Q2 2024 Cherry Hill Mortgage Investment Corp Earnings Call
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Speaker Change: Good day and welcome to the Cherry Hill mortgage investment corporations second quarter 2024 conference call. At this time, all participants are in a listen only mode.
Operator: After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Garrett Edson with Investor Relations. Please go ahead.
After the Speakers' presentation, there'll be a question and answer session and instructions will be given at that time.
As a reminder, this call maybe recorded.
Like to turn the call over to Garrett Edson with Investor Relations. Please go ahead.
Garrett Edson: We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's second quarter, 2024 Conference Call. In addition to this call, we have issued a press release that was distributed earlier this afternoon, and posted that press release in the second quarter 2024 Investor Presentation on the Investor Relations section of our website at www.chmi.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.
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Speaker Change: We'd like to thank you for joining us today for Cherry Hill mortgage investment corporations second quarter 2024 Conference call. In addition to this call. We have issued a press release that was distributed earlier this afternoon and posted that press release and in our second quarter 2024, investor presentation to the Investor Relations section of our website at Www Dot C. H M I reap dotcom.
Garrett Edson: Examples of forward-looking statements include those related to our ability to complete the planned internalization of our management, interest income, financial guidance, IRRs, future expected cash flows, as well as prepayment and recapture rates, delinquencies, and non-GAAP financial measures, such as earnings available for distribution or EAD, and comprehensive income. Forward-looking statements represent management's current estimates, and Cherry Hill assumes no obligation to update any forward-looking statements 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 J. Lown, President and CEO; Julian Evans, with Chief Investment Officer; and Michael Hutchby, Chief Financial Officer. Now, I will turn the call over to Jay.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements are subject to risks and uncertainties that could cause actual results to differ from those discussed today.
Speaker Change: Forward looking statements include those related to our ability to complete the planned internalization of management 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 or <unk>.
Speaker Change: Comprehensive income forward looking statements represent managements current estimates and Cherry Hill assumes no obligation to update any forward looking statements in the future.
Speaker Change: We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's filings with the SEC ended up initial contained in the financial presentations available on the company's website.
Speaker Change: Today's conference call hosted by Jay Lown, President and CEO, Julian Evans, our Chief investment Officer, and Michael Hershberger, Chief Financial Officer, now I will turn the call over to Jay.
Jeffrey Lown: And welcome to our second quarter 2024 earnings. The second quarter was very much a tale of two halves.
Jay: Thanks Garrett.
Jay Lown: And welcome to our second quarter 2024 earnings call.
Speaker Change: The second quarter was very much a tale of two halves.
Jeffrey Lown: As we entered April, markets continued to react to the Fed, which maintained hawkish language with respect to race. Inflation hovered slightly below 3%. It's a quarter for grass.
Jay Lown: As we entered April markets continue to react to the fed.
Jay: Which maintained hawkish language with respect to rates.
Speaker Change: <unk> hovered slightly below 3%.
Jay Lown: As the quarter progressed.
Jeffrey Lown: The Fed has become considerably more dovish given the uptick in unemployment and softer economic data. The weaker data have ultimately led to expectations that the Fed will ease monetary policy starting in September. We expect volatility will persist in the near term, in part due to current geopolitical unrest, the upcoming U.S. presidential election, and central banks globally having begun to cut interest rates. This was evident in the past week's market activity across equities and bonds. Wider Spritz ultimately impacted our portfolio's performance in the quarter, albeit mitigated by our hedging strategy of utilizing TBAs in addition to interest rate derivatives. Looking forward,
Jay Lown: That became considerably more dovish, given the uptick in unemployment and softer economic data.
Jay Lown: The weaker data has ultimately led to expectations that the federal ease monetary policy starting in September.
Jay Lown: We expect volatility will persist in the near term in part due to current geopolitical unrest.
Jay Lown: The upcoming U S presidential election.
Jay Lown: And central banks globally, having begun to cut interest rates.
Jay Lown: This was evident in the past weeks market activity across equities and bonds.
Jay Lown: Wider spreads ultimately impacted our portfolio's performance in the quarter.
Jay Lown: Be it mitigated by our hedging strategy of utilizing TBA is in addition to interest rate derivatives.
Jay Lown: Looking forward.
Jeffrey Lown: We are optimistic about what we and the market are seeing in terms of the economy's resilience thus far. However, be mindful of the economy cooling off, with a high degree of likelihood around make-up. The Yorker of a Steepening, And we are continuing to align our portfolio to take advantage as the curve steepens. We continue to watch economic indicators in the Fed close and believe our overall strategy of pairing MSORs with agency R&BS works well in the current environment. Post-Corder End, we announce that our special committee, which is comprised solely of independent and disinterested directors.
Jay Lown: We are optimistic about what we and the market are seeing in terms of the economies resilient thus far.
Jay Lown: We are mindful of the economy, calling off.
Jay Lown: With a high degree of likelihood around rate cuts.
Jay Lown: The yield curve steepening.
Jay Lown: And we are continuing to align our portfolio to take advantage as the curve steepens.
Jay Lown: We continue to watch economic indicators and the fed closely.
Jay Lown: And believe our overall strategy of pairing MSR with agency MBS works well in the current environment.
Speaker Change: Post quarter end, we announced that our special committee, which is comprised solely of independent and disinterested directors.
Jeffrey Lown: Determined and recommended to the Board to internalize management of Cherry Hill and that Cherry Hill's officers take all steps necessary to begin operating Cherry Hill as they fully integrated internally managed mortgaged wheat. Once completed, internalization should reduce our expenses, Hans Ernings, and Better Align Management and the Investment Community. Subsequent to our announcement, we have been working to complete the internalization so that we can transition to self-management. As we noted on our last earnings call, we will not discuss any information or developments relating to the special committee or its process until the evaluation of strategic alternatives has been completed or the special committee determines further disclosure is appropriate or legally required.
