge or take a more defensive posture during periods of market stress.
Subaru: Similarly, we see <unk> as an important component of our near term investment strategy not only do we view the asset class is one that can produce an attractive risk adjusted return, but can also serve as a natural hedge to our loan portfolio and help offset book value volatility associated with movements in interest rates.
Subaru: Our investment team has a reach and infrastructure to source and manage products across our residential spectrum and we seek to continue deploying these resources in the quarters to come.
Subaru: Turning to resources one of the most compelling aspects of our combined platform is the strength of our scaled infrastructure advanced data management capabilities and proprietary technologies. These tools are designed to empower our asset and investment management teams and optimize key workflows by enhancing asset.
Subaru: Level outcomes from the pre acquisition due diligence phase through post closing default management and loss mitigation, we work closely with our servicing partners to drive efficiency and performance across the portfolio.
Subaru: In just the first eight weeks since the acquisition we have already taken the first step in this initiative by having Palisades Advisory services named as the asset manager on our first securitization of 2025, and we plan on continuing to rollout this capability across the broader portfolio.
Subaru: Finally, I would like to reiterate Bill's comments about Palisades acquisition.
Speaker Change: Our third party asset and investment management capability presents a significant opportunity to grow our fee based revenue by providing clients with diversified access to residential credit products and portfolios. This.
Speaker Change: This includes non discretionary customized solutions discretionary separate accounts and private asset backed credit funds Palisades had experienced steady growth in recent years. However by uniting these capabilities under the scale <unk> platform, we expect to unlock substantial resources and enhance our ability to <unk>.
Speaker Change: Serve a broader range of institutional clients, including insurance companies asset managers endowment foundations and other institutional investors and allocators.
Speaker Change: We see these partnerships as highly complementary to our investment sourcing efforts for the REIT portfolio the diverse capital base from our advisory clients and credit funds not only enhances our market reach but also positions our team as a solutions provider in periods of market stress and.
Speaker Change: In closing the combination of the Palisades and <unk> teams strengthens our position as a leader in mortgage credit. Our combined team is passionate and takes great pride in our activities within this dynamic in our central industry and our team remains committed to executing our strategy with discipline and focus as we move into 2025.
Speaker Change: That concludes our remarks, we will now open the call up for questions.
Speaker Change: Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Speaker Change: Disappoints using speaker equipment, it may be necessary to pick up the handset before pressing the star Keys again Thats Star One to register a question at this time.
Bose George: Today's first question is coming from Bose George with <unk>. Please go ahead.
Bose George: Hey, everyone. Good morning.
Bose George: Can you talk about incremental <unk> and what you see is the normalized Roe.
Bose George: Just given the current rate environment, which looks like it's going to be higher for longer.
Bose George: Yeah, Hey, Bose this is Jack.
Bose George: With respect to normalized ROE, if you're referring to sort of what the opportunities. We are looking at in the market today, and where we're seeking to allocate capital toward our target.
Bose George: Return on at least on invested assets is going to be in that mid teens area.
Bose George: And I think in the areas that we're focused on notwithstanding the agency MBS, which has a purpose within our portfolio, but not necessarily seeking to be the driver of returns with respect to MSR and certainly what we are.
Bose George: Investing in on the RTL side of the portfolio those are all.
Bose George: Hitting those types of return targets with that being said as we think about the entire portfolio.
Bose George: We're in a position of receiving pay downs re levering our deals and when we do that we will have the intended effect of allowing us to reinvest into higher yielding assets and what is currently producing.
Bose George: And so on a net basis for the <unk> for the portfolio to kind of roll forward to a double digit net ROE is there a way to think about the timeline for that to happen.
Bose George: Yeah, I mean, it's a good question and we talk about that a lot and it really is a function of market conditions.
Bose George: When we think about areas, where we have availability of capital that's going to come from the things that we mentioned in our prepared remarks organically at least with respect to re levering some of our securitization, where we have the call rights and so we're constantly looking at those deals to understand what the economic impact.
Bose George: Calling those deals are and redeploying that into new investments. So it's really hard to predict you know sort of what the timeline is to reposition the portfolio, but that's definitely something that is top of mind.
Bose George: For the balance of 2025.
Bose George: Okay, great. Okay, and then just switching over to book value can you just talk about.
Bose George: The book value roll forward this quarter, just the drivers of the change.
Bose George: Yeah, I mean again this is Jack I mean, the book value change was somewhat nuanced. There are a lot of it was driven by the steepening of the year yield curve in December where I mean, we saw a bigger well typically the loans in our securitized debt they move in some.
Bose George: There is somewhat correlated but as we saw the longer end of the curve rise in December in particular.
Bose George: Relative to the short and then credit spreads tightened that had the effect of having a disproportionate impact on the value of our loans relative to our securitized debt.
Bose George: One thing that is interesting to look at.
