Chimera Investment Corporation Third Quarter Earnings Call - CHIMERA INVESTMENT CORP

Financial Performance:

• Reported a GAAP net loss of $193.6 million for Q3 2026, with $191.2 million loss driven by the investment portfolio segment and a $2.4 million loss from residential origination.
• Generated $32 million in earnings available for distribution (EAD), equating to $0.38 per share.
• Book value per share declined 16.5% to $14.82, primarily due to higher interest rates and wider mortgage spreads.
• Achieved an annualized EAD return on average common equity of 9.48% and a negative economic return on GAAP book value of 13.98% for the quarter.
• Investment portfolio segment recorded $69.4 million in economic net interest income with an annualized return on average equity of 13.91%; yield on average interest-earning assets was 5.9% against a cost of funds of 4.3% (1.6% net interest spread).
• Home Express (residential origination) funded $1.12 billion in loans, generating $0.4 million in EBITDA and a 0.6% annualized EBITDA ROE.
• Consolidated secured financing totaled $8.6 billion ($801 million for origination warehouse, $7.8 billion for investment portfolio); non-agency portfolio financing included $1.2 billion (73%) with non- or limited mark-to-market features.
• Ending liquidity stood at $561 million in cash and unencumbered assets, down from $656 million in the prior quarter.

Guidance and Future Outlook:

• Management expects Home Express profitability to remain roughly flat in Q4 2026 as the pipeline from Q3 is disposed, projecting a return to profitability in Q1 2027.
• Q4 2026 financials are expected to be impacted by the acquisition and holding of loans for securitization prior to deal closing, specifically exposure to the higher rate and wider spread environment observed in late September.
• Long-term outlook remains favorable, citing restored economics for new production, improved financing positions, and the maturation of the integrated origination and securitization platform.
• Management anticipates establishing PRISM as a regular issuer in the non-QM securitization market subject to market conditions.
• Capital allocation preference remains focused on investment deployment over share buybacks given current opportunities.

Business Segments and Product Lines:

• Home Express (Origination): Originated a quarterly record $1.12 billion (up 27% YoY), with 16.8% from the correspondent channel; maintained credit discipline with a weighted average FICO of 743 and LTV of 72.39%.
• PRISM Conduit: Completed the inaugural securitization (PRISM 2026 HX1) backed by $291 million of non-QM loans originated by Home Express; priced AAA bonds at 160 basis points, competitive with market standards.
• Investment Portfolio: Actively repositioned assets by selling $1.2 billion in lower coupon/pass-throughs and purchasing $1.9 billion in higher coupon securities, increasing average bond coupon to 5.67% and shortening duration by nine months.
• Securitization & Financing: Refinanced two maturing non-mark-to-market repo facilities totaling $280 million, extending maturities by two years and reducing funding costs; expanded facilities to $355 million, adding $75 million in reinvestment capacity.

Market and Competitive Landscape:

• Q3 characterized by the third-largest 10-year Treasury increase in the past decade, with yields rising over 50 basis points in September alone, creating significant volatility for originators.
• Agency MBS underperformed due to higher rates and volatility; however, management views the post-September repricing as creating a more attractive investment environment with improved yields and reduced negative convexity.
• Non-QM market delinquencies saw a modest, reversible increase in the investor DSCR portfolio but remain well below broader composite benchmarks for 2022-2023 vintages; losses remain nominal across the sector.
• Competition in origination intensified with some lenders holding pricing steady to preserve volume, while Chimera maintained disciplined pricing and credit standards, resulting in selective volume growth.

Risks and Challenges:

• Interest rate volatility and speed of rate movements significantly impacted origination margins by devaluing locked pipelines before secondary market sale.
• Book value erosion of 16.5% driven by unrealized mark-to-market adjustments on loans and agency MBS due to widening spreads and higher rates.
• Leverage ratios increased (Total: 6.5x; Recourse: 4.1x) due to the accumulation of loans held for sale ahead of securitization.
• Potential for further Q4 profitability pressure if market spreads widen or rates remain volatile before the PRISM pipeline is fully securitized.

Management Commentary and Tone:

• Tone was pragmatic and defensive of long-term strategy despite acknowledging the "challenging period" and sharp market repricing.
• Management emphasized the successful execution of the integrated platform (Origination + Asset Management + Securitization) as a key strategic differentiator.
• Confidence expressed in the quality of assets, underwriting discipline, and the ability of hedging strategies to cover margin calls without forced asset sales.
• CEO Bill Connors reiterated that while market volatility is uncontrollable, the firm maintains strict control over asset quality, financing structure, and capital allocation.

Analyst Questions and Answers:

• Agency vs. Credit Returns: Management expects 16-17% ROE on agency MBS, viewing them as a benchmark for capital deployment and a source of liquid cash flow to support origination activities.
• Liquidity Buffer: Clarified that leverage fluctuations are temporary tied to securitization aggregation; maintaining ~20% allocation to agency MBS provides sufficient capacity to fund PRISM pipeline needs.
• Hedging & TBA Position: Confirmed the $2.4 billion short TBA position was unwound in October as volatility moderated; the swap portfolio was managed to a tight duration gap rather than for directional views.
• Non-QM Delinquencies: Addressed concerns by noting delinquency upticks were limited to specific vintage portfolios and remain significantly better than market averages, with no material unexpected losses.
• Share Buybacks: Reiterated the stance that reinvesting capital into the portfolio is currently preferable to buying back shares.

Other Key Points:

• The company successfully closed the PRISM 2026 HX1 transaction in a difficult market, achieving pricing in line with seasoned competitors despite being a first issuance under the shelf.
• The platform leverages three complementary capabilities: Home Express (origination), Palisade (asset management), and Chimera (securitization/capital markets).
• Credit fundamentals remain stable with delinquencies within expected ranges and prepayments declining in line with broader non-QM trends due to higher rates.
• Total expenses remained relatively flat quarter-over-quarter, with no transaction-related expenses incurred in Q3.