Chimera Investment Corporation Aktie

Greetings, and welcome to the Chimera Investment Corporation First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Tyra Walton, Head of Investor Relations. Thank you. You may begin.

Thank you, operator, and thank you, everyone, for joining us today. I'm Tyra Walton, Head of Investor Relations. This morning, Chimera released its results for the first quarter of 2026. The earnings release and presentation for the quarter are both available on our website at chimerareit.com.

Before we begin, I'd like to review the safe harbor statement. Today's remarks may contain forward-looking statements, which are predictions, projections or other statements about future events. These events 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 disclaimers in our earnings release and our quarterly and annual filings. During the call, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliations 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 call over to our President and Chief Executive Officer, Phil Kardis.

Thank you, Tyra. Good morning, and welcome to Chimera Investment Corporation's First Quarter 2026 Earnings Call. Joining me on the call are Subra Viswanathan, our Chief Financial Officer; Jack MacDowell, our Chief Investment Officer; and Kyle Walker, the President and CEO of HomeXpress Mortgage.

After my remarks, Subra will review the financial results. Jack will review the investment portfolio, and then Kyle will review HomeXpress results. We operate in a market where conditions change -- can change quickly. Rates move, spreads widen, liquidity tightens and then [rarely] in a straight line. This year has been a clear reminder of that reality. During the quarter, treasury yields moved higher across the curve, while the 2/10s spread flattened. Prior to the Iran conflict, mortgage rates briefly touched the 3.5-year low, going to reverse higher by 40 basis points as volatility returned. Mortgage basis widened relative to treasuries and swaps, equity volatility spiked at one point doubling before stabilizing. Oil prices moved sharply higher. And at the same time, rate markets alternated between periods of calm and episodes of rapid repricing.

Overlaying this, the market expectations for monetary policy shifted meaningfully. At the start of the year, the market anticipated two to three rate cuts in 2026. By quarter end, those expectations had largely dissipated. And in fact, there's now some discussion of the possibility of rate hikes. I highlight these dynamics to underscore a central point. We are operating in a market where uncertainty is not episodic. It's structural. We don't try to predict where the market will be. We focus on being prepared for wherever it goes.

Our objective is clear: to build a company that's not dependent on any single market environment. The question then is straightforward. How did we perform in this environment? And how are we positioned going forward? I'll give you a sneak peek. We think we did very well and believe we are well positioned to take advantage of opportunities throughout the rest of the year.

So let's start with HomeXpress. HomeXpress had another strong quarter. Despite volatility, origination volume increased 39% compared to the first quarter of 2025, reaching $884 million. Moreover, they were able to generate $11 million of earnings before taxes, depreciation and amortization, representing an annualized return on equity of 16.8%. This is what we aim for, growth with discipline and returns that justify the capital employed.

Turning next to our investment portfolio. We continue to reposition the portfolio to unlock value and build more durable earnings. During the quarter, our allocation to loans decreased from 62% to 55% and our allocation to Agency RMBS increased from 15% to 21%. The primary driver for this shift was the redemption of eight securitizations backed by $1.5 billion of seasoned reperforming loans. We sold $1.2 billion of those loans, generating $195 million in net proceeds and retained $287 million for current income and future securitization.

With an estimated breakeven ROE of just under 8%, the reinvestment of these proceeds has the potential to generate an additional $15 million in annual earnings. The takeaway, we increased earnings power while improving portfolio flexibility. As we look at our portfolio repositioning over the past 15 months, our estimated investment levered returns, including the addition of HomeXpress, have increased by approximately 20%.

Also since the beginning of the year, we have been purchasing newly originated loans from HomeXpress. We plan to launch the new CIM HomeX securitization program later this quarter or early next. Overall, our portfolio had a very strong quarter. But as a REIT, the real test is our dividend. So how are we doing? First quarter earnings available for distribution EAD was $0.54 per share, which covered the $0.45 dividend by 120%. Over the past 10 quarters, our EAD has exceeded our dividend in nine, missing once by a single penny.

Over that same period, we increased the dividend from $0.33 to $0.45 per share, a 36% increase while maintaining EAD coverage of more than 1.1x. I want to let that sink in for a minute. We've grown and covered our dividend for the past 2.5 years. That consistency is not accidental. It reflects a focus on generating durable earnings. So what's our outlook for the remainder of the year and how are we positioned? Looking ahead, we expect continued uncertainty, political, geopolitical and market-driven.

But despite that uncertainty, we remain optimistic about the future. We have structured the platform to preserve optionality across origination, investment and asset management so that we can adapt as conditions evolve. And more than that, we have the capital and the liquidity to take advantage of that optionality. We ended the quarter with $476 million of cash, approximately $200 million of unencumbered assets and nearly $500 million of equity allocated to Agency RMBS.

So as we look over the rest of the year, we believe we have both the liquidity and the flexibility to continue to play offense and act when opportunities arise. Specifically, we will continue to grow and diversify the portfolio, expand originations, build fee-based income and pursue acquisitions. With that, I'll turn it over to Subra to walk you through the financials.

Thanks, Phil. GAAP net loss for the quarter was approximately $65 million. We generated approximately $46 million of earnings available for distribution or $0.54 per share compared with $34 million and $0.41 per share in Q1 of 2025. This improvement reflects higher net interest income from the portfolio and the addition of HomeXpress. Our quarterly dividend of $0.45 per share was covered by earnings at approximately 1.2x. GAAP book value per share declined by 6.9% to $18.34. Excluding the impact of redemption of eight securitization deals and related loan sales, book value was down by 2.5%.

Jack will provide additional details on the transaction and its impact on book value and earnings. In addition, the transaction released $195 million in equity, which was immediately redeployed into agency securities, increasing liquidity and supporting earnings accretion. Redeeming the securitized debt reduced net interest expense by $4 million, reflecting the exclusion of accrued carry interest on the payoff. In addition, income from our MSR-related investments benefited from early payout protection payments of $2 million. Together, these items contributed approximately $0.07 to earnings available for distribution per share and are not expected to recur.

With that, at the firm level for the quarter, economic return on GAAP book value was negative 4.6% based on the quarterly change in book value and the $0.45 first quarter dividend per common share. Annualized GAAP return on average equity was negative 6.97%, while annualized EAD return on average common equity was 11.53%.

Segment performance for the first quarter was as follows: -- for the investment portfolio, economic net interest income was $72.8 million, while annualized economic net interest income return on average equity was 13.03%. The yield on average interest-earning assets was 6%. Our average cost of funds was 4.2% and the resulting net interest spread was 1.8%. For the Residential Origination segment, HomeXpress funded $884 million of loans.

EBITDA defined as earnings before taxes, depreciation and amortization was $11.4 million and annualized EBITDA ROE was 16.8%. With respect to leverage and liquidity, our total leverage was 5.2:1, while recourse leverage was 2.9:1. Recourse leverage rose this quarter as we continue to increase our capital allocation to Agency RMBS securities.

We ended the quarter with $675 million in total cash and unencumbered assets compared to $528 million at the end of the year. Total consolidated secured financing outstanding was $7 billion. It was comprised of $629 million related to our residential origination warehouse loans and the remaining approximately $6.4 billion was for our investment portfolio. Within the investment portfolio, $4.1 billion of secured financing supported Agency RMBS positions against which we maintained $3.7 billion in swaps and swaps futures across varying maturities and $966 million in TBAs.

$1.9 billion was secured by residential credit assets, of which $1.2 billion or 62% carried non or limited mark-to-market features and $1 billion or 54% of this were floating rate facilities. We also utilized $224 million of warehouse capacity during the quarter to finance retained loans post redemption of the eight deals I discussed earlier.

Finally, on expenses. Compensation expense increased by $8.5 million quarter-over-quarter, mainly driven by a return to a more normalized run rate and higher stock-based compensation. In the Investment Portfolio segment, the prior quarter reflected a lower accrual while the first quarter returned to a more normalized run rate. We also recognized higher stock-based compensation in the first quarter related to grants awarded to retirement-eligible employees. In the Residential Originations segment, expenses increased by approximately $1.4 million, driven by primarily by a higher headcount. In summary, the first quarter reflects the impact of a deliberate portfolio repositioning with capital released and deployed into higher return opportunities, while the underlying business continues to perform. We believe the steps taken this quarter position us well for improved earnings and returns for the future.

With that, I'll turn the call over to Jack.

Thank you, Subra, and good morning, everyone. As Phil mentioned, the quarter began on constructive footing, supported by GSE demand for Agency MBS and expectations for Fed easing. That tone shifted in early February as liquidity and credit concerns reemerged, particularly in private credit. Conditions deteriorated further with the escalation of the conflict in the Middle East that continued throughout the balance of March. Since quarter end, mortgage spreads have tightened from their wides and credit has firmed across products, though rates remain higher and markets continue to digest an evolving geopolitical environment.

Against this backdrop, our focus has remained consistent. Over the past year, we have been executing a deliberate strategy to optimize our portfolio, in particular, raising capital organically by economically relevering securitization structures, divesting fully valued assets and increasing our allocation to more liquid investments. That strategy positioned us well heading into the March volatility, enabling us to de-risk quickly when conditions deteriorated and deploy promptly upon raising capital. During the quarter, we completed a series of strategic transactions involving the redemption of eight securitizations collateralized by $1.5 billion of legacy re-performing loans.

We sold $1.2 billion of the loans and retained approximately $287 million that we plan to resecuritize in the near term. These transactions released approximately $195 million of capital at a breakeven ROE of just under 8%, and we estimate the redeployment of that capital has the potential to increase annual earnings power by $15 million. You can see additional details on Slide 10 of the accompanying presentation.

I want to take a moment to walk through how these transactions impacted our reported book value as the mechanics of calling legacy securitizations can create movements that do not fully reflect the economic outcomes. When we call these securitizations at par, we redeemed securities that were carried on our balance sheet at a discount. That discount, approximately $43 million flowed through as a reduction in book value. In total, these strategic transactions accounted for nearly two thirds of our change in book value during the quarter, and absent these actions, book value would have been down approximately 2.5%, reflecting the impact of spread movements and rate volatility during the quarter. As of last Friday, our estimated book value is up about 1%. So for context, the majority of our book value decline this quarter was a direct result of strategic actions that are designed to improve the quality of our portfolio and enhance our go-forward earnings potential.

We are committed to preserving capital and managing risk, and we assess value at risk based on the earnings-generating capacity of our capital, not short-term market movements in securitized liabilities. We continued our capital reallocation efforts, repositioning the portfolio toward a more balanced mix, enhancing our liquidity profile and the potential for more durable risk-adjusted earnings. Our allocation to residential credit decreased to 65% from 72% at year-end, with loan exposure coming down to 55% from 62%, driven mainly by asset sales during the quarter.

