Q4 2024 Cherry Hill Mortgage Investment Corp Earnings Call
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Speaker Change: Hello everyone and welcome to Cherry Hill Mortgage Investment Corporation 4th quarter, 2024
Speaker Change: At this time, all participants are in a listen only mode. After this speaker's presentation, there will be a question and answer session. To participate, you will need to press the star 11 on your telephone. You will then hear a message advising your hand is raised.
Speaker Change: To withdraw your questions, simply press star 1-1 again. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Garrett Edson with ICR. Please proceed.
Garrett Edson: We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth quarter 2024 conference call.
Garrett Edson: In addition to this call, we have issued a press release that was distributed earlier this afternoon and posted that press release in the fourth quarter of 2024 investor presentation to the investor relations section of our website at www.chmireak.com
Garrett Edson: On today's call, management's prepared remarks and answers to your questions may contain forelooking statements that are subject to recent uncertainties that could cause actual results to differ from those discussed today.
Garrett Edson: Examples of forward-looking statements include those related to interest income, financial guidance, IRRs, future expected cash flows, as well as pre-payment and recapture rates, like with these non-GAAP financial measures such as earnings available for distribution, or EAD in comprehensive income.
Cherry Hill: for looking statements represent management's current estimates and Cherry Hill assumes no obligation to update any forward-looking statements in the future.
Cherry Hill: We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's violence with the SEC and the definitions contained in the financial presentations available on the company's website.
Speaker Change: Today's conference call is hosted by Jay Lown, President CEO Julian Evans, Chief Investment Officer, and Michael Hutchby, the Chief Financial Officer [inaudible]
Now I will turn the call over to Jay
Thanks, Garrett
and welcome to our fourth quarter, 2024 earnings call.
on our last call. We had just completed the election.
and we're watching market and economic reaction closely.
Speaker Change: While sentiment was broadly bullish for the new administration to come in and open up the economy.
What was a bit unexpected was the stubbornness of inflation.
Speaker Change: Despite a number of indicators and the market hending to a fed pause to the rate cut cycle.
Speaker Change: said, went ahead and cut rates a third time in mid-December
Speaker Change: As a result, investors concerned about stubborn inflation drove up long-term yields to seven month highs. With the 10 year ending at 2024, at 4.57 percent,
Nearly 80 basis point higher, quarter, over quarter
Speaker Change: Concerns over persistent inflation and uncertainty about economic growth due to the fast pace of policy changes by the new administration.
Speaker Change: has shifted both Cherry Hill's and market sentiment toward a position that additional rate cuts in 2025 will be fewer than expected last year and continue to remain data dependent.
Speaker Change: The relationship between short and longer data rates has been and will continue to be highly reactive to both political agendas globally and domestic economic data.
Speaker Change: Our R&BS portfolio was impacted in the fourth quarter by higher rates.
Increased volatility and spread widening
Speaker Change: Mitigated by our NSR portfolio, which saw a nice gains quarter over quarter
Julian will discuss this in more detail shortly.
Speaker Change: Looking forward, we remain thoughtful of the macro and geopolitical environment.
and expect to maintain our current investment strategy.
Speaker Change: In November , in concert with the conclusion of the company's special committee review.
Speaker Change: We were very pleased to complete the internalization of management and officially commence operations at the fully integrated, internally managed Mortgage Reak.
This was the right decision for shareholders for several reasons.
First
Speaker Change: Internalizing Management, More Strongly Aligned Management, and Shareholders, by a direct ownership, by our internally managed structure.
Speaker Change: Second, it also eliminates potential conflicts of interest inherent in an external management structure and improves our overall transparency.
Speaker Change: Third, management now has a much more streamlined and efficient decision-making process with direct control.
Speaker Change: Thanks to the elimination of external management fees, as well as some operational synergies inherent through internalizing.
Speaker Change: We expect the internalization will reduce our operating expenses in 2025 by 1.1 to 1.6 million
Speaker Change: I'm proud of our team for their relentless work through the summer and the fall of last year to get the process completed.
Speaker Change: For the fourth quarter, we generated gap net income applicable to common stockholders of 29 cents per
Speaker Change: and we generated earnings available for distribution or EAD, a non-GAAP financial measure of 3.3 million or 10 cents per share.
Speaker Change: The AD for the quarter was impacted by approximately two cents per share of expenses related to the special committee's efforts.
