Chimera Investment Corporation (CIM) Earnings Call Transcript & Summary

Good morning, and welcome to Chimera Investment Corporation's 2020 Annual Meeting of Stockholders. I'm Matthew Lambiase, Chief Executive Officer and President of Chimera Investment Corporation. As in prior years, we're hosting our annual meeting as a virtual meeting with our stockholders participating exclusively through the Internet and by telephone. This virtual meeting is being recorded and will be made available on our corporate website by 5:00 p.m. Eastern Standard Time tomorrow, June 26, and will remain available until August 30, 2020. The rules for conduct of the annual meeting, and our disclaimer regarding forward-looking statements have been posted on the virtual meeting website. The proxies appointed for today's meeting are Mr. Colligan and Mr. Kardis. The formal business of this meeting is listed in the notice of annual meeting and proxy statement timely mailed or made available to all stockholders of record as of the record date. With us today are the following members of Chimera's management: Rob Colligan, Chief Financial Officer; Choudhary Yarlagadda, Chief Operating Officer; Mohit Marria, Chief Investment Officer; Phillip Kardis, Secretary and Chief Legal Officer; Victor Falvo, Head of Capital Markets. Also with us today are Bryan Doran from Ernst & Young LLP, our registered independent public accounting firm; and Douglas Czarnecki, the inspector of election from American Election Services, LLC. We're looking forward to your questions. You may submit them at any time, and we'll respond later in the meeting. Now I will ask Mr. Kardis, the Corporate Secretary of Chimera, to convene the meeting.

Thank you, Mr. Lambiase. The Board of Directors fixed April 22, 2020 as the record date for determining stockholders entitled to vote at this meeting. As stated in the notice, the purposes of this meeting are as follows: first, to elect 3 Class I directors to serve until our Annual Meeting of Stockholders in 2023 and 1 Class III director to serve until our Annual Meeting of Stockholders in 2022, and until their successors are duly elected and qualified; second, to vote on a nonbinding advisory resolution on our executive compensation; third, to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year. Douglas Czarnecki, the inspector of election, is present and has submitted his report as follows: there were outstanding, on the record date, a total of 188,752,612 shares of common stock. The holders of not less than approximately 85.92% of the outstanding shares of the common stock are present at the meeting or by proxy. Accordingly, a quorum is present, and the meeting is duly convened. Stockholders who have sent in proxies need not take any further action with respect to any of the matters to be voted on today. If you wish to vote at this time, please record your vote via our annual meeting website. Now we will conduct the formal business as set forth in the Notice of Meeting. The Board of Directors has nominated the following persons, as named in the proxy statement, for election as Class I directors to serve until our Annual Meeting of Stockholders in 2023 and until their successors are duly elected and qualified. And for the election as a Class III director to serve until our Annual Meeting of Stockholders in 2022 and until their successor is duly elected and qualified. For election as Class I directors: Paul A. Donlin; Mark Abrams; Gerard Creagh. For election as a Class III director, Brian P. Reilly. On behalf of the Board of Directors, I move for the adoption of the following resolutions. Resolved, that the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and narrative discussion is hereby approved. Resolved, that the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the current fiscal year is hereby ratified.