In turn, we added $1.9 billion of Agency MBS, bringing that allocation to 21%, up six percentage points quarter-over-quarter with our specified pool portfolio ending at $4.9 billion. In March, amidst the onset of the conflict in the Middle East, we added selectively to our agency portfolio in five and six coupons where spreads have widened most and we were under-allocated, reducing overall portfolio duration at a time when we wanted to maintain a more defensive posture.

We also actively managed risk through TBA positions, initially shorting $500 million as the conflict intensified before unwinding those positions after raising liquidity through loan sales. We subsequently reestablished shorts on a portion of our portfolio to maintain flexibility across the stack. We continue to hedge our agency portfolio with interest rate swaps, consistent with our SOFR-based funding and the carry advantage provided by current swap spread levels.

On the credit side, our hedge composition shifted during the quarter from pay fixed swaps and swaptions to interest rate caps, providing an asymmetric payoff in the event of a material decline in short-term rates. As Phil mentioned, we began retaining HomeXpress loans in the first quarter and anticipate launching our first securitization in late Q2 or early Q3. These loans are representative of HomeXpress's normal production with investor loans making up approximately 55% of the population, reporting a 70% average loan-to-value ratio, 735 average credit score and 7% average coupon.

We see securitization execution outpacing whole loan pricing in the current market. And given our flexibility to hold, securitize or sell, we are well positioned to capture that differential. Turning now to credit. Performance across our loan portfolio remains strong. Delinquencies in the legacy re-performing book ticked up, though this was largely due to the composition of loans we sold versus retained. On the RTL side, the dollar balance of delinquencies remained stable and losses nominal. And in our investor loan cohort, delinquencies driven by a natural seasoning of the 2023 vintage are in line with expectations and reverted back into the mid-5% range as of the April remittance reports. Stepping back, the first quarter demonstrated both the value and the necessity of the transformation we have been executing over the past year.

The loan sale activities released capital and materially improved our earnings capacity. Our growing agency portfolio gave us flexibility to redeploy and de-risk dynamically as conditions shifted. And HomeXpress continues to contribute to earnings while building a pipeline for our securitization program. We entered this year with a clear plan, diversify the portfolio, strengthen liquidity and grow durable sources of income. The actions we took this quarter advanced each of those objectives. We covered our dividend. We improved the composition of the portfolio, and we redeployed the capital freed up from the legacy transactions into higher returning opportunities. The strategy is delivering results, and we see continued growth in the earnings power of this platform.

With that, I will turn it over to Kyle to discuss residential origination.

Thank you, Jack, and good morning, everyone. HomeXpress delivered strong results in the first quarter, building on the momentum from the prior quarter. We originated $884 million in total loan volume, representing a 39% increase as compared to the first quarter of last year. Despite market volatility emerging late in the quarter, our origination volume, all of which is first lien residential mortgages was not meaningfully impacted due to two key reasons. First, the loan submission to close process has a natural lag of about 35 days. As a result, much of our first quarter's volume was already in the pipeline before market conditions shifted.

Our first quarter results, therefore, largely reflect the origination pipeline activity built earlier in the quarter.

Second, consumer non-QM and business purpose loan demand is less dependent on rate-driven refinancing activity, which also supported our pipeline stability through the late quarter disruption. Looking ahead, our pull-through rates and broker engagement have remained relatively consistent entering the second quarter. Submissions did moderate briefly during the disruption, but activity has begun to normalize. Demand continues to be driven less by rate-sensitive refinancing activity and more by borrowers with specific financing needs, including consumer home purchases, cash-out refinancings and investment property purchases.

As a result, despite elevated and ongoing interest rate volatility, the underlying demand for HomeXpress loan origination remains firm. Our experienced leadership team has successfully navigated many past market disruptions and cycles. That experience enables us to make strategic decisions and pivot effectively with changes in the market. One area we have been focusing on is increasing our percentage of consumer non-QM loans, which generally carry higher average loan balances.

Our average loan size increased from $424,000 in March to $451,000 in April. This compares with a $410,000 average for the first -- for the entire first quarter. By increasing the average loan size, we can generate more volume with the same number of loans, further improving our efficiency. HomeXpress delivered strong profitability in the quarter, generating an EBITDA of $11.4 million. Our net origination margin, which reflects both gain on sale as well as operating cost to produce our loans was 114 basis points. In this environment, we remain focused on driving efficiency while maintaining disciplined pricing and sound underwriting standards.

On the front end, we've integrated with ARIVE, so brokers can access our products and pricing directly in their workflow and submit loans without jumping between systems. That has helped reduce some of the back and forth and improve submission quality. We're also using AI to reduce manual work in underwriting, automating parts of income verification. Our efforts have helped us handle more volume and bring down cost per loan as we scale. We continue to assess other opportunities to incorporate AI into our systems. Credit quality on new originations remained consistent and key metrics, including weighted average FICO and LTV ratios were maintained in line with our historical loan production levels.

To support production, we increased our total warehouse funding capacity to $1.5 billion during the quarter. That, combined with our strong cash position provides ample liquidity to support our expected production levels. Our seven warehouse facilities are maintained with large and leading financial institutions. We also continue to deliver HomeXpress's high-touch service model that distinguishes our platform, maintaining relationships with our more than 6,000 approved broker sources, which are serviced by our 142 account executives and related sales staff.

As our first quarter results demonstrate, HomeXpress is contributing meaningfully to Chimera's earnings base. Going forward, we will continue to scale the platform responsibly, maintain credit discipline and originate loans with attractive economics.

With that, I'll turn the call back over to Phil.

Thank you, Kyle. To sum up, we're not optimizing for quarterly outcomes. We're allocating capital for long-term compounding. Our objective is straightforward, build a residential platform engineered to perform across interest rate cycles, credit cycles and capital market cycles. If we execute, intrinsic value per share will grow and the dividend will follow. That's how we run the business. And that's how we believe it should be evaluated. We'll now open the call to questions.

[Operator Instructions]

Our first question comes from the line of Marissa Lobo with UBS.

On the securitization call strategy, that unlocked capital, but it pressured book value a little bit. How much additional embedded optionality remains in the existing securitization stack? And how should we think about the trade-off between book value volatility and future earnings power?

Yes, Marissa, I appreciate the question. Just for context, I mean, as we're looking at these deals and as I think we've talked about on this call and prior calls, the securitization -- securitized debt impact, we're evaluating this very holistically. And we look at the opportunity cost of doing these deals versus the opportunity cost of just continuing to do nothing and letting the capital generate the existing returns.

I mean we have a pretty large portfolio of callable deals. And so we view our job is to constantly be evaluating the economics of calling those and resecuritizing them. But like we said in the prepared remarks, I mean, there's a difference between earnings generating capital and then the capital that is somewhat derived from valuation marks on our securitized debt.

And looking at the allocation, loans still represent the majority of capital, but agency is growing. So what risk-adjusted return threshold determines whether incremental capital goes to agency or credit assets from here?

Yes. I mean, so we are thinking about portfolio construction. And so the agency sleeve has been an important component of growth over the last year, one, for the liquidity and the optionality that we've been talking about and making sure that we maintain that. The loans, I mean, the credit element is a core competency of ours. So it's not that we necessarily are looking to decrease that allocation, so to speak, but we are looking to identify areas where we can extract underperforming capital and redeploy that into higher earning assets.

And maybe back to your original question, are there continuing to be opportunities in the portfolio to call deals, extract capital, redeploy it accretively? I think the answer to that is certainly yes. This was a very important quarter for us that culminated in the sale of $1.2 billion of loans. So that was obviously a milestone effort on the team's part. But I probably wouldn't expect in the near term something of that size, but I certainly think there's still opportunities to prune the portfolio and continue to drive earnings power.

Our next question comes from the line of Trevor Cranston with Citizens JMP.

Question on the agency portfolio. You mentioned establishing a short TBA position in March. It looks like it was about $1 billion at the end of the quarter. Can you say if you guys are continuing to hold that short TBA position or if there's been any other significant changes to the agency book since the end of the quarter?

No. I guess what I would say is we are using the TBA shorts for two different purposes. One, the one that we put on early in March was at the onset of the Middle East conflict. So that was purely a de-risking effort on the team's part that we were doing in preparation for the loan sales that were occurring and would raise liquidity later in the quarter. We did take that short off before quarter end. We had reestablished some other shorts, the 966 that you see in the prepared materials.

And we have continued to maintain that for all intents and purposes post quarter end. And we use that in part when we see interesting spec pools that -- where we think the payups are attractive or the stores or the call protection is interesting. Whenever we know that we're going to be raising capital at some point in the future, we don't necessarily want to be forced buyers of whatever is in the market at that time. So when we know capital is coming in, we may go ahead and purchase bonds, but we'll offset that risk by shorting TBAs. And that's what you see with that 966 for the most part at quarter end.

Okay, Got it. Makes sense. Then on the HomeXpress business, can you maybe give us a little bit of color on sort of early indications on the second quarter, how volumes are holding up with higher mortgage rates? And I guess I'd be curious if you've seen any sort of indication of changes in margin levels as well.

Volume in the second quarter should be very consistent with what we forecasted. So our volume has been increasing month-over-month. The margins appear to be holding. We did a couple of trades to an insurance investor throughout the kind of market dislocation, and that helped us keep the margins right. Now it seems like things are back to normal regarding margin activity.

Our next question comes from the line of Bose George with KBW.

This is Frankie Labetti on for Bose. To start, just kind of more of a macro question. Given the rate volatility, given some headline risks on unemployment, maybe can you talk about what you're seeing in the market there on credit, how have credit conditions held up?

Yes, sure. I mean if you look across our portfolio, and we put like our delinquency history in some charts in the prepared materials. But look, I think what you -- in some of the, call it, 2023 more seasoned vintage pools or, let's say, non-QM, we are starting to see delinquencies rise in what I would say is a normal course. There's certainly labor market conditions are starting to soften. So we would expect to see delinquencies reflect those conditions. With.

That being said, this is a much different underwriting than what we've seen like pre-financial crisis. These loans have significant equity in them, which opens up opportunities for much more constructive workout solutions for borrowers. And I think that's reflected in the very, very low levels of losses that we've seen in all these loans across non-QM and non-agencies. So I think you'll continue to see delinquencies rise in the normal course, but also losses continue to remain very muted just given the amount of equity in the loans.

Great. And then on the HomeXpress platform, like how does Chimera think about retaining servicing or MSR exposure going forward?

Yes. I mean that's a good question. And right now, everything has been sold on a servicing release basis. You know from prior calls and our remarks that building an MSR sleeve is a very important component of our longer-term strategy. So there's certainly discussions about retaining servicing longer term. I think we've still got some work to do on that front, but it's definitely on the drawing board and something that we would hope to do going forward at some point.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Kardis for any final comments.

