Q4 2020 Cherry Hill Mortgage Investment Corp Earnings Call
Greetings and welcome to the Cherry Hill mortgage investment Corp, fourth quarter and full year 2020 earnings conference call. At this time all participants are in a listen only mode. A brief 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. A the reminder of this conference is being recorded it is now my pleasure to introduce your host Rory rumor. Thank you Rory you may begin.
We'd like to thank you for joining us today for Cherry Hill mortgage investment Corp, fourth quarter and full year 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.
The H M I read the 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. Examples of forward. Looking statements include those related to interest income financial guidance I are ours.
What your expected cash flows as well as prepayment and recapture rates delinquencies and non-GAAP financial measures such as core and comprehensive income for them.
We're looking statements represent managements current estimates and Cherry Hill seems 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 SEC 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 <unk>, The Chief Financial Officer, now I will turn the call over to Jay.
Thanks, Rory and welcome to today's call.
2020 was validation that we have the right team in place to handle the most challenging conditions and succeed longer term.
I want to thank our team for all of their hard work and dedication to navigate our company through this unprecedented environment.
We're very much looking forward to putting last year behind us.
Almost exactly one year ago, the world completely changed as COVID-19 hit our shores and caused massive sharp volatility in the worldwide economy.
Mortgage rates across the board, we're forced to act expediently to save their companies as liquidity greatly tightened and asset valuations dropped precipitously.
We have always proactively managed our portfolio, which enabled us to generate solid core earnings and preserve our book value and multiple interest rate environments.
However, the events that began last March proved to be our greatest challenge yet as.
As we work to Delever, our portfolio and stabilize our company.
By executing efficiently and effectively we positioned ourselves to maintain a stable liquidity profile, which proved to be of significant catalysts in recovering from the crisis.
By the third quarter, we had largely stabilize book value and our focus is squarely on rebuilding value. Despite a record low interest rate environment and significantly elevated prepayment speeds in our portfolio.
For the full year, our book value of performance compared to the broader hybrid REIT sector was very much in line with the group.
As we sit here today I'm proud to say that our team rose to the occasion and.
While we entered 2021 bruised the worst should be firmly behind us.
Rates have moved off their historic lows and continue to rise as the economic recovery progresses.
This should enable us to benefit as we move forward with respect to our core RMB as an MSR portfolio of strategies.
In the fourth quarter, we generated core earnings well above our distribution level, while maintaining a strong liquidity position.
For the quarter, we produced core income of 37 per share.
While maintaining a dividend yield of 11%.
We ended 2020 at four times leverage over half the turn lower than where we stood as of September 30th.
We also ended the year with 84 million of unrestricted cash on the balance sheet.
We believe our portfolio is well positioned relative to the current environment, allowing us to take advantage of investment opportunities that offer attractive risk adjusted rates of return.
As the economy has continued to rebound forbearance statistics have also improved further.
As of the end of December 2020.
Borrowers enacted forbearance remains just shy of five 9%.
With approximately 28 per cent of borrowers having made all payments due through December.
Forbearance statistics are stable post year end, despite regulatory efforts to extend policies on foreclosures and forbearance.
We continue to believe our bolstered liquidity position is sufficient to satisfy all of our servicing advance obligations for the foreseeable future.
Book value per common share finished at $11 16 as of December 31.
Broadly speaking as others have noted spread tightening benefited agency RBS at the expense of Msr's.
While agency reached hedge with rate instruments, we rely on the MBS to partially hedge out our MSR portfolio and this quarter the correlation was negatively impacted.
The performance of our RMB S and hedge portfolios did not compensate for the weakness in the MSR portfolio.
This was due in part to higher rates of prepayments in the portfolio as well as our positioning in both the coupon stack and story selection in our MBS pools.
Significant adjustments were made at year end and into the current quarter, which we believe should improve performance.
Our hybrid strategy of investing in RMB S. Combined with Msr's remains intact with the majority of our invested capital is still deployed in our MBS.
