Q3 2020 Cherry Hill Mortgage Investment Corp Earnings Call
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Greetings and welcome to the Cherry Hill mortgage investment Corp. third quarter 2020 earnings call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host worry remarks, Brian.
President of RCR. Please proceed.
We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations third quarter 2020 Conference call. In addition to this call. We have filed a press release that was distributed earlier this afternoon and posted to the Investor Relations section of our website at Www Dot C.
Yeah My read dotcom.
On 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 to differ from those discussed today exam.
Examples of forward looking statements include those related to interest income financial guidance I ours future 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 managements 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 Companys filings with the FCC and the definitions contained in the financial presentations available on the company's website.
Today's conference call is hosted by Jay Lown, 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 to todays call.
I Hope you and your families are remaining safe and healthy.
We appreciate you joining us this afternoon.
I want to thank our entire team for their continued hard work and dedication to manage through the ongoing challenges we face.
The team continues to work remotely with no disruption to productivity.
The third quarter saw the economy into ramp rebound from a pandemic, but there remains considerable volatility with respect to political and macroeconomic factors during the quarter.
U.S. GDP had a record third quarter bounced back and equities continued to push higher as the economy reopened.
But rates continue to remain at or near record lows throughout the quarter.
We remain hopeful that a covert vaccine will be forthcoming quickly and our elected officials will eventually work together to rebuild this great nation and create a more stable economic environment.
In the absence of certainty we continue to prioritize liquidity during the quarter and remain focus on our core RMBS and MSR portfolio strategies and competencies.
Given our ongoing proactive approach to managing our portfolio, we continued to generate strong core earnings while maintaining a strong liquidity position.
For the third quarter, we earned core income of 48 cents per share well above our distribution level.
And our current dividend yield is approximately 11%.
[noise] maintained lower leverage on our aggregate portfolio this quarter ending the quarter at 4.6 times leverage.
We also ended the quarter with 95 million and unrestricted cash on the balance sheet.
So our expectation that cash will be lower in the fourth quarter as we meet year end servicing advances and navigate higher prepay speeds in our investment portfolio.
We believe our portfolio remains poised to navigate the current environment and take advantage of select investment opportunities that present themselves.
Our strategy of investing in MBS combined with MSR remains intact.
With the majority of our invested capital deployed in MBS.
Drilling will provide some highlights on that portfolio shortly.
Our Fannie and Freddie MSR portfolio continues to experience highly elevated prepayment speeds as expected given the current interest rate environment.
We anticipate this to be the case at least into 2021.
Given the historic level of mortgage refinances this year.
We continue to rely on our phone program to acquire new MSR assets at your levels, we believe to be attractive.
That market has shown signs of life hopefully.
And we expect to grow our market share over the coming months.
Recapture efforts, our major focus as lower rates prevail and we are working closely with our recapture partners to improve results on a regular basis.
[noise] forbearance statistics improved over the quarter and into the fourth quarter.
As of the end of October active forbearance remain just shy of 6%.
With approximately 20% of borrowers having made all payments due through October.
We continue to believe our bolstered liquidity position is sufficient to satisfy all our servicing advance obligations over the foreseeable future.
Apart from the strong core earnings and our strength and liquidity position book.
Book value per common share finished the quarter at $11.74 as of September Thirtyth.
The large majority of the decline from June Thirtyth is due to a reduction in the value of our deferred tax asset.
Following the sale of our Ginnie Mae MSR portfolio at the end of the second quarter, we began to evaluate the size of our deferred tax asset versus our expectations.
That effort resulted in the identification of an error in the calculation of our deferred tax asset.
The error was not material to any single prior period, you know historical financial statements, but it required us to update certain financial numbers presented previously to correct. The error and we adjusted our book value this quarter to reflect the correction.
To be very clear the air and subsequent adjustment in our book value is not related in anyway to the composition or valuation of our core RMBS or our MSR portfolio.
The adjustment had and will have no impact on our core earnings or the sustainability of our dividend.
As we close out 2020 interest rates remain mange range bound as markets Digest the election results and news on cobot spikes worldwide.