Thank you. Thank you, everyone, for joining our first quarter 2026 earnings call, and we look forward to speaking to you next quarter.

Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Chimera Investment Corporation Fourth Quarter Earnings Call. [Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miyun Sung. Thank you. You may begin.

Thank you, operator, and thank you, everyone, for participating in Chimera's Fourth Quarter 2025 Earnings Call.

Before we begin, I'd like to review the safe harbor statement. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These events 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 disclaimers in our earnings release and 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 reconciliations 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 President and Chief Executive Officer, Phil Kardis.

Thanks, Miyun. And good morning, and welcome to the Chimera Investment Corporation's Fourth Quarter 2025 Earnings Call.

Joining me on the call are Subra Viswanathan, our Chief Financial Officer; Jack Macdowell, our Chief Investment Officer; and Kyle Walker, the President and CEO of HomeXpress Mortgage.

After my remarks, Subra will review the financial results, Jack will review our portfolio, and then Kyle will review HomeXpress's results.

Last year, we provided a consistent message. We said we weren't playing defense. We were building a hybrid REIT designed to endure. Durable companies are built on clear thinking, long-term orientation and discipline. Early last year, we laid out a simple actionable plan, diversify our portfolio, strengthen liquidity and expand our fee-based income. And we were explicit about how, grow Agency RMBS, acquire MSRs, expand nondiscretionary investment management and advisory services and pursue growth, both organic and through acquisitions, all funded primarily by our own portfolio. We repeated these same commitments throughout the year. Consistency of strategy is not a slogan. It's the operating system of any company that wants to outlast cycles.

Now let's look at what we delivered. We began the year with a GAAP portfolio composed of 81% loans, 3% agency securities and 16% non-agency securities. We ended the year at 61% loans, 16% agency securities and 10% non-agency securities, 11% lending activities and 1% MSRs. We aren't yet where we intend to be, but the direction is unmistakable and the progress is significant.

We also increased third-party AUM from $22 billion to $26 billion, added advisory services to 3 of our securitizations and successfully integrated our loan data into the Palisades systems, which is already improving the performance of the legacy portfolio.

And we closed on HomeXpress Mortgage, one of the largest non-QM originators, an acquisition that expands both our capabilities and our reach.

Although we raised approximately $120 million in unsecured debt, the majority of the funding for this transformation came directly from our own portfolio exactly as planned. Through asset sales and collapsing select securitizations, we generated approximately $485 million for an aggregate total of more than $600 million to redeploy into higher-value activities. While our orientation is always long term, we're beginning to see near-term results.

Our earnings power has begun to increase, enabling us to raise our dividend by 22% quarter-over-quarter to $0.45 in the first quarter, and our Board expects to maintain that dividend level for the remainder of the year. That combination, earnings momentum, coupled with disciplined capital allocation is how sustainable value is built.

As we transform Chimera into a long-term hybrid REIT, we've been clear that we're not changing who we are. We're expanding how we apply our capabilities. We remain at our core, focused on a set of competencies we know well, our hedgehog nature. But as every durable enterprise learns, evolution requires clarity of purpose.

Simon Sinek phrases it, it starts with why, and we know our why. We're here to give investors broad exposure to the entire residential real estate ecosystem through a diversified sets of assets, operations and income streams. That exposure shows up not only as dividends, but as enterprise growth. Our how is straightforward, manufacture and acquire a diversified portfolio of residential assets that generates net interest income, gains on sales and fees from operations or what is equally clear, consistent, reliable dividends across market environments while growing enterprise value over time.

Many REITs, including us, are viewed as a quasi bond, where book value is treated as principal and dividends as coupons. That's not who we're becoming. We're building an operating company with capacity to compound value while delivering a tax-advantaged dividend. As such, neither book value alone nor dividends alone tells the whole story. What matters is long-term intrinsic value per share supported by a consistent dividend.

As we look towards 2026, our priorities remain unchanged. We're focused on the long game on building a diversified residential platform capable of generating long-term value for both our customers and our investors across a wide range of economic environments. We will continue to diversify the portfolio, expand liquidity and grow our fee-based income, both organically and through thoughtful acquisitions. As we've said before, we're not merely building a bigger company, we're building a better one, one engineered for resiliency and longevity.

Now I'll turn it over to Subra to walk you through the financials.

Thank you, Phil. With the acquisition of HomeXpress, a material portion of our business is now operations in addition to our investment portfolio. As a result, we have reevaluated our financial reporting and beginning with the fourth quarter, we now have 2 reportable segments: our Investment Portfolio; and our Residential Origination platform.

The Investment Portfolio segment consists of our investments and third-party advisory business, for which Jack will provide more detail. Our Residential Origination segment consists of the stand-alone mortgage origination business for which both Jack and Kyle will provide more details.

And now I will review Chimera's financial highlights for the fourth quarter and full year of 2025. GAAP net income for the fourth quarter was $7 million or $0.08 per share, and GAAP net income for the full year was $144 million or $1.72 per share. GAAP book value at the end of fourth quarter was $19.70 per share. For the fourth quarter, our economic return on GAAP book value was negative 0.9% based on the quarterly change in book value and the $0.37 fourth quarter dividend per common share. And for the full year, our economic return was positive 7.4%, which includes $1.48 of dividends declared in 2025.

As Phil noted this morning, the company announced first quarter 2026 dividends of $0.45 per share, an increase of 22% from prior quarterly dividends, and our Board expects to continue that dividend for remaining 3 quarters of 2026. Our earnings available for distribution for the fourth quarter was $45 million or $0.53 per share, and our EAD for the full year was $141 million or $1.68 per share.

Turning now to our reportable segments. For the Investment Portfolio segment, during the fourth quarter, our economic net interest income was $65 million. The yield on average interest-earning assets was 5.9%, our average cost of funds was 4.5% and our net interest spread was 1.4%.

For the Residential Origination segment, during the fourth quarter, HomeXpress funded $1 billion in production with a gain on sale premium of, 358 basis points on loans sold and settled.

HomeXpress EBITDA, defined as earnings before taxes, depreciation and amortization was $11 million for the quarter, and HomeXpress annualized EBITDA ROE was 16.2%.

With respect to leverage, our total leverage for the fourth quarter was 5.1:1, while recourse leverage ended the quarter at 2.4:1. Recourse leverage increased this quarter as we continue to increase our capital allocation to Agency RMBS securities and the addition of warehouse lines from Residential Origination segment.

For liquidity and strategic developments, the company ended the year with $528 million in total cash and unencumbered assets compared to $752 million at the end of third quarter. Cash decreased as we completed the acquisition of HomeXpress for cash consideration of $244 million and total consideration of $272 million.

On the Investment Portfolio side, for the fourth quarter, we added $606 million of Agency RMBS during the quarter net of sales.

We continue to rebalance our portfolio as we redeemed $70 million of securities from CIM 2022-I1 securitization and sold the underlying loans with a principal balance of $166 million, releasing approximately $28 million of equity. We also sold $33 million of non-Agency RMBS subordinate securities.

At year-end, we had $6 billion of total consolidated secured financing outstanding, $802 million related to our Residential Origination warehouse loans and $5.2 billion for our Investment Portfolio. Of this $5.2 billion relating to our Investment Portfolio, $3.3 billion was secured financing for Agency RMBS positions. We maintained $2.9 billion of hedges against this exposure with a combination of swaps and swaptions across varying maturities.

$1.9 billion of secured financing was for residential credit exposure. Of that, $1.3 billion or -- of that, $1.3 billion or 66% included either non or limited mark-to-market features. $1 billion or 51% of this were floating rate facilities. We also maintained $2.15 billion with a combination of swap, swaptions, interest rate caps across varying maturities to hedge our interest rate cap across varying maturities to hedge our interest-rate risk related to residential credit exposure.

For the fourth quarter of 2025, our economic net interest income return on average equity assigned to the investment portfolio was 10.8%. Our GAAP return on average equity was 4.4%. Our EAD return on average equity was 11%, and our EAD return on average tangible equity was 11.9%.

And lastly, compensation, general and administrative expenses increased by $22 million year-over-year, which was primarily driven by the inclusion of staffing costs and G&A expenses related to Palisades acquisition in December 2024 and HomeXpress acquisition in Q4 of 2025. Compensation expense of our -- for our investment portfolio was lower during the fourth quarter due to the absence of severance costs that were recorded in the third quarter and a lower incentive compensation accrual in Q4.

Together, these items contributed approximately $0.05 to EAD for the fourth quarter. We consider both these items to be nonrecurring and do not expect these compensation-related benefits to continue to EAD in future periods. Servicing expense decreased by $2 million year-over-year due to lower loan balances and loan counts related to our portfolio reallocation strategy. Our transaction expenses were higher by $10 million this year, reflecting the costs associated with HomeXpress acquisition.

To close, as Phil noted and our financials are beginning to show, we're building a diversified residential platform that is generating income from assets, gain on sale and fees from operations.

I will now turn the call over to Jack to review the portfolio and investment activity.

Thanks, Subra, and good morning, everyone. 2025 was a pivotal year for the business and our capital allocation strategy. As Phil mentioned in his remarks, we began the year with a clear objective to reposition the investment portfolio to be more balanced and liquid, while strengthening our earnings power. That plan included increasing our allocation to liquid Agency MBS, adding MSRs to help offset interest rate and prepayment risk in other parts of the portfolio and applying our asset level credit risk management capabilities to enhance performance across the loan book.

Over the course of the year, we generated more than $600 million of capital through portfolio and capital markets activity, including $291 million from refinancing select investments, approximately $195 million from divesting assets that no longer met our return thresholds and $116 million from our senior unsecured notes offering. These actions supported our portfolio allocation realignment and importantly, positioned us to pursue a broader business transformation through the acquisition of HomeXpress.

During 2025, we purchased over $3 billion of Agency MBS net of sales and launched our MSR strategy. As a result, our capital allocation shifted from approximately 97% residential credit at the start of the year to 72% at year-end, with the balance now allocated across Agency MBS at 16%, MSRs at 1% and 11% to our HomeXpress lending platform. This was all carried out alongside a relatively dynamic market backdrop.

Following the volatility spike in April, agency and non-agency spreads tightened throughout the remainder of the year. In the fourth quarter, agency swap OAS continued tightening by approximately 22 basis points, while generic non-QM AAAs were firmer by 5 basis points. Treasury yields had a tightening bias during the year as the front end was driven primarily by expectations for Federal Reserve easing, while longer-term yields reflected inflation and fiscal considerations.