Julian will provide some additional highlights on the portfolio of shortly.
While highly elevated prepayment speeds in the fourth quarter for Fannie and Freddie MSR portfolio of weighed on performance. We've seen of steady rise in interest rates subsequent to year end, which should have a favorable effect on prepayments speeds post first quarter.
Although the fourth quarter numbers do not reflect the progress of recapture efforts due to the servicing transfer delays, we have seen significant improvement in recapture efforts from a round point portfolio in the first quarter and expect those results will further improve over the next few quarters.
Currently that portfolio is experiencing high teens recapture rates.
In addition, during the fourth quarter, we acquired approximately $3 billion in Fannie and Freddie Msr's utilizing our flow purchase program, which largely offset the runoff for the quarter.
We expect to remain on offense this year, when we see attractive yield levels.
Longer term, our focus remains resolute and proactively managing our portfolio to ensure that we are in a position to take advantage of attractive investment opportunities when presented.
We believe there was a solid opportunity to invest further in <unk> and 'twenty 'twenty, one to generate attractive returns and I look forward to sharing our progress with you in the quarters ahead.
With that I'll turn the call over to Julian who will cover more details regarding our investment portfolio and its performance in the fourth quarter.
Thank you Jay.
The fourth quarter was marked by political uncertainty and continued fed accommodation. There's another wave of Covid cases, and restrictive city lockdown policies of the country.
In the fourth quarter, we remain proactive in terms of adjusting our positioning to maintain a strong cash position.
But in recent weeks the prospects for greater growth renewed inflation started to group.
To start 2021 the.
U S economic and vaccine information has been solid.
The vaccine distribution has picked up steam COVID-19 cases, and hospitalizations globally as well as domestically have dropped and.
And the GA of Senate elections, coupled with president of items.
Early new stimulus plans of added fuel to the fire of an economy that was already EBITDA based on stimulus provided in the fourth quarter.
The before mentioned factors of laid a solid foundation for upward growth from 2021.
We are observing the environment closely and expect to be opportunistic in making new investments this year.
As Jay mentioned, the fourth quarter was impacted by weakness in both the MSR and the RMB of portfolios increased amortization affected both portfolios.
The MSR portfolios weakness was partially offset by increased new MSR flow purchases.
In addition to amortization the RMB is portfolio experienced softness as a portfolio of the structure.
We experienced weakness in the specified pool collateral and liquidity and the work that day.
The overall CPR for the portfolio remains solid for the fourth quarter liquidity with limited the deaths.
Servicing related investments comprised of full Msr's UTV of approximately 22 billion and a market value of approximately $174 million at quarter end.
MSR investments represented approximately 36% of our equity capital and approximately 10% of our investable assets excluding cash.
Meanwhile, our RMB S portfolio accounted for approximately 40% of our equity.
As a percentage of investable assets, our MBS represented approximately 90% excluding cash at quarter end.
Our conventional MSR portfolio averaged approximately 45% CPR for the fourth quarter.
Speeds increased and remained elevated from the third quarter, given the historically low interest and mortgage rate environment.
Similar to the MSR portfolio, the RMB Fs portfolio CPR is increased for the fourth quarter.
The weighted average CPR was approximately 19, 7% from approximately 41% rise from the third quarter.
Despite the increased prepayment speeds the RMB of speeds remained better from the Fannie Mae aggregate speeds for the quarter.
Year to day in 'twenty 'twenty, one we've seen CPR of similar to the fourth quarter as homeowners take advantage of low interest and mortgage rates.
As of December 31.
Our MBS portfolio inclusive of the TBA is sort of approximately $1 6 billion.
During the fourth quarter, we continued to reposition the delever our portfolio to maintain our liquidity position.
At year end, the 30 year securities position represented nearly a 100% of our portfolio.
For the fourth quarter, we posted a 177 RMB, yes, net interest spread versus the 2% to 3% net interest spread reported for the third quarter.
