Q3 2022 Cherry Hill Mortgage Investment Corp Earnings Call

November 2, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Good day and thank you for standing by welcome to the Cherry Hill Mortgage investment Corp, third quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press star one one on your telephone.

I would now like to hand, the conference over to your speaker for today Garrett Edson you may begin.

Okay.

We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations third quarter 2022 conference call.

During todays call. We have filed a press release that was distributed earlier this afternoon and posted to the Investor Relations section of our website.

W. W. C H M I read Dot com.

Call Managements' 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 <unk> future expected cash flows as well as prepayment and recapture rates delinquencies and non-GAAP financial measures.

As earnings available for distribution or deep and comprehensive income forward looking statements represent management's current estimates and Cherry Hill assumes no obligation to update any forward looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's filings with the SEC and the definitions contained in the financial.

<unk> is available on the company's website.

Today's conference call is hosted by Jay Lown, President and CEO , Julian Evans, Chief Investment Officer, and Michael <unk>, The Chief Financial Officer, now I will turn the call over to Jay.

Thanks, Garrett and welcome to our third quarter earnings call.

Central Bank policy and macroeconomic pressures persisted in the third quarter, which drove volatility higher and certainly impacted most mortgage assets.

Persistently high inflation, and a well supported employment market.

Ed to enact to 75 basis point rate hikes in July and September .

And provided that fed the cover to again raise rates earlier today.

That has remained steadfast in telegraphing its mission to lower inflation to its target level and markets have reacted significantly to any rhetoric related to the path and pace of future tightenings in this cycle.

This has helped fuel expectations for short term rates to exceed the levels policymakers have previously outlined.

Additionally, the U S Treasury twos tens curve inverted 51 basis points over the quarter moving from plus six basis points at $6 30 to minus 45 basis points at the end of September .

Signaling the potential for our forthcoming in recession.

While the U S 10 year Treasury finished the quarter at three 8% 78 basis points above its closing level at June 30th.

The past, 4.25% at one point in October .

The increase in rates and the shape of the yield curve, where relevant to the performance of our MBS assets in our sector and much has been discussed about how the rise in treasury rates and increased volatility has impacted mortgage spread widening this year and its impact to REIT book values.

While it is our view that agency MBS looks attractive at these levels.

Sector has continued to drift wider in October as others have highlighted.

Despite this we do believe that we are approaching MBS valuations that are attractive and expect to capitalize on that overtime.

For now we have positioned our portfolio for additional rate hikes and further mortgage spread widening.

As investors look to assess where the fed will signal a slowdown in this tightening cycle.

During the quarter, we work to effectively minimize the embedded macro risks and focus on what we could control.

We selectively deploy capital as we saw opportunities emerge.

While maintaining our leverage ratio that has room to increase.

We were proactive in terms of our hedging strategy and coupon selection, which began at the end of the prior quarter rotating out of lower coupon MBS into higher coupon MBS.

The end result was a solid performance in a very difficult environment.

Julian will provide more details on our efforts there shortly.

For the third quarter, we generated GAAP net income applicable to common stockholders of $38 3 million or $1 90 per diluted share.

And we generated earnings available for distribution or <unk>.

Our non-GAAP financial measure are $5 1 million or 26 per share.

This was just below our quarterly common dividend level of 27 per share.

Our primary focus this quarter was to protect book value given our view on MBS spread widening.

As we've noted before.

Only one of several factors considered in setting our dividend policy and we and our board continue to monitor our earnings capabilities.

To ensure our dividend is that an appropriate level.

Book value per common share finished at $6 five as of September 30th.

And a material amount of this is simply a function of preferred stock still making up a significant portion of our overall equity profile.

On an NAV basis, which does not account for the difference in common or preferred equity.

Our strategy of pairing our MBS with agency MSR continues to effectively minimize risk and moderate the impact of spread widening on agency MBS.

And in the quarter was off approximately five 1% quarter over quarter before taking into account any common stock issuances pursuant to our ATM program.

We remain committed to stabilizing and growing our NAV.

And book value.

And using all of our tools to navigate through the current environment.

