Chimera Investment Corporation Q4 FY2025 earnings call

Phillip Kardis discussed the company's strategy of diversifying portfolio, strengthening liquidity, and expanding fee-based income, having laid out a plan early last year and making progress towards it. Subramaniam Viswanathan reviewed financial highlights including GAAP net income, EAD, segments' financials, liquidity, and strategic developments. Jack Macdowell talked about portfolio repositioning, capital allocation, performance of Agency MBS, legacy asset exits, and future plans to continue unlocking capital and redeploy into earnings accretive investments. Kyle Walker discussed Home Express's performance, with $1.04 billion in fourth quarter production, launched a non-delegated correspondent program, and increased warehouse funding capacity.

The company has two reportable segments: Investment Portfolio and Residential Origination. For the Investment Portfolio segment, during the fourth quarter, economic net interest income was $65 million, with a yield on average interest-earning assets of 5.9%, average cost of funds of 4.5%, and net interest spread of 1.4%. For the Residential Origination segment, Home Express funded $1 billion in production during the fourth quarter with a gain on sale premium of 358 basis points on loans sold and settled. Home Express EBITDA was $11 million for the quarter, and annualized EBITDA ROE was 16.2%.

The company announced first quarter 2026 dividends of $0.45 per share, an increase of 22% from prior quarterly dividends, and the board expects to maintain that dividend level for the remainder of the year. Priorities for 2026 remain focused on the long game, building a diversified residential platform to generate long-term value, continuing to diversify the portfolio, expand liquidity, and grow fee-based income both organically and through thoughtful acquisitions.

Forward-looking statements are subject to risks and uncertainties outlined in the Risk Factors section in the most recent annual and quarterly SEC filings. Actual events and results may differ materially from forward-looking statements. Fluctuations in interest rates, market conditions affecting portfolio value and earnings are potential risks.

Q: Looking at the Home Express numbers, obviously, the fourth quarter was pretty strong, both in terms of production volume and gain on sale also saw a nice jump. Can you give us an update on kind of how you guys are seeing volume and gain on sales so far in the first quarter?

A: We are seeing the typical seasonal reduction in volume after the holidays. But we think that 2026 is going to be a great year. We think the first quarter is going to be a pretty good quarter in comparison to last year. We are seeing the gain on sale premiums to be pretty good in comparison to the fourth quarter, and we are optimistic about the revenue for the first quarter.

Q: As you go through the year and continue to free up capital in some cases and reposition the portfolio, can you talk about where you see the best relative value today between adding more agencies after the spread tightening that has occurred versus potentially doing securitizations of non-agency assets?

A: One of the things that we continue to be really focused on is the portfolio construction. There are certain objectives that we have that we have talked about in terms of what we are trying to do with the portfolio, namely, creating more balance. And part of that is having that liquid component with agencies, which I think we have done a really good job in 2025 of building up. The other bookend there would be to have somewhat of a hedge vis-a-vis our MSR allocation, which at 1% continues to be well below what our otherwise target would be. And in between those two bookends is the credit piece of the portfolio where, you know, we think that having the Home Express production in-house and being able to securitize that and retain certain parts of the capital structure in our investment portfolio can certainly be accretive. As you point out, agency spreads have come in where we are holding leverage right now. We still see that as, you know, relatively attractive or at least meeting our return threshold somewhere in that low to mid-double digits. But I would say where we are from an allocation perspective today, we are pretty comfortable with, you know, plus or minus another 5%, I would say. So, really, for the balance of the year, that will continue to serve as our liquidity bucket. MSRs continue to be a focus of ours. And right now, as Kyle mentioned, we are seeing pretty strong demand in the secondary market for loans. So we are constantly evaluating the cost-benefit analysis of selling loans in the secondary market versus retaining them for our investment portfolio.

Q: Was hoping you could put the dividend increase in context, kind of how you thought about the size of that increase and how you think about kind of retaining some capital for book value growth, being able to grow the investment portfolio operating businesses versus kind of maximizing the dividend?

A: I think as we look at that issue, what we look at is we look at it over the period of the year. We recognize as we become more of an operating company, we expect EAD to potentially be variable from short period to short period, but so how we look at it is we look at it over the course of the year, we feel like that dividend is one that will have sufficient EAD coverage on. And will provide us sufficient coverage for us to have the proper allocations to help grow, you know, the operating aspects of our business. So that is the kind of the balance we struck and to give the market some feel for where we think we will be throughout the year.

Q: On the residential segment, are you guys originating second liens at the moment? Or is that an incremental opportunity? Then where do you see industry non-QM volume in 2026 versus 2025?

A: We currently are not originating second mortgages. We originate through a wholesale brokered network, and it is difficult with small loan amounts, like second mortgages, to originate those in a profitable manner. So we have not gotten into the second mortgage market. All the statistics and analytics that we see for non-QM and business purpose loans in 2026 are growing, increasing over 2025. So we are seeing numbers as large as 20% to 25% growth in the market. So we are anticipating that the market is going to grow and that we will get our share of the increased market going forward.