The reduction in spread was the combination of higher prepayment speeds and additional swap expenses there were onetime charge in the fourth quarter.
And the interest and mortgage rates rise, we believe amortization has the potential to improve as the year progresses for the RMB and the MSR portfolios.
The current mortgage market has moved from being 80% refinance at the 60% refinance will given the movement in rates the.
The move in rates is a positive, but we think servicers will reduce margins to keep volumes elevated in the near term.
As a result improvement in amortization May show up in the second half of the year.
Repo costs should remain low as the fed remains committed it allows inflation of about hotter than the historical norms to make up for periods. When inflation is one of two low previously.
At quarter end, the aggregate portfolio operated with leverage of approximately four times.
We ended the quarter with an aggregate portfolio duration gap of minus point for years approximately.
I'll now turn the call over to Mike for the fourth quarter financial discussion.
Thank you Julien.
Our GAAP net income applicable to common stockholders for the fourth quarter was $6 4 million or <unk> 38 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 of RMB S was $5 2 million or <unk> 31 per share of.
Core earnings attributable to common stockholders for $6 3 million or <unk> 37 per share.
Our book value per common share as of December 31, 2020 was $11 16 compared to a book value of $11 74.
As of September 30 of 2020.
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 swaption of TBA and Treasury futures all of which had a combined notional amount of $2 billion.
You can see more details with respect to our hedging strategy and our 10-K as well as in the fourth 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 estimate of fair value as a component of the net gain or loss on interest rate derivatives.
Operating expenses were $3 1 million for the quarter.
On December 10, 2020, we declared a dividend of <unk> 27 per common share for the fourth quarter of 2020, which was paid in cash on January 26 2021.
We also declared a dividend of <unk> 51 to <unk> per share.
Our eight 2% series, a cumulative redeemable preferred stock and a dividend of 50 156 to five.
The hour, 8% to 5% of series B fixed to floating rate cumulative redeemable preferred stock for both.
Of which were paid on January 15, 2021.
At this time, we will open up the call for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up of your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from Kevin Barker with Piper Sandler. Please proceed with your question.
Hello, Good afternoon.
Could you guys give us just maybe a little bit of update on how the first quarter is coming along given where were through a good part of it just give us an idea of like where book value sits and how you see the the portfolio change and I know you gave some color on you know more aggressiveness on the MSR investment and so forth, but just a little bit of update of what's going on in the first quarter.
Sure kind of how you're doing.
So we don't have all the information you have for February of Msr's, yet so the only thing I can give you is through January.
And through January inclusive of accounting for the dividend it was a.
A little over 1% down.
Okay.
And then given you know.
Your expectations for MSR is I would assume that.
Were you anticipating prepay speeds to come down pretty hard.
As we go through the second quarter into the third quarter.
Just given the movement of rates.
What do you anticipate as far as just a drop in CPR of its given us at the levels that we're at today.
Are you, saying you expect superior quality of what you've done.
What are your.
The expectations just given the move the move in rates that we've seen in the last few weeks for.
For the climate.
For the decline in CPR.
I'll tell Ya dogs, I said high end, sorry about that right.
Right.
Of it.
I'm going to hand, it over to Ray he has a better grip on the portfolio for that.
Hey.
I think you know coming into Q1, a lot of those locks would have already taken place in December January.
So Q1, probably not a whole lot of change there coming into Q2, I think with what we saw in February.
And the pop up in rates.
That's all it would be that you could see a decline in CPR is into the call of the mid Thirty's Jai <unk>.
From where we're currently printing around.
The 45% Mark that we had in Q4.
And then.
Servicing costs came down a touch of quarter over quarter, but we're.
Relatively elevated for most of the 2020, just given the the forbearance programs and the decline in forbearance rates from the changes that are occurring.
You know with the expert exploration of some of the foreclosure moratoriums.
Maybe sometime in the next few months.
What are your expectations for servicing costs as we go into the back half of the year.
I mean, I think of lot of Thats going to depend on how much we have.