Speaker Change: The special committee concluded in November and therefore it will not impact results going forward.
Speaker Change: As we have stated consistently for a few quarters, EAD is not the only barometer our board utilizes for setting our dividend.
Book Value, Pacama Chair, finished the year at $3.82. [inaudible]
Compared to $4.02 on September 30th [inaudible]
Speaker Change: on an NAV basis, which includes preferred stock and excluding special committee expenses NAV was down approximately 5.5 million or 2.3% relative to September 30.
Speaker Change: Financial leverage at the end of the quarter remained consistent at 5.3 times as we continue to stay prudently levered.
Speaker Change: We ended the quarter with 46 million unrestricted cash on the balance sheet.
Maintaining a solid liquidity profile
Speaker Change: Looking ahead, we will continue to monitor the macro environment closely.
Speaker Change: and are positioning our portfolio in the near-term, back toward higher for longer.
Speaker Change: We will continue to employ capital as appropriate into agency RNBS and select MSRs, which still present strong risk-adjusted return profiles.
While maintaining strong liquidity and prudent leverage [inaudible]
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 fourth quarter.
Thank you, Jay.
Speaker Change: During the fourth quarter, mortgage spreads widened and volatility increased due to concerns about the U.S. election and future debt levels. Those factors, despite two 25 basis point eases by the Fed, led to higher interest rates, longer mortgage durations, and increased hedging costs.
Speaker Change: Current coupon mortgages widen approximately six faces points and the move index rose to 98-58-0 during the quarter.
Speaker Change: Constant volatility throughout the quarter caused mortgage performance to bury each month.
Speaker Change: In general, higher coupon mortgages perform relatively well compared to the rest of the coupons back. In addition, MSR values increase as interest in mortgage rates rose.
Speaker Change: That's far in 2025 Mortgage is a performed well despite the interday volatility volatility.
Speaker Change: They remain elevated given the pace of reforms from the current administration and the concerns that tariffs will lead to more sustained inflation and reduced growth.
Speaker Change: In the near term, we expect volatility to continue, and expect rate to remain higher into their clear signs that either inflation is moderating, or that the economy falters under the weight of pending policy changes.
Speaker Change: In quarter-end, our MSR portfolio had a UPB of 17.3 billion and a market value approximately 234 million.
Speaker Change: The MSR and related net assets represent approximately 46% of our equity capital and approximately 24% of our investable assets, excluding cash at the end of the quarter. Meanwhile, our own BS portfolio.
Speaker Change: accounted for approximately 38% of our equity capital. And the percentage of investable assets, the RNBS portfolio represented approximately 76% excluding cash at quarter
Speaker Change: Propayment Speeds for our MSR and our VS portfolio is continuing to remain relatively steady compared to the prior quarter as rates rose in the fourth quarter, despite cuts by the Fed.
Speaker Change: Our MSR portfolio is net CPR average approximately 4.7% for the fourth quarter, down modestly from the previous quarter [inaudible]
Speaker Change: The portfolios recapturing the main load approximately 0.6 percent as the intensive to refinance continues to be minimal for this portfolio given the portfolio's loan rate.
The one forward.
Speaker Change: With stubborn inflation and rate continuing to hold at higher levels, we continue to expect low recapture rates and a relatively low net CPR in the near term given the portfolio's characteristics.
Speaker Change: Meanwhile, the R&BS portfolio's prepayment speeds remain relatively low, but rose modestly as expected, given lower interest in mortgage rates in the third quarter.
Speaker Change: Those refinancing started to impact Mortgage Collateral in the course quarter, and the loans were processed.
Speaker Change: With mortgage rates remaining around 7%, we would expect pre-tainment speeds to moderate the first quarter.
Speaker Change: For the fourth quarter, the RNBS portfolio's weighted average 3 month CPR was approximately 5.7 percent.
Compared to approximately 5.4% in the third quarter [inaudible]
Speaker Change: We continue to shift the portfolio into higher coupon mortgages, as well as increasing our
Speaker Change: For the fourth quarter, our R&B net interest spread was 2.9%, lower than the prior quarter as improved repo costs were offset by reduction in swap and dollar roll income.
Overall
Speaker Change: Our head strategy remains largely intact, and we will continue to use a combination of swaps, BBA security and treasury futures to hedge the portfolio.