Q: Switching over to the change in book value this quarter and the reduction of the value related to your securitized debt. Is that happening mainly because that is more liquid than the loans on the other side? And should we just kind of see that as a timing issue?

A: It is a good question. So maybe we will just address what value quarter to date. I assume somebody is going to ask that. So we are basically flat to down, call it, 30 basis points quarter to date. And the one thing and maybe it is a good time just to talk about our views of capital at risk and value at risk. There has been a pretty heavy steepening in the yield curve during 2025. I think in the prior quarters, we have talked about the impact on our loans as well as on our securitized debt. And basically, loan values have been but the value of our securitized debt has increased at a faster pace, having the effect of reducing reported book value. Okay? And while that is an important accounting outcome, it does not really change how we view our economic risk or capital at risk. And that is because a core part of our strategy is exercising the call rights that we own on our securitizations where we redeem the bonds at par. And, you know, basically, the mark-to-market fluctuations in our securitized debt, it does not affect the economics of our call option nor does it affect the earnings power of our capital. So just want to give you kind of a, you know, how we think about that. We are focused squarely on managing capital at risk, and the way that we think about that is we evaluate based on the cash flow generating capital that we have, not on the short-term valuation movements of our securitized liabilities.

Q: Following up on this bullish non-QM outlook. I mean, do you think there is any room for credit enhancement levels to come down in the securitization trust? And to the extent that we ever saw more flexibility for credit enhancement levels, how do you think that would drive your appetite to take leverage on the subordinate pieces that you retain from securitization?

A: Good question. I mean, look, on some deals, we see quite a bit of differentiation among, call it, AAA enhancement levels across various deals. And we see the rating agencies consistently reviewing their models as more data comes in. And you are as aware as anybody that losses have been de minimis in the non-QM sector, but we are seeing the 2022, '23 cohorts where delinquencies are creeping up. So I guess our expectation is not that there is a material decline in credit enhancement levels. And for us, Eric, I mean, we actually look at securitization in two different components. One, horizontal risk retention and vertical risk retention. So the horizontal, obviously, we have, you know, certain types of requirements with respect to how much we must retain if we are holding horizontal. And then on the vertical side, we are holding most of that would be AAAs. So for us, it is really just an economic consideration. The nice thing about securitizing and retaining the horizontal piece is that you are basically, you know, funding your investment with fixed-rate term financing, so you are not taking liquidity risk. And certainly, from that perspective, we are more comfortable taking the leverage. And if it was like mark-to-market repo.

Q: The administration is focused on reducing mortgage rates by buying agency MBS, but the GSEs, of course, still hold a huge portfolio of mortgage loans, which they usually target for loss mitigation. Do you guys think the GSEs could ever look to sell more of the loan portfolio mainly in an effort to, like, create more room for MBS purchases? And do you think there is a deep enough market for them to potentially pursue that opportunity?

A: For sure. For sure. I mean, I would hope that they would. I mean, they have certainly been, you know, sellers in the past. So that could certainly be an avenue that they have used historically, and they could certainly use again to the extent that the economics made sense for them to do so.

Q: Just one on third-party assets under management and the growth around there. How do you think about the potential contribution of fee revenues or fee-related earnings over time? To see a meaningful pickup, would there have to be a pickup in loans under management? Or is there any other avenues that you are looking at there?

A: That is certainly a focus of ours to diversify our earnings and grow our fee-earning capabilities. I mean, that group is really bifurcated into two different pieces. One, the majority of which is managing, you know, loans on a third-party basis, and that creates a couple of different fee revenue streams. So we are constantly working to, you know, grow that business both sort of with external loans, and there are also synergies with respect to Home Express production to the extent that we sell loans and we can retain the asset management function on a go-forward basis. So we are certainly looking to exploit some of those synergies as well. And then on the more discretionary, you know, credit fund side, you know, we certainly remain focused on, you know, looking at building separately managed accounts and growing fees through that channel as well.

Q: Relatedly, are you seeing in terms of client demand or interest for the loans? Is there any kind of color around the mix of either institutional investors? What types?

A: If you are talking about the demand in the secondary market for Home Express' loan sales, I mean, it is a consortium of different buyers from insurance companies to dealers to, you know, asset managers who oftentimes are crossover between securities crossing over into the loan space. So, yeah, I mean, just like we have seen spreads tighten on AAA non-QM, 20 to 25 basis points start of the year, we are seeing very strong demand for non-QM loans in the secondary market from a whole host of investors. And maybe just to follow up on that question, the types of investors, I mean, you continue to see insurance companies looking to crossover and get exposure to the whole loans. So that is an area I think that we continue to be focused on to the extent that we can provide somewhat of a one-stop shop for folks who are looking to get exposure to non-QM loans, but perhaps do not have the infrastructure to manage those loans. We have the in-house capability, and we can provide that one-stop shop