Q3 2024 Cherry Hill Mortgage Investment Corp Earnings Call
Vince: [music].
Yeah.
desert, Maine: Ladies and gentlemen, thank you for standing by my name is desert, Maine, I will be your conference operator today.
desert, Maine: At this time I would like to welcome everyone to the Cherry Hill mortgage investment corporations third quarter of 'twenty 'twenty four conference call.
desert, Maine: All lines have been please on mute to prevent any background noise. After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
Speaker Change: I would now like to turn the conference over to Garrett Edson of ICR you may begin.
Speaker Change: I think he desert rate, we'd like to thank you for joining us today for Cherry Hill mortgage investment corporations third quarter 2024 Conference call. In addition to this call. We have issued a press release that was distributed earlier this afternoon and posted a press release in the third quarter of 2024 investor presentation to the Investor Relations section of our website at Www Dot C. H M I read Dot com.
Speaker Change: 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. Examples of forward looking statements include those related to our ability to complete the planned internalization of our management interest income financial guidance <unk> future expected cash flows as well as prepayment and recapture.
Speaker Change: Rates delinquencies and non-GAAP financial measures such as earnings available for distribution area.
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.
Speaker Change: 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.
Jay Lown: Thanks Garrett.
Jay Lown: And welcome to our third quarter 2024 earnings call.
Speaker Change: The third quarter when somewhat as expected.
Speaker Change: The fed utilized inflation indicators to go ahead and begin the rate cut cycle in September.
Speaker Change: While geopolitical unrest continued to persist.
Speaker Change: The market broadly look past international troubles.
Speaker Change: Rates pushed slower with the yield curve, specifically, the two year 10 year spread turning positively sloped for the first time since July 2022.
Speaker Change: The U S 10 year ended the quarter at $3 seven 8%.
Speaker Change: Around 62 basis points quarter over quarter as the market aggressively positioned for significant rate cuts over the next 18 months.
Speaker Change: That exuberance as syndicated as strong economic data has persisted and markets have since reduced those bets.
Speaker Change: With the U S presidential election, and the additional 25 basis point cut from the fed last week in the rearview mirror.
Speaker Change: We are closely monitoring the impact of a second Trump presidency, and its impact on both the economy and inflation.
Speaker Change: As we approach 2025.
Speaker Change: We expect to gain additional confidence that macro environment volatility will moderate.
Speaker Change: Our portfolio remained relatively consistent in the quarter.
Speaker Change: With the mortgage market improving as spreads compressed in the curve ball steepened.
Speaker Change: RMB export performance was mixed.
Speaker Change: And coupon selection drove performance.
Speaker Change: Our MSR portfolio consisting.
Speaker Change: Primarily of low note rate loans performed well.
Speaker Change: With prepayment speeds hovering in the mid single digits.
Speaker Change: Julian will discuss this in more detail shortly.
Speaker Change: Looking forward, we continue to watch the fed closely.
Speaker Change: As well as political developments globally.
Speaker Change: And expect to continue to pair Msr's with agency MBS.
Speaker Change: For the third quarter, we generated GAAP net loss applicable to common stockholders of <unk> 49 per diluted share.
Speaker Change: And we generated earnings available for distribution or AAD are.
Speaker Change: Our non-GAAP financial measure of $2 5 million or <unk> <unk> per share.
Speaker Change: For the quarter was impacted by approximately four and a half cents per share of expenses related to the special committee's efforts.
Speaker Change: As we've mentioned previously.
Speaker Change: <unk> is just one factor board of directors considers in setting our dividend policy and it is not the primary factor.
Speaker Change: Also considered as the existing market environment portfolio return potential.
Speaker Change: Our level of taxable income, including hedge gain impacts and.
Speaker Change: And the degree of certainty regarding forward investment return economics.
Speaker Change: Thus, while AAD may continue to remain under our dividend level in the near term.
Speaker Change: We believe other factors are important when considering whether we can sustainably cover our dividend.
Speaker Change: Book value per common share finished the quarter at $4 <unk>.
Speaker Change: Compared to $4 15 on June 30th.
Speaker Change: Approximately <unk> of the change in book value was attributable to the special Committee and ATM issuance.
Speaker Change: Similarly on an NAV basis, which includes preferred stock.
Speaker Change: When excluding special committee expenses and the ATM issuance.
Speaker Change: <unk> was down approximately $2 1 million or 9% relative to June 30.
Speaker Change: We continue to hedge a portion of our basis risk with TVA and.
Speaker Change: And we expect to lag our peer group when the basis tightens and outperformed to wider spreads.
