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Edited Transcript of CHMI.N earnings conference call or presentation 11-May-20 9:00pm GMT

Q1 2020 Cherry Hill Mortgage Investment Corp Earnings Call

Moorestown Jul 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Cherry Hill Mortgage Investment Corp earnings conference call or presentation Monday, May 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey B. Lown

Cherry Hill Mortgage Investment Corporation - President, CEO & Director

* Julian B. Evans

Cherry Hill Mortgage Investment Corporation - CIO

* Michael Andrew Hutchby

Cherry Hill Mortgage Investment Corporation - CFO, Treasurer, Secretary, Controller & Head of IR

* Raymond Slater

Cherry Hill Mortgage Investment Corporation - Senior VP & MSR Portfolio Manager

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Conference Call Participants

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* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Equities Research

* Kevin James Barker

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Michael Edward Smyth

B. Riley FBR, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst

* Rory Rumore

ICR, LLC - VP

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Presentation

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Operator [1]

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Good day, and welcome to the Cherry Hill Mortgage Investment Corporation First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Rory Rumore. Please go ahead.

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Rory Rumore, ICR, LLC - VP [2]

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We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's First Quarter 2020 Conference Call. In addition to this call, we have filed a press release that was distributed earlier this afternoon and posted to the Investor Relations section of our website at www.chmireit.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to interest income, financial guidance, IRRs, future expected cash flows as well as prepayment and recapture rates, delinquencies and non-GAAP financial measures such as core and comprehensive income. Forward-looking statements represent management's current estimates, and Cherry Hill assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC and the definitions contained in the financial presentations available on the company's website.

Today's conference call is hosted by Jay Lown, President and CEO; Julian Evans, the Chief Investment Officer; and Michael Hutchby, the Chief Financial Officer.

Now I will turn the call over to Jay.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [3]

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Thanks, Rory, and welcome to today's call. First and foremost, we hope you and your families are remaining safe and healthy. We would like to express our deepest gratitude to those on the front lines who work tirelessly to keep us all healthy and safe.

In addition, we continue to work through our subservicing partners to provide support to our borrowers who have been affected by the COVID-19 pandemic and ensure that they are receiving the appropriate level of forbearance assistance that they need with respect to their mortgage payments during this difficult period. These are unprecedented times for all of us, and we very much appreciate that you are taking the time to be with us on this call.

I also want to give very special thanks to our entire Cherry Hill team, who have been working tirelessly in terms of managing our portfolio and operations. The entire team has been working remotely since mid-March and will continue to do so until state and federal authorities provide guidelines for our people to safely return to our offices.

A few years ago, we made significant investments in our technology platform and moved to a cloud-based solution for our computing needs. This technology permitted a seamless transition to a work-from-home environment for the entire team with no loss of productivity in managing our portfolio.

Since our last earnings call in February, we have seen a complete shift in the world. At the time of our earnings call, we and the financial markets were watching the COVID-19 pandemic very closely as it pertained to global productivity and how it was impacting Asia and Europe. A few short weeks later, the pandemic gripped the United States with ferocity and has not really let go despite some states beginning to reopen for business. Overnight fund rates were cut to 0 by the Fed. The equity markets experienced a major correction, and mortgage REITs across the industry were suddenly under siege as liquidity tightened and margin calls on all asset classes forced many to delever their portfolios.

On top of that, the government wavered regarding mortgage loan forbearance programs before the CARES Act was signed into law, which exacerbated the fears of a mortgage collapse. Unlike the 2008, 2009 Great Recession, which saw the impact on markets gradually building over time, the reaction of the world markets to the pandemic and its feared consequences was sudden and violent.

At Cherry Hill, we have always been proactive managers of our portfolio, and it has served us well over the past 6 years in terms of our ability to generate core earnings and preserve book value despite some very volatile interest rate environments. However, this was, by far, our biggest challenge to date, one that demanded use of every tool in our tool belt to navigate dislocated markets and respond to the liquidity squeeze.

Early on, we knew that liquidity had become absolutely paramount. In March, we acted quickly and decisively to delever our company in an orderly manner, which enabled us to be well positioned following what we hope is the worst of the crisis. We reduced the leverage on our aggregate portfolio from 6.1x at December 31 to 3.9x at April 30. We also reduced our investments in credit risk transfer bonds by 88% over the same period. And as of April 30, we own 100% of the remaining position outright. We met all of our advancing obligations and believe we did a good job managing through a very difficult period.

