Q4 2019 Earnings Call
[music].
Greetings and welcome to the Cherry Hill mortgage investment Corporation fourth quarter and full year 2019 earnings conference call.
At this time, all participants will be in listen only mode.
Question answer session will follow the formal presentation.
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I would now like to turn the call or what's your host <unk>.
Cherry Hill. Please proceed.
I'd like to thank you for joining us today for Cherry Hill Mortgage investment Corporation fourth quarter 2019 conference call.
In addition to this call we have filed the press release that was distributed earlier this afternoon and posted to the Investor Relations section of our website at Www Dot CH am I right dotcom.
On today's call management's prepared remarks and answers to your question may contain forward looking statements that are subject to risks and uncertainties that could cause actual results could differ from those discussed today.
Samples of forward looking statements include those related to interest income financial guidance Harris Teeter expected cash flows as well as prepayment and recapture rate delinquencies and non-GAAP financial measures such as core and comprehensive income.
Forward looking statements represent management's current estimates and Cherry Hill assumes no obligation to update any forward looking statements in the future.
We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's filings with the FCC and the definitions contained in the financial presentation available on the company's website.
Today's conference calls hosted by Jay Lounge, President and CEO, Julian Evans, the Chief investment Officer, and Michael Hutchby, The Chief Financial Officer, now I will turn the call over to Jay.
Thanks, Laurie and welcome everyone to todays call.
We're very pleased with Jerry host fourth quarter, and 29 chain performance.
The quarter saw a moderating volatility as longer term rates moved off the lows witnessed over the summer.
The yield curve steepens slightly and the mortgage basis improved.
Prepayment speeds, however remained elevated throughout the quarter as originators closed out a record year for origination volume.
Despite the accelerated prepayments which cost headwinds.
We successfully managed our portfolio and delivered another quarter of solid core earnings.
While expanding our book value.
Overall, we're confident in the current composition of our investment portfolio and our investment teams risk management capabilities and believe we are well positioned to capture additional opportunities to extend our success into 2020.
Looking back on 2019.
We encountered significant macroeconomic and geopolitical noise through much of the year.
Broadly speaking positive domestic economic data throughout the year was largely overshadowed by global trade disputes and the overhang of negative interest rates abroad.
Driven by tepid economic data from that you in Asia.
Largely due to the economic impact of the U.S., China trade dispute.
It ended up shifting course and cut interest rates three times in the second half of the year.
Our investment team navigated through that environment by actively managing our portfolio and utilizing a disciplined interest rate hedging strategy.
As a result, we ended the year with our book value largely intact when compared to the prior year end, which in our view was an excellent outcome given the various headwinds.
Specifically for the fourth quarter of 2019.
We grew book value per share by 2%.
$17.35.
Generated core earnings of 48 cents.
In addition, we posted a 4.4% economic return for the quarter.
Which brought our full year economic return to 8.8%.
Meaningful accomplishment given the complex market environment, we faced throughout the year.
Meanwhile, we opportunistically began executing on our previously announced share repurchase program.
As of December 31st, we repurchased approximately three and a half million dollars common stock.
We remain confident in our strategy to deliver shareholder value over the long term.
While maintaining the ability to continue repurchasing shares as appropriate.
As we think about 2020, thus far the Corona virus has gripped the markets I mean uncertainty around the impact on global productivity.
This is what interest rates to hit record lows in recent days.
Although we believe longer term volatility will ultimately work its way through the system.
We remain highly committed to being flexible and responsive to market swings.
Enable us to navigate any prepayment volatility as we did in the back half 2019.
We believe that were properly positioned with a current asset composition and leverage.
And look to book value preservation, and long term shareholder returns as our primary focus.
More broadly in terms of our overall strategy as we look forward into 2020, we remain committed to both our RMBS an MSR strategies I.
I believe the two asset classes complement each other well and offer compelling returns and low to mid teens.
Given our current size, we've been diligent about staying the course in that respect.
On the MSR front.
We will continue to be selective and building and structuring our MSR portfolio.
Through attractive flow acquisitions, and bulk purchases that fit our needs.