Speaker Change: Financial bridge at the end of the quarter Rose to five three times as we continue to stay prudently levered.
Speaker Change: We ended the quarter with $50 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Speaker Change: With respect to our previously announced internalization and strategic process more generally we cannot comment at this time.
Speaker Change: On today's call, we will not discuss any information or developments or answer any questions relating to the internalization the special committee or its strategic process.
Speaker Change: Looking ahead, we will continue to monitor the macro environment and our positioning our portfolio for favorite further rate cuts.
Speaker Change: In the near term that means continuing to deploy capital into agency MBS.
Speaker Change: It still presents a strong risk adjusted return profile.
Speaker Change: And adjusting our hedge composition in order to take advantage of expected ongoing fed easing.
Speaker Change: While maintaining strong liquidity and prudent leverage.
Speaker Change: With that I'll turn the call over to Julian who will cover more details regarding our investment portfolio and its performance over the third quarter.
Julian Evans: Thank you Jay.
Julian Evans: There were not many macroeconomic surprises in the third quarter.
Julian Evans: Inflation met market expectations and with that was widely expected that the fed would initiate rate easing site.
Julian Evans: Perhaps the only surprise is that the fed was intent on easing 50 basis points when the market believed the data warranted a 25 basis 0.8.
During the quarter, the mortgage basis tightened as nominal spreads tightened and volatility declined.
Julian Evans: The tightening was driven by the fact that the investor community became more certain that the epilepsy with change its policy from being on hold to an easing monetary policy stance.
Julian Evans: The interest rate curve balls steepen on that belief.
Julian Evans: Ever within the mortgage sector, not all mortgages were created equal.
Julian Evans: As rates lowered the current coupons changed and mortgages performance diverged.
Julian Evans: During the quarter lower coupon 30 year mortgages performed best as the interest rate curve balls, steepen and investors had a need for duration as rates rallied.
Julian Evans: Higher coupon mortgages lagged and could not keep pace with the rally.
Julian Evans: Lower interest and mortgage rates increase the potential for mortgages to be more refinance boom.
Julian Evans: The refinance ability of loans aided in the differential between lower and higher coupon mortgage performance.
Julian Evans: Post quarter end not only has the fed ease that additional 25 basis points as of last week with interest rates have subsequently risen on the potential policy changes of the new administration and fit.
Julian Evans: Changes that occurred in the third quarter that reversed in the fourth quarter as spreads have widened and volatility has increased.
Julian Evans: We expect that the potential of at least one more cut in 2024, and we will continue to monitor the fed closely as well as the overall rapidly changing rate environment as we actively manage our portfolio.
At quarter end, our MSR portfolio had a <unk> of $17 6 billion and a market value of approximately $227 million.
Julian Evans: The MSR and related net assets represented approximately 42% of our equity capital and approximately 21% of our investable assets, excluding cash at the end of the quarter.
Julian Evans: Meanwhile, our RBS portfolio also accounted for approximately 42% of our equity capital.
Julian Evans: As a percentage of investable assets, the RMB <unk> portfolio represented approximately 79% excluding cash at.
Julian Evans: Quarter end.
Prepayment speeds for our MSR and <unk> portfolios continue to remain relatively stable compared to the prior quarter. Despite the lower interest and mortgage rate environment that was experienced throughout the quarter.
Julian Evans: Our MSR portfolio net CPR averaged approximately five 5% for the third quarter comparable to the previous quarter.
Julian Evans: The portfolios recapture rate remained low at approximately 9%.
Is the incentive to refinance continues to be minimal for this portfolio given the portfolio's loan rate.
Julian Evans: Going forward, we will continue to expect low recapture rate and a relatively low net CPR in the near term given our portfolio's characteristics.
Julian Evans: The <unk> portfolio as prepayment speeds remained relatively low we're starting to rise.
Julian Evans: Over the next few months, we would expect the portfolio CPR to rise as the portfolio Digest lower mortgage rates that occurred during the quarter.
Julian Evans: As rates moved lower with the expectation with third Ive mortgages were more refinance boom.
Julian Evans: As of September we started to see the effects of the lower mortgage rates.
Julian Evans: We would expect a lower mortgage rates to have a few more months of impact and then we would expect prepayment speeds to decrease based on the subsequent rise in interest and mortgage rates post third quarter.
Julian Evans: For the quarter. The RMB is portfolio's weighted average three month CPR was up modestly to approximately five 4%.
Julian Evans: Compared to approximately four 6% in the second quarter.
