Q2 2020 Cherry Hill Mortgage Investment Corp Earnings Call
[music].
Greetings and welcome to the Cherry Hill Mortgage investment Corporation second quarter 2020 earnings call.
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
Anyone should require operator systems during the conference. Please press star zero on your telephone Pete.
Please note this conference is being recorded.
I'll now turn the conference over to your host.
Right.
You may begin.
We'd like to thank you for joining us today for Cherry Hill mortgage investment Corporation's second quarter 2020 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 each am I right dotcom.
Today's call management's prepared remarks and answers to your questions may contain forward looking statements that are subject to risks and uncertainties that could cause actual results could differ from those discussed today.
Examples of forward looking statements include those related to interest income financial guidance.
Yeah ours.
<unk> expected cash flows as well as prepayment and recapture rates 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.
I 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 definition is 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, Rory and welcome todays call.
We hope you and your families are remaining safe and healthy and we appreciate you joining us this afternoon.
I'd like to begin the call by thanking our entire team for their continued efforts to manage through what it's been a most challenging environments. These last five months.
Their hard work dedication impresses me every day.
The team continues to work remotely with no disruption in productivity.
The second quarter could be described as a rebuilding period, where we work to stabilize our portfolios and closely monitor our risk.
Pandemic continue to greatly impact the economy and the country.
The U.S. experienced record high unemployment numbers paired with record low GDP keeping rates near historic lows throughout the second quarter.
<unk> equities pushed higher anticipation of covert vaccines and better economic times.
As we noted on our prior call liquidity was a paramount importance as we navigated through these challenges and we stayed focused on our core strategies and competencies throughout the second quarter.
We remain committed to our portfolio is constructed with both RMBS, an MSR and believe the two asset classes provide investors with compelling returns.
Together effectively hedge book value across multiple interest rate scenarios.
In the midst of a pandemic, we overcame many challenges and I'm pleased with our performance for the second quarter.
We reduced the leverage on our aggregate portfolio from five times at the end of March to 4.4 times at the end of June.
And ended the quarter with 94 million, an unrestricted cash on the balance sheet.
For the second quarter, we earn core income of 47 cents per share.
From a book value per common share perspective, we finished the quarter at $13.41 as of June Thirtyth.
The 2.3% reduction from where it stood on March 31st.
However, I want to emphasize that's the large majority of the reduction was the result of paying 50% of our first quarter common dividends and stock.
During the worst of the crisis.
Absent the stock dividend.
Book value for the second quarter was essentially flat.
We accomplished all of this without having to dilute shareholders by taking on any additional financing.
Year to date, our book value per common share is down a little less than 23%.
As a hybrid read that invest in MSR us, which have been significantly affected by falling rates.
Long with the unprecedented macroeconomic environment in recent months.
We believe our overall book value performance, thus far 2020 stands up very well relative to other hybrid rates.
Seeing greater deterioration in values since the onset of Cowen.
During the quarter, we made the decision to sell our Ginnie Mae Omnisource, we had not growing that portfolio since the initial purchase several years ago I.
Given the current collateral characteristics and expected future performance the cell with strategically appealing.
We recognized a small gain versus the portfolios fair value at June Thirtyth.
[noise] remaining Fannie and Freddie MSR as continued to experience highly elevated prepayment speeds as expected given their current interest rate environment.
As of the end of July active forbearance remain just shy of 8%.
Approximately 30% of borrowers having made all payments due through July.
Going forward, we believe our bolstered liquidity position is sufficient to satisfy all of our servicing advance obligations over the foreseeable future.
As we move into the second half 2020 interest rates remain near historic lows as markets a way to vaccine.
We are three months from a presidential election, which will undoubtedly heat up and there are still double digit unemployment.
The fed has communicated that they're prepared to do whatever it takes to keep the economy strong.
Housing remains a bright light despite high for Barents statistics.
We're content to keep our powder relatively dry as we seek further clarity on the pace of their recovery.