Work out of the forbearance into either deferrals or reinstatement.
For the next few months I think the moratoriums ending sometime towards the end of Q2.
So in the next couple of months I would suspect that.
For the most part of things will be similar to Q4.
Not a whole lot of uptick in forbearance, but then again, we're not seeing a lot of.
Exiting from the forbearance either since they've pushed back the forbearance timeframes.
Going into later in the year I think the expectation would be that forbearance is we'll start to clear up you'll start to see the exits in the turnovers from loss of mitigation.
And Thats, where we might see some pickup in sort.
Servicing costs dropping.
So would you expect like a spike in servicing costs, you know just to do an increasing amount of foreclosures from the back half of the year of maybe early 'twenty two before dropping back closer to like a normalized level.
How should we think about that.
No.
I think when you think about if you had you know even if you had 20% of your forbearance loans.
The continued through the path of foreclosure, which I think is.
By many estimates would be of very high number you're still looking at a substantial amount of forbearance loans, which are currently delinquent and are being charged higher delinquent cost.
And those would all be wiped out.
As they go through either deferral of reinstatement. So I think net net the impact would be on.
The upside to sub servicing cost decreasing.
As it relates to the amount of forbearance loans dropping off even with some some continuing on the path through foreclosure.
I would add debt, we've seen stabilization in the absolute level of forbearance.
And so I wouldn't quite correct me, if I'm wrong I wouldn't anticipate significant increases in the cost of servicing given most of the loans that are in forbearance are already past that 90 day delinquency.
Charged so.
I would expect that we wouldnt see a huge increase in forbearance costs related to servicing expenses.
Until.
Until we get to a point, where we're allowed to kind of.
The move more aggressively towards deferral or to get them out set per yes, that's right.
Okay Alright.
That's helpful. Thank you.
Okay.
Thank you. Our next question comes from Henry Coffey with Wedbush. Please proceed with your question.
Yes, Hi, how are you all and congratulations on a solid quarter and just listening to the remarks, you made the Kevin and the comments on the call.
Uh huh.
Obviously, we're off to a good start but it seems like.
There's a lot of good things to look forward to in the second half if servicing costs start to come down.
The other.
The the rising rates actually does create some flow, but the speeds in the second half.
Are there other sort of inputs that we should think about as rates rise and we start looking at.
The second half of this year.
No I think speeds of really the thing that we think about the most I mean, you can see in the presentation that speeds have been elevated for a greater part of the recorded now.
And as we all know there's a lag between origination and when you actually see the speeds come through the closest so.
It's been a good.
Quarter, so far relative to the primary rate rising in tandem with rates and so you've seen that in the primary secondary spread.
But.
There is still some fruit left on the true for these guys to take and we would expect and I think we noted in the presentation over the coming quarters that we would expect to see that but really speeds.
The thing that we think about the most relative to <unk>.
Interest income versus amortization, and how that impacts earnings going forward as well as just broadly speaking on the Airbus side, just absolute yields.
And the leverage associated with the asset.
To get to an income level that we think is commensurate with the risk return.
But I mean is it fair to say that it's not the first half of the story when we see any of these positive developments, but more of like.
The second half for towards the back end of this year given the <unk>.
Factors that you just kind of pointed to.
Yeah.
The one thing I would say is the volume. This is as you know.
Not the.
The name of the company, but mine.
I'm not really sure youre going to see the seasonal impact that.
You did over the last.
The number of years because people have the ability to move at any point in time given work from home in an education from home. So I Havent view that the seasonal <unk>.
B is heavily impacted this summer as you might think because the speeds have remained elevated throughout the year just given the.
Absolute low level of rates and the ability of people to refinancing to be mobile so.
I think from our perspective, we would say mid second quarter is when we would start to see.
The decrease in speeds and I have a lot of the competence in our recapture capabilities to further mitigate that and you know I'm hopeful that our speeds.
Net of recapture.
Come down meaningfully.