The 2-year 10-year treasury spread ended the year at 69 basis points, approximately 37 wider than where it began with roughly 15 basis points of that occurring in the fourth quarter alongside the Fed rate cuts. Lower treasury yields helped guide mortgage rates down approximately 70 basis points for the year with 15 basis points coming in the fourth quarter to end at 6.15%.

Our book value is sensitive to yield curve dynamics, both because both our securitized loans and the related liabilities are recorded at fair value. As the curve steepened in recent quarters, loan values increased. However, those gains were more than offset by increases in the fair value of our securitized debt, resulting in lower reported book value.

In the fourth quarter, our Agency MBS portfolio contributed positively to book value as spreads tightened, while our aggregate loan portfolio was roughly flat. However, as Subra noted earlier, overall book value declined 2.7%, attributable in large part to the increase in value of our consolidated securitized debt and activities related to the HomeXpress acquisition. Our earnings power increased during 2025, reflecting deliberate portfolio repositioning, improvements in capital allocation and contributions derived from the HomeXpress acquisition. The Federal Reserve's easing provided some benefit through the asymmetry in our liability hedge structure related to the residential credit portfolio.

In the first full quarter with HomeXpress contributions, the business generated a distributable ROE as measured by EAD over average common equity of 11% annualized. This compares to 7.16% in the fourth quarter of 2024, representing an increase of nearly 400 basis points.

During the fourth quarter, we exited approximately $33 million of legacy non-Agency RMBS, releasing roughly $6.7 million of capital at a breakeven ROE of 7%. We also exercised our redemption rights on the CIM 2022-i1 investor loan securitization, sold $166 million of underlying loans and generated $28 million of net capital after satisfying debt obligations with a breakeven ROE of 3%.

We added approximately $606 million of Agency MBS in the fourth quarter and ended the year with over $3 billion, consisting primarily of specified pools selected for call protection characteristics. Performance in our seasoned reperforming loan portfolio remained stable. Prepayments were primarily driven by housing turnover, and we saw a seasonal 50 basis point increase in delinquencies during the fourth quarter. Otherwise, no other notable trends.

Looking ahead, we expect the first half of 2026 to focus on continuing to unlock capital and redeploy into investments that are earnings accretive and align with our portfolio repositioning objectives. This may include exercising additional securitization redemption rights and divesting of assets that no longer meet portfolio objectives or return thresholds. We expect our capital deployment efforts will remain focused on Agency MBS, MSRs, sponsored securitizations backed by HomeXpress production and other select credit investments while positioning ourselves to capitalize on potential platform acquisitions as they emerge.

Agency MBS continues to serve as the most liquid component of our portfolio, enabling efficient deployment following capital markets activity, asset sales or portfolio runoff while preserving liquidity for future investments and other strategic initiatives. At approximately 7.5x leverage, the agency portfolio continues to generate run rate ROEs in the low to mid-double digits. We are seeing strong demand for non-QM loans and related securitized products to start the year. Generic non-QM AAA spreads have tightened approximately 20 to 25 basis points year-to-date, surpassing 2025 levels. While we intend to retain portions of HomeXpress' production for our securitization program, we will continue to evaluate relative value between selling the loans in the secondary market and securitizing and retaining portions of the capital structure in our investment portfolio.

2025 represented a meaningful transition year for the portfolio and the broader business. We repositioned capital, diversified sources of earnings and expanded platform capabilities. As Phil mentioned in his remarks, while our core discipline remains unchanged, we believe these steps enhance our value proposition and improve the durability of our earnings profile.

With that, I will turn it over to Kyle to discuss residential origination.

Thank you, Jack, and good morning, everyone. I'd like to begin by noting that the transition into the Chimera organization has gone smoothly throughout our first quarter of ownership. Although the relationship is new, we are already seeing meaningful synergies between the Chimera, Palisades platform and HomeXpress.

HomeXpress currently has 332 employees and is licensed to originate mortgage loans in 46 states. We primarily focus on originating non-QM consumer and business purpose loans through a network of 6,000 mortgage brokers and bankers. These loans are sold in pools to investors who either aggregate and securitize the loans or hold them in their portfolios. HomeXpress originated $1.04 billion in loans during the fourth quarter, representing an 18% increase over the third quarter and marks a record for our company.

For the full year 2025, we originated $3.4 billion in loan volume. As Subra noted, HomeXpress's EBITDA was $11 million in the fourth quarter. Throughout 2025, we have been focused on expanding our lending capacity by further building our sales and operations teams. We believe this, combined with our continual technology enhancements will support the continuation of our origination growth into future quarters. We have always been very focused on our cost metrics, and we reached a new record low GAAP cost to originate in the fourth quarter of 201 basis points, which produced a net margin of 111 basis points.

In 2025, we launched a non-delegated correspondent program to serve a growing segment of mortgage bankers seeking to fund non-QM and business purpose loans. HomeXpress underwrites these loans to our guidelines with the bankers funding the loans in their names. We now have 55 mortgage bankers approved to deliver closed loans to HomeXpress. While volume in this channel was modest in the fourth quarter at $47 million, we expect it to represent a growing share of our origination volume going forward.

We increased our total warehouse funding capacity to $1.35 billion in the fourth quarter, which we expect will be sufficient to fund our anticipated growth in the near term. With the anticipated continued growth of the non-QM and business purpose market, we are optimistic that our business will continue to grow, and we look forward to realizing the benefits that our partnership with Chimera can deliver.

Thanks, Kyle. We're glad to have HomeXpress as part of the Chimera team. And as you said, we're already seeing the benefits of the partnership.

Now we'll open the call for questions.

Our first question comes from the line of Trevor Cranston with Citizens JMP.

Looking at the HomeXpress numbers, obviously, 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 sale so far in the first quarter? I know you mentioned that AAA spreads have tightened quite a bit year-to-date.

We're 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're seeing the gain on sale premiums to be pretty good in comparison to the fourth quarter, and we're optimistic about the revenue for the first quarter.

Got it. Okay. That's helpful. And then 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's occurred versus potentially doing securitizations of non-agency assets?

Yes. Trevor, this is Jack. One of the things that we continue to be really focused on is the portfolio construction. So there are certain objectives that we have that we've talked about in terms of what we're trying to do with the portfolio, namely creating more balance -- and part of that is having that liquid component with respect to agencies, which I think we've done a really good job in 2025 of building up.

The other [ bookends ] 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 then in between those 2 [ bookends ] is the credit piece of the portfolio where we think that having the HomeXpress 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're holding leverage right now. We still see that as 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're pretty comfortable with 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 continues to be a focus of ours. And right now, as Kyle mentioned, we're seeing pretty strong demand in the secondary market for loans. So we're constantly evaluating the cost benefit analysis of selling loans in the secondary market versus retaining them for our investment portfolio.

Our next question comes from the line of Doug Harter with UBS.

I was hoping you could put the dividend increase in context, kind of how you thought about the sizing 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?

This is Phil. Thanks for the question. I think as we look at that issue, what we looked at is we look at it over the period of -- over a 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 as we look at over the course of the year. And we feel like that dividend is one that we'll have sufficient EAD coverage on and will provide us sufficient coverage for us to have the proper allocations to help grow the operating aspects of our business. So that's the kind of the balance we struck and to give the market some feel for where we think we'll be throughout the year.

And I guess just on that point, would you expect going forward to kind of give guidance for the full year in the first quarter dividend? Or is that kind of unique to this year since it's kind of the first?

Yes. I think -- I mean, that's hard to say. As we looked at it for this year, we did think it would be helpful to the market to address the questions that you asked, which were like how much do you expect to have in a dividend? How much do you expect to retain? And we thought rather it would be helpful to the market to go ahead and try to lay out what our expectations were. Whether we proceed -- continue to do that a year from now, we'll just have to wait and see.

Our next question comes from the line of Bose George with KBW.

On the residential segment, are you guys originating second liens at the moment? Or is that an incremental opportunity? And then where do you see industry non-QM volume in '26 versus '25?

We currently are not originating second mortgages. We originate through a wholesale broker network, and it's difficult with small loan amounts like second mortgages to originate those in a profitable manner. So we haven't got into the second mortgage market. We -- all the statistics and analytics that we see for non-QM and business purpose loans in '26 is growing -- increasing over 2025. So we're 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.

Yes. And the other thing, Bose, I would just say on the second lien side, I mean, when you have a servicing business, as you know, that's a very good mechanism for sourcing second lien borrowers in a way to kind of address some of the prepayment activity associated with your MSRs. So perhaps at some point down the road, that could be more of a strategy for us. But at this as Kyle said, it's not something that we're originating.

And then just in terms of the non-QM volume outlook, this was a major thesis for us early last year as we were sort of thinking about the acquisition of HomeXpress and the viability of doing that. And I think 2025 sort of supported our case. But going into 2026, I mean, we saw a considerable increase in both origination volume in non-QM in 2025 plus issuance volume.

And looking out into 2026, I mean, we're projecting just on the -- not issuance volume, but on the origination volume side, that could be anywhere from $110 billion to $130 billion, which is based on modest growth in overall mortgage originations, including conventional and agencies, plus having non-QM capture another 100 basis points or so of wallet share.

Okay. Great. That's helpful. And then actually, just switching over to the change in book value this quarter and the reduction in the value related to your securitized debt. Is that happening mainly because that's more liquid than the loans on the other side? And should we just kind of see that as a timing issue?

Yes. I mean it's a good question. So maybe we'll just address book value quarter-to-date. I assume somebody is going to ask that. So we're basically flat to down, call it, 30 basis points quarter-to-date. And the one thing -- and maybe it's a good time just to talk about our views of capital at risk and value at risk. There's been a pretty heavy steepening in the yield curve during 2025.

And I think in the prior quarters, we've talked about the impact on our loans as well as on our securitized debt. And basically, our loan values have increased, 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's an important accounting outcome, it doesn't really change how we view our economic risk or capital at risk. And that's 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 basically, the mark-to-market fluctuations in our securitized debt, it doesn't affect the economics of our call option nor does it affect the earnings power of our capital. So I just want to give you kind of how we think about that. We're 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.

Our next question comes from the line of Eric Hagen with BTIG.

Maybe following up on this bullish non-QM outlook. I mean, do you think there's 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?

Yes. Good question. I mean, look, on some deals, we see some 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're as aware as anybody that losses have been de minimis in the non-QM sector, but we are seeing like in the 2022, 2023 cohorts where delinquencies are creeping up.

So I guess our expectation isn't that there's a material decline in credit enhancement levels. And for us, Eric, I mean, we actually look at securitization in 2 different components. One, horizontal risk retention and vertical risk retention.

So the horizontal, obviously, we have certain types of requirements with respect to how much we must retain if we're holding horizontal.