Jay Lown: Determined and recommended to the board to internalize management of Cherry Hill.
Jerry: And that Jerry host officers to take all steps necessary to begin operating Cherry Hill is a fully integrated internally managed mortgage REIT.
Jay Lown: Once completed internalization should reduce our expenses enhance earnings and better align management and the investment community.
Jay Lown: Subsequent to our announcement, we have been working to complete the internalization. So that we can transition to self management.
Jay Lown: As we noted on our last earnings call, we will not discuss any information or developments relating to the special committee or its process until the evaluation of strategic alternatives has been completed or the special committee determines further disclosure is appropriate or lately.
Jeffrey Lown: Their focus remains on doing what is in the best interest of the company and its shareholders. For the second quarter, we generated a gap net loss applicable to common stockholders of six cents per diluted share, and we generated earnings available for distribution or EAD. A non-gap financial measure, 2.3 million, or 8 cents per share. However, A.G. for the quarter was impacted by six cents per share of expenses related to the special committees.
Jay Lown: Required.
Speaker Change: Their focus remains on doing what is in the best interest of the company and its shareholders.
Jay Lown: For the second quarter.
Jay Lown: We generated GAAP net loss applicable to common stockholders of <unk> <unk> per diluted share.
Jay Lown: And we generated earnings available for distribution or AAD.
Jay Lown: Our non-GAAP financial measure of $2 3 million or <unk> <unk> per share.
Jay Lown: For the quarter was impacted by <unk> <unk> per share of expenses related to the special committee's efforts.
Jeffrey Lown: A reminder that EAD is just one factor that the Board of Directors considers, and setting our given-end policy, as we've previously noted, and is not the primary factor; also considered is the existing market environment and Portfoli Return Potential.
Speaker Change: A reminder, that EAP is just one factor to board of directors considers resetting our dividend.
Jay Lown: Dividend policy as we've previously noted.
Jay Lown: And it is not the primary factor.
Jay Lown: Also considered as the existing market environment.
Jay Lown: Portfolio return potential.
Jeffrey Lown: Our level of taxable income, including hedging impacts, and the degree of certainty regarding forward investment return economics. Thus, while EAD may continue to remain under our given level in the near term. We believe other factors are important when considering whether we can sustainably cover our dividend. During the quarter, we strategically sold over 1 billion UPD in low-owned down DMSR. We believe the sale will improve our portfolio's efficiency and reduce servicing costs for our remaining MSR portfolios. Looks like it will become a share, finished the quarter at $4.15. Compared to $4.49 on March 30th,
Jay Lown: Our level of taxable income, including hedging impacts.
Jay Lown: And the degree of certainty regarding forward investment return economics.
Jay Lown: Thus, while AAD may continue to remain under our dividend level in the near term.
Jay Lown: Believe other factors are important when considering whether we can sustainably cover our dividend.
Speaker Change: During the quarter, we strategically sold over $1 billion, a few PB and low loan balance msr's.
Jay Lown: We believe the sale will improve our portfolio is efficiency.
Jay Lown: <unk> reduced servicing costs for our remaining MSR portfolio.
Jay Lown: Book value per common share finished the quarter at $4 15.
Jay Lown: Compared to $4 49 on March 31.
Jeffrey Lown: The reduction was driven in part by special committee expenses and hired given in payments on our Class B preferred. We continue to opportunistically repurchase Class B preferred shares to further stabilize our equity profile, on an NAV basis, which includes preferred stock in the calculation. NAV was off approximately $12.4 million, or 5% relative to March 31st. This is inclusive of repurchasing approximately $2.2 million of Class B preferred shares and approximately $1.7 million of special committee related expenses.
Jay Lown: The reduction was driven in part by Special Committee expenses and.
Jay Lown: Higher dividend payments on a class b preferred.
Jay Lown: We continue to Opportunistically repurchase class B preferred shares to further stabilize our equity profile.
Jay Lown: On an NAV basis, which includes preferred stock in the calculation.
Jay Lown: And he was off approximately $12 4 million or 5% relative to March 31.
Jay Lown: This is inclusive of repurchasing approximately $2 2 million of class B preferred shares and approximately $1 7 million of special committee related expenses.
Jeffrey Lown: Financial leverage at the end of the quarter rose to 4.9 times, as we continue to stay prudently levered given the volatility in the market. We ended the quarter with $52 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Jay Lown: Financial leverage at the end of the quarter Rose to four nine times as we continue to stay prudently levered given the volatility in the market.
Jay Lown: We ended the quarter with $52 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Julian Evans: As we have previously discussed, while our financial leverage has stayed relatively low, our capital structure leverage, consisting of our mix of common and preferred equity, amplifies how changes in our NAV, or total equity, impacts our common book value per share. Thus, we have been repurchasing Series B preferred shares to stabilize our equity profile, particularly since the Series B preferred shares are now floating rates, as of August 7. We have repurchased approximately 9.4 million Series B preferred shares, and we expect to continue repurchasing preferred shares moving ahead, while remaining mindful of our balance sheet strength and our investment portfolio.
Jay Lown: As we have previously discussed while our financial leverage has stayed relatively low.
Jay Lown: Our capital structure leverage consisting of our mix of common to preferred equity amplifies how changes in our <unk> or total equity impacts our common book value per share.
Jay Lown: Thus, we have been repurchasing series B preferred shares to stabilize our equity profile, particularly since the series B preferred shares are now floating rate.
Jay Lown: As of August seven.
Jay Lown: We have repurchased approximately $9 4 million of series B preferred shares.
Jay Lown: And we expect to continue repurchasing preferred shares moving ahead well.
Jay Lown: While remaining mindful of our balance sheet strength.
Jay Lown: In our investment portfolio.