At the same time on the RMBS side, we have a strong desire to mitigate our interest rate risk with respect to our agency portfolio.
Through the purchase a specified pools that offer compelling refinance protection.
As we've noted in the past.
There are opportunities in the whole loan space that we believed would be accretive to shareholders.
Allow us to further diversify our business assuming we're in a position to grow the company.
Ultimately, we will continue to be thoughtful and our approach to deploying capital and portfolio construction.
As we seek to create additional shareholder value.
In short I'm proud of the performance bar investment team for 2019, given the complex macroeconomic we encountered.
We began to here with the tenure pushing to 70 and a benign prepaying environment.
At the 10 year plans to 146 prepayment speeds increased significantly.
In addition spread income compressed as the yoker inverted during the summer putting additional pressure on earnings.
Throughout that turbulent cycle, our team took actions to preserve book value utilizing a proactive hedging strategy.
Just as importantly, we're positioned to build off last year, it's exceeding 2020 and beyond.
We will continue to take a proactive approach towards managing our portfolio.
Including continuing to add investments that will enable us to further withstand any increases and prepayment levels.
We will also take advantage of opportunities that exist to add assets of the portfolio and reduce our overall risk exposure.
We're excited for our future and are positioned well for another year of building value for shareholders as we continue to execute on our strategy.
With that I'll turn the call over to Julien, who will cover more detailed highlights of our portfolio when its performance over the quarter.
Thank you Jay.
During the fourth quarter, U.S. and global rates rose, even with the fed delivering their third and final interest rate ease of 2019.
The interest rate rise in the quarter can be attributed to optimism surrounding the reduction of the U.S. in China trade tensions, which ultimately resulted in the signing of a phase one trade agreement in early 2020.
Based on these themes all spread sector assets, including mortgages outperformed hedges as interest rates rose and volatility declined in the fourth quarter.
As shown on slide five servicing related investments comprised of bullet Miss ours represented approximately 40% over equity capital and approximately 10% of our investable assets, excluding cash at quarter end.
Servicing assets increased as a percentage of equity from the previous quarter as improved MSR valuation increase the portfolio's market value.
As well as some selective additions we made to the portfolio.
Meanwhile, our RMBS portfolio accounted for approximately 57% of our equity the 5% decline from the previous quarter as a percentage of investable assets RMBS represented approximately 90% excluding cash a quarter red.
As of December 31st we held MSR, whether you PB of approximately 29 billion in a market value of approximately 291 million.
Conventional and government MSR CPR is averaged approximately 22.3% and 15.5% respectively for the fourth quarter, both hopefully which were marginally slower than in the prior quarter.
The improvement in CPR speed is a function of interest rates and mortgage rates hitting low levels in September and rates subsequently bouncing to higher levels in November December month does slowing prepayments.
Additionally, winter Seasonals and improved conventional recapture rates had an impact on speeds.
As of December 31st the RMBS portfolio stood at approximately 2.7 billion is shown on slide seven.
Quarter over quarter, the RMBS portfolio composition continued to shift as capital was deployed.
The 30 year securities position of the portfolio grew to 87% up from approximately 85% as of September Thirtyth and the remaining assets represented 13%.
In the fourth quarter, the collateral composition of the RMBS portfolio posted a weighted average three months CPR of approximately 11.3%.
Prepayments speeds accelerated further in the fourth quarter as homeowners locked in lower mortgage rates in the third quarter when U.S. interest rates touched near term yearly lows.
For the fourth quarter, we posted a 0.73 RMBS NIM versus <unk> 0.87, NIM for the third quarter.
The reduction in NIM was due to the increased amortization, which resulted from faster prepayment speeds, which offset the reduction in rebuilt and swap cost.
Near term, we expect the NIM to fluctuate, but throughout 2020, we expect the NIM to maintain or improve based on continued improvements in acid financing levels removal higher cost interest rate swap positions and slower prepayments at the start of the year based on Seasonals.
The transition to improvement may take several months.
And the recent interest rate movements, driven by the lack of clarity surrounding the Corona buyers may further delay this improvement.