During the third quarter, we acquired approximately $1 2 billion, <unk> and Fannie and Freddie Msr's.

And bulk purchases.

Prepayment speeds on our MSR portfolio have declined materially in.

And as such the pace of reinvestment to maintain the allocation of capital to the asset class a slope.

Our strategy of pairing MSR with agency MBS.

Along with proactive portfolio management and hedging benefited shareholders. This quarter given the composition of the overall portfolio.

Our recapture efforts remained solid with a 7% recapture rate on msr's in the quarter. Despite the ongoing rapid rise in mortgage rates.

We would expect recapture rates should further decline at these higher interest rate levels, though prepayments speeds net of recapture should continue to remain low.

At the end of the quarter financial leverage increased modestly to four two times as we saw opportunities late in the quarter to deploy capital Opportunistically.

Given the current heightened market volatility, we believe we remain prudently levered and were cognizant not to be too aggressive in increasing our leverage.

We ended the quarter with 43 million of unrestricted cash on our balance sheet, maintaining a solid liquidity profile.

Looking ahead, we will continue to selectively deploy capital, where we see clear risk adjusted opportunities as we closely monitor central Bank monetary policy actions and.

The impact on global markets and MBS spreads.

We expect to maintain an elevated hedge ratio as we remain positioned for a biased towards further fed tightening of monetary policy and a higher rate environment for the foreseeable future.

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And we expect economic headwinds to carry into 2023.

We will also continue to actively adjust our investment portfolio to protect the business and remain mindful of our liquidity and leverage profile in this dynamic environment to preserve book value.

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

Thank you Jay.

The third quarter was not a good quarter for mortgages as Jay stressed higher volatility wide bid ask spread and limited liquidity describe this sector best.

Throughout the quarter, the mortgage basis underperformed significantly occur.

According to Bloomberg the mortgage index underperformed hedges by 169 basis points for the quarter of.

The performance number that was worse than all of 2020 the year. The pandemic said differently nominal spreads touched the pandemic wides of 2020.

Since the start of 2022, the fed has raised the fed funds rate significantly inclusive of today's rate increase leading to a significant way on the mortgage sector.

Of our investable assets, excluding cash Meanwhile.

Meanwhile, Rvs portfolio also accounted for approximately 49% of our equity.

As a percentage of investable assets, the rmb's portfolio represented approximately 73%, excluding cash a quarter and.

During the quarter, we continue to experience CPR improvements in both our MSR and Rmb's portfolios.

Our MSR portfolios net CPR averaged approximately 7% for the third quarter down from approximately 10% net CPR on the previous quarter.

The decline mainly driven by the continued rapid rise in interest rates and the change of mortgage production coupons was drove slower prepayment speeds in the quarter.

The portfolios recapture rate was lower at 7% versus 12% in the second quarter, which was expected as interest and mortgage rates rose, making the incentive to refinance less.

We continue to expect a lower recapture rate, but stable or improved net cpr's, given the elevated levels of interest and mortgage rates.

The armed yes portfolios prepayments feeds exhibited similar themes the portfolios weighted average three months CPR reduced to approximately four 7% for the third quarter.

Compared to approximately 7% in the second quarter.

As of today, the vast majority of the mortgage universe is out of the money in terms of refinancing.

We expect prepayments to remain at low levels as long as interest rates stay at these levels are move higher.

As of September 30th the Rmb's portfolio inclusive the TVA stood at approximately $759 million.

Compared to $831 million at previous quarter and.

The quarter over quarter.

The spectral portion of the portfolio of grew as we attempted to take advantage of higher interest rates and.

And lower price premiums by putting new cash to work.

As well as converting dollar rolls into spec pools is one dollar rules weekend.

The total Rmb's portfolio number is lower as we headed to portion of the portfolio with Tba's.

We also continue to proactively change the portfolios composition move.

Moving into higher coupons, and reducing spread duration for the portfolio.

At the end of the third quarter. The 30 year Securities position represented 96% of the Rmb's portfolio up from 93% at the end of the second quarter.

Shorter duration securities made up 4% of the portfolio at quarter end.

For the third quarter, we posted a three spot for nine Rmb's net interest spread versus a three spot for 6% net interest spread reported for the second quarter a modest increase.

