Cherry Hill Mortgage Investment Corporation Q1 2023 Earnings Call
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Yeah.
Good day, and thank you all for standing by and welcome to the Cherry Hill mortgage investment corporations first quarter 2023 conference.
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The speaker's presentation, there will be a question and answer session.
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Now I'd like to hand, the conference over to our speaker today Garrett Edson. Please go ahead.
We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations first quarter 2023 Conference call. In addition to this call. We have filed a press release that was distributed earlier. This afternoon, you posted to the Investor Relations section of our website at Www Dot C. H M Iris 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 prepaid and recapture rates delinquencies and non-GAAP financial measure.
As such as earnings available for distribution or EAP and cap rates. I think are 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.
All of them on the company's website.
These conference calls 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, Garrett and well.
We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations first quarter 2023 Conference call. In addition to this call. We have filed a press release that was distributed earlier. This afternoon, you posted to the Investor Relations section of our website at Www Dot C. H M Iris 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 recapture rates delinquencies and non-GAAP financial measure.
Areas, such as earnings available for distribution or EAP 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 calls 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, Garrett and welcome to our first quarter 2023 earnings call.
On our last call.
Note that we remain positioned for additional rate hikes as we await word from a fed tightening.
Tightening cycle would end.
And our efforts to navigate the environment and protect book value are holding up well in the first quarter.
Just a couple of days after our call.
Valley Bank suddenly collapsed with signature bank right behind it.
Spending in the U S banking sector and to a significant crisis that we had not seen since 2008.
Nearly overnight after the STB news interest rates golf starkly as the market's belief the rate hike cycle was poised to earn much sooner than expected.
And pricing in rate cuts in the second half of 2023.
It's a patient if economic conditions deteriorate again.
Subsequently the yield curve bulk steepen meaningfully.
David Great to sell significantly more than longer dated Greg.
We were not positioned predict immediate violent reaction.
And given that we were positioned for higher rates.
Scenario with where we were most exposed.
That combined with additional spread widening post the bank failures mid March negatively impacted our performance for the quarter.
In light of the continued banking turmoil.
We have maintained a conservative posture towards both our exposure to interest rates and the mortgage basis.
We believe the fed funds rate is approaching the terminal base and the banking crisis is largely contained.
Despite the recent failure of first Republic.
And see opportunities in the RMB in this sector during the second half of 2023.
For the first quarter, while we generated a GAAP net loss applicable to common shareholders of 87 cents per diluted share.
We generated earnings available for distribution or a non-GAAP financial measure.
$5 2 million or <unk> 21 per share.
Well EAP is only one of several factors considering in setting our dividend policy.
When we consider the current uncertain environment, we expect the EAP will continue to be pressured in the near term.
Given that macro backdrop.
Subject to board approval, we expect to realign our dividend in June to a level closer to a yield of 13% to 15% of our current book value.
We believe this change will ensure that the dividend is more in line with our current earnings power.
Book value per common share finished at $5 52 at March 31 down.
Down eight 9% from year end 2022.
A portion of that decline as always it's because preferred stock makes up a significant portion of our overall equity profile.
On an NAV basis, which includes preferred stock in the calculation and before taking into account any issuances of equity through our common stock ATM program.
We were down five 3% relative to year end.
We added a slide in this quarter's investor presentation, which describes this impact in more detail.
We believe creating a more stable book value profile is in our shareholders' best interest and remains a top priority for us.
We are focused on continuing to navigate through this very challenging and dynamic macro environment.
During the first quarter, we essentially split Pat on our MSR portfolio choosing not to make additional purchases at this time.
Prepayment speeds on our MSR portfolio remained low and.
And that's the pace of reinvestment to maintain the allocation of capital to the asset class has decelerated.
Recapture rates on MSR were minimal as expected given.
Given the higher interest rate levels.
Our portfolio of MSR is a weighted average note rate of less than three 5%.
Riding us with significant room to weather rate cuts down the road.
Impacting our prepay speeds in a meaningful way.
We continue to believe our strategy of pairing MSR with agency MBS.
Along with proactive portfolio management and hedging.
Right long term strategy to steer through this challenging environment.
At the end of the quarter financial leverage Rosemont, it's great to four four times.
As we Opportunistically deployed additional capital during the quarter.
Given the ongoing market volatility, we believe we remain prudently levered and expect to be further opportunistic in deploying capital in the months ahead.
We ended the quarter with $55 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Looking ahead, we will continue to maintain our conservative and proactive approach to portfolio management for foreseeable future as.
As markets Digest macroeconomic data and forecast Central Bank monetary policy actions.