And then on the vertical side, we're holding -- most of that would be AAAs. So for us, it's really just an economic consideration. But nice thing about securitizing and retaining the horizontal piece is that you're basically funding your investment with fixed rate term financing. So you're not taking liquidity risk. And so certainly, from that perspective, we're more comfortable taking the leverage than if it was like mark-to-market repo.

That's really helpful color. I appreciate that. All right here. As you guys know, 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's a deep enough market for them to potentially pursue that opportunity?

Are you talking about like the NPL sales?

Yes, pretty exactly.

Yes. Yes, for sure, for sure. I mean, I would hope that they would. I mean they've certainly been sellers in the past. So I think that could certainly be an avenue that they've used historically, and they could certainly use again to the extent that the economics made sense for them to do so.

Our next question comes from the line of Kenneth Lee with RBC Capital Markets.

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

Yes. I mean that's certainly a focus of ours to diversify our earnings and grow our fee earning capabilities. I mean that group is really bifurcated into 2 different pieces. One, the majority of which is managing loans on a third-party basis, and that creates a couple of different fee revenue streams. So we're constantly working to grow that business, both sort of with external loans, and there's also synergies with respect to HomeXpress production to the extent that we sell loans and we can retain the asset management function on a go-forward basis. So we're certainly looking to exploit some of those synergies as well.

And then on the more discretionary credit fund side, we certainly remain focused on looking at building -- separately managed accounts and growing fees through that channel as well.

Got you. And then relatedly, what are you seeing in terms of client demand or interest for loans? Is there any kind of color around mix of either institutional investors, what types? It sounds like from the prepared remarks, you're seeing stronger demand there, but I just want to get a little bit more color on that.

Yes. If you're talking about the demand in the secondary market for HomeXpress' loan sales, I mean, it's a consortium of different buyers from insurance companies to dealers, to asset managers who oftentimes are crossover between securities crossing over into the loan space. So yes, I mean, just like we've seen spreads tighten on AAA non-QM 25 basis points at the start of the year, we're 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 cross over 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 don't have the infrastructure to manage those loans. We have the in-house capability, and we can provide that one-stop shop.

And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, Phil Kardis, for closing remarks.

I'd like to thank everybody for participating in our 2025 fourth quarter earnings call, and we look forward to speaking with you again for our 2026 first quarter earnings call. Thanks again.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Greetings. Welcome to Chimera Investment Corporation Third Quarter Earnings Call.

[Operator Instructions]

Please note, this conference is being recorded. I would now like to turn the conference over to Miyun Sung, Chief Legal Officer. Thank you. You may begin.

Thank you, operator, and thank you, everyone, for participating in Chimera's Third Quarter 2025 Earnings Conference Call. Before we begin, I'd like to review the safe harbor statement. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These events 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 disclaimers in our earnings release and 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 reconciliations 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 President and Chief Executive Officer, Phil Kardis.

Thanks, Miyun. Good morning, and welcome to Chimera Investment Corporation's Third Quarter 2025 Earnings Call. It's great to have you with us today. Joining me are Jack MacDowell, our Chief Investment Officer; and Subra Viswanathan, our Chief Financial Officer. After my remarks, Subra will review our results, and then Jack will discuss the portfolio before we open it up for questions.

This quarter's story doesn't start in ancient Greece. It doesn't involve hedgehogs or foxes, so we remain proud to be a hedgehog. It began this past spring when we learned that HomeXpress mortgage was for sale. At that point, we weren't looking for an originator. We had just completed our strategic analysis, sharpened our focus and executed on that clarity with the acquisition of Palisades. That integration went smoothly, proved that discipline and culture matter.

Because Palisades manages assets for third parties who own HomeXpress loans, we knew the high quality of their production. So when HomeXpress came to market, we reached out. We had an introductory call with Kyle Walker, as CEO and members of the senior team. That conversation was the first of many over the ensuing months. They confirmed we weren't just buying a platform, we were partnering with a team that shares our values and vision. We saw 7 key reasons why this acquisition made sense. First, it met our high standard.

When we look at a potential acquisition, we asked 3 questions. Does the management team share our values and vision? Is it profitable and well run? Can it make the whole greater than the sum of the parts? HomeXpress passed each test. I'll discuss profitability, operations and synergies shortly, but what are our values and visions. Our values are simple, long-term orientation, high ethical standards and an insistence on operational excellence. Our vision is to build a company that endures, one where our team members are proud to work, clients receive tangible value and shareholders are rewarded for their partnership. That's the standard and HomeXpress met it.

Second, the size and growth of the non-QM market. While there's not a lot of data on non-QM originations, we believe such originations have grown every year since 2021 from about 1.1% of total residential mortgage originations in 2021 to an expected 5.1% or more than $100 billion in 2025. That's a roughly fivefold increase in the sector's market share in the last 4 years. Forecast for the size of the 2026 non-QM market range between $110 billion and $150 billion. We like markets with durable tailwinds.

Third, the management team. HomeXpress has an experienced management team that knows how to grow in a disciplined manner, placing quality of production over volume. Fourth, the synergies. The synergies with Palisades and Chimera, we believe, are obvious. Palisades already manages assets for some of the buyers of HomeXpress' loans. By connecting origination and asset management, we can widen that reach to others and support the performance of HomeXpress' loans. While HomeXpress has not had its own securitization program, Chimera is a leader in securitizing residential mortgage loans. We believe that the ability to securitize some of their production at the cost to originate while still satisfying their customer base will provide an additional longer-term source of income.

Fifth, expansion runway. Today, HomeXpress originates business purpose loans in 46 states and consumer loans in 42 states. We plan on adding additional states, including New York and accelerate the correspondent channel growth alongside the already successful wholesale channel. Sixth, the MSR opportunity. HomeXpress currently sells all loans servicing-released. They plan to obtain the servicing license they don't have, which will enable us to grow our own MSR book, both from our production and from purchases from third parties, which will create a hedge for our loan portfolio and reoccurring income engine. Seventh, agency originations, a small but promising business that adds optionality and balance.

Turning to the transaction. We closed the acquisition on October 1 for $267 million. That's the sum of the 6/30 (sic) [ 8/30 ] book value of nearly $120 million, $120 million premium and about $28 million in stock. The price will be adjusted based on the 9/30 book value and some other true-ups, which we expect will result in an increase in the purchase price of around $5 million. Importantly, the HomeXpress leadership team remains in place, and we granted retention stock to HomeXpress' employees that vest in 3 years because ownership builds alignment and alignment builds results.

Let's talk about the numbers. Through September 30, HomeXpress originated $2.4 billion by UPB, up 36% year-over-year, about 40% consumer, just under 60% business purpose and the rest agency. For Q4, we expect around $1 billion in originations, yielding expected pretax earnings of $15 million to $18 million and after-tax earnings of $13 million to $15 million. That's after the application of our net operating losses, and annualized return on equity of 19% to 23%.

For 2026, we project $4 billion to $4.4 billion in originations, pretax earnings of $62 million to $80 million and after-tax earnings of $53 million to $68 million, again, after the application of our NOLs. That's a 20% to 25% return on equity.

So looking ahead, what does it all mean? It means we believe HomeXpress is accretive to our earnings. It gives us a new revenue stream, greater diversification and more recurring income. It accelerates our strategy, growing our assets and fee generation, which we believe will lead to an increase in our dividend paying ability and total economic return over the long term. We're not just building a bigger company, we're building a better one, one designed for the long term.

Now I'll turn it over to Subra to walk you through the financials.

Thank you, Phil. I will review Chimera's financial highlights for the third quarter of 2025. GAAP net loss for the third quarter was $22 million or $0.27 per share. GAAP book value at the end of third quarter was $20.24 per share. For the third quarter, our economic return on GAAP book value was negative 1.4% based on the quarterly change in book value and the $0.37 third quarter dividend per common share. And year-to-date 2025, our economic return on GAAP book value was 8.3%. On an earnings available for distribution basis, net income for the third quarter was $30 million or $0.37 per share. Our economic net interest income for the third quarter was $69 million. For the third quarter, the yield on average interest-earning assets was 5.9%. Our average cost of funds was 4.5%, and our net interest spread was 1.4%.

Total leverage for the third quarter was 4.8:1, while recourse leverage ended the quarter at 2:1. Recourse leverage increased this quarter as we continue to increase our capital allocation to Agency RMBS securities. For liquidity and strategic developments, the company ended the quarter -- ended the third quarter with $752 million in total cash and unencumbered assets compared to $561 million at the end of second quarter. During the quarter, we strategically raised liquidity through staggered sales of select assets. We sold $617 million of retained bonds, non-Agency RMBS and Agency CMBS IO positions, releasing $116 million of capital. In addition, we issued $120 million of 8.875% senior unsecured notes due 2030. Net of the underwriting discount and other debt issuance costs, we raised $116 million in capital.

The increase in cash balance prepared us with anticipated funds required to close the HomeXpress acquisition, which was finalized on October 1. We closed on our acquisition of HomeXpress for $240 million in cash comprised of an estimated adjusted book value of $120 million. This is subject to certain post-closing adjustments and a cash premium of $120 million plus the issuance of 2,077,151 shares of common stock.

Okay. So I just wanted to update one remark from Phil's earlier prepared remarks. The -- Phil mentioned that the adjusted book value was as of 6/30, but it is actually the adjusted book value as of 8/30, make a correction. The purchase price that we paid. And for liquidity, continuing on, separately during the quarter, we added $275 million of Agency RMBS securities and closed on our initial $38 million MSR investment. For repo and hedging, we had $2.1 billion outstanding repo liabilities secured by the residential credit portfolio. 53% of the outstanding residential credit repo or $1.1 billion had a floating rate sensitivity, and we maintained $2.2 billion in notional value of various interest rate hedges protecting the repo liabilities.

We had $1.3 billion of either non or limited mark-to-market features on our outstanding repo agreements, representing 64% of our secured recourse funding for the residential credit portfolio. On the Agency RMBS side, we had $2.4 billion notional value of interest rate swap, swap futures and cancelable swaps with varying tenors protecting against $2.4 billion of outstanding repo liabilities. For the third quarter of 2025, our economic net interest income return on average equity was 10.6%. Our GAAP return on average equity was negative 0.1%, and our EAD return on average equity was 7.3%.

And lastly, compensation, general, administrative and servicing expenses were higher by $2 million, primarily driven by onetime severance payments. Our transaction expenses were higher by $10 million this quarter, reflecting the costs associated with HomeXpress acquisitions.

I will now turn the call over to Jack to review our portfolio and investment activity.