We continue to believe MSR, so compelling at current levels and if they meet our measured risk reward criteria.
We will selectively invest to work well program.
All in all our team's efforts remain squarely focused on proactively managing our portfolio.
Keeping our balance sheet strong and preserving our book value to enable us to emerge from a pandemic to take advantage of the opportunities. We believe will be present once the economy rebounds.
With that I'll turn the corporate call over the Julien who will cover more details regarding our investment portfolio and its performance over the second quarter.
Thank you Jay.
During the second quarter spread sector markets improved as liquidity return and spreads tightened on the heels of fed policy.
Those policy actions allowed us to continue to adjust our positioning to reduce leverage and maintain a high cash position.
As the third quarter begins continued fed policy is the one constant.
U.S. gross ton unemployment remain uncertain as the Corona virus weighs on the U.S. and global economies.
A bible vaccine, what eight consumer sentiment and confidence and would comfortably allow employees to return to work and improved growth prospects.
Timing of such is unknown, but we're hopeful that something materializes in the latter part of the year.
Servicing related investments comprised of full MSR at U.P.B. of approximately 24 billion in a market value of approximately 177 million at quarter end.
MSR investments represented approximately 37% of our equity capital and approximately 10% of our investable assets excluding cash.
Meanwhile, RMBS portfolio accounted for approximately 39% of our equity a slight decline from the previous quarter.
As a percentage of investable assets RMBS represented approximately 90% excluding cash at quarter end.
Our conventional and government MSR CP ours averaged approximately 38% and 28% respectively for the second quarter.
Speeds were elevated from the first quarter, given historically low interest rates and mortgage rates.
Similar to MSR speed, the RMBS portfolio posted a weighted average three months CPR of approximately 13.7%.
Elevated from the prior quarter.
Despite the decrease prepayments.
The RMBS speeds remain better then Fannie Mae aggregate speaks for the quarter.
As of June Thirtyth, the RMBS portfolio stood at approximately 1.5 billion.
During the second quarter, we further repositioned and de Levered, our portfolio to me maintain our liquidity position.
Quarter over quarter, the 30 year security position of the RMBS portfolio grew to 95%.
Slight increase from 93% as of March 31st and the remaining assets represented 5%.
Well the second quarter, we posted a 1.64 RMBS net interest spread versus a 1.25 net interest spread reported for the first quarter <unk>.
The improvement in spread was due to significantly lower repo cost in the quarter and resetting our swap hedges to lower rates.
During the quarter, our repo costs improved from ones bought six 2% 2.39%.
It's interesting mortgage rates remained at historically low levels mortgage prepayments will be the main driver of the net interest spread going forward.
At quarter end, the aggregate portfolio operated with leverage of approximately 4.4 times.
From five times the prior quarter.
We ended the quarter with an average portfolio duration gap positive point.
One nine years.
We continue to evaluate known to the portfolio is necessary as we move forward I'll now turn the call over to Mike for a second quarter financial discussion.
Thank you Julie.
Our GAAP net loss applicable to common stockholders for the second quarter was $12.4 million were 73 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 $3.1 million or 18 cents per share.
Our core earnings attributable to common stock holders were $7.9 million or 47 cents per share.
As Jay mentioned, our book value per common share as of June Thirtyth 2020 was $13.41 a reduction of 32 cents per share from March 30, Onest 2020, net of the second quarter 2020 dividend.
As we noted on prior calls the accounting impact of paying half of our first quarter common dividend in shares of common stock was recognized in the second quarter and that encompass the large majority of our books a reduction from March 30, Onest, excluding that impact looks like it was relatively comparable with the prior quarter.
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 second quarter, we held interest rate swaps and Swaptions TV Ace and Treasury futures all of which had a combined notional amount of $2.1 billion.
Beginning with this quarter, we're providing more granularity with respect to our hedging strategy, which you can see in our 10-Q as well as in our second quarter presentation.
For GAAP purposes, we've 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.