At quarter end, the aggregate portfolio operated with leverage of approximately 6.1 times in a positive duration gap, we ended the quarter with an aggregate portfolio duration gap.
Positive 0.11 years as we move forward, we will continue to evaluate and all to the portfolio as necessary.
I will now turn the call over to Mike for fourth quarter financial discussion.
Thank you Julien our GAAP net income applicable to common stockholders for the fourth quarter was $5.2 million worth 31 cents per weighted average shares outstanding during the quarter well comprehensive income attributable to common stockholders, which includes the mark to market of our held for sale RMBS was $11.8 million or.
70 cents per share.
Our core earnings were $8.1 million or 48 cents per share.
As Jay mentioned, our book value as of December 31 was $17.35 an increase of 34 cents per share from September thirtyth or 2% net of the fourth quarter 2019 dividend.
We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings.
At the end of the fourth quarter, we held interest rate swaps Swaptions TB A's and Treasury futures all of which had a combined notional amount of $2.8 billion.
For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives and as a result, we record the change in estimated fair value as a component of the net gain or loss on interest rate derivatives.
Operating expenses were $3.4 million for the quarter of which approximately 688000 was related to our taxable REIT subsidiary.
On December 12, 2019, we declared a dividend of 40 cents per common share for the fourth quarter of 29 team, which was paid on January 28 2020.
He also declared a dividend of 51.25 cents per share on our 8.2% series a cumulative redeemable preferred stock.
And the dividend of 51.56 to five cents on our 8.25% series B fixed to floating rate cumulative redeemable preferred stock both of which were paid on January 15 2020.
At this time, we will open up the call for questions operator.
Thank you at this time, we will conduct a question answer session. If you like to ask a question. Please press star one when you telephone keypad.
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Our first question comes from Tim Hayes with B. Riley. Please proceed.
Hey, guys. This is actually Mike on for 10, congrats on great quarter.
So my first question what is good how are you.
Great.
So my first question is what kind of Levered returns are you seeing on M.S. ours versus ER versus RMBS.
Sure what ranch that sure so on the MSR from a I think the Levered returns are in the low to mid teens.
Unlevered high single digits.
Yeah, that's on well.
And for the RMB, yes, or if we just take generic three is levered lets say about 10 times, they're looking at something in the and the low to mid teens.
Gotcha. That's helpful. And then just given where your stock is trading on pro forma or there are the new books I. How do you think about investing in MSR is versus MBS versus a versus buying back stock at these levels.
Well a week ago, we were trading at 95% of all books, so that's different discussion, but relative to the.
Allocation between asset classes, Joanna let you take that.
Yeah, I mean look I think that the.
We're continuously trying to figure out where the market wants to go in terms of absolute level of a of interest rates.
The entry point I think for RMBS, specifically on some of the lower coupon mortgages. It is somewhat attractive.
If we're going to maintain at these rate levels over foreseeable period of time.
If rates were or have the ability to rise of the curve steepening on out they have to assess that this is probably a decent entry point for MSR.
That's helpful. That's helpful. And then just something appears refund is tied to expand and get more active in credit and are you hinted at this on the call, but just given my Tony interest rate volatility. It's something you guys are taking a hard look at.
I would say that we get presented with a fair amount of opportunities in the space and I think for us to do something a one it would have to be accretive to returns.
Two it would have to be within the context of our experience and our ability to actually manage the assets. So [noise].
Yeah, we when we think about that we think about things more in the non QM space than we do the agency space, but as we do think about MSR suite, we do think about origination just generally speaking around.
How to come up with the recapture machine that that helps.
That's helpful. And then just one one other question. So as you had an is entering the seasonally weaker months I'm. Just wondering how prepayments are looking so far in one Q relative to historical.
Oh definitely seeing you know a bit of a slow down with a winter seasonal.
Obviously, that's also have driving rates typically 45 day lag. So you know what we're seeing in the market right now as far as levels of interest rates haven't really showing up in closings yet for originators.
Looking to start I'm in a sense of what we've seen at least in the first couple of months here.
For the RMBS portfolio has been a slower speeds I'm out the gate, mainly based on seasonal.