As of September 30th the RMB is portfolio inclusive of TBA stood at approximately $866 million up from $674 million at the previous quarter end.
Julian Evans: After over quarter.
Julian Evans: Additional MBS purchases were focused on higher coupons.
Julian Evans: The increase was due to investing additional cash as well as removing some TBA hedges.
Julian Evans: For the third quarter, our MBS portfolio net interest spread was three 2% effectively unchanged from the prior quarter.
Julian Evans: Slightly higher repo costs due to financing more securities were offset by increased RMB as income from the purchases.
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.
Speaker Change: I will now turn the call over to Mike.
Mike: Our third quarter financial discussion.
Mike: Thank you Julien.
Speaker Change: GAAP net loss applicable to common stockholders for the third quarter was 14.
Speaker Change: $8 million or <unk> 49 per weighted average diluted share outstanding during the quarter, while comprehensive income attributable to common stockholders, which includes the mark to market of our available for sale, our MBS was $1 $3 million or <unk> <unk> per weighted average diluted share.
Speaker Change: Our earnings available for distribution attributable to common stockholders for $2 $5 million or <unk> <unk> per share.
Speaker Change: AAD is inclusive of approximately $1 4 million or $4.05 per share of expenses related to special Committee work.
Speaker Change: Our book value per common share as of September 30th was $4 <unk> compared to a book value of $4 15.
Speaker Change: As of June 30th.
Speaker Change: 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.
Speaker Change: At the end of the third quarter, we held interest rate swaps <unk> and Treasury futures all of which had a combined notional amount of approximately $1 1 billion.
Speaker Change: You can see more details with respect to our hedging strategy and our 10-Q as well as in our third quarter presentation.
Speaker Change: For GAAP purposes, we've 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 $5 1 million for the quarter, which included the $1 $4 million of special Committee related expenses.
Speaker Change: On September 13th 2024, our board of directors declared a dividend of <unk> 15 per common share for the third quarter of 2024, which was paid in cash on October 31.
Speaker Change: We also declared a dividend of $51 <unk> per share on our eight 2% series, a cumulative redeemable preferred stock and a dividend of <unk> 71, 5% <unk> on our $8 two 5% series b fixed to floating rate cumulative redeemable preferred stock both of which were paid on October 15th.
Speaker Change: At this time, we will open up the call for questions operator.
Speaker Change: Thanks. Thank you we will now begin the question and answer session will follow up.
Speaker Change: And I would like to ask a question. Please press star one on your telephone keypad ratio had angina Q.
Speaker Change: If you would like to withdraw your question simply questions are one again.
We are called upon to ask a question in a loosening the speaker following our device. Please pick up your handset to ensure that your phone is not on mute when asking a question again press star one to trying to queue.
Our first question comes from the line of.
Speaker Change: Robert Mondavi, Cheetos and JMP Your line is open.
Speaker Change: Hi, Thank you.
Speaker Change: Good afternoon, guys hope everybody is doing well.
Speaker Change: If I could maybe start with a question on how you guys are thinking about the tradeoff between agency MBS and MSR I know.
Speaker Change: You mentioned that you.
Speaker Change: We're going to be continuing the twist the asset investment composition and the direction of agency MBS versus MSR.
How do you guys think about that and also in terms of how you allocate capital.
Speaker Change: To continue to sort of balance the 42% each capital allocation to both segments going forward.
Speaker Change: Given where you think the rate outlook is going between.
Speaker Change: Short rates and long rates.
Speaker Change: One of your one of your competitors.
Speaker Change: Running an agency and MSR strategy as well recently kind of rebranded towards.
Speaker Change: More towards the MSR side, so I'm just I'm just.
Speaker Change: Wondering how you guys are thinking about that.
Speaker Change: That tradeoff between the two the two asset classes going forward. Thanks.
Speaker Change: Thanks.
Speaker Change: Hey, Macau.
Speaker Change: No no problems one of our competitors.
Speaker Change: So.
Speaker Change: Hello.
Speaker Change: We look at total returns and.
Speaker Change: While we accept that.
Speaker Change: Short dated rates are expected to move lower which should improve the.
Speaker Change: Return prospects of the MSR portfolio on a levered basis broadly speaking MBS still presents a better return profile than MSR is on a levered basis.
Speaker Change: And I think that for us at least is primarily due to the fact, where we think the MSR is currently priced and the associated yield with it and so maybe there is a difference of opinion on the yields around the asset.
Speaker Change: Okay.
Speaker Change: And how that impacts a levered return.
But in the near term.
Speaker Change: Thank you would find that we would all agree here that at least in that in the current environment.
