Q2 2023 Cherry Hill Mortgage Investment Corporation Earnings Call
[music].
Good day and thank you for standing by welcome to the Cherry Hill Mortgage investment Corporation second quarter 2023 earnings 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 a question. During this session you will need to press star one one on your telephone you will then hear an automated message advice you hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today Garrett Edson. Please go ahead.
We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations second quarter 2023 Conference call. In addition to this call. We have filed a press release that was distributed.
Posted to the Investor Relations section of our website at Www Dot <unk> Dot com.
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.
Today examples of forward looking statements include those related to interest income financial guidance Irr's future expected cash flows as well as prepayment and recapture rates delinquencies and non-GAAP financial measures such as earnings available for distribution or <unk>.
And comprehensive income.
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 presentations available on the company's website.
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, Garrett and welcome to our second quarter 2023 earnings call.
Markets in the second quarter were again, largely driven by the fed and economic data.
As regional bank pressures eased and market's absorbed the MBS asset sales from the FDIC.
At a macro level, while rates ended the quarter higher at three 4%.
The U S 10 year Treasury fell as low as three 3% early in the quarter and the banking crisis was still top of mind.
Spreads tightened slightly towards the end of the quarter, creating some tailwind for agency MBS investors and the worst case scenario of a significant recession seem to win.
In light of the uncertainty around fed policy and the direction of rates during the quarter.
We continue to maintain a disciplined neutral posture.
<unk> significant rate bets in either direction.
Working to protect and enhance value.
Inflation, while stabilized has remained elevated above the fed's, 2% target.
Given the fed enough justification to raise rates 25 basis points in May and again last week.
We believe we are near the end of the tightening cycle and as others have noted this should be a positive catalyst for agency MBS securities and potentially drive more attractive returns.
Assuming that remains the case in quarters ahead, we are positioned well to deploy capital into new RMB us opportunities as we move through the back half of the year.
For the second quarter, we generated a GAAP net loss applicable to common share stockholders.
<unk> per diluted share.
And we generated earnings available for distribution or a non-GAAP financial measure of $4 2 million.
Or <unk> 16 per share.
As we've noted before AAD is only one of several factors considered in setting our dividend policy.
Additionally, factors such as the existing market environment and portfolio return potential.
Our level of taxable income, including hedge gain impacts and the degree of certainty regarding forward investment return economics, all contribute to determining what we believe is the appropriate dividend level.
Book value.
<unk> per common share finished at $5 19 as of June 30.
Down 6% from March 31.
On an NAV basis, which includes preferred stock and the calculation.
And before taking into account any issuances of equity through our common stock ATM program we.
We were down 3% relative to March 31.
As noted in our prior quarter, our existing mix of common to preferred equity amplifies the impacts of changes in our total equity.
Common book value.
Creating a more stable equity profile is in our shareholders' best interest and remains a top priority for us.
During the second quarter, we continued to stand firm on our MSR portfolio as we believe agency MBS presented a better return profile in the current environment.
Prepayment speeds on our MSR portfolio remained low and.
And thus the pace of reinvestment required to maintain the allocation of capital to the asset class is low.
Recapture rates on MSR is minimal given the higher interest rate levels.
Our portfolio of Msr's has a weighted average note rate slightly less than three 5%.
Providing us with plenty of room to weather potential rate cuts down the road before impacting our prepay speeds in a meaningful manner.
We continue to believe our strategy of pairing MSR with agency MBS.
Along with proactive portfolio management and hedging is.
Is the right long term strategy to steer through the current challenging environment.
At the end of the quarter financial leverage stayed consistent at four four times as we opportunistically deployed additional capital through the quarter.
We remain prudently levered and assuming the economy slowly continues its march toward stabilization.
We expect to remain opportunistic in the deployment of capital.
We ended the quarter with $53 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Looking ahead, we are maintaining our conservative yet proactive approach to portfolio management for the near term.
The volatility around the fed further diminishes and we begin to return to an environment, where mortgages typically perform better.
We believe there is an opportunity to deploy capital into additional agency MBS, which currently presents a strong risk adjusted return profile.
Our priority remains to protect book value and we remain 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 second quarter.
Thank you Jay.
Second quarter 2023 began with the overhang of the banking crisis.
As the market seem to believe that the fed would need to stop raising rates.
Concerns related to the banking crisis and began to see during the quarter rates began to rebound higher as the fed used the resilient economy as a backdrop to continuous war on inflation raising rates 25 basis points in may and once again last week.
Notably, but the headline CPI posting 3% in June it seems that the fed is getting close to a terminal rate for fed funds.
The possibility of one or two more rate hikes left as the fed attempts to get inflation back to the target rate of 2%.