On June 18th we declared a dividend of 27 cents per common share for the second quarter of 2020.
Which was paid in cash on July 28, 2020.
We also declared a dividend of 51.25 cents per share on our 8.2% series, a cumulative redeemable preferred stock and a 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 July 15 2020.
At this time, we will open up the call for questions operator.
Thank you at this time will be conducting a question answer session if you'd like to ask the question. Please press star one on your telephone keypad.
Consummation towing will indicate your line is the question Keith.
You May prestart too if you like to move your question from Q4 participant using speaker equipment. It may be necessarily pickups, we had said before Christmas start keys.
One moment, please lobby poll for questions.
Our first question is from Tim Hayes with B. Riley yet.
Please proceed with your question.
Hey, guys. This is actually Mike on for Jim Congrats I can corridor.
My first question is that correct, yes, as well ahead of the dividend again I.
I guess just first question would you expect core earnings to exceed the dividend again in Threeq you know.
Assuming there's no other major economic deterioration.
Hi, how are you it's Jay it's possible, but you know I think others, but as soon as others have noted this quarter, we use a variety of metrics to evaluate a earnings power of the company in core as one you know, it's it's a big one but a you know we do look at other.
Oh methods or.
Or things that we are used to think about you know that the true earnings probably come in today, you know, we're comfortable with where we are but it's possible that a core could exceed.
Gotcha. That's helpful. Then another question is it getting more MBS spreads are and just the fact that it's become cheaper your hedge and your current not on liquidity I know you mentioned in your prepared remarks trend that you intend to maintain dry powder I'm, just wondering what would need to change for you guys to decide to go a little more offensive.
Yeah, but broadly speaking I think you know Oh harp hybrid Reits are holding onto more cash than agency routes or you know in light of some of the investments that they hold so I would say that you know our desire to hold more cash is not a reflection of our view on any one specific asset.
But a reflection of our ability to maintain a strong balance sheet still you know just a few months. After what happened last time I don't you know again I would also emphasize that weve.
Significantly reduced the size of our non agency position. So today you know the position really comprises of agency RMBS, which is very liquid and very transparent pricing wise and then MSR.
Given given where we are with forbearance, a we think you know our for Barents statistics are very good relative to a you know what we thought might happen. So you know as we get more.
Clarity into what's what we think might happen going into the fall I would expect that we you know we could pare down that that cash position, but it really isn't a function of.
You know a lack of desire anywhere to investors more a function of trying to maintain strong balance sheet.
That's helpful. Thank you and then one more just on speeds. So I guess high level whats the outlook for the back half a year and then what would you expect to see in time to speed up the primary so another 30 or 40 basis points to 2.5%. How do you think how sensitive do you think speeds would be two to that decline.
Hi, This is Julien I mean, we're already pretty sensitive to two that decline. We're already seeing you know things over created three to four months ago already being three financeable things that came out with a 3% coupon mortgage with like a three.
And a three courts, the three nine GE whack, a refinancing pool. So I would say the more current mortgage REIT that we're kind of seeing out there right now is like three three in an eighth right now when you're talking about another potential 25 to 60 basis points, we easily the market would clearly be much more refinance won't and.
On the RMBS side, I mean, we've had good speeds, but I could easily see those you know increasing by 50, 50%.
That's helpful. And then just one more for me could you provide inter quarter book value up there's anything out of their legacy end of July.
Sure you know I would characterize it as down in approximately 1% to 2%.
Thank you for taking my questions.
Our next question.
Steve Delaney from JMP Securities. Please proceed your question.
Hey, good evening, everyone, Hi, Steve Harvey.
I'm good Jay I hope Youre, So Ah, yes look I mean, all in all.
A lot to be thankful for both [laughter] company was perfect you know personally everything else, considering where you know what we've been through this year. So far so congrats on that as well.
You mentioned liquidity about a dozen times in your remarks, and just thinking about the decision to onboard made in June to cut the dip from 40 cents, a 27 pretty meaningful cod.