Thanks, Subra, and good morning, everyone. We had a busy third quarter as the team remained focused on repositioning the portfolio while maintaining elevated levels of cash in preparation for the HomeXpress acquisition. Against this backdrop, the U.S. economy remained mixed but generally resilient. Growth was supported by continued strength in nonresidential investment, particularly in artificial intelligence-related infrastructure, equipment and software, while labor conditions show gradual signs of cooling. Policy and regulatory developments once again shaped the tone of financial markets. The Federal Reserve shifted from holding the line on restrictive policy to actively easing, cutting the target Fed funds rate by 25 basis points in September. Importantly, the Fed acknowledged that risks have begun to tilt toward labor market conditions rather than inflation alone, reinforcing a market narrative that policy is now oriented towards sustaining growth and employment rather than focusing solely on price stability.

In rates, the curve steepened as front-end yields led the rally. The 2-year treasury declined 11 basis points during the quarter, while the 10-year fell 8, widening the 2s 10 spread to 54 basis points. Agency MBS continued to offer attractive carry even as OAS tightened amid lower volatility and strong demand. Current coupon nominal spreads tightened by 24 basis points versus swaps and 21 basis points versus treasuries. Primary mortgage rates declined roughly 35 basis points to 6.32%, spurring a rise in refinance activity as the refinance share of applications climbed from 40% in early July to more than 60% in late September. Housing activity improved modestly, though existing home sales at a $4.1 million annual pace remains well below the 27-year average of $5.2 million.

Credit markets remained firm. Investment-grade and high-yield corporate spreads tightened 9 and 23 basis points, respectively. Non-Agency RMBS saw strong demand and healthy absorption of supply with the non-QM credit curve flattening as AAA spreads tightened in the context of 15 basis points and BBB spreads held steady. In the legacy reperforming loan sector, which represents the majority of our portfolio, AAA and senior unrated bonds tightened by approximately 10 and 25 basis points. Overall, mortgage credit fundamentals remain solid, supported by high homeowner equity, low incidence of default and near historic low unemployment. Even so, rising defaults and isolated idiosyncratic events in non-mortgage sectors have prompted heightened investor awareness.

Turning to our portfolio. Book value declined approximately 3.2% during the quarter, largely driven by the combined effects of tighter non-Agency RMBS spreads and the rally in short-term rates, each of which lifted the valuation of our securitized debt more significantly than the corresponding gains in our loan portfolio. We made substantial progress in repositioning the portfolio during the quarter. while also preparing for the HomeXpress acquisition.

To put that in context, excluding the Palisades acquisition, we began the year with more than 90% of our economic capital allocated to residential credit, just 4% in Agency MBS and the remainder in cash. As of October 1, we are beginning to see a more balanced and diversified portfolio with robust sources of income. The residential credit allocation is now below 70%. Agency MBS has increased to about 17%. MSRs are small but growing at just over 1%. And importantly, we deployed roughly $267 million or about 13% of our economic portfolio into the HomeXpress investment. The issuance of $120 million in senior unsecured debt during the quarter allowed us to retain a larger portion of the Agency MBS portfolio in advance of that acquisition.

Our investment strategy remains centered on rotating out of fully valued assets and redeploying capital across opportunities that align with our long-term portfolio construction goals and enhance earnings power. During the quarter, we exited $453 million of retained and non-agency bonds, including senior and subordinate positions, along with the $164 million notional Agency CMBS IO position. These sales released approximately $116 million of net liquidity at a breakeven GAAP ROE of just over 7%. We purchased a net $275 million of Agency MBS, settled our previously announced MSR transaction and increased our cash balance ahead of the HomeXpress closing. This elevated cash balance was a temporary drag on earnings, but we believe that drag will be more than offset by the near-term contributions from HomeXpress as illustrated on Slide 9 of the presentation.

Our agency pass-through portfolio now stands at just over $2.5 billion across the coupon stack. Leverage on the agency pass-through book increased modestly to 7.3x from 6.6x during the quarter, with rate and spread sensitivities remaining within risk parameters. We continue to hedge with swaps to maintain tight duration alignment, match our SOFR-based funding and capture additional carry. These positions continue to deliver high-quality income with levered ROEs in the low to mid-teens.

On the credit side, the majority of our portfolio is made up of reperforming loans that exhibit high levels of borrower home equity and over 17 years of seasoning. Loan performance remained stable with these loans reporting a modest increase in delinquencies of 20 basis points during the quarter. Recourse leverage on the residential credit portfolio declined by approximately $329 million to $2.1 billion, reflecting asset sales and normal course paydowns. 64% of this financing was structured as non-mark-to-market or limited mark-to-market, up from 58% in the second quarter, while the floating rate component declined from 58% to 53%.

As discussed last quarter, our interest rate hedging strategy for the residential credit portfolio remains designed to protect earnings power in a rising rate environment while maintaining upside in the declining rate scenario. During the quarter, we added $600 million in 1.5x 2-year swaptions to further hedge our floating rate liability exposure further out the curve.

We continue to evaluate opportunities to unlock value and reinvestment capital by exercising call rights on our legacy securitizations. The scope of our review currently includes 18 transactions collateralized by approximately $5.9 billion of loans. At times, we may call these deals and either sell or resecuritize the loans. These activities can allow us to unlock capital to reinvest in higher return opportunities that drive earnings growth and support our portfolio repositioning efforts. While redeeming debt at par can reduce book value when the debt is valued at a discount, we balance those near-term effects against the benefits of our long-term portfolio objectives. These activities are designed to enhance earnings durability and reinforce the portfolio's resilience across economic, interest rate and credit environments.

Turning to HomeXpress. We're excited to welcome the team as this transaction further diversifies our earnings base, creates synergies with our third-party asset management activities and supports our long-term portfolio goals by enabling us to retain loans for our own investment and securitization programs. Overall, the third quarter was another transitional period for both the portfolio and the broader business. We continue to unlock value organically through strategic divestitures, redeployed capital into accretive investments, most notably HomeXpress, diversified our portfolio and sources of income and enhanced our platform capabilities.

We remain focused on executing our strategy. And with the HomeXpress acquisition now closed, we are well positioned to capture earnings tailwinds heading into the fourth quarter and into 2026.

That concludes our prepared remarks. We'll now turn the line back to the operator for questions.

[Operator Instructions]

Our first questions come from the line of Bose George with KBW.

This is Frankie Labetti on for Bose. Congrats on the deal closing as well. And first question is on book value. You noted that the change was due to like the steeper yield curve and the increase in value of the securitized debt more than the value of the loans. Can you just walk through that and why the loans don't get a similar mark? Is it due to like liquidity or -- yes.

Yes. No, it's a good question. And part of it is a lag in just the timing with respect to when we're seeing spreads change in the securitization markets versus when we actually see that propagate down into the loan market. So that has one effect. The other piece is the shape of the yield curve. So as we saw the 2-year rallied 11 basis points, the 5-year, only 6 basis points, so that steepening caused the yields in our securitized debt to increase -- to decrease more than on the loan side. So that has the effect while our loans actually increased in value, the increase in the value of our liabilities increased more.

The other piece I would highlight there, we saw spreads tighten across non-Agency RMBS during the quarter. But when you think about what our portfolio is comprised of, it's really reperforming loans. So there's a rated and a non-rated component there. And the unrated portion of the RPL market is where we saw the tightest spreads that came in somewhere between 20 and 25 basis points. So that represents somewhere between 55%, 60% of our securitized debt. And again, that's what caused the increase in value of our debt more so than what we saw on the loan side.

Great. That's very helpful. And do we have an update of book for the quarter?

Yes, yes. And actually, we've seen some of that reverse. Some of that has to do with the timing and seeing some loan activity during the course of October, but we're up about 2.4% through October 31.

Awesome. And just one last one on the deal, is goodwill $120 million? You noted that the deal was -- that was a premium to book. Is that -- I just want to confirm that.

Yes. This is Subra. Thanks for the question. Well, the total premium was -- well, all the payments above the $120 million book value. Obviously, we haven't closed, and there will be an adjustment, meaning there is some final adjustments to the book value that will come through as we true up September.

Now as far as everything is going to be goodwill, that all depends on the purchase accounting. We're going through these numbers right now. And a portion of the purchase accounting, that will -- we are still evaluating how much of that premium is related to intangibles versus goodwill.

[Operator Instructions]

Our next questions come from the line of Trevor Cranston with Citizens JMP.

A couple of questions on HomeXpress. First of all, thank you for the projections for Q4 and 2026. That's very helpful. I guess when you guys think about the earnings contribution that you're going to get from HomeXpress, can you talk about how you guys are going to approach that with the dividend? Would you expect to pay out the majority of HomeXpress' earnings as part of the dividend? Or do you think a lot of that will be retained to sort of finance future growth in that business?

Yes, sir, this is Phil. So that's a question and we started to address last time. It's -- first, as you know, it's a final determination by the Board. But we'll look at a variety of factors, which are related to how much HomeXpress would need to retain to continue to grow and as we want to be able to grow our own asset base even through securitizations, for example, versus current dividend needs. I mean we recognize the benefits for both, and we're just going to have to look at the timing and make assessments at that time where we think the split is appropriate between current dividend needs and future growth. it's a little bit wishy, but it's hard to predict right now for that.

Sure. Okay. And then as you look at the origination volume that they're producing, can you talk about kind of your near-term expectations as to how much of that you might retain and securitize for an ongoing investment on the balance sheet and how you sort of view returns on retaining that production as investment relative to some of the other areas you've been deploying capital?

Yes, sure. This is Jack. I guess what we would say, first and foremost, is our intent is not to disrupt any of the partnerships that they have with their existing investor base. That's a very important component of their business. We continue to believe that our job is in part to support that effort. With that being said, given just the predictions for the growth in overall mortgage originations in 2026, and the fact that the non-QM share of total mortgage originations has increased every single year since 2020. We believe that their volume is going to be such that our retention of loans will not disrupt any of those partnerships.

So I think a fair assessment of that is we'll look to do something in the context of 4 to 5 securitizations a year, maybe 1 per quarter. When that starts will be a function of market conditions. And it's also a balance between they are generating some healthy gain on sale income. And when we retain those loans for our portfolio, that's a long-term investment decision, but we're also giving up some of those near-term gains. So there's an economic assessment that we go through as well. But I think it's a fair assessment to assume something along the lines of 1 deal per quarter.

And the other piece of your question, I think, is with respect to economics. I mean it depends on the structure of the deal, how far we sell down in the capital structure and what we ultimately retain. But we're looking at returns on our retained pieces of those deals somewhere in the context of mid- to high teens.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Phil Kardis for closing comments.

Thanks for participating in our third quarter earnings call. We look forward to speaking to you in February about the fourth quarter and 2025 end of the year. So look forward to seeing you. Thanks for joining.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.

