Q1 2021 Cherry Hill Mortgage Investment Corp Earnings Call

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Greetings and welcome to Cherry Hill mortgage investment Corp, first quarter 2021 earnings call.

At this time all participants are in a listen only mode.

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. Please note. This conference is being recorded I will now turn the conference over to Rory Rumore of ICR. Thank you you may begin.

We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations first quarter 2021 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 the H M I reach 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 are 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 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.

In the first quarter of 2021, we continue to reposition our portfolio, while maintaining a solid balance sheet as rates continue to climb off hyster historic lows.

Despite the rising rate dynamic elevated prepayment speeds persisted throughout the quarter due.

Due in part to the delay between locks and closings on new loans at.

At the same time mortgage rates did not keep pace with the broader rate selloff.

Spreads remain at historic tight.

This day version swing in rates continues and has had a near term impact on the portfolio's performance.

However, with two recent rounds of stimulus and an economic recovery seemingly fully underway.

We believe rates are positioned to head higher in the coming quarters.

As the shift evolves, we believe MBS spreads will normalize to higher levels, which better align with our hybrid strategy of pairing our MBS with msr's.

In the first quarter, we generated core earnings of 21.

We have emphasized in previous calls the core earnings is one of several factors, we consider in setting our dividend policy.

During previous quarters, where core income far exceeded the distribution level, we were clear that we expected core to normalize over the coming quarters as amortization expenses increased due to high higher prepayment speeds.

We remain confident in the near term sustainability of our dividend and.

And assuming rates remain at these levels or move higher and prepayments further slow we expect core earnings to realign with the distribution level.

For the first quarter, we maintained a strong liquidity position ending the quarter with $62 million in unrestricted cash on the balance sheet.

We continued purchasing msr's through our flow program and expect the market for MSR is to remain competitive in this higher interest rate environment.

As new buyers enter the market.

The MSR strategy has been a part of our DNA since inception.

We believe our ability to manage this asset exceeds those who opportunistically enter and leave this space, whether large or small.

Our RMB S portfolio.

Underwent significant changes during the quarter as we work to reposition its composition and a higher interest rate environment and to control our exposure to spread duration.

We believe that a portfolio of lower coupon 15 year, and 30 year TBA married with higher coupon pools as the appropriate positioning as rates move higher.

Throughout the quarter, we increased our TBA position at the expense of whole loan pools as price premiums for many prepayment protection stories suffered and higher interest rate environment and.

And performance for select assets underperformed expectations.

Company leverage was reduced to 3.4 times from four times at the end of the prior quarter.

This was primarily due to the company not taking on additional leverage available to us on the MSR portfolio towards the end of the quarter.

Subsequent to the first quarter, we elected to draw on those lines and expect leverage at the end of the second quarter to retraced somewhat towards levels in prior quarters.

We believe our portfolio remains well positioned relative to our view on the revitalization of the economy.

And an expectation of higher rates over time.

Allowing us to take advantage of future investment opportunities that offer attractive risk adjusted rates of return.

As the economy has continued to rebound forbearance statistics that have also further improved.

As of April 27, borrowers enacted forbearance were three 6%.

Decline of approximately two 3% from yearend.

With our solid liquidity position, we are sufficiently capitalized to satisfy all of our servicing advance obligations for the foreseeable future.

Yeah.

Book value per common share finished at $10.83 as of March 31.

The primary reasons for the change in book value quarter over quarter related to volatility spiking in the second half of February.

The change in the shape of the yield curve relative to our hedge position.

And higher tax provision expenses, partially offsetting the related increase in MSR mark to market.

Yeah.

We continue to adjust the composition of our portfolios and hedges in order to drive performance and preserve book value.

Ongoing elevated prepayment speeds for our RMB S and MSR portfolios also impacted our first quarter performance.

We believe speeds in the MSR portfolio peaked in the fourth quarter and will continue to tail off amid a higher interest rate environment and the ongoing reduction in the weighted average note rate of the loans underlying our msr's.

During the first quarter, we acquired approximately two and a half billion and Fannie and Freddie MSR utilizing our flow purchase program.

We continue to make significant improvement in our recapture efforts.

With a 24.5% recapture rate on our msr's in the quarter.