The fed recently reiterated its commitment in assessing the economy as necessary, but as it remains a very fluid environment, we remain content to keep some powder dry as we await further clarity.
All in all we remain squarely focused on proactively managing our portfolio.
Keeping our balance sheet and liquidity position strong to ensure we can take advantage of opportunities.
Once we are past the pandemic.
With that I will turn the call over to Julian who will cover more details regarding the investment portfolio and its performance over the third quarter.
Thank you Jay.
During the third quarter spread sector assets continued to steadily improve as the fed policy remain accommodated and autonomy mostly be open.
Those policy actions allowed us to continue proactively adjusting our positioning to maintain a strong cash position.
As we move past the election you.
The only certainty seems to be continued uncertainty with respect to the Corona buyers as positive cases increase and the fact that we eagerly await news of a viable vaccine by the end of this year or early 2021.
Servicing related investments comprised the full limits ours, approximately you PB 22 billion and a market value of approximately 163 million at quarter end.
MSR investments represented approximately 29% of our equity capital and approximately 9% of our investable assets excluding cash.
Meanwhile, our RMBS portfolio accounted for approximately 45% of our.
As a percentage of investable assets RMBS represented approximately 90% excluding cash at quarter end.
Our conventional MSR CPR averaged approximately 41% for the third.
Third quarter.
Speeds remained elevated were up in the second quarter, given the historically low interest in mortgage rate environment.
The RMBS portfolio posted a weighted average three month CPR of approximately 14%.
Slightly above the prior period.
Despite the slightly increased prepayment speed the RMBS speeds remain remarkably better in the Fannie Mae aggregate speeds for the quarter.
As of September Thirtyth, the RMBS portfolio inclusive of TV, a stood at approximately 1.6 billion.
During the third quarter, we continue to reposition and de lever up a bit.
To maintain our liquidity position.
Quarter over quarter, the 30 year securities position of the portfolio grew to 98% up from 95% as of June Thirtyth.
And the remaining assets represented 2%.
For the third quarter, we posted a 2.23% RMBS net interest spread versus a 1.64% net interest spread reported for the second quarter.
The improvement in spread was a combination of dollar roll income lower repo cost and resetting swap hedges lower payments.
During the quarter, our repo cost improve.
Three 9% <unk>, 0.25%.
His interest in mortgage rates remain at historically low levels mortgage prepayments speeds will be a driver of the net interest spread as well as dollar roll income as we move forward.
Quarter end the aggregate portfolio operated with leverage of approximately 4.6 times.
We ended the quarter with an aggregate portfolio duration gap of positive 0.2 years.
We will continue to evaluate and also the portfolio as necessary.
Now I'll turn the call over to Mike for third quarter financial discussion.
Thank you Julien.
Our GAAP net loss applicable to common stockholders for the third quarter was $3.2 million or 19 cents per weighted average share outstanding during the quarter while.
Comprehensive loss attributable to common stockholders, which includes the mark to market of our held for sale RMBS was $5.3 million or 31 cents per share.
Our core earnings attributable to common stockholders were $8.2 million or 48 cents per share.
Our book value per common share as of September Thirtyth was $11.74 compared to the revised book value of $12.32 as of June Thirtyth 2020.
As Jay said most of the books a reduction in the quarter was due to the recalculation of our deferred tax asset, which has no impact on our core earnings or the sustainability of our 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 third quarter, we held interest rate swaps Swaptions TB A's and Treasury futures all of which had a combined notional amount of $1.9 billion.
You can see more details with respect to our hedging strategy and our 10-Q as well as in the third quarter presentation.
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 <unk> as a component of the net gain or loss on our interest rate derivatives.
Operating expenses were $3.5 million for the quarter.
On September 17th 2020, we declared a dividend of 27 cents per common share for the third quarter of 2020, which was paid in cash on October 27 2020.
We also declared a dividend of 51.25 cents per share on our 8.2% series, a cumulative redeemable preferred stock and the dividend to 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 October 15th.
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At this time, we will open up the call for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Your first question comes from line of Henry Coffey with Wedbush. Please proceed with your question.
Good evening.
Oh It seems [laughter] has always been the case with this market.