Speaker Change: Moving forward, we will continue to proactively manage our portfolio while continuing to ship our overall capital that value for shareholders to improve performance and earnings.
Mike: I will now turn the call over to Mike for a boys quarter financial discussion.
Thank you Julian.
Mike: GapNet income applicable to common stockholders for the fourth quarter was $9.1 million or 29 cents per away at average diluted share outstanding during the quarter.
Mike: Well, comprehensive loss, attributable to common stockholders, which includes the mark to market of our available for sale on BS, was $1.5 million or $5 cents per weight average due to
Mike: Our earnings available for distribution, attributable to common stockholders, were $3.3 million or 10 cents per share, and EAD is inclusive of approximately two cents per share of expenses related to the special committee's work.
As you mentioned,
Speaker Change: We've stated for a while that EAD is not the sole barometer for setting our common dividend, and that the board also considers factors such as prevailing market environment, portfolio return potential.
Speaker Change: Our level of taxable income, including potential hedge game impacts, and the degree of certainty regarding forward investment return economics.
Speaker Change: Our book value per comment share as of December 31st was $3.82 compared to a book value of $4.02 as of September 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.
Speaker Change: At the end of the fourth quarter, we held interest rates swaps, TPAs and Treasury futures, all of which had a combined national amount of approximately $809 million.
Speaker Change: You can see more details with respect to our hedging strategy in our 10K as well as in our fourth quarter presentation.
Speaker Change: 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 estimated fair value as a component of the net gain or loss on interest rate derivatives.
Speaker Change: Operating expenses were $4.5 million to the quarter, which included those special committee-related expenses.
Speaker Change: On December 12, 2024, our Board of Directors declared a dividend of $0.15 per common share for the fourth quarter of 2024, which was paid in cash on January 31, 2025.
Speaker Change: on our 8.25% Series B 6th to floating rate cumulative redeemable preferred stock, both of which were paid on January 15th, 2025.
Speaker Change: At this time, we will open up the call for questions. Operator? Thank you so much, Anna-Thary Minder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced.
Speaker Change: Do we draw the question? Press star one one again, one moment for our first question
Operator: And it's from the line of rendez-binner with B. Riley Securities, please proceed.
Hey there, good evening.
Operator: I just wanted to, I can't see that, I'm even missed it, but um...
Operator: I think that you said the drag and the drag of two stems for the special committee in the fourth quarter was was that in the SG&A line and is that also
Operator: where we should speed the three to five cents of benefits from internalization you mentioned in 2025, just trying to find the right geography and the model for those items.
Operator: Yeah, sure. Hey, it's Mike. So, yes to your first question, the special committee expenses all throughout last year and again in the fourth quarter would be found in the SGNA line item on the income statement. So, that's where they float through.
Operator: You know obviously you have the management fee rolling off and being replaced with comp and benefits so there's that direct swap there and then we'll have within SGNA going forward some of the additional processes that we brought in in-house as part of the internalization.
Operator: So you're going to see SGNA and Compton benefits replacing essentially the SGNA and management fee from before if that makes sense.
Yeah, that's super helpful. And then I guess on the
This is the-
Speaker Change: You know, it was a good inline Corp, but just, you know, your commentary about elevated interest rates seems to be hitting the cost of the reperson agreements quite bad. And so, like, you know, not favorable way. And so is there. [inaudible]
We expect the same level of cost in
Speaker Change: Is there a way to mitigate that and is the only way to grow out of it and increase the size of the portfolio?
Speaker Change: Hey, Randy, Julian. In terms of some of the repo costs, I think some of the higher costs kind of were year-end.
Speaker Change: Expenses just as we were using kind of the streets balance sheet as we were going from 24 to 25. So we might have seen some validated levels there. We have seen those come down and seen some benefits in the first quarter.
Speaker Change: Okay, well, that's that's good. And I guess it's my last one is the it's just I'm gross is that I mean as far as
What is the expectation?
Speaker Change: kind of for average balance size and it is ticking up but you know it should we expect that the continue to see growth throughout 2025s.
Speaker Change: I'm not sure exactly what the question is, the growth around the average balance around light.
of the RMBS portfolio.
Speaker Change: Oh, you mean in terms of taking up leverage or things like that or more just in terms of?
Speaker Change: Well, I mean, I'd say taking up leverage and otherwise having a larger balance. I didn't catch in the commentary if that's a goal or if that's a way to manage a higher interest rate environment.