As we communicated in our update in mid-April, we anticipated pressure on book value. For the first quarter of 2020, book value per common share was reduced to $13.73 as of March 31, while we generated strong core earnings of $0.47. Julian will talk more about the circumstances affecting our book value per common share in Q1.

We distributed 100% of our first quarter dividends declared on March 12 to both preferred and common shareholders, with half of the first quarter common dividend paid in shares of common stock. Since the end of the first quarter, we have continued to delever our portfolio and build our liquidity position. These steps will help us address the continued uncertainty regarding the timing and effectiveness of the country reopening as well as the impact of the historic levels of unemployment on our servicing portfolio. As a result, our aggregate portfolio as of April 30 is smaller than on March 31.

Over the past 2 months, we have essentially recast our portfolio. And as of April 30, we held approximately $90 million in unrestricted cash. Although this strong cash position will negatively impact earnings in the near term, we believe it is the wise and prudent approach until greater economic clarity emerges, and in light of our expectation of the increased cost to service loans in forbearance due to COVID-19, and elevated prepayment speeds on our RMBS portfolio.

Lastly, with historically low interest rates and outsized origination volumes, MSRs look compelling today. And where we see select opportunities that made our risk/reward criteria, we will look to utilize our flow program to invest capital there.

With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the first quarter.

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Julian B. Evans, Cherry Hill Mortgage Investment Corporation - CIO [4]

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Thank you, Jay. The market disruption that occurred in the latter half of March was caused by a combination of events. Increased mortgage supply, limited bank credit availability and quarter-end concerns all contributed to unforeseen market illiquidity, increased volatility and credit spread widening centered around COVID-19.

As Jay mentioned, we are in unprecedented times, and we worked hard to proactively manage our portfolio, preserve liquidity and reduce our leverage. The deleveraging of the portfolio through asset sales contributed to the decline in book value per common share.

As shown on Slide 5, servicing-related investments comprised of full MSRs with a UPB of approximately $30 billion and a market value of approximately $223 million, represented approximately 33% of our equity capital and approximately 11% of our investable assets, excluding cash at quarter end. Servicing assets declined as a percentage of equity from the previous quarter as MSR valuations were significantly impacted by the decline in mortgage and interest rates throughout the quarter, lowering the portfolio's market value.

Meanwhile, our RMBS portfolio accounted for approximately 41% of our equity, a significant decline from the previous quarter as we manage our RMBS portfolio to increase liquidity and to reduce leverage. As a percentage of investable assets, our RMBS represented approximately 89%, excluding cash, at quarter end.

Our conventional and government MSR CPRs averaged approximately 20% and 15%, respectively, for the first quarter, a significant increase in March as interest rates declined. Quarter-over-quarter, our MSR speeds were better. Improvement in the first couple of months was partially offset by the rise in speeds in March, driven by lower rates. We noticed a similar speed story in our RMBS portfolio as well during the quarter.

The RMBS portfolio stood at approximately $1.7 billion, as shown on Slide 7, as the latter part of March was focused on deleveraging our portfolio and preserving liquidity. Quarter-over-quarter, the 30-year securities position grew to 93% of the portfolio, up from 87% as of December 31, and the remaining assets represented 7%. The collateral composition of the RMBS portfolio posted a weighted average 3-month CPR of approximately 10.2% in the first quarter. Similar to our MSR portfolio, prepayment speeds were lower in the first couple months of the quarter but rose in March as U.S. interest rates touched record lows as a result of the pandemic.

For the first quarter, we posted a 1.25% RMBS NIM versus a 0.73% NIM for the fourth quarter. The improvement in NIM was due to the lower amortization cost based on the slower prepayment speeds and was also aided by lower repo cost as well as improved swap income in the quarter. During the pandemic, we expect the NIM to remain volatile given the lower mortgage rates.

At quarter end, the aggregate portfolio operated with leverage of approximately 5x, down from 6.1x the previous quarter. We ended the quarter with an aggregate portfolio duration gap of negative 0.1 years. We will continue to evaluate and alter the portfolio as necessary.

I'll now turn the call over to Mike for our first quarter financial discussion.

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Michael Andrew Hutchby, Cherry Hill Mortgage Investment Corporation - CFO, Treasurer, Secretary, Controller & Head of IR [5]

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Thank you, Julian. Our GAAP net loss applicable to common stockholders for the first quarter was $46.4 million or $2.79 per weighted average share outstanding during the quarter, while comprehensive loss attributable to common stockholders, which includes the mark-to-market of our held for sale RMBS, was $53.9 million or $3.24 per share. Our core earnings attributable to common stockholders were $7.8 million or $0.47 per share.