You know what we may start to see is it in the second quarter as as Ray kind of mentioned as things get locked in this month that at these lower levels.
That's helpful and then I'll take one more and could you provide an intra quarter Ah, but can you update.
[noise] here, what I can tell you is that we looked at the book by on February 14th and on on that day.
But the book value was approximately flat.
That's helpful. Thanks for taking my question I.
I'm, sorry that and that's inclusive of two months of dividend.
Gotcha.
Our next question comes from Trevor Cranston JMP. Please proceed with your question.
[laughter].
Yeah on the last question.
Hey, how are you.
Good.
So Paul following up on the last question about the book value So far this quarter.
I understand that that update it does the mid February could you guys give us a sense generically I know things are moving around pretty quickly, but do you have it do you have a sense of how MSR prices.
Have changed or performed over the last several days as rates, it's declined pretty sharply.
Just broadly speaking about relative to what we think about paying for MSR.
Or the valuation yeah.
Hi, both <unk> and any color you brought our there would be helpful.
Well were predominantly buying flow. So we don't really have good color on anything related to bulk and we haven't really seen a whole lot of trades in that space, but I think broadly speaking on the flow side, we've been taking down pricing.
On a regular basis.
Okay right, Yeah, Yeah, Yeah, I would say that you know pricing remains relatively fair.
But keeping in mind doctors convexity adjustments to these grid so.
As we see par rates get reset lower obviously, that's going to reflect and you know adjusters backing off price due to the market move.
With respect to flow, we we get to refresh pricing frequently. So you know we feel pretty good about our ability to keep pace.
Right got you okay.
And as you as you think about the outlook for Prepays going forward.
If rates were to sort of stabilize around where there are currently can you give us a sense as to where your expectations are in terms of where speeds on your portfolio.
Ah would likely go relative to kind of where they came and save for the for the fourth quarter nitrate.
Well I mean, obviously, it's impossible to predict exactly where the CPR as I've known to be in any given month.
I would say that you know the portion of the portfolio that was highly revival since 630, we've seen a 20% decrease in that of course some of that came back at recapture alone that he saw the recapture rate they pop up but the other thing that keep in mind as you know the burn out on these are typically you know.
About a 25% decrease each time, they see a cycle of similar amount of incentive so.
What's what's the open item as what does.
Loans that had a foreigner quarter no rate with their first chance to really rifai with 50, but instead of what that going to do.
Hard to say on it does appear that you know comparative to previous cycles.
That you know the revised pop up quicker, but burn out faster as well.
Okay. That's helpful.
You guys mentioned that the recapture a percentage went up in the fourth quarter can you provide any commentary around.
Sort of if there's any additional room for improvement in that number.
I mean, we do see reprise start to pick up again going forward or if I'm sort of that 10% level, where it came in as sort of a reasonable way to think about a gone corporate.
Yeah, you know and keep in mind to that you know that's a quote off of total payoffs.
So there's always a portion of payoffs every month that are basically turnover people just moving so it is not really reasonable time to recapture much out of there.
But you know in terms of recapture rate, we suspect that'll that'll be pretty much stable in the near term.
Yeah, we have enacted.
You know a more focused strategy on on refining the guys with the highest propensity to pay based on the payment saving [noise].
We think that showed an improvement from Q3 Q4.
Okay got it.
And then.
Sorry, I think that I think that actually covered everything for me. Thanks.
Our next quarter. Thanks.
Our next question comes from Henry Coffee with Wedbush. Please proceed with your question.
Yes, two two questions you talked about.
A recapture arrangement <unk> those.
Those seem to only work if you own the person or the the organization responsible for the <unk> for doing that.
It is that feasible or would it be more of a partnership like you've had in the past.
So the personally I'd say is if ginnie recapture rates are very different than conventional recapture rates as I think you know.
And I think that.
With respect to the absolute number we dig deeper.
And.
The portfolio is broken out by servicer and the collateral characteristics between the two servicers are different and given the collateral characteristics of each portfolio, we've become increasingly more comfortable with their efforts to help us recapture our loans and I would say that's the round point portfolio has a higher gross no.