Oh that everything changed today, we saw the mortgage name sell off we saw all our credit sensitive names rally et cetera et cetera.
Do you think there's something really durable going on here that could.
No alters things like payment speeds and MSR values and.
And your own view can you give us a sense of you know where you.
Where are we with rates in Reais and refinance activity I you know what.
How how much of a rate increase so could we see and still have a kind of the still red hot refinance market, though we've been living with.
Hey, Henry how are it's Jay.
I'm happy to happy to address that you know look we think that.
Valid are credible vaccine will definitely oh.
I have a meaningful impact.
Relative to rates Weve also felt that.
The current results around the election that that could.
Also trigger a higher rate environment, just given what we think around absolute level stimulus that might come through the economy over the next year.
Well with respect to the question around what rates are going to take.
I think Ray would tell you and he's sitting next to me so it could but he would tell you that.
Our 4.5% note rates and our 3.5% know rates are pretty much paying same space.
On the on the MSR.
<unk>, so we would need to see.
Of rate sell off that.
Good bid from here to have a meaningful impact on speeds.
And I say that because five mortgage companies didn't decide to go public because they thought the end of this was December 2020. So you know, we're optimistic and were cautiously optimistic about that but no understanding.
Margins around originations and profit levels around the originators himself sleep lead us to believe that there's still a ways to go before a meaningful decrease in speeds will happen.
What about what a 4% mortgage coupon.
Change things or is that or does it need to be higher.
Oh, clearly yeah that would absolutely.
Well, it's like three where it three if you're getting a mortgage today, depending on who you talk to your paying to 90 to in the threes low low low low threes. The 30 year fixed then if you have super credit and.
No you're refinancing a low will have a.
The high LTV, a house, you you're going to do much better than that.
That's why I say, you know is a three and a half or is it for that really alter is the market.
Yeah, clearly for does with respect to three and a half you know somewhere between three and four has you know has a decent impact but you know.
We would air on the higher side of that just just based on.
Our view on origination relative to margins primary secondary spreads et cetera.
Great. Thank you.
Your next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Thanks, I was hoping you give a little more detail on what happened with the deferred tax asset how much of the how much was the write down and what.
Was that related to certain assets.
Offsetting that the servicing liabilities or something else that was calculated differently. Thanks.
Sure I'll, let Mike take that Kevin.
Hey, Kevin Yeah, So weve calculated the deferred tax asset the same way for the past few years and with the sale of our Ginnie Mae MSR ours.
After the sales or didn't produce the sort of reduction in the DTA that we were anticipating we began to dig into what led to be an identification of an error in the calculation of that DTA.
But as I noted in my remarks, and as Jay noted in his remarks the DTA.
Isn't related to the value of the MSR themselves or the RMBS income producing assets and so that error doesn't affect the ability to pay for earnings or the sustainability of the dividend yeah.
Yeah, and Kevin I would add that the or occurred in booking the allocation of a servicing fee and mark to market changes in.
In the MSR as between Aurora and the QRS due to the intercompany sales at the excess MSR sales.
Okay and then.
Does this have any impact on the taxes, you're paying right now or your pay in the future.
Oh no. It doesn't know this is purely a deferred tax item.
It has nothing to do with current taxes.
And how much.
Q, how much was the write down.
No I, probably speaking Kevin it was or the total book value dropped about a third of the drop was performance related and about two thirds of it was related to the DTA.
Okay.
And then.
The CPR in the servicing portfolio.
He is running much higher than the RMBS portfolio.
Or is there any desire to you know attempt to match those more or try to get those costs.
Closer together, just given you know the <unk> economic hedges that they naturally provide.
Others, Theres definitely a desire as I think as I think I said in my notes that.
We're looking to.
Have a bigger market share on the MSR side of the house, but I will tell you. This you know again to my former comment to Henry <unk>.
All of these guys that.
We are looking to go public aren't willing to go public with you know a statement to the market that 2020 is the last year for profitability. So.
We have been very.
Careful about how we think about MSR sales and the MSR as we've been at it or you know have later, probably right around or just south of 3% area in terms of no rate and you know to us that's compelling.
So there.