Other places in the portfolio, where you're willing to really be aggressive or are there spots in the portfolio, where you know.
Do you really want to put on the breaks of slow things down.
Yeah.
Across the two asset classes.
No.
It's a balancing act when it comes to these two asset classes I think we've all talked about over the last number of years.
And so I don't think we want to get too in.
Over the skis relative to the percentage of equity and MSR ours, but I think broadly speaking today, we see the MSR space as a compelling opportunity.
And we have been.
<unk> using our income from amortization to invest more into the MSR space that we have into the MBS space.
Is there any question about capital levels or anything that would cause the restraint to you're executing where you want to execute.
Yeah.
Yeah, I mean capital is always a constraint right.
We want to maintain a fairly healthy balance sheet still.
And so within the context of that.
You can you can only do so much.
Broadly speaking relative to the reinvestment that occurs every month.
If we had additional capital yeah, I would say the same holds true that we would probably allocate.
More of that capital into servicing thing.
Okay.
Would it be.
The appropriate for you to raise more preferred or or traditional straight term debt capital to do that or are we just not so great.
Yeah, well, hey, we're not there yet, but the I think given the.
For the movement in the company over the last year I'd say, we're pretty heavily.
We're pretty heavy on preferred today.
Alright, thank you.
Thank you. Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.
Hi, Jay and everyone nice to be on with you. This evening.
The first look.
The graph on the strong.
The strong core EPS and the dividend coverage I mean.
You're showing a 10% yield on our comp table.
Fourth quarter, you had 130 per cent dividend coverage. So it seems to me the issue with Cherry Hill is it's certainly not earnings at this point its certainly not an attractive dividend you cut it like most everybody cut it but you know it's.
You know that that's life in Covid and in 2020 for sure.
I guess my concern is the.
It's more structural this is not like a one of one quarter thing as you mentioned like in Covid last year and I'm sure your numbers of right Jay about the.
The book value decline in 2020 being in line so.
Obviously most of the pain in the first quarter in any one who had credit got destroyed in the first quarter, what looking at your numbers what surprises me a bit one you didn't have any credit okay for sure.
But your book value by my math is down 19% over the last three quarters of of the year.
And we know which is which you.
You own good.
Fundamental assets.
And obviously there's tons of liquidity in the agency space and repo is great I guess, what I'm, saying is.
The market. This year was very strange between primary and secondary rates.
Gain on sale margins for the originators and Henry and Kevin and I and Trevor been all over these ipos and that's been the story in the in the market and there are obviously where were extreme.
And they have plenty of room to be very slow and it seems like there's this big lag.
There's a big lag between what is the tenure of moved up as the F. N C. L moved up the primary rates have not moved up and I guess Ray can tell us this but it seems to me that I assume the MSR of models pay a lot of attention to primary rates and I guess, what I guess I'm, saying is two.
'twenty has been a strange year because of refi volume is a lot of other stuff is there an anomaly here that has made the last 12 months more complex for those who choose to per agency MBS with M. S. Ours than you would expect over say a five year average I'm just I'm.
Looking at it and say this trade should work, but what's going on between.
The results and what's going on in the in the primary mortgage market sorry for the ramble, but I hope you get the S and I understand the question Yeah. So the first thing I'll say is.
A decent portion of the the book value.
The issues over the past few quarters was around the deferred tax asset that's.
That's the number one so you'd have to from my perception prospective separate that out from the rest of the performance over the last couple of quarters and I believe that was somewhere around 7% or something of the or <unk> 70 per cent of the book value loss in the third in the third quarter, yes, okay. So relative to that I would say.
In the servicing space I think that the servicing behavioral models for have been slow to change over the course of the last nine months relative to.
Just actually seeing the speeds come in and so that's that's one thing that's difficult to hedge for it because you can't anticipate changes in behavior models.
Relative to how the third part of evaluate or think about the asset in the fourth quarter as well.
Both I and Julian noted the.
<unk>.