Bose George: And how you can see that the fourth quarter was somewhat nuanced is if you look at the change in value with respect to the loans versus the securitized debt for the entire year I think there was a $6 million overall different something like that where the loan value increased by $6 million relative to <unk>.
Bose George: <unk> debt. So we do view that as somewhat of an anomaly, but if you think about our balance sheet and our investment portfolio. It really is all driven by changes in the value of the loans versus the securitized debt in large part.
Bose George: Okay.
Bose George: Great. Thank you.
Speaker Change: Thank you. The next question is coming from Doug Harter of UBS. Please go ahead.
Speaker Change: Thanks you.
Speaker Change: You talked a little bit about the potential to add MSR.
Speaker Change: Just talk about the thoughts around potentially adding other.
Speaker Change: Hedges that might look to dampen book value volatility or youre comfort with west kind of accepting that volatility currently.
Speaker Change: Yes, good question.
Speaker Change: So if you think about our strategy our strategy is really focused on buying residential loans and securitizing them and non recourse term financing structures those term financing structures.
Speaker Change: Allow us to effectively lock in our net interest margin and our dividend paying ability as long as the loans are in those financing structures. So that allows us.
Speaker Change: Isolate credit risk and focus on the things that we.
Speaker Change: We believe our core competency.
Speaker Change: Our hedging strategy up to this point has been focused on.
Speaker Change: The floating rate liabilities, the repo that we have on where we retain where refinance some of our non agency securities are some of the retained portions of our Securitizations. So if you look at all of our hedges. They really have been focused on further locking in our earnings or dividend.
Speaker Change: Pain ability. So I think just as we sit here today the volatility as a buy and hold investor you know we have taken the position that we're accepting the risk of the book value volatility. However.
Speaker Change: As it relates to hedging with derivatives now the MSR strategy as you pointed out that is a portfolio construction element that we see as being very important to add to our portfolio in an effort to stabilize book value, but instead of doing it with the yield diluting our earnings diluting <unk>.
Speaker Change: <unk> hedge we're able to do that with a cash flowing.
Speaker Change: Asset yielding allocation to the overall portfolio.
I guess just on the buy and hold.
Speaker Change: Strategy as you mentioned you lever the subordinates.
Speaker Change: No the retained pieces.
Speaker Change: Is there.
Speaker Change: Mark to market risk on those retained pieces.
Speaker Change: Now that needs to be hedged or are those all in non mark to market facilities.
Speaker Change: Yes, that's a great question. So it's a combination I think we provided that in some of our materials.
Speaker Change: The recourse financing that we have on our non agency and agency as well as our retained pieces.
Speaker Change: Do have I want to say about half of it is mark to market.
Speaker Change: Page eight of the Investor deck.
Speaker Change: So I guess a quick answers some of it is mark to market some of it is new.
Speaker Change: Non mark to market the big push that we have made over the course of the last year and continue to do so is to continue to put the less liquid retained portions of these securitizations into non mark to market and even fixed rate facilities.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. The next question is coming from Eric Hagen of BPI. Please go ahead.
Eric Hagen: Hey, Thanks, Good morning, good to hear from you guys.
Eric Hagen: During the quarter in response to the increase in interest rates did you receive a margin call and can you share how much cash or liquidity you posted for that margin call.
Eric Hagen: So hi, this is Phil So we received some margin calls they were really immaterial.
Speaker Change: No that's not.
Eric Hagen: No nothing that significant.
Eric Hagen: Okay.
Eric Hagen: I mean, maybe just turn into like conditions in the securitization market can you maybe share how you guys are thinking about.
Eric Hagen: The flow of capital in response to.
Eric Hagen: Changing expectations for the fed to cut interest rates.
Eric Hagen: Yes, I mean, you can see credit spreads have been tightening over the course of 2024 as well as coming into 2025. So from our perspective, we take all of that into account as part of the economic analysis that we go through as we're looking.
Eric Hagen: To exercise our call rights and seek to pull capital out and redeploy it so notwithstanding the CPI news that came out this morning.
Eric Hagen: Through yesterday that was something that we thought was favorable conditions continues to be good demand throughout the capital structure, especially down at the bottom end of the capital structure just in the last deal that we did our first deal of 2025 that we talked about there was strong demand.
Eric Hagen: I think that was the first time, we've sold down to a double b.
Eric Hagen:
Eric Hagen: Yes.
Eric Hagen: In history.
Eric Hagen: Okay. Thanks for the color I appreciate it guys.
Trevor Cranston: Thank you. The next question is coming from Trevor Cranston of citizens JMP. Please go ahead.
Eric Hagen: Yeah.
Trevor Cranston: Thanks, Good morning.
Trevor Cranston: You mentioned, adding MSR.
New asset class.
Trevor Cranston: To help you.
Trevor Cranston: To help hedged some of the book value volatility.