The spread was relatively stable despite increased repo cost <unk>.

Higher financed costs were offset by resetting LIBOR expenses on our swap portfolio as well as new asset purchases at the higher yield levels and lower dollar prices.

At the quarter and the portfolios financial leverage stood at approximately $4 two times at the aggregate level in the portfolio was manage with a small negative duration gap.

Looking forward, especially in the fourth quarter, we remained guarded as we expect the investment market to remain volatile for the foreseeable future until there is greater clarity as to the feds reaction to inflation and unemployment.

I will now turn the call over to Mike the third quarter financial discussion.

Thank you Julian.

Our GAAP net income applicable to common stockholders for the third quarter.

<unk> $38.3 million or $1.90 per weighted average diluted share outstanding during the quarter.

While comprehensive loss attributable to come stockholders, which includes the mark to market of our house or sell RMB S was $7.3 million or 36 cents per weighted average due to share.

Our earnings available for distribution attributable to common stock holders, where $5.1 million or 2006 cents per share.

Our book value per common share as of September 30th with $6 and five <unk>.

Compared to a book value of $6 and 73.

As of June 30th.

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 Tva's treasury.

Treasury futures and options on Treasury Future's, all of which had a combined notional amount of $1 million.

You can see more details with respect to our hedging strategy and our 10-Q as well as in our third quarter presentation.

For cap purposes, we've not elected to apply hedge accounting for our interest rate derivatives and as a result, we recorded the change and estimated fair value as a component of the net gain or loss on interest rate derivatives.

Operating expenses were three $1 million for the quarter.

On September 15th our board of Directors declared a dividend of 27 per common share for the third quarter of 2000, 2010, which was paid in cash on October 25th 2022.

We also declared a dividend of $51 two five per share on our eight 2% series a cumulative redeemable preferred stock and dividend of 51 500 605.

On our 8% to 5% series be fixed or floating rate cumulative redeemable preferred stock both of which were paid on October 17th 2022.

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

Thank you.

As a reminder to ask the question you would need to press star one one on your telephone.

That start one line to ask the question.

Please stand by while we compiled the Q&A roster.

Our first question comes from the line up Henry Coffee with Wedbush. Your line is open.

Good afternoon, everyone and thank you for taking my questions.

[noise] two items.

Excuse me [laughter].

On the.

RMB S portfolio.

It looks like you've been able to hold.

Funding costs fairly low.

And as Rage Fries are we gonna be able to continue to hold spreads at about where they are now.

Oh, it should there be some more downward pressure.

Hi, Henry it's Julien.

Look I think we all know that the fed is going to continue to raise rates and we do expect that a repo cost to <unk>.

Continue to rise.

That is being offset by our swap hedges.

Whether it's three month, LIBOR resetting or the sofa resetting we've.

We've been able so far to fortunately.

Be able to keep our expenses at the levels that they are.

So as long as the fed continues to raise.

Fed funds, we would expect three month LIBOR as well as so far to go up we do have a hedge ratio currently in the portfolio about about 119.

Percent. So we are overheads.

From that perspective.

So in a rising rate environment.

You should be able to hold <unk>.

Spreads about where they are.

We're expecting that I mean on the asset side, we have changed around the portfolio even today since the third the end of the third quarter. We continued to manage the portfolio continue adjust our on the on the asset side as well not just on the liability side I would say.

Is the mindset.

To expand the rmb's portfolio or just kind of turn it over as <unk>.

Trading opportunities present themselves are assets mature.

You want me to go.

Ricardo.

I would say that.

MSR portfolio is not all that liquid so there is a ton of room for us to substantially.

No I meant on the Rmb's book.

Yeah, So <unk>.

From a capital allocation perspective.

Equity.

I would say things shouldn't change much but as.

As I alluded.

During the call I think we think that we're approaching wives priest.

For spreads and once we feel is so.

We're getting closer to those those whites.

It will be more inclined to increase leverage in that portfolio. So a percentage of assets wants to I think you could see RMB us going higher as a percentage of equity.

Not not significantly I would say.