And we see significantly higher recapture rate from them than we do flagstar, who has a lower gross no rate on on their portfolio. So while the absolute number.
May not being present to you I, we're pretty we're pretty happy with you know the fact that the percentages are increasing and we look forward to be able to.
I'll give you guys more color on the first quarter in a couple of months.
So you're happy with the partnerships there actually working.
Sure. They look to you always want more recapture Henry sure you know I think Oh, we would love to get every loan that we possibly could I think originators are.
Or a lot more efficient about refinancing loans today than they were one or two years ago, but given the relationships that we have in the partnerships that we have and the communication around their efforts on our portfolio.
We have gotten more comfortable with that their efforts over the last six months I can tell you six months go no. It wasn't very happy with it but you know given the recent results that I've seen I'm much more comfortable.
So you don't have to go to the extreme of quote buying somebody you used the partnerships are working.
Yes. The other question is a though I didn't say that but I think you know I think I alluded to the fact that you know if we looked at an originator would be with the.
Goal of being able to do just that which has to be more control of your capture and I think that as you.
Probably the best scenario, you have but at our size what we what we have we think works well for us.
And then on the.
You know, it's a little shocking looking at where rates are.
[music].
Forgetting what's going on in the MSR side is there a reinvestment issue on the horizon for you or.
Okay can you sort of live comfortably with where things are with where your dividend is obviously, you've got a nice earnings buffer in there that that wasn't there before.
You know the yield curve is looking a little funky.
When you when you look at rates today is there a spread issue or a reinvestment problem. It as you put new money to work.
Well Henry it's truly and leave you know clearly we've come down to these low level of rates very quickly.
I would not be surprised if some of this reverse just just as quickly.
It would be nice to always be able to put money to work I think at higher levels of interest rates given where we are currently we're able to put things to work in the mid teens.
But you know, we'll have to wait and see in terms of where prepayments.
We're financing cost as well as where swap rates kind of kind of wind out.
I think we feel comfortable a where we are currently with our dividend and where our core expectations are at the current moment in time.
Great. Thank you.
Our next question comes from Kevin Barker would pay per Se, but please proceed with your question.
This is actually appears that were on for Kevin I'm Sullivan My questions have been answered, but maybe a quick one of the buyback would just wanting to get a gauge of I guess your appetite.
To use the remaining six and a half million or so I guess it as a authored authorization and how you're thinking about kind of deploying capital via this matter going forward.
Sure. So oh, we believe that a week, we put that program in place to execute it.
You know I think we've had a few other things on our mine. This week relative to just volatility in marketplace, but you know at 80, 85% of books, you know I, it's a it's compelling discussion.
But I you know I can't give you an absolute number as to what we do I think we've had a lot of work to do this week just to keep on top of the markets, but to your point.
We put the program in place a we've shown that we were willing to execute on it and we're just trying to be smart about how we do it.
Great. That's helpful. Thank you.
We have a follow up question from Trevor Cranston, but JMP. Please proceed with your question.
Hi, Thanks.
Just one more thing you are related to the movement in rates, we've read recently.
No you guys I've talked about being dynamic and your approach to hedging and trying to protect book value can you disclose any significant changes you've made to the ahead, but to the hedge book, where the portfolio. Since you ended the year.
Thanks.
Yeah, I'll take some of that we have made some changes I mean, obviously drive the rate rally.
We have continuously adjusted this portfolio. It is not remain constant I would say some of the things that we have done we have moved into lower coupon mortgages, a combination of TV as well as spec pools.
In addition, we've also taking the opportunity reset some of our payer swaps as.
As interest rates have rallied and in addition to that we've also added duration be treasuries.
Futures.
I think our goal is pretty much unchanged carrier, which has to be fairly neutral given the lack of conviction about where rates are going.
That really hasn't changed.
Okay. That's helpful. Thank you.
At this time I would like to turn the call back over to management for closing comments.
Great. Thank you everybody for joining us on todays call and we look forward to updating you soon on our first quarter results have a great evening.
This concludes today's teleconference. You may disconnect your lines at this time and have a great evening.