Julian Evans: Looking ahead, we are closely monitoring the macro environment as we look to position our portfolio appropriately should the Fed begin to lower rates. In the near term, we will expect to deploy capital into agency RMBS, which still presents a strong risk-adjusted return profile, and reduce the portion of preferred equity in our capital structure to provide greater stability of our equity profile for the ultimate benefit of common shareholders. While maintaining our strong liquidity and leverage. With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance in the second quarter.
Jay Lown: Looking ahead, we are closely monitoring the macro environment as we look to position our portfolio appropriately.
Jay Lown: Should the fed begin to lower rates.
Jay Lown: In the near term, we will expect to deploy capital into agency MBS, which still presents a strong risk adjusted return profile.
Jay Lown: And reduced the portion of preferred equity in our capital structure to provide greater stability of our equity profile for the ultimate benefit of common shareholders.
Jay Lown: While maintaining our strong liquidity and leverage.
Jay Lown: 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.
Julian Evans: As Cherry noted, the Fed started the quarter concerned that inflation was too high. As the quarter progressed, inflation reduced to levels that were in line with their expectations. The Fed's voice turned dovish, as economic data did not meet market expectations. Given recent market data and Fed rhetoric, we expect the Fed to reduce rates at the September meeting, although the magnitude of the eases is yet to be determined.
Julian Evans: Thank you J.
Julian Evans: As Jay noted the fed started the quarter concern that inflation was too high.
Julian Evans: As the quarter progressed inflation reduced to levels that were in line with their expectations for fed voice turned dovish as economic data did not meet market expectations.
Speaker Change: Given recent market data and fed rhetoric, we expect the fed to reduce rates at the September meeting.
Jay Lown: The magnitude of the eases is yet to be determined.
Julian Evans: Wider spreads, special committee expenses, and preferred share repurchases impacted our book value in the second quarter. With more certainty potentially coming into the market surrounding rates, we may finally begin to see the macro environment normalize and potentially the end of the inverted yield curve. We will continue to monitor the Fed closely in case there is any shift from the current sentiment.
Speaker Change: While wider spreads special committee expenses and preferred share repurchases impacted our book value in the second quarter.
Jay Lown: With more certainty potentially coming into the market surrounding rates. We may finally begin to see the macro environment normalize and potentially the end of the inverted yield curve.
Speaker Change: We will continue to monitor the fed closely in case, there is any shift from the current sentiment.
Julian Evans: At quarter end, our MSR portfolio had an UPB of $18 billion and a market buy of approximately $234. As Jay mentioned, we sold over $1 billion of UPB during the quarter to make our MSR portfolio more efficient and reduce servicing costs. The MSR and related net assets represented approximately 42% of our equity capital and approximately 26% of our investable assets, including cash, a quarter-red. Meanwhile, our RMBS portfolio accounted for approximately 40% of our equity capital. As a percentage of investment assets, the R&DS portfolio represented approximately 74%, excluding cash, at quarter-end.
Jay Lown: At quarter end, our MSR portfolio at <unk>.
Julian Evans: Of $18 billion and a market value of approximately $234 million.
Julian Evans: As Jay mentioned, we sold over $1 billion of <unk> during the quarter to make our MSR portfolio more efficient and reduce servicing costs.
Jay Lown: The MSR and related net assets represented approximately 42% of our equity capital and approximately 26% of our investable assets, excluding cash at quarter end.
Speaker Change: Meanwhile, our RMB <unk> portfolio accounted for approximately 40% of our equity capital.
Julian Evans: As a percentage of investable assets. The RMB is portfolio represented approximately 74% excluding cash at quarter end.
Julian Evans: Prepayment speeds for our MSR and RMBS portfolios continue to remain relatively steady compared to the prior quarter, given the elevated mortgage rate environment. Our MSR portfolio's net CPR averaged approximately 5.5 percent for the second quarter, compared to 3.9 percent net CPR in the previous quarter. The portfolio's recapture rate remained low at approximately 0.3%, as the incentive to refinance continues to be minimal.
Julian Evans: Prepayment speeds for our MSR and <unk> portfolios continued to remain relatively steady compared to the prior quarter given the elevated mortgage rate environment.
Julian Evans: Our MSR portfolios net CPR averaged approximately five 5% for the second quarter compared to three 9% net CPR in the previous quarter.
Julian Evans: The portfolios recapture rate remained low at approximately 3% as the incentive to refinance continues to be minimal.
Julian Evans: Moving forward, we continue to expect a lower capture rate and a stable net CPR for at least the near-term, given our portfolios have one rate. The RMBS portfolio's prepayment speeds remain low, driven by a combination of new asset purchases as well as the current higher mortgage rate environment, which continues to compress CPRs for the existing portfolio. At quarter end, most of the mortgage universe remained out of the money in terms of refinancing, based on those love.
Julian Evans: Moving forward, we continue to expect a low recapture rate and a stable net CPR for at least the near term given our portfolio's loan rate.
Julian Evans: The RMB is portfolios prepayment speeds remained low driven by a combination of new asset purchases as well as the current higher mortgage rate environment, which continues to compress CPR for the existing portfolio.
Julian Evans: At quarter end most of the mortgage universe remain out of the money in terms of refinancing based on those levels.
Julian Evans: We would expect pre-payments to remain at low levels based on the quarter-end level. Since the end of the quarter, interest rates have declined to levels that should cause refinancing activities to start to pick up. The expectation for the Fed to lower rates has increased. We could see pre-payments rise as the Fed follows through with lowering rates.
Julian Evans: We would expect prepayments to remain at low levels based on quarter end levels.
Julian Evans: Since the end of the quarter interest rates have declined to levels that should cause refinancing activity start to pick up.
Julian Evans: The expectation for the fed to lower rates has increased we could see prepayments rise as the fed follows through with lowering rates.