Greetings, and welcome to the Chimera Investment Corporation Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to [ Mean Sung ]. Please go ahead.

Thank you, operator, and thank you, everyone, for participating in Chimera's Second Quarter 2025 Earnings Conference Call. Before we begin, I'd like to review the safe harbor statement. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These events 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 disclaimers in our earnings release and 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 President and Chief Executive Officer, Phil Kardis.

Thank you. Good morning, and welcome to the Chimera Investment Corporation's Second Quarter 2025 Earnings Call. It's great to have you with us today. Joining me on the call are Jack Macdowell, our Chief Investment Officer; and Subra Viswanathan, our Chief Financial Officer. After my remarks, Subra will review the financial results, and then Jack will review our portfolio before opening the call for questions.

You may be familiar with the ancient Greek parable, "the fox knows many things, but the hedgehog knows one big thing." It's a simple parable, but powerful. The fox is clever, always trying new things. The hedgehog, it just sticks to what it knows best, and the fox cannot defeat him. And good to great, Jim Collins took that idea and asked what separates great companies from the rest? He found the answer was not simply trying new things. It was focus. He called it the hedgehog concept, the intersection of 3 key questions.

What are you deeply passionate about? What can you be the best in the world at? And what drives your economic engine? A couple of years ago, we looked at ourselves in the mirror and realized we were too focused on securitizing reperforming residential mortgage loans. We needed to change, but not by becoming something new, not by chasing the new hot idea, rather by becoming more of who we already are, something we're deeply passionate about that we believe we can be the best at and will drive our economic engine, and that's residential mortgage credit.

The first step, the acquisition of the Palisades Group, which enhanced our existing expertise in residential mortgage credit, brought us third-party mortgage loan management, portfolio optimization and third-party private capital raising. The second step was portfolio diversification. We have started selling some of our assets and have relevered some of our securitizations and used those proceeds to acquire Agency RMBS, which supports our REIT and 40 Act compliance as well as providing us with a source of liquidity and income. And more recently, to acquire $6.5 billion of Fannie Mae mortgage servicing rights through a servicing partnership. We made progress, but there's still more work to be done.

The third step is the acquisition of HomeXpress, a leading non-QM originator with a history of growth and profitability. We currently have broad, deep experience in acquiring, financing and managing a range of residential mortgage credit assets, both for ourselves and for others, and HomeXpress adds the production of those assets to our platform. But this is not just vertical integration, but this is strategic clarity. With both Palisades and HomeXpress, we look for companies that expanded and enhanced our existing capabilities. We expect both acquisitions to be accretive, not through subtraction or reduction in headcount or other so-called cost saving synergies, but through addition, the addition of complementary capabilities, the addition of talent and the addition of scale and scope.

So what's next? We're not done yet. We'll continue to look for opportunities to grow the platform, both organically as well as adding new pieces, all the while being diligent to our core principles, our expertise in residential mortgage credit, our hedgehog status. Our new trajectory will not be linear. As we noted during the last earnings call, while we successfully relevered our NR securitization, it takes time to effectively deploy capital, especially given the volatility surrounding Liberation Day, which resulted in a short-term drag on earnings in April and May before we hit our stride in June.

Also, while we believe HomeXpress acquisition will be meaningfully accretive to our earnings as we expect 2026 and 2027 to be especially strong years for non-QM originations, we may experience decreased earnings in the short term as we redeploy capital for the acquisition and integrate them as an operating subsidiary. We also expect to invest some of those earnings to grow the platform and our assets to support future growth of our dividend.

As we look forward to the future, what's the big takeaway? We're a company that knows one big thing, residential mortgage credit and executes it. We'll continue diversifying our portfolio and income streams, growing recurring fee income, adding liquidity and looking for opportunities to add accretive platforms and invest in accretive assets, all with the focus of growing our assets and dividend or total economic return over the long term.

I'll now hand it off to Subra to walk you through the financials.

Thank you, Phil. I will review Chimera's financial highlights for the second quarter of 2025. GAAP net income for the second quarter was $14 million or $0.17 per share. GAAP book value at the end of second quarter was $20.91 per share. For the second quarter, our economic return on GAAP book value was 0.5% based on the quarterly change in book value and the $0.37 second quarter dividend per common share. And year-to-date 2025, our economic return on GAAP book value was 9.8%.

On an earnings available for distribution basis, net income for the second quarter was $32.1 million or $0.39 per share. Our economic net interest income for the second quarter was $69 million. For the second quarter, the yield on average interest-earning assets was 6%, our average cost of funds was 4.5% and our net interest spread was 1.5%. Total leverage for the second quarter was 4.5:1 while recourse leverage ended the quarter at 1.8:1. Recourse leverage increased this quarter as we increased our investments in agency securities.

For liquidity and strategic developments, the company ended the quarter with $561 million in total cash and unencumbered assets. As Phil mentioned, during the quarter, we announced a definitive agreement to acquire HomeXpress Mortgage Corporation. This transaction is expected to close in the fourth quarter of 2025. On the investment front, we deployed approximately $2.3 billion in new Agency RMBS investments during the quarter, primarily in the back half as opportunities arose.

For repo and hedging, we had $2.4 billion outstanding repo liabilities secured by the residential credit portfolio. 58% of the outstanding residential credit repo or $1.4 billion had a floating rate sensitivity, and we maintained $1.6 billion in notional value of various interest rate hedges protecting the repo liabilities. We had $1.4 billion in either non or limited mark-to-market features on our outstanding repo agreements, representing 58% of our secured recourse funding for the residential credit portfolio.

On the Agency RMBS side, we had $2 billion of interest rate swap notionals with various tenants protecting against $2.1 billion of outstanding repo liabilities. Additionally, during the quarter related to the Agency RMBS hedges, we entered and closed out $2.5 billion notional of swaption contracts with varying maturities.

For the second quarter of 2025, our economic net interest income return on average equity was 10.5%. Our GAAP return on average equity was 5.4%, and our EAD return on average equity was 7.5%.

And lastly, compensation, general, administrative and servicing expenses were marginally lower this quarter. Our transaction expenses were lower by $5 million this quarter, reflecting the costs associated with increased securitization activity in the prior quarter.

I will now turn the call over to Jack to review our portfolio and investment activity.

Thanks, Subra, and good morning, everyone. The second quarter was shaped primarily by policy developments, including international trade uncertainty, the administration's tax proposal, regulatory capital relief initiatives, geopolitical events and ongoing scrutiny of Federal Reserve rate policy.

The early April tariff escalation rattled risk markets, pushing interest rate volatility to levels not seen since October 2023. Investors repriced the odds of a June Fed rate cut peaking at an implied 1.6 cuts on April 8 as concerns of a tariff-induced recession increased. But as trade time lines extended and policy tensions eased, risk sentiment stabilized and volatility finished the quarter below its starting point.

Economic data remained a key market driver as the Fed maintained its data-dependent stance. While early Q2 consumer sentiment surveys showed weakness, June data improved notably. Hard data revealed surprising economic resilience despite tariff concerns. Employment statistics consistently met or exceeded expectations and core PCE inflation ended the quarter at 2.8%, just 10 basis points above where it began.

The yield curve steepened during the quarter, with the 2-year treasury yield declining approximately 16 basis points, supported by softening inflation expectations and a more balanced economic backdrop. Conversely, long-duration treasuries faced headwinds with the 10-year [indiscernible] hedging up 2 basis points, while the 30-year sold off roughly 20, pressured by mounting fiscal supply concerns and uncertainty around duration demand. This dynamic produced significant curve steepening with the 2s, 10 spread widening approximately 19 basis points and the 2s and 30s by roughly 37 basis points.

Corporate credit spreads outperformed non-Agency RMBS as investment grade and high-yield corporates tightened 11 and 57 basis points, respectively, while non-Agency RMBS was wider by 5 to 10 basis points across the capital stack. Generically, Agency MBS held up better against treasury hedges with current coupon OAS tightening 8 basis points, whereas swap OAS traded within a 23 basis point range, ending 2 basis points wider.

Housing conditions remain challenging against the backdrop of low affordability and market uncertainty. Through June 2025, existing home sales registered the weakest year-to-date activity in nearly 27 years outside of 2009. While resale inventory remains historically low, May's 1.5 million units represented the highest level since June 2020.

Home price forecasts have moderated with most year-to-date projections now ranging between 0% and 4% for 2025. The bright spot continues to be the non-QM market, where originations and issuance volumes continue to outpace 2024 levels and are on track to reach the highest post-crisis level on record.

Our book value declined 1.2% during the quarter, primarily driven by the rally at the short end of the curve that impacted our securitized debt valuations more significantly than the corresponding gains in our loan portfolio. With respect to the portfolio, we entered April with $253 million in cash and a fortified liability structure that allowed us to navigate market volatility comfortably. Our funding remains stable throughout the turbulence as approximately 61% of our portfolio liabilities are comprised of nonrecourse term financing. The remaining 39% is made up of repo with approximately $2.1 billion secured against liquid Agency MBS and $2.4 billion against non-Agency RMBS.

Notably, 58% of our non-agency repo or $1.4 billion is non-mark-to-market or limited mark-to-market, providing stability in our funding during times of market stress. We ended Q2 with approximately 62% of the portfolio's capital allocated to legacy reperforming loans, which compares to roughly 68% at the end of the first quarter. RPL portfolio fundamentals performed consistent with expectations. Cash flow velocity remained steady. Prepayments increased each month of the quarter, consistent with seasonal factors, while RPL delinquencies ended the quarter lower at 8.4%.

With ample liquidity coming into Q2, we remain disciplined while markets work through early quarter volatility. Consistent with the strategy we outlined in Q1, we focused on repositioning toward more liquid assets through an expanded Agency MBS allocation. We began deploying capital following the peak volatility period, adding positions opportunistically in late April and more aggressively in May when spreads remained wide with the majority of settlement activity occurring in the back half of the quarter. That deliberate pacing resulted in a modest drag on earnings in Q2 while also preserving strategic flexibility and underscoring our commitment to disciplined risk management amid evolving market dynamics.

During the quarter, we committed over $300 million of capital toward the purchase of approximately $2.3 billion of agency pass-throughs, utilizing approximately 6.5 turns of leverage. We hedged these positions with swaps to achieve tighter duration alignment, match our SOFR-based funding profile and capitalize on structural carry advantages in the current negative swap spread environment. We expect these positions to deliver high-quality carry with levered ROEs in the low to mid-teens.

After quarter end, we closed on our first MSR transaction consisting of $6.5 billion of Fannie Mae loans through a third-party servicing partnership. The portfolio consists of 4-year seasoned loans with a 4% average interest rate, $220,000 average balance, 71% loan-to-value and 750 average borrower credit score. The transaction deployed approximately $37 million of capital at an expected levered ROE in the low teens. This asset class complements our residential credit and Agency MBS holdings while helping balance portfolio interest rate sensitivities.