We there are risk adjusted opportunities to selectively deploy capital.
We will take advantage as we did in the prior quarter.
Our priority remains to protect book value.
And we continue to be mindful of our liquidity and leverage profile.
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.
The first quarter 2023.
Be described as volatile.
Year began on a positive note for mortgages with interest rates, moving lower and mortgage spreads tightening.
That lasted until the end of January and subsequently with mortgage spreads move wider as the investment markets realize inflation was more persistent.
We need to continue its rate hiking path.
In early March the U S experienced a banking crisis marked by the twin failures of SBB in signature Bank and was marked by the continued struggles first Republic bank amongst other regional banks.
Nearly overnight investor sentiment shifted to believe that the fed rate hiking cycle is over and that the investment markets would be experiencing rate cut before the end of the year to minimize possible recession.
No longer with the fed continues to raise rates through the summer.
The fed is in a tough situation and we will have difficult decisions to make this spring headed into the summer.
<unk> is lower but remains elevated and above its target of 2%.
The banking crisis somewhat contained has the potential of spreading and tightening credit conditions, and thus reducing growth.
These issues lead the fed ending its rate hiking cycle sooner than initially anticipated and may hold rates steady.
Longer than anticipated as the first seeks greater clarity on the issues previously mentioned.
As a result, we continue to employ a thoughtful hedging strategy in the first quarter.
And while the volatility of rates in March impacted book value. We believe we are managing through the environment as best as possible.
Investment strategy has carried over into the second quarter.
At quarter end, our MSR portfolio.
Of $21 3 billion and a market value of approximately $271 million.
During the quarter, we made only minimal purchases of new MSR through a bulk and flow programs.
At quarter end, the Msr's and related assets represented approximately 45% of our equity capital and approximately 28% of our investable assets excluding cash means.
Meanwhile, our MBS portfolio accounted for approximately 39% of our equity capital.
As a percentage of investable assets.
RMB as portfolio represented approximately 72% excluding cash at quarter end.
During the quarter, we continued to experience ctr improvements in both our MSR and <unk> portfolios, our MSR portfolio net CPR averaged approximately four 7% for the quarter down from five 4% net CPR in the previous quarter.
Decline was mainly driven by seasonality and the change in mortgage production coupons, which drove slower prepayment speeds in the quarter.
The portfolios with capture was lowered approximately 1% versus approximately 2% in the fourth quarter as expected with current mortgage rate levels the incentive to refinance is minimal.
Moving forward, we continue to expect low recapture rates and a stable net CPR for the foreseeable future given the current levels of interest and mortgage rates.
The arm portfolio as prepayment speeds remained low driven by the combination of new asset purchases as well as the fact that current higher matters right.
Environment Compresses CPR.
As of today, the majority of the mortgage universe remained out of the model in terms of refinance.
We would expect prepayments to remain low as long as interest rate levels.
At these levels or higher for.
For the quarter, the R&D portfolios weighted average three month CPR reduced to approximately 3% compared to approximately three 8% in the fourth quarter.
As of March 31, the <unk> portfolio inclusive of TBA third approximately $709 million compared to $646 million in the previous quarter.
Quarter over quarter respectful of course in the portfolio continued to grow as we opportunistically put cash to work as.
As well as converting a few dollar rolls in the pools as dollar rolls weaken further.
We also continue to proactively change the portfolio composition.
At the end of the first quarter 30 year Securities position represented 100% of the MBS portfolio.
For the first quarter, our R&D net interest spread was three point or 1% driven in part, perhaps the larger portfolio and by having more securities on repo.
At quarter end, the portfolio's financial leverage stood at approximately four four times looking forward, we remain mindful of the continuing uncertain environment and await further clarity from the fed regarding the terminal rate.
I will now turn the call over to Mike for our first quarter financial discussion.
Thank you Julien.
GAAP net loss applicable to common stockholders for the first quarter was $21 4 million or <unk> 87 per weighted average diluted share outstanding during the quarter, while comprehensive loss attributable to common stockholders, which includes the mark to market of our available for sale on MBS were $7 $1 million 29 per weighted average diluted share.
Our earnings available for distribution attributable to common stockholders were $5 2 million or 21 seven per share.
Our book value per common share as of March 31 was $5 50 to.
Compared to a book value of $6 <unk> as of December 31, 2022.
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.
At the end of the first quarter, we held interest rate swaps, Tas and Treasury futures all of which had a combined notional amount of $1 1 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 2 million for the quarter.
On March 16, the board of directors declared a dividend of <unk> 27 per common share for the first quarter of 2023, which was paid in cash on April 25th when translated.