And in the line of business stuff on slide 20.

There was a.

Other income there was another expense and the servicing business of $12, one what what was that all about.

Oh, so the income statement here being broken down across the different segments takes the entire portfolio and Davies it up and so the servicing related assets segment includes not just not just the msr's themselves, but also related assets and hedges and so you might see.

As the MSR values increase your you would see that their MSR hedges those swaps those values would be impacted and you'd see that show up here.

Okay. Thank you.

Thank you.

Please stand by far our next question.

Our next question comes from the lineup Makayla Cooperman with Kmt's Securities. Your line is open.

Hi, Good evening gentlemen, thanks for taking my question.

One is doing well.

Just a couple of quick questions just wanted to gauge her appetite.

On further stock issuance notice you guys went from about 19.6 million shares to just under 21.

Million quarter over quarter, and putting that capital to work and.

Also sort of commensurate with that wanted to gauge our appetite for health how high up could leverage call. I mean, we're talking about maybe getting up towards a five handle at.

At 4.2 now.

And finally, if I may add a third just to.

Update on book value, thus far in the fourth quarter. Thanks, a lot.

Sure related to the leverage.

I think there's a fairly crude conversation, we haven't really assign a number to that I think a lot more focused on making sure that we.

We have.

A pretty good view collectively on on the right time to to get more involved in the Rmb's space and.

I think so far we've made the right moves with respect to kind of limiting.

The additional leverage we've taken on that.

The first part of your question was it was to do with.

Using the ATM Oh, yes, the link in the quarter.

The the.

The capital that we raised in the third quarter was accretive to book.

And I believe.

The total that was raised definitely.

To our book value for the quarter. So we felt good about that.

We have <unk>.

Half the ATM.

Primarily this year actually exclusively this year.

<unk> and I would expect.

Us too.

To continue to tap the ATM at the appropriate time.

Given where the stock trades relative to book.

Relative to the amount.

I don't know, but I would tell you that again as we get closer to.

Right I think we would consider the wives for further MBS at a point, where we think the feds.

Perhaps in terms of the terminal rate per rates.

I think there is.

Really good opportunity to invest in our space and the agency side.

For agency routes, who rely on the basis for a creative book value moves and so I I would love to be able to be in a position to take advantage of that.

On a larger scale at the appropriate time.

The extent to which will be able to do that.

Again, it depends on things not really inside our control.

Related to how the stock trades, but we do think that there is an opportunity coming relative to.

Being able to.

Bad assets and asset class.

Decent levels.

As for the current book value as of the end of October I'll, let Mike gives you that yep. So it's obviously still very early as it's just the very beginning of November but from what we have put together we.

See October 31st book value down about book.

Buffet per share down about 1% from where it was at September 30th and that is of course before any fourth quarter.

Dividend accrual as the board has not yet met to review and approve a dividend for the quarter.

Alright, Thank you very much gentlemen, Ah, 1% of it would be a very.

I'm very fond performance compared to some of your peers. So.

Best of luck going forward.

Thanks Man Thank you.

Thank you.

I'm showing no further questions in the queue I will now like to turn the call back over to J allow for closing remarks.

Great. Thank you and thank you everybody for joining us for our third quarter conference call and we do look forward to updating you. Some time in February March next year to.

The priority of our fourth quarter <unk>.

<unk> for 2022.

Have a great day thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

The conference will begin solti to raise your hand during Q&A you can <unk> one one.

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The conference will begin shortly to raise your hand during Q&A you can dial 911.

[music].

Good day and thank you for standing by welcome to the Cherry Hill Mortgage investment Corp, third quarter 2022 earnings conference call at.

I would now like to hand, the conference over to your speaker for today Garrett Edson you may begin.

Okay.

We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations third quarter 2022 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 <unk> Dot com 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 <unk> future expected cash flows as well as prepayment and recapture rates delinquencies and non-GAAP financial measures such as earnings available for distribution.

<unk> deep 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 Companys.

Website.

Today's conference call is hosted by Jay Lown, President and CEO , Julian Evans, our Chief investment Officer, and Michael <unk>, The Chief Financial Officer, now I will turn the call over to Jay.