As Jay mentioned, our book value per common share as of March 31, 2020, was $13.73, a reduction of $3.62 per share from December 31, 2019, net of the first quarter 2020 dividend. As previously noted, we paid half of our first quarter common dividend in shares of common stock. While the impact on book value per common share will be recognized in the second quarter when the shares were issued, it relates to the first quarter dividend. The effective price of $6.27 per share was determined in accordance with IRS regulations and resulted in a reduction in book value per common share of approximately 1.6%. As of April 30, and after considering the dilutive effect of issuing common stock to pay half of the first quarter dividend, we believe our book value per common share declined by approximately 0.9% from March 31.

We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings. At the end of the first quarter, we held interest rate swaps, swaptions, TBAs and treasury futures, all of which had a combined notional amount of $2.7 billion. For GAAP purposes, we have elected not 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 $4.7 million for the quarter, of which approximately $757,000 was related to our taxable REIT subsidiary.

On March 12, 2020, we declared a dividend of $0.40 per common share for the first quarter of 2020. On March 27, due to the pandemic and rising economic volatility, we announced that the common dividend will be paid in a combination of cash and common stock in order to preserve liquidity. The dividend was paid 50% in cash and 50% in common stock on April 28, 2020. We also declared a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock, and a dividend of $0.515625 on our 8.25% Series B fixed-to-floating rate cumulative redeemable preferred stock, both of which were paid on April 15, 2020.

At this time, we will open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Tim Hayes of B. Riley FBR.

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Michael Edward Smyth, B. Riley FBR, Inc., Research Division - Research Analyst [2]

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This is actually Mike on for Tim. I hope you're doing well and congrats on a strong quarter despite some of the macro headwinds. So my first question is on the servicer advance issue. So it seems like peak forbearance estimates are ranging from 15% to 20%. I'm just wondering how forbearances have been trending relative to your initial expectations, and then give a bear kind of base case scenario for capital commitments.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [3]

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It's Jay. So as of April 30, our conventional portfolio was running around mid 8s, 8% around active forbearance plans. And on the Ginnie portfolio, it was lower by a percentage. So mid-8s and mid-7s, hasn't really moved since then.

We ran our -- when we look at cash and requirements around that, it's not a simple answer. I mean I think we look at it in 2 ways: one related to the principal and interest, and the other with respect to the T&I component. So with the GSEs coming out around 4 months for the P&I, most of our analysis ends up focusing on the T&I component. And we've run the portfolio in the mid-plus teens in terms of forbearance, and the Ginnie is closer to 20%. And given today, we're comfortable with the amount of cash that we'd need to service that portfolio through the year -- through the end of the year, sorry.

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Michael Edward Smyth, B. Riley FBR, Inc., Research Division - Research Analyst [4]

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That's very helpful. And just on a different note, can you just provide some color on how you're thinking about kind of the balancing act between liquidity and capital deployment in 2Q? And just a follow-up to that, given where the stock is trading, how do you think about additional repurchases versus investing in MSRs or MBS?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [5]

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Sure. So over the last 1.5 months, liquidity has been a very important part of our reality. And I think that over the near term, it's prudent for us to continue to think about having a strong liquidity base to manage through the business. As -- I think it's more -- as important and more important that as we get more clarity with respect to the country reopening, unemployment, active forbearance plans going up or down, that will really kind of determine how we think about redeploying more capital versus holding cash. And I would expect that as the country reopens in June and forward, that we'll be able to give some more clarity for that.

But in the near term, I think we definitely are thinking about liquidity more so than we are relative to deployment of that cash into other new assets that will help the income stream.

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Michael Edward Smyth, B. Riley FBR, Inc., Research Division - Research Analyst [6]

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Got you. That's very helpful. And just one more question for me. So on the dividend, 50% paid in stock and the rest is in cash, and the Board decided not to reduce it. So can you just provide some more color on the dividend? Is there an expectation that a certain amount of the idle cash will be deployed? Or any other color here would be very helpful.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [7]

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So you asked me a question about the dividend, and then you move to cash. I'm not sure exactly what the question was.

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Michael Edward Smyth, B. Riley FBR, Inc., Research Division - Research Analyst [8]

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Sorry, I was just -- is the decision to maintain the dividend at a time when a lot of peers have reduced their dividend, is there any expectation that some percentage of that cash will be deployed over the quarter?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [9]

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Yes. I...

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Michael Edward Smyth, B. Riley FBR, Inc., Research Division - Research Analyst [10]

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In order to maintain the dividend.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [11]

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Look, the stock answer is that the Board sets the dividend. And at the appropriate time when the Board meets, and we give the Board information to make an educated decision on where to go from that, we'll definitely communicate that.