There is an interest here in kind of level on that but you just don't go out and offer a portion of your MSR for Sip portfolio for sale. The way you do it you know specific uses on that on the MBS I.
Okay. Thanks for taking my question.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now one moment, please while we poll for questions.
Your next question comes from line of Mike Smith with B. Riley FBR. Please proceed with your question.
Hey, guys. So on the 1.1 billion of MSR sales can you just talk a little bit about the acquisition this bulk purchase or to the flow sale and then you know what kind of multiple did you purchase it at and is it all new production.
Production in us dollars.
Hi, So a it was also a and again you know I think its relative to our size relative to our size run off and where we want it to be you know all things considered pellets.
Relative to our view on rates prior to today, where the election.
That was the number we're comfortable with.
Historically with the understanding that you know clearly we want to.
Continue to a purchase you know within the context of a good majority of whats running off but Oh, we want to make smart decisions around servicing because it behaves more like T V. Eight in specified pools and as you all know Tvs speeds are pretty high.
So you know that's the.
The first part the second part is no.
Think of it around three more slightly less but think about it and you know in the remote conversation.
Got you that's helpful and then so.
Is that 1.1 billion during the third quarter or how much of that is subsequent to quarter end.
Oh, that's all just every quarter and I can tell you know offering for it so yeah fourth quarter has been pretty good so far.
Gotcha, that's helpful and just kind of going off of that can you provide an intra quarter book value update.
Yeah, I would think of stuff, so I'm gonna down somewhere between one and 2%.
Gotcha.
And then another question just given your cash balance and your kind of outlook for speeds and the best thing environment. How do you think about five actually used to top it all I'm you know just given your outlook for seeds, I'm, not necessarily but something where you're trading on book value.
Right.
Yes, so the MSR isn't really what we think about the most related to cash you know we have maintained that we have a desire to maintain a strong cash position going into your rent and yes, you may or may not know the fourth quarter is always the goal.
The largest relative to the servicing advances that are required to be.
We paid relative to ask Chris and given all things related to forbearance you know, it's our desire to make sure that we had a strong balance sheet going into that.
I as I said in my remarks also you know as a result of using cash for all of that plus you know dealing with factor as much color center on the MBS portfolio I would expect cash to come down, but I think what we want to do is get through the fourth quarter.
Understand the implications of pride and presidency and will be in a better position to kind of give you an answer on where what we think about cash you know early on in the new year.
Gotcha. Thank you for taking my questions.
Your next question comes from line of Trevor Cranston with JMP Securities. Please proceed with your question.
All right. Thanks.
To follow up on the question about the deferred tax asset write down <unk> can you say what the remaining size of the judiciary is after the write down.
Sure, it's a right about $20 million.
Okay got it thank you.
And then I guess as you follow up on the you know the previous questions about.
MSR acquisitions.
As you think about the size of that portfolio going forward, and you know where prepaid speeds or.
Are you guys expecting the MSR portfolio to continue shrinking over the near term or do you think.
Higher flow volume or or maybe some bulk activity could also thrown off.
Just curious how to think about the size of that going forward.
Yeah. So our goal I think going forward is to use this done about new acquisitions.
That would that would be our goal on a go forward basis and to the extent that we have.
Some opportunities to buy MSR is at.
At a level that we find compelling that would be above that.
I think we would be in a position to do that to once we get through the year.
Got it okay.
Then as you guys are making new investments or Reinvestments and the agency book can you comment on.
<unk>.
What kinda coupons are or what stories, you like in spec pool market and kind of where you are where you see you Levered returns on new agency investments. Thanks.
[noise] Hi, Trevor its Julien.
In terms of a the coupons that we have been buying I think we've been like some of the other reid's playing a dollar roll income so we've been buying twos and two and a half in the portfolio I would say the majority of our teams in the portfolio are all TBD at this point.
That return is probably mid teens.
In terms of like two and a half is it's a combination of spec pools as well as dollar roll income and I would say that that would probably range in the low to mid teens.
Got it okay. Appreciate the color. Thank you.
No problem.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Jay Lown for closing remarks.
Thank you operator, thank you very much everyone for joining us on this call and we look forward to updating you on our fourth quarter call next year have a great ended the year.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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