And that decision you to mid June you have you had to know that you were going to make something north of 40, sending core you know at that point and all of Us I.
I didn't address my numbers until I guess after that so I was below 25, but you know the highest submitted the four was 32. So we all I don't know whether we got head fake to we were just you know assuming more de leveraging or whatever but you know was was it decision made just too.
Protect liquidity in that I assume that was largely largely related to servicing advances as opposed to repo or anything like that could you comment on on kinda the.
Why why such a large cutting the dividend relative to what core came out to be thank you yeah sure. So so I'm happy to so.
A couple of things one up you know, we definitely want to concentrate on.
You know strong balance sheet, given everything around for parents and at that time, we were in the very early stages of understanding.
You know how many people would go into forbearance, how long they would stay there and how that would impact our ability to.
Support that you know as a service are obviously you have an obligation to support you know those borrowers so sure that was not definitely a consideration.
[laughter] you know, it's one of our peers mentioned on on and their presentation. Yeah. We do look at a a few metrics you know we look at core whether it's a comprehensive like a taxable.
And we look at the true earnings power of the company and so core income as one.
Opponent of that and we we had a feeling that core might exceed the dividend in the short term.
But you know as we looked at other components you know I'm thinking about our income you know those other metrics came into play and that was a consideration. The last thing I'd mentioned as you know as joint mentioned like speeds are high and at right.
Time in June we are you don't know how long you know how long of these speed is going to persist as their tenure really supposed to be a 50 points or 50 basis points when.
Yeah, the S&P and that our approaching you know all time highs.
Where's the disconnect is disconnect and rates as the disconnect and equities and so within the context of that if we're in this lower interest rate for longer environment. You know, we do expect speeds to continue to be high and that should also.
I have an income or have I.
A meaningful and.
Input to the core calculation as well and in a my guess is that would be to the negative. So what we discussed with the board was look what's sustainable you know what are we sort of sustainable you know the last thing we want to do is did mess messed with the dividend to walk for sure.
That you don't want a missing.
That's right and so you know given what happened in March that is exactly true you know so I wouldn't <unk>. Yeah. Go ahead go ahead, I'm, sorry them into cut your Australia.
Could we revisit it sure you know, but we're still you know in the middle innings of all of US. So you know.
We do have the ability to raise it but you know generically speaking are broadly speaking you know I think what the board decided it was appropriate.
And you still have plenty time to deal with any Greek minimum distribution requirements between now and into your so that can be though yeah separately, yeah. So long.
He that in our you'll see that once you go through the financials, that's not as you [laughter]. So look first the correlation between stocks and bonds.
We bought broken I mean, you know.
We have to throughout all our textbooks I guess or <unk>.
Our notes from economics everything else I mean, it is it just start spiel broken.
But won't that that's not relevant what is what is interesting.
For a company that is focused on agency MBS and agency MSR is given where we are today.
Is there anywhere you Julian that you got where can you I mean [laughter] pay ups is the obvious answer but they've got run up so much so where is that your investment menu, where do you go right now and get any some kind of protection from speech.
Disneyworld [laughter] yeah, Okay [laughter].
Denver [laughter] little bit more detail of an answer look I think you can buy security that where you don't have to pay an exorbitant price premium on those bonds and still get some type of protection you may not hold them and you mean.
Hold them as long as you would like to hold the better quality type and type of product that you are paying a higher price premium for but you can still get some protection I mean on the RMBS side, we still are seeing low double digit type of.
Returns, even with paying for you know a higher price premium and you know even on MSR on the leverage side, we're still seeing on the low double digit type side. So we do think the combination does offered an attractive return I'm. Currently you know we like some of our.
Appears are rolling a portion of our bonds. So we are taking advantage of the dollar roll market. That's out there yes, it's never been a major strategy for US we have been you know affirm that likes to pick bonds go to the collateral and sure.
Right to have collateralized stories.