Looking ahead, we continue to evaluate liquidity-generating opportunities within our portfolio of securitizations where we hold exercisable redemption rights. That currently includes 18 callable deals consisting of approximately $6 billion of loans. We analyze the economics of exercising call rights and either selling the underlying loans or as we did in Q1, resecuritize them. Our decision framework incorporates breakeven ROE thresholds, near-term book value impacts and longer-term earnings accretion potential.

While some opportunities may offer accretive redeployment, they may require near-term book value reductions when redeeming discounted securitization debt at par. We carefully weigh enhanced earnings power against book value impacts and corresponding payback periods. And as we identify deals that meet our economic thresholds, we expect to pursue these strategies as we continue repositioning our portfolio and platform.

As mentioned, on June 12, we announced the acquisition of HomeXpress, marking another strategic step in transforming our portfolio and platform capabilities. From a business standpoint, HomeXpress' founders and senior leadership have built a high-caliber team serving brokers and correspondent lenders in the non-QM and DSCR markets at scale. Additionally, they have a strong network of institutional investment partners that have been consistent buyers of HomeXpress' loan production over the years, and we intend to continue supporting and growing those relationships.

From a portfolio perspective, the HomeXpress platform creates a pipeline of investable assets, not only for the REIT, but also for our investment and asset management clients while simultaneously supporting the growth of our third-party MSR footprint. We're excited about the cultural alignment, business synergy and HomeXpress' ability to capture market share in the expanding non-QM sector.

We are pleased with the progress made in Q2 as we patiently deployed the capital raised, ending with over $300 million allocated to Agency MBS, prepared for our first MSR investment that closed in early July and announced the acquisition of HomeXpress. We look forward to maintaining this momentum through the third quarter.

And that concludes our prepared remarks. We'll now turn the line back over to the operator for questions.

[Operator Instructions]

Our first question today is coming from Bose George from KBW.

Actually, in the prepared remarks, you suggested that there might be more to do in terms of -- on the acquisition front or sort of pieces as the company continues to evolve. Can you just discuss what direction that could be?

Yes. What I want to signal is that as with HomeXpress, I mean, we will continue to be open to opportunities that make sense within our kind of core competency of residential credit. And that's -- we'll just remain open to those things, and we're more signaling that. It's still possible to continue to grow those to the extent that they could be synergistic within that framework.

Okay. That makes sense. And then after the HomeXpress deal closes, do you think you have all the pieces in place to generate a double-digit ROE next year?

Yes. I think, Bose, just from an earnings power perspective, I mean, obviously, we're doing several things that are focused on increasing our earnings power, increasing our EAD. HomeXpress is obviously a critical component to that. We think that's going to be materially accretive as we go forward in 2026 and beyond. The other thing that we alluded to in some of the prepared remarks was just our efforts to generate liquidity and earnings power just from our existing callable securitization. So that's something that we're continuing to focus on and try to identify the economics of.

The other thing, too, is just looking across our portfolio, we've got a lot of legacy positions. So identifying any underperforming or fully valued assets and seeking to sell those, redeploy them into more accretive investments. And I think as we've mentioned on prior calls, another element that we're very focused on is continuing to increase the revenue and earnings attribution from our fee-based businesses, our asset management and investment management platforms.

So look, all those pieces and then there's obviously market dynamics that flow into this with respect to the path of Fed rate policy, and that obviously impacts our net interest margin and things like that. But we certainly believe that we're laying the foundation and are on the right path for continuing to increase our earnings power going forward.

Next question today is coming from Trevor Cranston from Citizens JMP.

As you guys continue to go through the portfolio repositioning process, can you talk about how you sort of envision the long-term capital allocation mix between the legacy credit portfolio and the newer Agency/MSR asset classes?

Yes, sure. It's a good question. And obviously, that is a function of several things, market conditions being one; two, the legacy portfolio naturally will run off over time. But we're certainly focused on sort of what we have in-house that we're looking at, which is kind of our model portfolio. And one of our primary goals there is to have a diversified portfolio across complementary sectors or product types that would provide stability and durability across different economic housing and interest rate environments.

The legacy portfolio, primarily made up of the reperforming loans, super seasoned loans. They've got a ton of equity in them. In many cases and for many reasons, we like those assets. At the same time, they were securitized in a different period of the market. And so we're looking and they've delevered. And as they continue to delever, that has an impact on our earnings power.

So going forward, I would say -- MSRs, we did our first MSR transaction. It's now less than 2% of our overall capital allocation. As we think about where we want to be from an equity duration perspective, again, depending on the types of MSRs that we're buying, are they at the money? Are they more out of the money like the trade that we did in July? I see those being anywhere from 15% to 25%, something like that, give or take.

Agencies, we've mentioned, is a very important component of our overall portfolio allocation, but that's going to be a function of our liquidity needs, where we're seeing relative value, some of the opportunistic -- relative value opportunities we're seeing in other products and sectors. So it's hard to nail down like what is our specific long-term portfolio allocation. But what I can say is agencies has a permanent role there, MSRs have a permanent role there, and being opportunistic around other product sectors is something that we're always going to do just because we've got the capabilities to allocate and manage assets across the entire spectrum of residential credit products. And so we don't want to limit ourselves to any just 1 or 2. I don't know if that helps, but hopefully, it gives you some idea of what we're thinking.

Next question today is coming from Doug Harter from UBS.

Hoping you could talk about how you're thinking about the dividend strategy going forward once HomeXpress closes and how you think about retaining some capital from that business versus increasing the payout?

This is Phil. Yes, I mean, as we signaled, we are -- we look at a variety of factors. We look at what our liquidity needs are, what the investment horizon is. And we're looking to maintain and grow kind of the total economic return. And there's a couple of levers there. As you know, there's the dividend, there's book value, there's assets that support both. And so as we look at HomeXpress, we do believe it's going to be materially accretive to our earnings.

And the question will be at the time of next year as we look through things, we will want to take some of that and make sure we invest it to grow that platform and assets. And some of that, we will want to make sure that we're providing some near-term dividend. That mix, we haven't determined, but those are the kind of factors we'll think about as we go forward because acquiring new and accretive assets is going to support the current dividend and allow that dividend to grow. So we have to strike an appropriate balance between using some of those earnings to grow the dividend now versus making the investments that will grow the dividend in the future.

Great. And then shifting to the secured financings. It looks like as of June 30, that rate came down about 60 basis points from the prior quarter. I guess can you just talk about what drove that and how much of that benefit you saw during the second quarter?

Doug, it's Subra. Thanks for your question. So that 60 basis points is really a result of our increase in financing of our agency portfolio. So that just brought the weighted average rate down.

Okay. That makes sense. And then is there -- has there been any significant change in book value quarter-to-date or through July, whichever?

Yes. I think as of the end of last Friday, we were down about 55 basis points on book value. That was primarily driven by our loan portfolio being relatively flat quarter-to-date, and we are seeing spreads tighten marginally on securitized -- senior securitized debt. So that increased the value of our sec debt and had a nominal impact on our book value.

[Operator Instructions]

Our next question is coming from Eric Hagen from BTIG.

Maybe following up on that last point. I mean you mentioned some mark-to-market noise related to the move at the short end of the yield curve last quarter. I mean what's the outlook from here if the Fed cuts rates? And how will that drive your appetite to call the remaining securitized debt that you have that's currently callable?

Yes. No, that's a great question, Eric. And certainly, if rates -- if they cut rates sort of where we're seeing Fed futures and things like that, that would certainly have multiple impacts on how we look at things. I mean, one, that would increase our net interest margin. We've set up our non-agency hedges in a bit of an asymmetric way with our $1 billion cap that we put on earlier this year. So as rates go down -- we're protected if rates go up. But to the extent that rates go down, we're going to see a benefit there from our net interest margin.

At the same time, if rates go down, that -- depending on where other parts of the curve move, that should also help the economics in our callable securitization analysis. So we certainly could see some of those deals that may not be currently economic to call, we could certainly see them move into the box and be more actionable. So yes, those things are definitely something that we're paying close attention to.

Got it. That's helpful. That's helpful. All right. So we're looking at the really low mark-to-market LTV for these seasoned reperforming loans. I imagine the DTI is probably too high for most of those folks to get a cash out refi or take on more debt. But there's so much innovation in our market right now, right, especially with like home equity products. I mean, are there other equity products which could appeal to these borrowers, which either drive a refi event or strengthen the underlying credit in some way?

Yes. That's another good question. And we're very familiar with a lot of these home equity products that are out there, including the ones that require no monthly scheduled payments. So I do think they -- some of these borrowers would be ripe for those types of products to the extent that they wanted to tap into the equity in their homes. With that being said, if you think about the profile of the borrower in this portfolio, they've been in the house 17, 18, 19, 20 years. If they didn't refinance back in 2021, I think in many cases, these folks are just planning on living in these places for the rest of their lives almost. And basically, we're seeing that captured in the prepayment speeds that are basically right around housing turnover levels.

So I agree with you, it very well could be a world where some of these home equity products and the marketing reach that they're making gets to these borrowers, and we could see some pickup in payoff speeds. But I will say from a credit perspective, I'm not sure that any of those products will really -- we're looking toward those to improve the credit profile. We're seeing, like I said in the prepared remarks, very good cash flow velocity. You've got a ton of equity in these loans. The profile of borrower, they may miss a payment or 2 around the holidays. They pick it back up again when they get their tax returns just as a general profile. So yes, it's -- I'm not sure if that answered the question.

No, that was really helpful detail. No, that was good stuff. I appreciate that. One more, if I may. I mean, do you have a sense for how much of the production from HomeXpress will be capitalized on the balance sheet versus sold to third parties going forward?

Yes. I think it's really important for us to really emphasize the fact that -- and I alluded to it in the prepared remarks, but their business has been built around relationships they have with institutional investors who have been multiyear partners to them and buying their production, and we expect to continue to support that and continue to develop those relationships and sell to third parties.

At the same time, as we see HomeXpress' production volume grow, we do expect to be in a position to retain a portion of that production, whether it's for the REIT balance sheet, for our credit funds, our third-party clients on the asset management side. But we certainly do not -- we want to strike a very good balance with respect to continuing to make sure that we grow the relationships that they already have in place and that they've been building over the years versus what we're retaining. I can't tell you that -- we don't have a specific number or percentage at this point. I think it's something that we're still working through and making sure that we're thoughtful as we go down that path.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

This is Phil Kardis again. I want to thank everyone for participating in our second quarter earnings call, and we look forward to speaking with you in November for our third quarter call. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.