Julian Evans: For the quarter, the RMBS portfolio's weighted average three-month CPR fell to approximately 4.6% compared to approximately 5.2% in the first quarter. As of June 30th, the R&BS portfolio includes a PBA suited approximately 674 men, up marginally compared to the previous quarter. Quarter Over Quarter, we acquired additional higher coupon R&DS, and we continue to remain positions protected against additional spreadweights. For the second quarter, our R&BX Net Interest Express was approximately 3.23%.
Julian Evans: For the quarter, the <unk> portfolio's weighted average three month CPR fell to approximately four 6% compared to approximately five 2% in the first quarter.
Julian Evans: As of June 30, the RMB is portfolio inclusive of TBA stood at approximately $674 million up marginally compared to the previous quarter at <unk>.
Julian Evans: Quarter over quarter, we acquired additional higher coupon rvs, and we continue to remain positioned to protect against additional spread widening.
Julian Evans: For the second quarter our RMB.
Julian Evans: The reduction from the prior quarter was driven primarily by higher repo costs, as we financed more securities, and a reduction in our swap income, which offset increased R&B has income for purchase. As Jay mentioned, the portfolio's financial leverage stood at approximately 4.9 times, and the 30-year securities position continued to represent 100 percent of the RMVS portfolio at quarter end. Moving forward, we will continue to proactively manage our portfolio and shift our overall capital structure to add value for shareholders and improve performance in our. I will now turn the call over to Mike for a second quarter financial discussion.
Julian Evans: Net interest spread was approximately three two.
Julian Evans: <unk>, 3% the reduction from the prior quarter was driven primarily by higher repo cost as we financed more securities and a reduction in our swap income, which offset increased RMB income for purchases.
Julian Evans: And as Jay mentioned, the portfolio's financial leverage stood at approximately four nine times and the 30 year securities position continue to represent a 100% of the rvs portfolio at quarter end.
Julian Evans: Moving forward, we will continue to proactively manage our portfolio, while continuing to shift our overall capital structure to add value for shareholders through improved performance and earnings.
Julian Evans: I will now turn the call over to Mike for a second quarter financial discussion.
Mike: Thank you Julien.
Michael Hutchby: Gap net loss applicable to common stockholders for the second quarter was $1.9 million, or $0.06 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 RMBS, was $5.5 million, or $0.18 per weighted average diluted share outstanding.
Mike: GAAP net loss applicable to common stockholders for the second quarter was $1 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 RMB, Yes was $5 $5 million or <unk> 18 per weighted average diluted share.
Michael Hutchby: per Weighted Average Diluted Share.
Michael Hutchby: Our earnings available for distribution attributable to common stockholders were $2.3 million or $0.08 per share. EAD is inclusive of approximately $1.7 million or six cents per share of expenses related to the special committees' work. Our book value, per common share, as of June 30th was $4.15 compared to a book value of $4.49 as of March 31st. We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchased borrowing.
Michael Hutchby: Our earnings available for distribution attributable to common stockholders were $2 3 million or <unk> <unk> per share.
Michael Hutchby: It is inclusive of approximately $1 7 million or <unk> <unk> per share of expenses related to the special committee's work.
Michael Hutchby: Our book value per common share as of June 30 was $4 15 compared.
Michael Hutchby: Compared to a book value of $4 49 as of March 31.
Michael Hutchby: We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings.
Michael Hutchby: At the end of the second quarter, we held interest rate swaps, TBAs, and Treasury futures, all of which had a combined notional amount of approximately $954 million. You can see more details with respect to our hedging strategy in our 10Q, as well as in our second quarter presentation. For gap purposes, we've not elected to apply hedge accounting for our interest rate derivatives, and as a result, we record the change in the estimate of fair value as a component of the net gain or loss on an interest rate derivative.
Michael Hutchby: At the end of the second quarter, we held interest rate swaps <unk> and Treasury futures all of which had a combined notional amount of approximately $954 million you can see more details with respect to our hedging strategy and our 10-Q as well as in our second quarter presentation.
Michael Hutchby: 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.
Michael Hutchby: Operating expenses were $5.1 million for the quarter, which included the $1.7 million special committee related expenses. On June 13, our Board of Directors declared a dividend of 15 cents per common share for the second quarter of 2024, which was paid in cash on July 31. We also declared a dividend of $0.5125 per share on our 8.2% Series A Cumulative Redeemable Preferred Stock and a dividend of $0.6995 on our 8.25% Series B Fixed Floating Rate Cumulative Redeemable Preferred Stock, both of which were paid on July 15th. At this time, we will open up the call to questions. Operator?
Michael Hutchby: Operating expenses were $5 1 million for the quarter, which included the $1 $7 million of special Committee related expenses.
Michael Hutchby: On June 13th our board of directors declared a dividend of <unk> 15 per common share for the second quarter of 2024, which was paid in cash on July 31.
Michael Hutchby: We also declared a dividend of <unk> 51 to <unk> per share on our eight 2% series, a cumulative redeemable preferred stock and a dividend of <unk> 69 95.
Michael Hutchby: On our 825% series B fixed to floating rate cumulative redeemable preferred stock both of which were paid on July 15th.
Operator: Thank you. If you would like to ask a question, please press star 1 1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1 1 again. One moment for questions. Our first question comes from Mikhail Goberman with Citizens J&P. Your line is open.
Michael Hutchby: At this time, we will open up the call for questions operator.
Operator: Thank you if you would like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again, one moment for questions.
Operator: Our first question comes from Mcgill Guberman with citizens JMP. Your line is open.
Mikhail Goberman: Hey, good evening guys. Hope everybody's doing well. If I could start with the, I don't know if you guys can answer this given that it's related to the special committee, but the six cents of expenses this quarter, is that something that is going to be popping up until the, um, committee completes its work?
Mikhail Goberman: Hey, good evening, guys hope everybody is doing well.
Mikhail Goberman: If I could start with the I don't know if you guys can answer this given that is related to the special committee, but the sixth sense of.