Optimistically this appears to be giving the market signs of stabilization amid a growing belief that the fed may be able to achieve a soft landing while holding rates higher for longer.
We continue to employ thoughtful hedging strategy in the second quarter remaining long duration, which impacted our book value.
However, we believe we are properly positioned from a hedging perspective, given the current macro environment and managing through the environment as best as possible.
Our investment strategy is carried over thus far into the third quarter.
At quarter end, our MSR portfolio had an <unk> of $20 8 billion and a market value of approximately 265.
At quarter end, the MSR net related asset represented approximately 43% of our equity capital and approximately 31% of our investable assets excluding cash.
Meanwhile, our R&D portfolio accounted for approximately 40% of our equity capital as a percentage of investable assets. The RMB is portfolio represented approximately 69% excluding cash at quarter end.
During the quarter prepayment speeds for our MSR and Rvs portfolios rose modestly as rates fluctuated for much of the quarter.
Our portfolio's net CPR averaged approximately six 2% for the second quarter up from four 7% net CPR in the previous quarter.
Rise is mainly driven by seasonality the.
The portfolios or capture rate remained consistent low at approximately 1% as the incentive to refinance continues to be 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 RMB <unk> portfolio as prepayment speeds remained low driven by the combination of new asset purchases as well as the fact that the current higher mortgage rate environment is compressing CPR for the existing portfolio.
As of today, the majority of the mortgage universe remains out of the money in terms of refinancing we would expect prepayments to remain at low levels as long as interest rates stay at these levels or move higher.
For the quarter.
Our MBS portfolios weighted average three month CPR moved a bit higher to approximately four 2% compared to approximately 3% in the first quarter.
As of June 30, <unk> portfolio inclusive of TBA stood at approximately $602 million compared to $709 million at the previous quarter end.
Quarter over quarter respectful portion of the portfolio remain constant, but the composition of the portfolio changed during the quarter as we opportunistically moved into higher coupon mortgages and put new cash to work.
At the same time, we materially.
<unk> increased our TBA hedges as an offset.
For the second quarter, our RMB as net interest spread was 384% the increase was driven by higher asset yields, resulting from new purchases as well as a change in the portfolio of composition.
Both of which helped to offset higher repo cost.
At quarter end, the portfolio's financial leverage remained at approximately four four times and the 30 year securities position represented 100% of our MBS portfolio.
Looking forward.
We remain mindful of the ongoing challenging environment, but are optimistic that we may be getting close to a terminal rate given encouraging inflation data I will now turn the call over to Mike for a second quarter financial discussion.
Thank you Julien.
Our GAAP net loss applicable to common stockholders for the second quarter was.
$9 million or <unk> <unk> 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. Our MBS was $3 9 million or <unk> 15 per weighted average diluted share.
Our earnings available for distribution attributable to common stockholders was $4 2 million or <unk> 16 per share.
Our book value per common share as of June 30 was $5 19, compared to a book value of $5 52.
As of March 31, 2023.
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 second quarter, we held interest rate swaps TBA <unk> and Treasury futures all of which had a combined notional amount of approximately $700 million you can see more details with respect to our hedging strategy and our 10-Q as well as in our second 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.
Our operating expenses were $3 7 million for the quarter.
On June 15th 2023, our board of directors declared a dividend of <unk> 15 per common share for the second quarter of 2023, which was paid in cash on July 31 2023.
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 redeemable preferred stock both of which were paid on July <unk>.
<unk> 2023.
At this time, we will open up the call for questions operator.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby will be compile the Q&A roster.
Our first question comes from Mikael Guberman with JMP Securities. Your line is open.
Hey, good afternoon, guys hope everybody is doing well.
With the recent kind of bonds fell off firmly in mind.
Kind of thinking about how are you guys thinking about the mix of.
Agency MBS on MSR should rates continue to sell off and we we get.
Continuation of the rising rate environment.
Yeah.
Yes.
And how are you.
Thank you.
This is a this is julian.
Yes.
Look it's been a very interesting week very volatile I think we're constantly updating and changing the portfolio.
On a given day.
From a.
Longer term it should say perspective, the combination of MSR as well as agency mortgages.
It is a very sound strategy that we truly believe in I think in the short term. What we found is that RMB as at the current moment yields a little bit better than with the MSR is yielding from evaluation standpoint.
And so we'd probably be holding more agency MBS as for rates continuing to go up.
We continue to move around the portfolio manage the asset side as well as the liability side.
And we're trying to effectively minimize the risk in the portfolio.
And one other thing to note Erika is that.
A decent portion of our <unk> portfolio is hedge with TBA, which mitigates some of the spread widening that we've seen this week so.