Speaker Change: Sure, so I'll answer just part of it, you know, obviously we're looking to grow through
Speaker Change: Capital raising and things like that. So that would not impact leverage. So to the extent that we're able to raise capital we we grow in that way. And then with respect to leverage, I'll let Julian pick up from there.
Julian Evans: Yeah, I'll just say that look, we have the ability to increase our leverage, you know, I would expect us to increase the leverage over time as we kind of get greater clarity on the Fed's intentions, you know, administrative policies that are coming out and their impact.
Julian Evans: I think we'll begin to, once we have greater clarity on appeal of this thing, I would expect us to kind of increase our leverage over time.
Okay, I understood that. Thank you for the answers.
Thank you.
Our next question. One moment.
It's from Mikhail Goberman, with citizens, please proceed [inaudible]
Michael Government: Hey, good afternoon, gentlemen, and congrats on getting this internalization in the rear-view near. Thanks.
Yeah, great stuff!
Speaker Change: How do we sort of think about that in terms of capital allocation between the two major investment
Speaker Change: I see you guys took up servicing equity composition to 46 from 42%. Could we expect that to drift higher, given the expectation for a higher rate environment?
Julian Evans: So, I'll take a piece of that and let Julian talk about more. So, some of the-
Or at least speaking, the answer class is priced fairly rich [inaudible]
Speaker Change: and so within a context of delivering returns that are creative to...
Speaker Change: The dividend we have favored, as you know, for the past couple quarters or more, NBS. On the letter it basis those assets till they were better returns.
and so given. [inaudible]
Song
Speaker Change: Degree of uncertainty with respect to where long-term rates go, especially since Trump got elected and the desire for them to reduce the 10-year-level we...
we have
Speaker Change: Not necessarily shy away from MSR, but have been more selective about what we're going to invest in there.
Speaker Change: The recapture efforts are important relative to current coupons so if you're pretty active in that space right now and you have a view that
Speaker Change: Administration is going to be successful in managing the yield curve, you know, at least from the longer dated side of it then you would definitely have a view on your ability to.
Julian Evans: to recapture and maintain returns that you expect relative to the verge of birth, but outside of that, I'll let Julian handle the rest of that.
Julian Evans: are better at the moment in terms of RNBS and obviously that changes and the returns on the MSR become more favorable will look to invest in some cash there.
Speaker Change: Gotcha, and how would the expectations for Fed rate cuts?
Effect that calculus. It seems like in recent weeks.
The expectations have gone a little higher for
Speaker Change: Maybe two or even three cuts this year. So if that stays sort of in that 75, maybe even a hundred basics points area, would that affect your calculus in order?
Speaker Change: You know, it's possible for sure. You know, it's been incredibly
Speaker Change: Interesting is probably a politically correct way of saying, you know, how we've managed through.
The set of recuts that were expected
Speaker Change: You know, in September versus the amount of recuts that the market expects today and even today
Speaker Change: You know, you just have Fed speakers that come out and say things on the daily basis relative to
What their expectations are for the year and
Speaker Change: Clearly, as we noted in the script, there's an expectation for less cuts this year versus where we thought we would be sitting at the end of September . Our view is still that that's the case as the economy continues to remain fairly strong.
Speaker Change: You know, how we think about the investment portfolio relative to those rate cuts, but the MSR portfolio, the financing on the MSR portfolio,
is
Speaker Change: meaningfully higher than the MBS portfolio, so to the extent that we do get those rate cuts and the returns improved on that in that asset class, we would definitely think about the lever returns on that portfolio differently.
But, you know, what I'll say is-
Every day is a different day [inaudible]
You know, as you know, under the current administration and
How they think about controlling...
Speaker Change: interest rates. It makes our job a little bit more difficult, but you definitely have some impact in terms of how we think about the allocation of the asset classes.
Julian
Julian Evans: Yeah, I would just say, look, when we came into this year, we were at expectations that the Fed was probably one to maybe two eases this year potentially depending on inflation and depending on growth. Obviously, the markets expectations that you have noted has increased to about three eases.
Julian Evans: this year. Soft data has obviously been kind of inching expectations higher for additional eases. The hard data has actually come in fairly decently.
Obviously, we are hearing and learning about various different...
Julian Evans: Policy changes that are going on with the administration and we will adjust the portfolio accordingly as the facts come up.