We also declared a dividend of <unk> $51 <unk> per share on our 812% series, a cumulative redeemable preferred stock and a dividend of <unk> $51 five six cheap assets on our eight 5% series b fixed to floating rate cumulative redeemable preferred stock both of which were paid on April 17 2020.
Right.
At this time, we will open up the call for questions operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Macau government of JMP Securities as they move ahead with your question.
Hey, guys good afternoon.
And I appreciate the color on the dividend going forward.
Quick question for you just wanted to get your thoughts on hypothetical scenarios lots.
Lots of reports coming out that the banking industry.
You're going to have two.
Strongly decrease its duration in your portfolios and that could end up having a pretty severe effect on.
MBS purchases as a marginal buyer.
Just wanted to get your thoughts on how you see that potentially playing out going forward.
With spreads and also kind of piggyback on that.
We're to develop.
Do you guys think about the relationship between MSR and MBS in that environment. Thanks.
Good evening.
Julien.
Yes.
Hey, How're you doing.
As for sales of MBS, obviously, we have started to experience some sales through the FDIC at the moment those have gone pretty well in terms of selling some of the securities that were in Sbb's portfolio.
On a going forward basis, it would not surprise me that banks themselves kind of pulled back a little bit on purchases of RMB as securities Im not expecting them to be a big buyer as we move forward and as such yes mortgage spreads have tightened in over the past couple of days, but we could see them kind of being <unk>.
Volatility for the.
For the rest of the year.
Whether that be tightening in several days a week and then widening out several days a week and as a result, we're also keeping our powder powder dry and also trying to keep our leverage on the lower hand side of things. This market we expect.
As I mentioned from a technical standpoint, the buyers of mortgages are just not going to be the buyers that we've had in the past the fed is not buying.
The gse's or not buying and as mentioned I think the banks will be limited in terms of the purchases that they are doing.
And I'll turn it over to Jay if he wants to make some comments on MSR as well as <unk>.
Yes.
So I think the important thing to note on the MSR portfolio is from a spread perspective, we've pointed out over the years that it definitely does a better job of protecting.
With current coupon.
And as I noted in the speech, our coupon or a note rate on the mortgages is in the mid threes and so.
By definition it will.
Protect less relative to spread widening on the MBS.
But clearly to some extent just less and I think that's true for antibody.
It's a large portfolio of msr's.
That were originated.
2023.
Got it appreciate that color and could you guys give an update on book value thus far this quarter.
Yeah, Hey, Michael It's Mike Yes.
Sure.
April 30th we estimate that our book value per share is down about 3% and thats before any dividend accrual as the board has not yet met two to approve a dividend for the quarter.
Gotcha. Thanks.
Guys I appreciate it have a good night.
Please standby, while we prepare the next question.
Our next question comes from Matthew Howlett of B Riley in the move ahead with your question.
Good afternoon, everybody Hi, Jay Thanks for taking my question.
Hey, Matt.
First on the higher coupons I mean, you mentioned, obviously March surprised everybody.
Is the bias is still towards.
The higher coupons here today.
I noticed.
The yield came down a little bit on the on the MBS side was that because of sort of higher prepayment rates assumptions just walk me through where you were in the stack you want to be and what was the impact of the fourth quarter on an NII basis.
Okay.
Yes, hi.
Hi, Matt It's Julian again.
Let's just start with like portfolio in terms of coupon selection. The primary coupon that we like in the portfolio was 30 year fives in the portfolio, so slightly below par kind of on a discounted basis.
You can you can get that.
Particular, coupon and kind of the coupons that surround that a little bit five fives as well as for four and a half we've been buying those for the portfolio over the timeframe.
Now clearly if the fed is changing its posture and thinks that it needs to lower rates within the coming year I think that there will suddenly be a shift slowly.
A shift into perhaps some lower coupons, we are keeping powder dry.
We're cheap Dave.
<unk>.
Partially driven by the fact that they were going to be security sales that we all knew that we're going to be coming out by the FDIC in terms of some of the bank portfolios those sales have actually gone pretty well and we've seen lower coupons trade.
Pretty well, we still think the fed has got a goal here to accomplish in terms of inflation.
We think it'll be more persistent than what a lot of investors are kind of thinking we think that the fed is not going to cut rates. This particular year, if that were to change or prior to that changing we have looked into the valuations of lower coupon securities, we still own some threes as well as $3.
<unk> in our portfolio.
But we would begin to take that up in size if.
Towards the end of the year I believe as the fed may be changing its posture at that point in time.