A portion of the MSR portfolio are serviced by round point experienced a recapture rate of approximately 30 per cent for the first quarter, which was the primary driver for the meaningful increase quarter over quarter.

As we move forward our team will continue to proactively manage our portfolio to ensure that we are in a position to take advantage of attractive investment opportunities when presented.

We would expect to invest further in msr's to take advantage of potential rate increases and generate value for the company and our shareholders.

With that I'll turn the call over to Julian who will cover more details regarding our investment portfolio and its performance over the first quarter.

Thank you Jay.

In the first quarter the U S experienced higher interest and mortgage rates as expectations increased potentially higher growth and inflation is a nationwide vaccine program was rolled out the.

The successful vaccine rollout as well as two additional rounds of government stimulus added further fuel to the economy.

With many states reopening and relaxing those COVID-19 related protocols, there appears to be a solid foundation for upward economic growth in 2021.

In the first quarter, we remain proactive in terms of adjusting our portfolio positioning and maintaining our liquidity position.

We continue to closely monitor the overall environment and will remain opportunistic in making new investments throughout the year.

At quarter end, our servicing related investments comprised of full Msr's had a U P. B of approximately 22 billion and a market value of approximately $217 million.

During the quarter, we purchased $2 5 billion of new Msr's through our flow program.

At the end of the first quarter MSR investments represented approximately 48% of our equity capital and approximately 14% of our investable assets, excluding cash well above where we stood at December 31.

Meanwhile, our MBS portfolio accounted for approximately 35% of our equity as a per.

Percentage of Investable assets RMB S represented approximately 86% excluding cash at quarter end.

Our conventional MSR has averaged approximately 35% net CPR for the first quarter.

<unk> gone from 45% net CPR in the previous quarter.

Driven by better prepayment speeds as well as improved recapture as Jay previously mentioned.

We saw mortgage volumes begin to decline in mortgage speeds begin to decelerate from the record fourth quarter levels in large part due to the increase in interest and mortgage rates.

Meanwhile, the Army's portfolio's weighted average three month CPR rose for the first quarter to approximately 21% relative to 20% in the fourth quarter.

With mortgage rates higher but still at historically low levels April CPR is remains similar as homeowners continue to take advantage of the environment.

As of March 31, the RMB is portfolio inclusive of TBA stood at approximately $1 4 billion down from $1 6 billion in the previous quarter.

During the first quarter, we continue to reposition and Delever, our portfolio to mainline chain and liquidity as well as invest in msr's.

As Jay mentioned, we sold specified pools and moved into TBA positions, and 30 year and 15 year collateral quarter.

Quarter over quarter, we've reduced our 30 year securities position from nearly 100% the previous quarter to 79% of the portfolio.

As an offset the 15 year securities position in other securities grew to 21 per cent of the portfolio.

So the first quarter, we posted a one spot five seven our MBS net interest spread versus the one spot 770 <unk>.

<unk> net interest spread reported for the fourth quarter.

The reduction in spread was primarily driven by increased RMB as amortization expense.

In the recent quarter, our amortization expense has increased as mortgage prepays have risen.

Homeowners have taken advantage of historically low mortgage rates and servicers have improved the refinancing capabilities the.

The increased amortization lowered yields more than offsetting the decline in interest expense.

As interest and mortgage rates rise you believe amortization has the potential to improve as the year progresses for the RMB asking MSR portfolios.

The current mortgage market is approximately 42% refinanced will below where we started the year given the movement in interest rates.

Mortgage volumes declined but remained elevated and we expect that will remain the case in the near term as interest rates have firms since quarter end.

Despite the recent rate move we believe improvements in amortization may show up in the second half of the year.

We book cost should continue to remain low as the fed remains committed to holding the fed funds rate near zero, and allowing growth and inflation to run hotter than historical norms to make up for periods. When inflation was run two little previously.

At quarter end, the aggregate portfolio operated with leverage of approximately three four times.

I will now turn the call over to Mike for our first quarter financial discussion.

Thank you Julien.

Our GAAP net income applicable to common stockholders for the first quarter was approximately $18 $3 million or $1 seven 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. Our MBS was approximately $600000 or four cents per share.

Our core earnings attributable to common stockholders of approximately $3 5 million or 21 per share.