But we also will take advantage of the specialists went when it's that attractive. So we are doing that coupled with you know picking selectively picking some bonds as well.
And I would add guy that do that you know look the fed has indicated that they're going to continue to be involved and by MBS and and as long as that short holds true.
Prepay or prepays and mortgage loan pricing.
We'll be it remain elevated and we remain very in tune in touch with you know that as as it determinant in how we think about deploying capital and.
For those who are highly invested in lower coupon MBS today, which have done well on a price price perspective, the data fed decides that yes. There are no longer is going to support that market in size, you know you're going to see some meaningful hats and so we're very in tune.
To that and try to maintain a balanced a you know mortgage backed securities portfolio relative to coupon right right I'll never forget June 2013 that Wednesday in the taper Tantrum I'm sure you guys remember that to listen thanks, all thanks.
[laughter] yeah, thanks, very much for a fruit for the for the comments. It was helpful. Thanks and stay well there. Thanks.
Your next question is from Kevin Barker Fabric Center. Please proceed with your question.
Thank you I just wanted to follow up on the Ginnie Mae MSR sale, you just walk through.
Some of the rationale behind the sale and then some of the direct impact you may see.
I'm, assuming it's going to cause you know the significant decline in servicing costs, especially with elevated forbearance, that's going on right now.
Well remember it was only hey, Kevin how are you it's good to hear from it.
Remember it was only 10% of our overall servicing portfolio. So you know relative to the overall portfolio of servicing the impacts aren't aren't going to be significantly meaningful, but I think as you pointed out you know the delinquencies on the portfolio are getting high and there we weren't.
Into the portfolio. So it's a static portfolio, that's only getting worse.
And so you know obviously when you think about.
How the regulators might think about that.
That's probably not a positive discussion.
So given our current short term views on on that part of the sector.
And given that you know our strategic partner is much better at handling that.
Recaptured refinancing that we are.
They were interested in the portfolio. They saw based on recent recapture results that.
A lot of that portfolio had potential for them.
They had an interest in.
In the portfolio and you know we both booked data together and we said to ourselves look if we're not planning on making investments in the short term this portfolio.
And we think that you know for Barents et cetera might increase or grow relative to.
[noise] composition of that portfolio Tonight today might be the right time to kind of different divest of that and you should never be married to any specific portfolio right. I think it was it's a great fact pattern that we can actually trade that asset instead of you know held for investment.
Or held to maturity. So you know from my perspective, it's always good to be able to show.
Transactions on both sides of the coin.
And you know given.
Given that we hadn't added any assets that and in the short term hadn't planned on growing that part part of the portfolio.
It made sense to us.
So hopefully that helps you know with respect to your question.
Yeah. It makes it makes sense polling understandable just given the size of it.
The fact that you weren't adding to it and then also could you can you just talked about like some other opportunities that you may see out there just maybe another asset classes you still have a certain amount of cash obviously, you're being conservative with it but I'm just thinking like you know there has been quite a bit of market disruption.
And continues to be the case, but.
Are you seeing any other ideas or maybe some other diversification.
Possibility that that's actually.
Great question Yeah.
Right. After March you know I think a lot of us.
Tenet wanted to focus on the strategies that were kind of within your DNA and you know for us at that time that was agency MBS and servicing a you know what happened in credit look everybody was down on rates going into this but rates aren't going to kill your credit is going to kill yet.
You know just I can tell you first hand and from that perspective over the last three months, we really just kind of stuck to our core competencies and to your point you know in the back in my mind I'm thinking okay. What's the next leg of the store supposed to be.
Given that you know to your point, there's been a fair amount dislocation or are there any opportunities in the market relative to our core competencies and when and where should we invest in those and those are great discussions that we have here with the board.
But over the last couple of months you know my personal view Us book.
As we exit out of this you know our view as we did a good job.
Coming out of this don't get too crazy.
Getting into an asset class that you may have wanted to get into.
Going into the crisis, just because you think it might look cheap.