Mikhail Goberman: Expenses. This quarter is that something that is going to be popping up until.
Mikhail Goberman: The committee completes its work.
Jeffrey Lown: Hey Mikhail, it's Jay. I don't have a number for the third quarter, so I can't tell you what I think that number would be for the current quarter, but the committee is still in effect, and I would anticipate some expenses this quarter related to the committee's efforts.
Micah: Hey, Micah.
Jeffrey Lown: I don't have a number for the third quarter. So I can't tell you that what I think that number would be for the current quarter, but the committee is still in effect and.
Jeffrey Lown: I would anticipate some expenses this.
Jeffrey Lown: This quarter related to the committee's efforts.
Mikhail Goberman: Gotcha, thanks. Can you guys maybe flesh out your comments? As you're thinking about the interplay between agency MBS and MSRs going forward in a lower rate environment, how are you thinking about the trade-offs between the two portfolio stalwarts, especially in terms of lowering the MSR component? Thanks.
Speaker Change: Got you thanks.
Speaker Change: Can you guys, maybe flesh out your comments.
Speaker Change: And just thinking about the interplay between agency MBS and MSR is going forward.
Speaker Change: And a lower rate environment, how are you thinking about.
Speaker Change: The trade offs between the two.
Speaker Change: Portfolio stalwarts, especially in terms of lowering the MSR component.
Mikhail Goberman: Thanks.
Julian Evans: I'm a kid, Julian. I heard the moment. We see RMBS as a good place to invest money. Right now, those yields are probably between 14 and, let's call it, 17 percent, return on equity. So we like that return. So I would say at the moment that additional cash flows will probably be going into R&BF.
Speaker Change: Hi, Julien.
Julian Evans: At the moment.
Julian Evans: We see RMB, yes is a good place to invest money.
Julian Evans: Now those yields are probably between 2014 and let's call it 17%.
Julian Evans: Our return on equity so we liked that return.
Julian Evans: So I would say at the moment as additional cash flows will probably be going into RMB, yes.
Mikhail Goberman: and in terms of MSR sales, that's something you guys are going to continue to look into opportunistically.
Speaker Change: And in terms of MSR sales, that's something you guys are going to continue to opportune opportunistically looking to.
Julian Evans: A good question. That sale is very strategic. I think we looked at the portfolio, looked at the low-balance loans, the drag that it was putting relative to the expense side of running that business, and we've been engaged with a counterparty for a while that has an interest in that portfolio, and we're very happy with the execution on that portfolio. You know, look, you're always marked to market; you're available for sale. So to the extent that something occurs where we think there's an opportunity to take advantage of the strong market, that there's a possibility. But there's nothing planned today around a sale in that portfolio that would be meaningful.
Speaker Change: So good question.
Julian Evans: So it was very strategic.
Julian Evans: I think we looked at the portfolio looked at the low balance loans.
Julian Evans: The drag that it was putting.
Julian Evans: Relative to the expense side of running that business and.
Julian Evans: We've been engaged with the counterparty for a while that has an interest in that portfolio and we're very happy with the execution on that portfolio and.
Julian Evans: Look you're always mark to market your available for sale. So to the extent that something occurs where we think there's an opportunity to take advantage of strong the strong market that there is a possibility.
Julian Evans: But there is nothing planned today around.
Julian Evans: Our sell in that portfolio that would be meaningful.
Mikhail Goberman: Gotcha. Thanks, guys. And it wouldn't be an earnings call without a question about current book value, so...
Speaker Change: Got you, thanks, guys and it wouldn't be an earnings call without a question about current book value sale.
Jeffrey Lown: I figured... That one's coming. There it is. Thank you. Thank you. There it is. So at the end of July, we see our book value basically flat at quarter end. And that is, of course, before any third quarter dividend accrual as the board has not yet met to approve a dividend for the quarter. Gotcha, thanks guys, best of luck going forward with the internalization and everything else next.
Mikhail Goberman: Yes.
Speaker Change: I think your.
Jeffrey Lown: Comment.
Speaker Change: Fair enough.
Jeffrey Lown: At the end.
Jeffrey Lown: July we see our book value basically flat to quarter end and that is of course before any third quarter dividend accrual as the board has not yet met to approve a dividend for the quarter.
Speaker Change: Got you. Thanks, guys best of luck going forward with the internalization and everything else. Thanks.
Matthew Howlett: Thank you. Our next question comes from Matthew P. Howlett with B Raleigh. Your line is open.
Jeffrey Lown: Sure.
Speaker Change: Thank you. Our next question comes from Matthew Howlett with B Riley Your line is open.
Speaker Change: Oh, Hey, Jay Hey, guys. Thanks for taking my question and congratulations.
Speaker Change: The enormous milestone of internalized company, yet again, I know you're limited in what you can say, but just Jay hi.
Speaker Change: A high level what.
Speaker Change: Yes. This is a huge turn for the company can you just give us some.
Matthew Howlett: Holistic.
Matthew Howlett: Yes.
Speaker Change: What you can tell us about Hello comparable operate now with Charlie what it has done historically.
Speaker Change: Just some high level.
Speaker Change: Words around that.
Jeffrey Lown: Yeah, hey, Matt. So I'll apologize up front for saying there's not much I can say.
Matt: Hey, Matt.
Jeffrey Lown: You know, the goal has been to, we've been looking at this for a long time, you know, relative to being externally managed and understanding the efficiencies around running the company internally, and I think the special committee has evaluated that versus other options and, you know, announced in the press release elected to terminate, to move forward to terminate, being externally managed and for us to run the company independently and internally. Broadly speaking, you know, it's the same group of people.
Jeffrey Lown: I'll apologize upfront for saying Theres not much I can say.
Jeffrey Lown: The goal has been to we've been looking at this for a long time relative to being externally managed understanding the efficiencies around running the company internally and I.