In a widening environment, we feel great about what we're doing obviously, you're in a spread winding you want to.
You have more protection and when spreads tightened we definitely don't get the same benefit that others do but we definitely have.
Alright.
Some of the spread widening risk in an environment.
Where we think the fed may not be done if we are in a higher rates. There is the potential for further spread widening.
Got it thank you for that.
Just kind of thinking about.
The mix of.
Possibly issuing more stock through the ATM versus buybacks with the stock at about 90% of book how are you guys thinking about the trade offs there going forward.
So we haven't really we haven't thought about the ATM and a little in a little bit with respect to.
Where we were relative to I think what youre referencing is tangible book.
Yes.
Yes.
It's definitely something that we think about with respect to the board but.
It's a decision that we make with the board.
Currently we are not tapping the ATM today, but.
Right.
We do have some parameters internally think about relative to how we how we think about <unk>.
Raising capital through that program and similarly, I think if the stock gets to a level that.
Would support.
Buy backs then we would definitely consider that as well same thing with the preferred.
Got it so when youre thinking about buybacks do you look at the stock on a tangible basis or on a straight up.
To be perfectly candid tangible.
Okay.
With that in mind any just one more if I may just any update on book value. This quarter, thus far in the third quarter. Thank you guys.
Yes sure. So we just don't have that yet honestly, it's been all hands on deck to be able to report at this point and three.
Three days into the month and as you know with the MSR.
We just don't have I don't have that for you I wish I did but.
We were racing to get done to be able to do the call on time and.
I just don't have it yet.
No problem best of luck going forward. Thanks, guys.
Thanks.
One moment for our next question.
Our next question comes from Matthew Howlett with B Riley Your line is open.
Hey, good afternoon Jay.
Everybody Hey, Matt.
Right.
Good. Thanks, Thanks for taking my question just on.
The commentary on Mds and value in spreads.
Yes, I think I heard you correctly, you said sort of.
You don't see a lot of catalyst for things to tightened here and there.
And at least in the short term.
Wondering how you look at value would you look at.
How do you look at spreads.
<unk> you look at.
Yes.
No other how do you how do you address value in the MBS space and what are the signs you need to see where it sort of <unk>.
Spread widening is.
As Don It is time to kind of go in is it just.
These signals are going to cut rates or.
To say it needs to stop running off your book I'd, just love to hear it because everything we read is that MBS is just cheap to corporate.
It's just huge value, there's not a lot of supply Fannies book came down and.
And that that supply is going to tighten spreads here in the back half of the year.
Yes so.
Hi, Max Julien.
Look I think when we look at agency RMB.
Path, we've looked at them versus swaps.
Now that the swap curve has kind of gone away. The question is do you want to look at them versus sofa or treasuries I'd say on a nominal basis, we're looking at them versus treasuries, we still run.
Oes to kind of see where.
Mortgages are.
I think those two those two are effective tools in terms of trying to figure out the valuation in terms of spreads I think look I think we've all looked at spreads from a historical standpoint on a nominal basis.
And if you take a look at them over the five year timeframe. They are very attractive from a historical standpoint.
Yes, I think if you look at the average over.
The five year timeframe, it's like too.
83 spread.
And right now we are probably about 175, given the widening that we've had continuing over the last couple of days.
It's been as high as 200 and <unk>.
Our mind I think that chops around.
I think it's going to chop around a little bit given that volatility.
It has come comes and goes all the time it seems as of late.
And it can come from.
Anywhere in terms of statements either by our own fed or from other central banks globally at this point in time.
And I think what Youre asking for is when will you finally see some type of <unk>.
Tightening thats more continuous than then.
What we have experienced so far I think you need stability in rates.
I think you need volatility to kind of stabilize if not truly be able to maintain the lower levels and continue forward.
I do think that you need.
<unk>.
The banks to feel comfortable coming back into the market to buy mortgages.
I think a lot of people have bought mortgages at the wider levels of 175 200 in that in that particular range I think you'll find a lot of the indexers or on the investors who had been on the sideline or kind of.
Neutral to kind of overweight at this point in terms of mortgages.
There is no doubt that they are attractive from a long term, but over the short term timeframe. If volatility continues to move the way. It is I think it's going to be hard for them to Titan and stay there continuously and I think it's the reason why we continue to hold the TBA shorts in the portfolio.
It also makes it makes a lot of sense.
Spreads did you say spreads did widen here this past week with the soften yes, yes.
Yes.
Yes, they have widened.
Okay, Great. We'll look at look it makes it makes sense, what you're saying and keeping a short TBA position my question.
My question. My next question is this I mean.
I'll try to kind of figure out where how much excess capital each reached.