Now that everyone has had an opportunity to vote, I declare the polls closed. Any ballots collected before the poll closed but not reflected in the preliminary report will be reflected in the final report of the inspector. The final results be filed on a Form 8-K with the SEC within 4 business days. As we take a moment to tally the ballots and collect questions, I'd like to take some time to discuss dramatic events relating to COVID-19, how it affected the financial markets and the operations of Chimera recently. Chimera started 2020 in very strong financial position. As many of you know, over the past several years, we've been acquiring a unique portfolio of residential mortgage credit. Our large portfolio of mortgage loans is unique because it has very low loan balance, less than $100,000, high coupons over 6% on average. And on average, our borrowers have been living in their homes for more than 10 years. Prepayments and turnover have been low, and the credit of the portfolio has performed better than what we modeled at purchase. Our loan portfolio is primarily financed through CIM securitizations and secondarily financed through repo and warehouse facilities. This strategy has historically produced solid income for the company. We approached 2020 with approximately $5 billion of previously issued securitizations nearing their call dates, with the potential to be refinanced. Our plan was to call these outstanding deals and reissue new debt with more favorable terms, including rate, duration and subordination. We were hopeful at the start of the year that successful refinancing of the outstanding debt would positively impact Chimera's earnings. Unfortunately, in March, the COVID-19 virus pandemic caused catastrophic upheaval in the financial markets, changed the focus and priorities of management and delayed our refinancing plans. The COVID-19 pandemic is responsible for one of the greatest stresses on the U.S. economy and the financial market seen in a lifetime. The lockdown and sheltering in place in the majority of the population created an abrupt stop to economic activity. The U.S. unemployment rate was at a 50-year low in February and shot up to levels not seen since the Great Depression over just a span of 2 months. Consumer confidence, industrial production and retail sales all had unprecedented sharp drops over the same period. Many sectors of the economy, like hospitality, retail and transportation faced and continue to face serious challenges to their operations. The economic fallout from the COVID-19 virus was akin to the U.S. economy having a heart attack. It was sudden, violent and most likely have a long recovery period. The financial market's response to the COVID-19 was rapid, and prices on credit assets fell quickly as investors rushed to cash -- into cash and U.S. treasury. Mortgage-backed securities also faced significant pressure on pricing and liquidity. Investors who used leverage struggled to keep up with margin calls on their financing, and many faced liquidation. During this period, Chimera was able to sell its agency mortgage-backed securities portfolio to raise cash to meet margin calls on our credit assets. Accessing this liquidity enabled us to retain our unique, high-yielding residential mortgage credit portfolio. And while the value of this credit portfolio had gone down meaningfully, we remain hopeful that the U.S. economy reopens, the price of these assets will recover, creating an opportunity for reappreciation in Chimera's book value. We've taken several initiatives this year to bolster Chimera's balance sheet and liquidity. In April, we issued $374 million convertible bonds with a 7% interest rate and a 3-year final maturity. In our first quarter earnings call, we announced that we secured $800 million of non-agency repo facilities with favorable mark-to-market characteristics. These facilities have maturities ranging from 12 to 24 months. In late May, we issued over $400 million of CIM 2020 R3 loan securitization, our first since the crisis. And most recently, we closed a 3-year, secured, nonmark-to-market financing arrangement led by Ares Capital (sic) [ Ares Management Corporation ] though the rates and terms associated with these transactions are not as attractive as they were pre-COVID-19, the added liquidity is beneficial to the company and will help Chimera execute its business strategy through the unprecedented market environment. Looking forward, we continue to believe that over the long run, residential mortgages and non-agency mortgage-backed securities will provide meaningful income and some of the best total return opportunities in the fixed income market. We believe that the U.S. economy will eventually improve from its current fragile state, and the markets will become more orderly. While 2020 has been a difficult market to navigate, we believe Chimera has taken the actions to stabilize our funding and put itself in a position to seek new investment opportunities in order to build for our future. And now I'll pause to collect questions.

I will now call upon the Secretary to present the preliminary report of the inspector.

Mr. Lambiase, the Inspector of Election has presented his preliminary report. He is to determine that a quorum is present. The inspector...

We did get a question. Why did Chimera reduce their dividend 40% when Annaly, their sister company, reduced their dividend by 12%? And I would just like to say that Annaly isn't our sister company, we are 2 separate companies. But the mix of our assets is completely different. Chimera has credit assets and Annaly is primarily in agency mortgage-backed securities, which did not have the funding issues. In response to the liquidity crisis in March and April, we sold $6 billion of our agency mortgage-backed securities to meet the margin calls on our credit assets, and that was a meaningful deleverage of our balance sheet. We also entered into a number of longer-term financing facilities, which were more expensive than the previous financings that we had. And then additionally, our convertible deal added new to share count. All of these were factors for the lower dividend for the second quarter. But all of them were also factors for us being viable today. Now I thank you for the question. Okay. Now I'll call upon the Secretary to present the preliminary report of the inspector.

Mr. Lambiase, the inspector of election has presented his preliminary report. He has determined that a quorum is present. The inspector of election has also determined that each nominee for director has received affirmative vote of a majority of the total votes cast for or against such nominee, and that the majority of votes cast were cast in favor for each of the other proposals presented in the proxy.

Based upon the preliminary report of the inspector of election, I declare that each of Paul A. Donlin, Mark Abrams and Gerard Creagh are elected Class I directors; and Brian P. Reilly is elected Class III director of the company; that the resolution of the company's executive compensation has been approved; that the selection of Ernst & Young LLP as the company's registered independent public accounting firm for the current fiscal year is ratified. There being no further business to come before the meeting, the annual meeting is concluded. Thank you.