Jeffrey Lown: I think the special committee has evaluated that versus other options and enel.
Jeffrey Lown: Announced in the press release.
Speaker Change: <unk> two <unk>.
Jeffrey Lown: Terminated to move forward to terminate.
Jeffrey Lown: Yes.
Jeffrey Lown: Externally managed and restaurant company independently.
Jeffrey Lown: And internally, but.
Jeffrey Lown: It's the same structure, and we're looking forward to being able to do a better job of being able to respond to changes in the market, the ability to... potentially make some changes in the assets that we invest in, et cetera, and we think it'll give us a lot more flexibility with respect to how we run the business. We're pretty excited about the development.
Jeffrey Lown: Broadly speaking.
Jeffrey Lown: Same group of people.
Jeffrey Lown: It's the same structure and we're looking forward to being able to.
Jeffrey Lown: To do a better job of being able to respond to changes in the market the ability to.
Jeffrey Lown: Potentially make some changes in the.
Jeffrey Lown: And the assets that we invest in et cetera, and we think it will give us.
Jeffrey Lown: A lot more flexibility with respect to how we run the business to work, we're pretty excited about the development.
Matthew Howlett: I think the independent board made the right decision; we can all do the math on efficiencies, and we just look forward to, are you expecting this to be able to come out next quarter, by the fourth quarter, and just unveil this and tell everyone about it? Will this be done by then? Can you give us a sense of when it will be completed?
Speaker Change: Yeah look I think I think.
Speaker Change: The board made the right decision last week and I'll do the math efficiencies.
Speaker Change: And we.
Speaker Change: We just look forward to I mean, you're expecting this to.
Speaker Change: Next quarter, but the fourth quarter be able to come out and just unveiled us until everyone about let's be done by then let me just give us a sense of it will be completed.
Jeffrey Lown: Yeah, so I try to be pretty clear in the script that the special committee is comprised of independent directors, and that does not include me. So, you know, broadly speaking, I don't have a feel for timing on that just today. And I expect that, should they feel compelled to, put something out that's more definitive than what was previously announced. I'm sure they would do that.
Matthew Howlett: Yes.
Jeffrey Lown: I tried to be pretty clear on the script that the special Committee is comprised of independent directors and.
May: That does not include May so broadly speaking.
Jeffrey Lown: I don't have a feel for timing on that just today and I expect that should they feel compelled to.
Jeffrey Lown: Put something out that that's more definitive than what was previously announced I'm sure they would do that.
Matthew Howlett: Great, okay, what we look forward to that, and I think it is an exciting time for everybody, and congratulations on the outcome. I guess it's moving towards the support volume. You're saying, you know, up in coupon, it looks like, you know, the pay off. Just give us a sense of which one, you know, what are the premiums that you're paying in these specified pools, man? What are you looking at? And then, then, let's just talk about the sad, I mean, you know, I think you guys said we don't only know what the point is, you think it's 25 or it's 50 in September, but let's just talk about next year. I mean, is it 150 to 100?
Speaker Change: Great. Okay, well, we look forward to that and I think it is an exciting time for everybody.
Speaker Change: Congrats on the outcome I guess, just moving towards the portfolio.
Matthew Howlett: Staying up in coupon it looks like the pay up so just give us a sense of one what are the premiums that are you paying them in the specified pools, but what are you looking at it then.
Speaker Change: Until this just talk about the fed I mean.
Speaker Change: I think you guys said you don't really delivers point you think it's 25 or 50 in September but.
Matthew Howlett: Let's just talk about next year I mean is it 150 to 100.
Matthew Howlett: How are things that a change in the portfolio from asset selection from hedging.
Matthew Howlett: If the fed is going to really start lowering aggressively or it just we just don't know when you're just going to have to wait and see just look it's such an interesting time you guys had been very defensive.
Speaker Change: <unk> managed the volatility very well better than probably any mortgage REIT out there, but now it looks like we are in the cusp of.
Speaker Change: This change in cycle. So first talk about the asset selection and then two just tell me, how you're going to position if the fed does start cutting aggressively.
Julian Evans: Hey, Matt, and Julian. I'll start with kind of like the positioning in terms of security selection. You know, in terms of like specified pools, we've been purchasing specified pools probably for the last, you know, throughout the last year, kind of trying to improve the overall quality of our portfolio, buying loan balance type of collateral, pretty much stuck somewhere between 200 and 250k max type pools. You can obviously see that in the collateral story slide that we have in the portfolio. And if you go back through a couple of presentations, we'll kind of show you the kind of migration. In the beginning, we probably haven't paid a lot for pools.
Matthew Howlett: Yeah.
Matt Julien: Hey, Matt Julien I'll start with kind of like the positioning in terms of like security selection.
Julian Evans: In terms of like specified pools, we've been purchasing specified pools, probably for like the last.
Julian Evans: Throughout the last year kind of tying to improve the overall quality of our portfolio buying loan balance type of collateral pretty much been sticking somewhere between 200 250, K Max type pools, you can obviously see that in the collateral stories slide that we have in the portfolio and if you go back a couple of presentation.
Julian Evans: And we'll kind of show you kind of the migration in the beginning we currently haven't paid a lot for pools have been really trying to stick to something thats probably been around half a point, we've probably migrated to a few things that have gotten up to maybe a full point that we're having to purchase I think as rates have kind of lowered here in the last couple of weeks.
Julian Evans: We've been really trying to stick to something that's probably been around half a point. We've probably migrated to a few things that have gotten up to maybe a full point where we're having to purchase them. I think as rates have kind of fallen here in the last couple of weeks, specified stories have obviously gotten more expensive, and so we're trying to have a cautious approach about what we're adding to the portfolio and whether it meets kind of an investment return.
Julian Evans: That's why stories have obviously gotten more expensive and so we're trying to be have a cautious approach about what we're adding to the portfolio and does it meet kind of an investment returns.