And I think that there are some asset classes that continue to look interesting and appealing on the loan space to us.
And given the recent.
Opening of credit relative to kind of non agency slash not nonqm that could be something but.
I would say that that is probably more of a fourth quarter questions and a third quarter question, our second quarter question.
Okay. That's fair I mean are still a lot of things that need to figure it out over the next several months or even years [laughter].
Okay and then.
No you're you've got to hold up.
Notably well compare to your peers on.
Book value holding up.
And portfolios fairly stable leverage is low cash is fine.
But your stock is not reflecting strengthened the balance sheet. Yeah would you consider you know me a little bit more aggressive in.
Buying back stock, obviously, you got liquidity concerns there, but you would you look at that you have had no history of doing that you're there, but I was wondering if you were looking at it just given where the stock is trading.
Yeah. So that's definitely a a conversation we would have with the board and you know should the board decided that that would be appropriate you know I would tell you that we would act on that.
Okay.
Alright, thanks for taking my questions.
Thanks, Kevin.
And once again as a reminder, if you have any questions you May press star one of the telephone keypad.
Our next question is from Henry Coffey Wedbush. Please proceed with your question.
Yeah, good afternoon, and thanks for taking my question.
You know in listening to the com conversation.
There are small pockets it sounds like there are smallpox pockets, where you'd like to deploy capital.
But there aren't any large places to put the money is that I think there yeah I think that's right Henry.
And and you know.
Now you're servicing costs.
I'm just looking at my model really quickly.
I mean is still around 6 million do they start to come down now that you've sold these assets or.
Is this the 6.6 that we're looking at them work.
Likely number for the rest of the year.
Yeah. So broadly speaking I would say ginnies, where the most expensive service right you know Jane, especially given you know levels delinquencies and the high touch of the in nature of the product versus conventional so.
You know on a pure relative basis definitely on an absolute basis, given a small percentage of you know the portfolio in that asset class, maybe not as much as you would think but.
I'm happy to kind of that that out with you on the side.
So everyone. We talked to is looking at a three trillion dollar mortgage market.
Sure so yeah.
Yeah.
Some people brought that up in February and.
[laughter] they expectations for next year are pretty rich.
I would foreign cash you know you're good the sure forecast aren't there yet, but you know.
Every company, we talk to thinks this spills over.
So that means speed stay high and and and the attraction of your two primary asset classes remain slow.
You can talk to the board about buying back stock for.
Just sitting here generating the kind of returns that you are.
Yeah.
Growing book value.
Yeah is that the worst possible thing you can do with the next nine months.
After well what we just witnessed over the last five months now.
I mean, just I know, it's a lot more conservative than my colleagues are talking about but.
From a point of view of a current investor if I bought this this.
No.
I'm not talking about the person who bought the stock six months ago, but.
In terms of writing checks today, that's the best profile for just buying the stock and letting things.
Then a chill.
Yeah look I would say how much are looking.
We're looking to we're looking to play offense and we're looking to figure out where we're supposed to play offense.
Within the context of.
What what another round of a an increase in.
Couple of cases due to the market our sector specifically and.
Oh, the equity markets relative to.
The REIT sector, we think that there's room to to play offense, but do it in a responsible way we're not a straight agency routes, we're not going back to 10 times leverage you know, we're going to let those guys do that.
They do good job, great and we're a hybrid we haven't been shy about that and no to the extent that we find something and I think you're right to the but to your point, it's probably you know in a smaller scale than the other two asset classes meal.
Then, we'll we'll think about investing in it but.
The last four months it would be best be described as you go back to basics.
Great. Thank you.
Sure.
And we have recently entered the question and answer session I'll now turn call over to JLL for closing remarks.
Thanks, so much.
Everybody. Thank you for joining us in today's call and we look forward to updating you soon on our third quarter results and we hope you remain safe and healthy have a great night.
And this concludes today's conference and Youve may disconnect. Your lines at this time. Thank you for your participation.
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