Trevor Cranston: Can you elaborate a little bit on what kind of <unk> you guys are potentially looking at you know if its current coupon type of product or a little bit more seasoned.
Trevor Cranston: Lower coupon.
Trevor Cranston: And maybe also just provide some color on sort of how much approximate capital you'd be looking to deploy it to that asset class over the next year or so.
Speaker Change: Yes, sure I mean.
Trevor Cranston: Start in reverse order here from an allocation perspective.
It's really hard to say I mean, we do have sort of our internal model portfolio, but sort of getting to that model portfolio is a function of a whole host of things including market conditions.
Trevor Cranston: How much capital, we're able to pull out from the re securitization of re levers that we're doing so.
Trevor Cranston: It's hard to give a definitive answer I will say that we are laser focused on.
Trevor Cranston: Moving in that direction so.
More to come there over the course of 2025.
Trevor Cranston: MSR, so as an asset class, where we see value I mean, we like the MSR.
Trevor Cranston: For a couple of different reasons, one we're really seeking to make purposeful allocations within the portfolio. So it's not just let's look at whatever trade is in front of us at any point in time, it's really thinking about portfolio construction, where how do we want this portfolio to look over the next 2345.
Trevor Cranston: Five years.
Trevor Cranston: <unk>.
Trevor Cranston: And MSR as are a core component of that.
Trevor Cranston: In order to get the most bang for the Buck if you will from a negative duration attributes of an MSR, obviously buying at the money coupons are going to have a more.
Trevor Cranston: Substantive effect versus out of the money, but we also have to look at things from a relative value perspective. So.
Trevor Cranston: The lower coupons that have less prepayment volatility those hack in.
Trevor Cranston: But at this point in time have some attractive attractive relative value characteristics, just because I think a lot of the market and folks are looking at that current coupon is having more of a recapture component to it and theres value there for a lot of these originators. So we will look across the coupon stack.
Trevor Cranston: Msr's and see where relative value is but when we think about it we're really putting it in the context of what is the duration offset how is it going to stabilize the overall portfolio. So if we I guess I'll just end with this we did more current coupons, we could have less of an allocation if we had a.
Trevor Cranston: Lower coupon portfolio, we would have to allocate more equity capital in order for it to achieve our objectives.
Trevor Cranston: Got it okay. That's helpful.
Speaker Change: And then could you guys, maybe talk a little bit about your thoughts around the likelihood of GSE reform and what kind of opportunities.
Trevor Cranston: <unk> for Chimera.
Speaker Change: If that were to end up happening.
Speaker Change: Yes, I mean, that's a tough one I guess, when we think about it and we talk about it.
Speaker Change: Our investment committee.
Speaker Change: I have to start with what are the administration's stated priorities. They seem to include you know tariffs and trade policy immigration border security government efficiency. You know the question is how much does GSE privatization to sort of fall into that third bucket of government efficiency I mean.
Speaker Change: I guess what was the last week, probably I think the new HUD Secretary has come out and made comments about GSE privatization, so whether it's going to be top of mind or not is hard to say.
Speaker Change: From our perspective.
One thing that seems to be clear and a bit of a consensus is that.
Speaker Change: We do not want to the policymakers do not want to do anything that is going to negatively impact or disrupt the housing finance market and it sounds like this is going to be if we do go down the path of privatization is likely to be a long process. It will be one that we will see to ensure that it doesn't have a material.
Speaker Change: Negative effect on housing policy.
Speaker Change: And it will likely focus on.
Speaker Change: Core objectives of the agency's wishes to promote opportunities for increasing homeownership for.
Speaker Change: Our perspective, if we had to lie.
Speaker Change: Sort of guess, if you will like what could be some of the possible.
Opportunities, perhaps or even risks I mean, I guess as we seek to build our agency MBS portfolio. You know so much of the market today is driven by you know headline.
Speaker Change: Headline of the day and as headlines come out that could present opportunities for us to sort of leg in two agencies when the headlines caused spreads to widen.
Speaker Change: The other element as you know.
Speaker Change: If the.
Speaker Change: They do move towards privatization.
Speaker Change: Then one eventuality could be a scenario, where they do focus more on some of the core products and that can move some of the more noncore products into the non agency space.
Speaker Change: And that you know.
Speaker Change: It's really anybody's guess I would say.
Speaker Change: Yeah fair enough okay. Thank you.
Carlos: Thank you at this time I'd like to turn the floor back over to Mr. Carlos <unk> for closing comments.
Carlos: I'd like to thank everyone for participating in our fourth quarter 2024 earnings call and I look forward to speaking to you on our 2025 first quarter earnings call. Thank you again.
Speaker Change: Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.
Carlos: Okay.
Carlos: Okay.
Carlos: Okay.
Carlos: Okay.
Carlos: Okay.
Carlos: Sure.
Carlos: [music].
Carlos: Yeah.