Julian Evans: I think as the Fed kind of progresses in terms of what they want to do over the next year, the portfolio will obviously change. I think as a group, our initial expectation was that the Fed, let's say within this year to the end of 2025, would probably end up doing about six eases, so maybe two this year and four throughout 2025. Now that is making a basic assumption that we're not in a recession and the Fed is basically trying to do some normalization type of ease.
Julian Evans: I think as the fed kind of progresses in terms of what they want to do over the next year the portfolio will obviously change.
Julian Evans: And as a group our initial expectation was that the fed lets say within this year to the end of 2025 would probably end up doing about six eases. So maybe two this year and the poor throughout.
Julian Evans: 2025, now thats make baked making a basic assumption that we're not in a recession and the fed is basically trying to do some normalization.
Julian Evans: The type of eases, if we are entering into.
Julian Evans: If we are entering into a period of possibly a recession, I think the Fed would obviously be a lot more aggressive in terms of the amount of cuts that they want to do. So you could easily end up seeing 200 basis points or more of cuts if the Fed had to get very aggressive to kind of bring growth back into the environment. Look, I think any time you're managing a portfolio like this, you're trying to look at and manage the portfolio within 25 basis point increments.
Julian Evans: A period of possibly a recession I think the fed would obviously be a lot more aggressive in terms of the amount of cuts that they want to do so you could easily end up seeing 200 basis points or more of cuts if the fed had to get very aggressive to kind of.
Julian Evans: Bring growth back into the environment look I think anytime you're managing a portfolio like this youre trying to look and manage the portfolio within 25 basis point increments. Once it steps out a 25 basis point increments you have to think about readjusting your hedges and always think about the different types of positioning I think some of the things we've been seeing from the fed.
Julian Evans: Once it steps out of 25 basis point increments, you have to think about readjusting your hedges and always think about the different types of positioning. I think some of the things we've been seeing from the Fed obviously is the potential if we are entering into a slowdown in terms of labor versus rates, and rates want to move very aggressively forward. At one point, we were probably almost down 70 basis points within the quarter.
Julian Evans: This leaves the potential if we are entering into a slowdown in terms of labor versus rates and rates are going to move very aggressively forward at one point, we were probably almost down 70 basis points within the quarter. Obviously, we have to think about adjustments on the portfolio. I think July we were down maybe about 2025, and then we but obviously the first couple of days of August.
Julian Evans: Obviously, we have to think about adjustments on the portfolio. I think July, we were down maybe about 20, 25, and then obviously, the first couple days of August, we pushed almost another 50 down and then have subsequently reversed some of that. So we're trying to be very selective and cautious about where we think Fed policy will be going. But not only is there volatility within that, I think we also have to think about the election and the overall economy in terms of what it's doing.
Julian Evans: We pushed almost another 50 down and then have subsequently reversed some of that so we're trying to be very selective and cautious about.
Julian Evans: We think fed policy will be going but not only is there volatility within that I think we also have to think about the election and the overall economy in terms of what it's doing.
Jeffrey Lown: I'll see if Jay has anything to say. We're supposed to deploy the capital, and, As Julian's mentioned a couple times today, sitting here today, we think that's the R&B aspect. That could change, you know, if the MSR market sort of stabilizes and gets a little cheaper, then sure, we're not opposed to owning current coupon MSRs at the right levels. We are supposed to take advantage of opportunities that benefit shareholders, and we think we did that in the second quarter.
TJ Anthony: TJ Anthony Yeah. The only thing I also add Matt is look we're not opposed to investing in Msr's I think we're not the only entity out there over the last three to four plus months that have taken advantage of what we would call a very strong market for that asset class and I think two harbors also sold some assets as well so.
Speaker Change: From our perspective, it's a risk return profile discussion around where we think.
Jeffrey Lown: Okay.
Jeffrey Lown: We're supposed to deploy the capital and.
Speaker Change: As Julian has mentioned a couple of times today.
Jeffrey Lown: So sitting here today, we think that's RMB asked that could change.
Jeffrey Lown: The MSR market.
Jeffrey Lown: Sort of stabilizes and gets all cheaper than sure. We we're not opposed to owning current coupon MSR.
Jeffrey Lown: MSR is at the right levels, we just.
Jeffrey Lown: Are supposed to take advantage of opportunities that benefit shareholders and we think we did that in the second quarter.
Matthew Howlett: Okay, that's interesting because your existing MSR book has got a 3.5% whack. I mean, those, I think, will agree that mortgage rates are going to take a lot to get people in the money to refinance. But what you're saying is you would be open to current coupon MSRs at the right price.
Speaker Change: Okay. That's interesting because your existing MSR book set at three 5% WAC.
Speaker Change: He will agree that mortgage rates it will take a lot a lot to get people in the money to refinance.
Matthew Howlett: I mean, that's interesting. Is it because you feel good about recapture? Is it because you feel good about just assets? Or do you just feel like prices could fall off a cliff at some point, and you'd be interested at that time? No.
Speaker Change: But what Youre, saying is you would you be open that current coupon them as far as that at the right at the right price.
Speaker Change: That's interesting.
Speaker Change: Is it because you said that about recapture if you will because you can feel good about just assets lets you look at.
Matthew Howlett: Or do you just feel like prices could fall off a cliff at some point be interested at that time.
Jeffrey Lown: No, it's more at the late level that we think current coupon MSRs do a good job of hedging the MBS. And so, you know, with the MSR current note rate at 3.5, it's not, you know, significantly hedging the RMBS portfolio. It's performing like a rock star, but broadly speaking, it's... Not the best hedge for that, for the MBS given the differential in the current coupons, but, you know, at the right levels, we've always been prepared to buy into the stars.
Speaker Change: No its more at the right level, we think current coupon MSR is do a good job of hedging MBS and so.
Jeffrey Lown: With the MSR note rate of three and a half.