The the mix became just a little bit more difficult relative to things around pay up stories and just speeds and if I were to answer your question just very.
Sure I would say given the absolute low low level of rates and given the degree of refinance ability alright.
Alright within the servicing portfolio and the fact that.
Originators have enjoyed incredibly high margins.
Over the last let's just call it nine months or so.
That has been a dynamic that broadly speaking over the last seven years, we have not.
Seen or dealt with because.
In a normal environment when rates move because.
The originators should have.
The fully included all of that into there.
Their margins at the time they would move.
There.
Rates in tandem with.
Real rates moving treasury rate right and sort of what we've found and you can see interest in terms of looking at the primary secondary spread as it has been.
Widened and tightened.
And broadly speaking the originators had a lot of wiggle room before they needed to.
Change rates just based on the amount of low hanging fruit and I think that once you get to a certain point in the 10 year, whether that's $1 50, 175 that number is coming up quickly, whereas we've seen and you've seen originators feel the need to.
Adjust there.
Origination rates and the primary rate.
To compensate for the loss in margin and right and correct me, if I'm wrong, but we're definitely starting to see that and I believe that once you hit a number somewhere between $115 75 of the 10 year Youll start to see a more normalized environment, where originators will start to move.
The primary rate.
In a manner, that's more consistent with historical norms, but you're absolutely right last year was just based on the absolute level debt rates hit on the low side.
The absolute historic margins that you've seen covering the originators it created a dynamic that we had not seen.
I think I think that's important to note net debt that's why I brought it up and it seems to me that in the normalization in you know in 2021. There is this lag effect that you know the the originators of eventually will there'll be rationalization in pricing and the MSR.
MSR asset should perform better relative to rates in 'twenty 'twenty, one rather than 'twenty, 'twenty and I'm not asking you to make us make a day.
Clarity of the statement on that but I would point to the fact that last Friday, the 30 year fixed the MBA 30 year rate was 167 over the 10 year and on March 31 of last year. It was 277. The obviously the 10 year crash, but it was too low of seven at the end of of 2019. So.
Wish you all of the best for this year will be we'll be watching closely.
Closely and and you know.
Good luck with everything you're trying to accomplish thanks.
Thanks, Steve.
Thank you our last question comes from Eric Hagen with BTG. Please proceed with your question.
Hey, Thank you very much. Thanks for taking my question can you guys share some color around how lower coupons specified pools of performed since the end of December.
Do you feel like durations of fully extended on the on the portfolio of two of the halves at this point or do you think there is some more and then maybe you could share some color around just the gross yield do you think youre getting on new purchases of the MSR.
Hello. This is a this is julian low coupons I would say from.
From an excess return standpoint, you know vs versus treasuries or even swaps have underperform, specifically one of the haves and.
In twos, and two and a half day think theres of breakage, when you kind of get above threes.
There has been some outperformance in terms of those cool.
Coupons on an excess return standpoint.
Obviously everything is down on a total return standpoint, and the lower coupons bidding being hurt more from a all in total return standpoint so.
Just from dollar prices.
Falling as rates have moved higher.
And that has continued there has been some firming up over the last over the last couple of days is is rates are trying to find some footing.
But we still see we have seen weakness there from a year to date perspective, mainly in February is.
When we saw that the weakness that started in January rolled into February and I would say early March there has been still some weakness, but a little bit affirming firming up from that particular standpoint.
Great.
And how about the MSR component, Yeah, I would say somewhat for for us and we havent really been active in the in the bulk market because we've seen some pretty steep.
The pricing there.
Over the past month, or so but in the flow space, we're still seeing unlevered returns in the 8% to 9%.
Which for us is.
Continues to be attractive.
Great. Thank you very much for the color.
Sure.
There are no further questions at this time I would like to turn the floor back over to Jay Lown for any closing comments.
Thank you operator at this time the call has ended and we appreciate your continued interest in Cherry Hill, and we look forward to updating you next quarter have a great evening.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.