As for the NIM.
Part of the NIM was driven by the fact that some additional securities went on repo.
Quarter over quarter, there were a couple of securities that had yet to be put on repo and that kind of decreased our overall NIM in the quarter.
Got you.
It makes a lot of sense. Thanks for that clarification, I guess just to follow on I guess.
And the second question is just when you look at the debt ceiling and how do you I guess a quick question.
How are you positioning for an event for us.
Unlikely event of default or that.
I mean is there any sort of color you can give us on how you're positioned going into two.
Jim.
Well.
Let's say.
<unk> three.
March 8th we have started to position the portfolio.
Much more conservatively prior to that the expectation was the fed was going to continue at a rate path or possibly two to three more hikes in the year and possibly getting a terminal fed funds rate of 6%.
We're not under the belief that they can't get at least one more hike this year, but let's just say that's not that's not possible and they hold out for the end of the year. The debt ceiling. Obviously is somewhat of a concern and kind of ironically is youre, saying the fact that the U S campaigns that people tend to buy the debt. So.
We're not trying to take any real positioning we're trying to smooth out.
Our positioning on the curve as well as our duration.
That makes a lot of sense amendment are expected.
Youre not expecting any disruption in the repo market or does that mean that your counterpart you Eric Hausler flat and then with liquidity still good in the repo market.
We have found liquidity to be very good in the in the repo market.
I think all you have to do is look at the Fed's repo facility and you've got $2 five trillion dollars sitting there people have cash that they would like to put to work. We have access to repo that is that has not changed.
Great Great and then last question I look at.
You guys have you done it you've done it really commendable job getting through these rate hikes at the MSR or is it.
Like that side in terms of the preferred now showing the impact.
The leverage of a common the greater the impact that's had on you guys and you guys really defended it really well and hopefully it starts working on the other end with the right sizing of the dividend I mean, when you look at the company. The next stage of growth I would say the fed does.
Stop here at some point begin cutting and you get all these MBS coming out of a spreadsheet.
You look at the company I know you want to grow it would you look at.
Moving towards a much bigger RMB S portfolio over time, and MSR as that was sort of a great.
Hedged to have on during this rising rate environment and that you can really you have a lot of dry powder, but if you even let the MRI go on MSR.
<unk> runoff or even sell them you could even have a bigger balance sheet going into.
This next leg of the cycle just talk to me about where with this dividend reset I mean, where do you see the company going.
The next the next part of the cycle.
Assuming that we're close to the end of this one.
Yes, I'm happy to do that math, so I think theres a value conversation relative to just rates.
Wells Fargo and others have put out.
Fairly significant amount of servicing this year, so far and the expectation is that should continue for some time and so we have seen some relief.
If you will and pricing around servicing so as much as you think about rates, you think about pricing and yield and so as we look at the MSR space and the amount of capital that we want to.
Allocate to it especially in a scenario that you pointed out which is a growth scenario I think.
We'll be looking at a few things, which is one of course the optimal mix between the two strategies that we think makes sense.
From an equity capital perspective, and then also from your perspective as well I think there's a view on our side that.
Any relief in rates will primarily come from the front end of the curve in the backend of the curve might be less volatile over the near term if you will.
And so from that perspective, we think that the MSR continues to present and represent a pretty good investment.
Alternative for us it becomes a conversation about.
Returns and the amount of absolute capital that you'd like to deploy to the sector. So.
We think that once the fed starts cutting that is predominantly a front end of the curve.
Domino, which should provide some relief to the MBS returns.
But we won't take away from the MSR returns.
And by the way one of the reasons I mentioned the note rate on the <unk>.
In the script was because I just want to point out that we are so we have so much runway left.
With this portfolio relative to what really matters and that speeds and so to the extent that speeds are managed.
We can manage through the pricing aspect of it from a rates perspective, but we feel really confident about the ability for the portfolio to perform from a prepayment perspective.
Does that help.
Delta helps tremendous I mean, you'd have to see mortgage rates.
I mean below three I mean, you'd have to see Amit.
Pre COVID-19.
Covid level right to even put any of those in the money to refinance.
While my kids are very hopeful that might happen I'm optimistic for them.
I would agree I really appreciate it guys. Thank you.
Sure.
Thank you I'd like to turn it now back to Jay for closing remarks.
Thanks, operator, thank you very much for joining us on today's call.
Look forward to updating you soon on our second quarter results have a good evening.
Sure.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Thank you everyone sorry about the hiccup with the recording we did recover but I appreciate your patience.
And wish you a great evening I will now and just the contracts.
Okay.
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Okay.