A great thank you for that color, that's really.
Julian Evans: That's really good. And I know you're not going to let me sign off without asking one final question about where a current book value is. So...
I wait every quarter to hear you ask the question.
Julian Evans: Yeah, so at the end of February we see books about Slat as compared to year-end and of course that is before any first quarter dividend to cruel because the board has not yet met.
Right.
Speaker Change: All right, thank you very much, gentlemen, best of luck in this volatile environment.
Thanks, Mikhail. Appreciate it.
Speaker Change: Thank you. Our next question comes from Jason Stewart with Jenny Montgomery Scott. Please proceed.
Speaker Change: Okay, thank you. Just given the right move that we've seen so far.
Speaker Change: in the quarter, maybe the last couple of weeks. Could I get your take on where you see speeds going, the recent instability of the marginal mortgage, sort of your take on, you know, call it a wavelet of refi activity that's potential and then take that to where you see value and stack polls.
Thank you.
Speaker Change: on that portfolio before we think speeds are impacted and as noted in the presentation, I believe.
Speaker Change: We note that the speeds are in the mid-single digits, which is really your best case-based scenario for that portfolio given the collateral composition. So we really feel good about that portfolio in terms of being able to withstand.
Anything material related to?
Speaker Change: The efforts to lower the the long end of the curve, which would obviously impact mortgage rates. So we'll pick up that portfolio.
Speaker Change: Should be able to withstand a lot of things that might happen with the current administration on the armbeer side because there are a lot more coupons about that I would Julian answer that [inaudible]
Julian Evans: Yeah, in terms of the recent instability of the market, we stand about 5 to 10% refinanceable in terms of that market.
Julian Evans: I think it's this morning and Mortgage rapes like six and a half. Obviously it's come down over the past couple weeks from seven.
in order to get kind of, I think, a decent...
Julian Evans: You know, refinancing waive to hit the market. I think you're going to have to get to about 5.8, 5.7 in terms of mortgage rates. You know, obviously everybody who kind of refinanced, I'm sorry, everybody who got originated loans.
Julian Evans: You know, they have seven, seven-and-a-half type mortgages will be able to re-finance themselves.
Julian Evans: But in order to get a majority of your five and a half and some of your fives kind of into the category of being refinanceable, I think you need to get down to about 5.7, 5.8 in terms of the mortgage rate. So we've got further to go.
Julian Evans: The ten year would need to drop, perhaps get itself around 380 in order of that to happen.
Julian Evans: Respect Pools. In terms of that market, we've been really playing in terms of our specified pool story right below or near par. Where we have significant weights in terms of our respect pools is in 5 and 5 and a half.
Julian Evans: The stories that we have played have been loan balance. We've been incrementally picking up loan balance. Let's call it 200k to 50k.
within that range.
some geo-type pools.
But we've been-
Julian Evans: Going back and forth between low pay-up stories and loan balance. Any time loan balance has kind of gotten cheap, we go to pick it up. If we've been swarpping out of some pools that have loan balance, we'd look for additional loan balance. [inaudible]
Just in case there is a major movement rate.
We think Lone Balance will perform better
then some of these, let's say,
Julian Evans: And when I say loan balance, I'm really referring to like between two and two fifty.
Julian Evans: Some of these unknown but cheap stories of 300 and 350K. I would expect those to kind of prepaid quickly.
Julian Evans: I think Florida and Texas given their loan balances on the size of those pools that's kind of coming through, especially on new production, will pick up speeds as well
Julian Evans: I think there's stories when the entire refinanceability of the market is not around, but once you begin to have some refinanceability, the homeowner gets cured and those loans will get refinanced over time [inaudible]
Speaker Change: Okay, that's helpful. And then just pull it way up, you know, if we look at the portfolio on a just a cash carry basis, what's your estimate for current ROE's on a blended basis, you know, across the whole portfolio?
Speaker Change: 17% and that's with kind of the markets moving around. Also say on the MSR side, you're probably seeing something that's around call is low teams.
Great. Thanks for taking the question. Appreciate it.
Speaker Change: Thank you and this concludes our Q&A session. I will turn it back to Jay Long for his final remarks.
Jay Lown: Thank you everybody for joining us on our fourth quarter of 2024. Our new is calling. We look forward to updating you in coming months for our first quarter of 2025, our new report. Have a good evening everyone.