Speaker Change: MBS still presents a better risk adjusted return profile that doesn't mean by any stretch that we don't like the MSR asset or that we're not interested in continuing to invest in it or that we think it should remain static it just means that as a small company.
Speaker Change: And someone who is constantly working to maximize returns.
Speaker Change: Today as things sit today relative to.
Speaker Change: The return profiles of the two asset classes, we prefer MBS.
Jay Lown: Alright, Thanks Jay.
Speaker Change: And in terms of leverage.
Speaker Change: Just to pick up from $4 nine or more.
Speaker Change: Five for you Brendan.
There are room for error.
Speaker Change: Moving it up a little bit further some of your peers are and Youre at the lower end of your peer group. So is there is there any room to move it higher.
Speaker Change: Yes, so that's a good question.
Speaker Change: The start of the fourth quarter.
Speaker Change: There's a good reason why not fully.
Speaker Change: Extending your leverage is a prudent idea as rates.
Speaker Change: Sold off meaningfully and margin calls came in meaningfully on the RBS portfolio.
Speaker Change: And as you know.
Margin calls come in on the MBS daily and that doesn't exactly what's happened on the MSR side. So from a cash management perspective, we like where we sit on leverage today.
Speaker Change: Because we are mindful of cash and we're mindful of what happened.
Speaker Change: Approximately five years ago relative to.
Speaker Change: Things that you might not expect and so I think that.
If there were room to lever it would not necessarily be on the MSR side, we could potentially take the MBS up a little bit, but we're not really looking.
Speaker Change: To fully maximize the available leverage on the MBS.
Speaker Change: In large part because.
Speaker Change: To maintain liquidity in the event that the basis widens further.
Or that rates rise materially from here, so that makes sense.
Speaker Change: Yes, yes. It does thank you.
Speaker Change: And I guess, if I could just close with.
Speaker Change: Our ubiquitous question of book value performance, thus far fourth quarter. Thanks.
Speaker Change: That's a new questions.
Speaker Change: Okay Mikael.
Speaker Change: Mike as of last Friday, we pay as of last Friday, we are estimating our book value per share down about 4% to 5%.
Speaker Change: From quarter end and that is of course before any fourth quarter dividend accrual as the board has not yet met to approve a dividend for the quarter.
Speaker Change: Alright, Thank you guys and best of luck going forward.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Again, if you would like to ask question Chris.
Speaker Change: Number one on your telephone keypad.
Speaker Change: Our next question comes from the line of Matthew Howlett with B Riley.
Speaker Change: Your line is open.
Matthew Howlett: Hey, Joe Hey, everybody.
Matthew Howlett: Hi, Matt.
Matthew Howlett: Hey, Jade.
Matthew Howlett: Do you think about.
Matthew Howlett: Sure.
Matthew Howlett: We look at it going forward.
Matthew Howlett: I think of about three or four days I think the first thing youre going to pick up some interest savings with that floating rate preferred that that's going to go down or has had a reset down.
Matthew Howlett: And then you're going to probably pick up something on your MSR facilities are going to reprice down.
Matthew Howlett: And then I mean.
Speaker Change: I will say you don't have to Bob My guess is you'll pick up a few cents from internalization and cost savings so.
Speaker Change: If I look at your <unk>, it's around <unk> 13 cents today pro forma for the onetime expenses.
Speaker Change: I mean am I.
Speaker Change: Am I thinking it the right way and then also you could take leverage up or <unk> or <unk>.
Speaker Change: Some other things happen I mean, you could even go beyond what I am talking when it might be I guess, my thinking was that the right way.
Speaker Change: So I won't comment on the internalization of our foot relative to the other two things you mentioned I think you have that right I think that as.
Short dated rates fall.
Speaker Change: The MSR portfolio should benefit from.
Speaker Change: The cost of asset asset and that will that should work its way through and.
Speaker Change: And as we look at our financial models for the company on a go forward basis looking at the forward curve.
Speaker Change: Over time, we definitely see a pickup in <unk> relative to the current environment.
Speaker Change: Which support sort of that is as youre presenting.
Speaker Change: Yes, Okay and then.
Speaker Change: What was repo what are you rolling since the last cut I was just curious where the repo rates are now and what Youre wrong, yes, Brett So post the fed.
Great.
Speaker Change: <unk> of 480, yes.
Speaker Change: Okay.
Speaker Change: Okay. Okay that was it was what five well over 555 hundred fives.
Speaker Change: Yes somewhere between five to eight.
Speaker Change: At the end of the quarter.
Speaker Change: Prior to the.