Speaker Change: It's not.
Jeffrey Lown: Significantly hedging MBS portfolio, it's performing like a rock star, but broadly speaking, it's not the best hedge for that.
Jeffrey Lown: For the MBS given the differential.
Jeffrey Lown: And the current coupons, but at.
Jeffrey Lown: At the right levels.
Jeffrey Lown: We've always been prepared to buy Msr's.
Matthew Howlett: Right now, it's been an excellent strategy, and I don't think anyone, I mean, it's a nice trade you did, it sounds like it's going to improve your costs. And it's an excellent trade. But it's great to hear that you're still committed to that strategy. Last question, I think, you know, it wouldn't be unreasonable if I didn't ask about leverage. And you guys have a lot of dry powder. But you know, what would it take?
Speaker Change: Alright, Thank you guys.
Matthew Howlett: Been an excellent strategy and I don't think anyone I mean, it's a nice trade you did it sounds like it's going to improve your cost.
Matthew Howlett: And it's an excellent paper, it's great to hear that you're still committed to that strategy.
Matthew Howlett: Yes.
Matthew Howlett: Last question I think.
Matthew Howlett: It wouldn't be an earnings call if I didn't ask about leverage and you guys have a lot of dry powder.
Speaker Change: What would it take for.
Matthew Howlett: I mean, for you guys to really just say, this is, you know, this is a curve that is going to steepen, spreads are going to tighten, and we're going to take our leverage up, because at some point, repo is going to be that 2.6%, you know, rate going looking out. I mean, just talk about the excess capacity, you know, capital in the company today. And, you know, when would you really, what would you need to see to get more aggressive?
Speaker Change: For you guys to really to say that this is this is a curve steepened spreads are going to tighten and we're going to take our leverage up because at some point, but it's going to be that 2.6%.
Speaker Change: Great looking out I mean, just talk about the excess capacity capital in the company today.
Speaker Change: When would you really what would you need to see to get more aggressive on leverage.
Jeffrey Lown: So, we are definitely on the low end of the leverage side relative to, I would guess, our peers that, you know, share the same strategies. And that comes from Real is really the last leverage on the MBS side. From the MMR side, you know, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're, we're And so the question really becomes, when do we get comfortable enough with MBS relative to spread risk and just the market around, you know, what the Fed's doing, and who the true buyers are for the asset classes.
Speaker Change: So we are definitely on the low end of the leverage side relative to our guests our peers that share the same strategies.
Jeffrey Lown: And that comes from.
Jeffrey Lown: Realize really less leverage on the Mds side.
Jeffrey Lown: On the MSR side.
Jeffrey Lown: We're levered pretty similarly to our peers and so the question really becomes when do we get comfortable enough with MBS relative to spread raskin.
Jeffrey Lown: Just the market rally around.
Jeffrey Lown: The fed is doing and who the true buyers are for the asset classes and.
Jeffrey Lown: And it's an ongoing conversation and debate about where we think spreads could go from here. But I do expect that as we get closer to an easing cycle on the Fed side, we would be more comfortable taking additional risk on that side of the house.
Jeffrey Lown: It's an ongoing conversation and debate about where we think spreads could go from here.
Jeffrey Lown: But I do expect that as we get closer to.
Jeffrey Lown: An easing cycle.
Jeffrey Lown: Fed side, we would be more comfortable taking additional risk on that side of the house.
Matthew Howlett: Yeah, that's clearly the crew of that; we're all looking in, no potential, but I think that obviously congratulations with the internalization and the new chapter. Cherry Hill.
Speaker Change: Yes, clearly that's the true upside that we're all we're all looking at all potential, but I think that obviously, congrats with the internalization and the.
Matthew Howlett: New chapter.
Matthew Howlett: We really look forward to it and really look forward to the next year. So congratulations to the team and everybody. Thanks. Thanks, Jay.
Speaker Change: We really look forward to it and really look forward to the next year or so.
Matthew Howlett: Congrats to the team and everybody. Thanks, Thanks Jed.
Operator: As a reminder, if you would like to ask a question, please press star 11. There are no further questions at this time. I'd like to turn the call back over to Jay Lown for closing remarks.
Matt: Thank you Matt.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one one.
Operator: There are no further questions at this time I'd like to turn the call back over to Jay Lown for closing remarks. Thanks.
Jeffrey Lown: Thanks, operator. Thank you everyone for joining us on our second quarter 2024 earnings call, and we look forward to updating you on our third quarter earnings call in November.
Jay Lown: Thanks, operator, thank you everyone for joining us on our second quarter 2020 for our earnings call and we look forward to updating you on our third quarter earnings call in November.
Matthew Howlett: Oh, hey Jay. Hey guys. Hey, thanks for taking my question. Hey, and congratulations. The Enormous Milestone of Internalizing a Company. Again, I know you're limited in what you can say, but just, Jay, high level, what... Yeah, this is a huge turning point for the company. Can you just give us some, you know, holistic, you know, what you can tell us about how the company will operate now internally versus what it's done historically and just some high-level words around that, if you could?
Operator: Thank you for your participation. This doesn't include the program, and you may now disconnect. Everyone, have a great day.
Speaker Change: Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Operator: Okay.
Operator: [music].
Operator: Yes.
Operator: [music].
Operator: Okay.
Operator: Thanks.
Operator: Okay.
Operator: [music].
Matthew Howlett: I mean, how are things going to change in the portfolio from asset selection to hedging if, you know, the Fed is going to really start lowering aggressively here? Or it's just, we just don't know, and you're just going to have to wait and see it. I just think it's such an interesting time. You guys have been very defensive, and you've really managed the volatility very well, better than probably getting rid of it.
Matthew Howlett: But now, it looks like we're in the cost of this change in cycle. So first talk about asset selection, and then you just tell me how you got a position at the Fed that starts cutting growth.