Where they could take leverage up to.
And it's hard it's hard to do it no holistically across the space. So I wanted to ask you. When you look at your leverage just over four turns in your asset mix with.
<unk>, 40%, our MBS and 43% servicing.
When you talk about full deployment of where you could take the portfolio to where you could take leverage to.
How should we think how should we think about some REIT say.
10 times, but I know you have some MSR is how do we look at your balance sheet and how much excess capital there could be when you finally decided to say, let's add let's add some more MBS.
It's a great question.
I think that we've.
Been holding more cash and I think.
I would like to in a normal.
Stable environment, but I think this week is a perfect example, as to why.
We do we do that still just given.
The margin calls around spread widening in MBS side of the house.
Yeah.
I do think that as you get closer to the end of the year.
And you get closer.
To the.
At the end of the fed cycle that.
There is.
Theres going to be an opportunity to take up leverage whether thats.
One two turns or whatever we don't have that dialed in yet, but I think that as Julian pointed out.
As other Reits have as well.
Spreads start to widen at specific points in time, we do try to nibble land when we think there is value.
And I think youll see slowly.
US take up leverage a bit as we feel.
Again to Julians point boss coming down things are starting to stabilize and market reactions to.
Economic data.
Geopolitical news et cetera, it doesn't create the volatility in the market that still currently does today so our intention.
I can tell you is that.
Over time, we would like to take up the leverage somewhat I can't tell you exactly how but I think thats really etcetera.
Et cetera, so it's data dependent.
It's dependent upon.
Related to the market too.
Get to a point where it.
It's able to absorb economic data and information and news and.
And stabilize and so.
So I think thats in the next six to 12 months absolutely.
Yes.
It's clear I mean, the earnings power is significant and it may take up.
Just to turn.
And I think thats.
I think something we've all been waiting for it and clearly.
It's been incredibly volatile and youre doing a great job managing through it but I think.
You said you have a lot of dry powder that you just that you have the ability to.
It gives me comfort that you know obviously, there's significant earnings power.
In the company when we when the time is right.
You'll remember that's all going to come in on the RMB, two we're pretty comfortable with where we are levered on the MSR front.
So broadly speaking, we run about 60% LTV.
When we think about leverage on the Msr's and given some of the things that have happened over times et cetera et cetera.
We're comfortable with that level for the MSR. So if you think about where that additional level come from most likely it would come from the RMB et cetera.
Gotcha.
Great quarter, and we look forward to the next story of growth with the company. Thanks, Jay Thanks, everybody.
Sure.
Hey, Kevin.
Showing no further questions at this time I would now like to turn the conference back to Jay for closing remarks.
Thank you operator.
Thank you everybody for joining us on our second quarter 2023 earnings call. We look forward to updating you soon on our third quarter's performance have a good evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Thank you.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
[music].
Okay.
Yes.
Okay.
[music].
No.
Hmm.
[music].
Okay.
[music].
Okay.
Yes.
[music].
Okay.
Okay.
[music].
<unk>.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
[music].
Yes.
Yes.
Yes.
Okay.
[music].
Okay.
[music].
No.
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
[music].
So.
Okay.
Yes.
Okay.
Yes.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Yes.
Okay.
[music].
Thanks.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Sure.
[music].
Yes.
[music].
Yes.
Okay.
Thanks.
[music].
Okay.
[music].
Yes.
Okay.
[music].
Yes.
Okay.
[music].
Okay.
Okay.
[music].
Yes.
[music].
Yes.
[music].
Sure.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
[music].
Sure.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Sure.
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
Sure.
Yes.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
[music].
Great.
Okay.
Okay.
Okay.
Thanks.
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
Yes.
[music].
Okay.
Yes.
Great.
Okay.
Yes.
Okay.
[music].
Okay.
Thanks.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Thank you.
Yes.
Yes.
Okay.
Please go ahead.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Sure.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Thank you.
[music].
Thank you.
Okay.
Okay.
Okay.
Okay.
Okay.
Right.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Thanks.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Thank you.
Okay.
Okay.
Okay.
Okay.
Okay.
Thanks.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Okay.
Thanks.
Okay.
[music].
Sure.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Sure.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Sure.
Thank you.
Okay.
Yes.
Okay.
Okay.
Thanks.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Sure.
Sure.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Great.
Sure.
Okay.
Okay.
Okay.
Yes.
Hi.
Sure.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
[music].
Yes.
[music].
Yes.
Okay.
Okay.
Thanks.
Hum.
Yes.
Okay.
Yes.
[music].
Okay.
Sure.
Yes.
Yes.
Okay.
Thanks.
Okay.
[music].
Yes.
Yes.
[music].