Speaker Change: The fed rate cut brand.
Speaker Change: Okay, great alright, so I'm thinking about those rates. So when you think about I. Appreciate the comments you guys are always risk adverse and you're thinking about.
Speaker Change: I want to hear your thoughts on like the dynamic okay, there's going to be all of this debt issue is.
Speaker Change: It's going to grow and therefore, the yield could really spike I think thats, what youre kind of saying youre kind of.
Speaker Change: Taking a that's obviously a big train of thought that yields could go much higher undertrump because the deficit spending and then the other side is how much are they going to cut next year.
Speaker Change: What do you think I'd love to hear your comments on on both ends of the curve.
Matt This is Julian.
Speaker Change: We could spend an hour is chatting about this.
Speaker Change: And the Max at a time.
Speaker Change: I would just say look it's really unknown.
Speaker Change: We know the policies are going to be stimulative, we just don't know to the extent that they're going to be stimulative.
Speaker Change: And how theyre going to fund a lot of the policies finance the policies. So yes, I would expect it to be stimulative.
Speaker Change: But what actually of the promises that get through.
Speaker Change: I don't think.
Speaker Change: We will have very conclusive evidence of that until it gets put into some type of budget.
Speaker Change: In terms of the fed.
Speaker Change: Look I think if the fed is going to be thinking of a couple of things here. One I do expect them to ease in December and then I think next year will be up to the data.
Speaker Change: Previously they were obviously onboard to possibly doing four eases I think the December dot plot will show something different it may show three instead of before I don't think it will maybe move to where investors are thinking currently in terms of to where possibly the one next year, but I think at the end of the day what.
Speaker Change: With fees come out of the New administration will kind of tie the fed's hands of how much they can and cannot ease if the policies don't live up to all the promises campaign promises that will give the fed the potential royalty he's more as long as inflation is moving in the right direction continuing to move lower if not then I would expect to.
Speaker Change: Third to either do pause pause for an extended period or potentially not ease during one of the quarters.
Speaker Change: Going forward.
Speaker Change: Yes.
Speaker Change: Go ahead no you guys thought you guys had I will say if you guys had been certainly ahead of you called with the Fed's done for a while now so sort of in my mind.
Speaker Change: Just listen to what you have to say so.
Speaker Change: I guess.
Speaker Change: And just where suddenly if we could can you get this widening the steepening in the curve and this is a great thing for Cherry Hill in the script and the.
<unk> strategy and even the shortly MSR strategy is that does.
Speaker Change: Is that the right way to think about it I mean.
Speaker Change: This widening continued steepening seems to happen, it's a really good thing.
Great.
Speaker Change: Hey, Matt.
Speaker Change: I think that we're set up for a twist and we continue to be set up for that trust.
Speaker Change: Obviously that dynamic in the last three plus weeks have been.
Speaker Change: Fairly volatile with respect to how the carriers moved in the shape of the curve over the course of that timeframe, but we continue to believe that rate long long dated rates could be at this level or slightly higher and that short dated rates should fall.
Speaker Change: There's a lot of noise over the last three to four weeks relative to things related to the election.
Speaker Change: Fiscal and monetary policy on a go forward basis, and who is in the seat of the president but.
We're trying to.
Speaker Change: Kind of table that noise and stick toward our long term thesis is relative to where we think the curbs finally ends up and that hasnt changed over the last quarter or so.
We're not always right on a day to day basis, but we still remain committed to that thesis.
Speaker Change: We really look forward to seeing out performance in that type of environment, you guys have managed through the cycle so well.
Speaker Change: It'd be.
Speaker Change: Yes, it would be at a loss I didn't ask this last question I know you don't talk about transition, but when can you give us when this timing when you would like to <unk> This will be over.
Speaker Change: Any sense and this is a transformational event for the company.
Speaker Change: One of the few mortgage reached its internalized.
Speaker Change: Any sense on when investors can expect us to be over.
Speaker Change: Yes, I really I.
Speaker Change: Really don't and I'm not prepared to answer anything related to that on the call Tonight.
Speaker Change: No look I figure out I ask I appreciate the.
Speaker Change: Solid results and we look forward to.
Jay Lown: What's to come thanks, Jay.
Speaker Change: No worries.
Speaker Change: And that concludes the question and answer session. Mr. <unk> I'll turn the call back over to you.
Speaker Change: Thanks, operator.
Speaker Change: Thank you everybody for joining us on our third quarter 2024 call have a great evening talk to you soon.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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Speaker Change: Yes.
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Speaker Change: Okay.
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