Our book value per common share as of March 31 was $10 83 <unk>.

Compared to a book value of $11 16.

As of December 31, 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 first quarter, we held interest rate swaps swaption, Tva's and Treasury futures all of which had a combined notional amount of approximately $2 billion.

You can see more details with respect to our hedging strategy and our 10-Q as well as in our first 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 a component of the net gain or loss on interest rate derivatives.

Operating expenses were $3 $4 million per the quarter.

On March four 2021, our board of directors declared a dividend of <unk> 27 per common share for the first quarter of 2021, which was paid in cash on April 27th 2021.

We also declared a dividend of <unk> 50, 125 per share on our eight 2% series, a cumulative redeemable preferred stock and a dividend of <unk> 50 156 to five.

On our 825% series B fixed to floating rate cumulative book cumulative redeemable preferred stock both of which were paid on April 15 2021.

At this time, we will open up the call for questions operator.

Thank you if you would like to ask a question. Please press star one on your telephone keypad.

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Our first question is from Mikael Guberman with JMP Securities. Please proceed.

Okay.

Amoco.

Please check and see if you have your line muted.

I'm, sorry, I had my line music.

I'm sorry about that.

Afternoon.

I'm wondering how much you expect prepay speeds are slow in the second quarter, thus far.

Or how Youre also thinking about leverage given how tight MBS spreads are currently thank you.

Are you talking about speed zone MBS are on MSR his or her book.

Both.

So I'll I'll take the MSR part and I'll, let Julian talk about the MBS and the leverage.

We have.

We have seen speeds.

<unk> slow down.

Sure.

April was a pretty good print for us relatively speaking given the past three or four quarters and we expect that.

Persist.

I think I noted in the in the script that.

Through the turnover of the collateral.

The weighted average note rate has come down.

Decent amount over the last couple of quarters and as such we have seen.

Speeds net of recapture.

Paul the key is net of recapture because reality with recapture as your those outbound calls are going to increase your growth Cpr's and you're really focused on the.

The net CPR after the recapture but we have seen.

Continued through April print somewhere around 30, low 30 CPR net.

On the AR on the RMB S side look our April speeds came in line to where the March speeds were.

There was a slight look a little bit of differential that we saw there one of the things as we've been and that's just on the specified pool portfolio. We have obviously increased the TBA portfolio as Jay is kind of mentioned.

As we've gone into TBA is in 30 year as well as in 15 year collateral so for some diversification.

So the overall speeds, we're expecting to slow down if you include the.

The combination of TBA as well as spec pools, but the spec pools, we they were in the similar to where they were the previous months in terms of the overall.

What we think of mortgages mortgages are on the tight side I think from a fundamental valuation perspective.

People know that either on a nominal spread basis or on a LIBOR basis.

Our it tight.

The technicals.

Are expected to remain strong.

And be with us throughout.

Probably the second and third quarter.

There is an expectation potentially if the U S data remains good.

Good footing that the fed might announce something.

Later that Jackson hole.

But that will depend on the data and then they will decide whether they will taper at that point in time.

So mortgages, we view them as on the Richard side, but from a file from them.

Fundamental standpoint, but the technicals.

They can still remain well bid here for a while.

Got you and if I could just follow up on just the corresponding question on leverage I believe Jay you mentioned that.

Net leverage when maybe drift.

Back to historical levels, but is there a sort of a range that you guys are targeting going forward.

As far our range I wouldn't exactly pinpoint it to a range I think it's a function it'll be more of a function of the asset allocation with respect to equity.

How much equity we.

Decided to deploy you know outside of our MBS and potentially into Msr's on a go forward basis. So like I mentioned in the script.

April we did take advantage of.

Good money available to us on Msr's and that brings us more in line with what I would say historical.

Over the last couple of quarters.

Some somewhere around four.

Got it thank you very much share gentlemen.

As a reminder, this star one on your telephone keypad, if he would like to ask a question. We will just pause for a brief from it.

There are no further questions at this time I would like to turn it back over.

Jay management for closing remarks.

Thanks, everybody for joining us on our first quarter call. We look forward to updating you in August on our second quarter results have a great afternoon.

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

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Yeah.

Okay.

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