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Operator [12]

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Our next question comes from Steve Delaney of JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [13]

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And first and foremost, I'm pleased to see that all of you guys are safe and well -- doing well. And it's been a challenging time, and I think where we are today, we can be thankful regardless of the pain to get here.

Jay, in response to Mike's question, you talked about preparing his question about forbearance and where that would go. Obviously, you're in a cash build mode, and we assume part of that is not just playing defense, but prepping for possible needs to cover advances. Are you in discussions about any credit facilities with financial institutions that might also assist you in that regard?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [14]

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So Steve, by the way, glad to see you're doing well too, and thanks for joining us today. So we do have facilities in place today. We have 3 facilities in place for servicing. The Ginnies have a separate component for T&I for servicing advances. And then with the Freddie line, the sourcing advances are part of the borrowing base. So the only part of the MSR portfolio that doesn't have a facility is Fannie Mae. And 75% of our Fannie Mae portfolio is actual/actual, so we're really talking about a facility on the Fannie Maes for the T&I. And it's definitely something that we're looking into.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [15]

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Okay, good. So it sounds like there are some things in place that you're not -- if you are already financing MSRs and you're saying it's part of the facility -- I guess, that was on the Freddies -- that you're not starting from scratch on the financing standpoint, it sounds like?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [16]

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No, that's correct. The Freddie line has always had, as part of the borrowing base, sourcing advances. And that's part of the total line. And on the Ginnie side, the separate facility intended just for the servicing advances. And as you can imagine, we did tap that in the first quarter.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [17]

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Right. You've obviously sold CRT. You disclosed that. Can you just give us a general idea of what is left in the credit book? There was, I think, 12% of the CRT that you're carrying on your own balance sheet without financing. And is there non-agency RMBS or anything else that's left?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [18]

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Yes. So it's a small portion, a small portfolio of CRTs owned outright as of April. And if certain memory serves me correct, it's something in the neighborhood of $10 million.

And then on the jumbo side, it's predominantly private label jumbo AAAs. And it's pretty much 2 issuers, 2 large well-known issuers. I mean we feel very good about [those].

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [19]

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And those are like fairly recent last couple of years, current guideline -- current underwriting guidelines, pretty much?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [20]

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Yes.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [21]

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Okay. All right. I think we know that product pretty well. Okay. And then the last thing for me. Not at all surprised leverage went down in the first quarter. And interesting, you took it down further. I mean I applaud conservatism and defense at this point in time. I'm just curious, as you move down a little over 1 turn of leverage, can you talk about what you were selling? Or how did you accomplish that delevering? Getting that book value was essentially flat or down 1% over that period. So it wasn't the book value going up, I guess, is what I'm saying.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [22]

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So you mean over the second quarter?

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [23]

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No. From 3/31 to 4/30, your leverage went from 5.0 to 3.9? I believe I heard that.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [24]

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Yes. So it was a combination of selling both agencies and continuing to sell CRTs. And the only other major component around book value for the second quarter through April was really related to MSRs in the last 2 days of the month in April. I don't know how many people really noticed or paid attention, but the primary mortgage rate drops approximately 20 basis points. So we're very -- we're pretty conservative, we think, in terms of the MSR mark, and so that was related to spreads. And we made some adjustments to that portfolio, but we didn't sell anything there.

So if you ask me about sales, we continue to sell some RMBS, and then we continue to sell some CRTs. We really haven't sold a lot of the jumbos.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [25]

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Okay. It sounds like you've got the balance sheet pretty much where it needs to be now, given everything you've had to come through. So -- okay. Well, listen, thanks for the comments and -- go ahead. I didn't mean to cut you off.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [26]

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Oh, no. So I agree with you. I think we're pretty well (inaudible).

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Operator [27]

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The next question comes from Kevin Barker of Piper Sandler.

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Kevin James Barker, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [28]

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So there's obviously been a lot of talk in the servicing market where very few bids or the bid and the ask is very wide within MSRs today, and for good reason, right? We don't know what the delinquency rates ultimately will be. We don't know where mortgage rates are going to go, just given where rates are in general. But can you just give us your view on your expectations for the MSRs and whether you think that bid and the ask will start to tighten here in the near term or do you think it's going to probably play out a little bit longer?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [29]

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So broadly speaking, dislocated markets for more off-the-run asset classes take longer to recover. I think you probably agree with that. I think that with respect to things like the MSRs and even CRTs, the -- it's -- it was interesting to see how quickly the MBS market snapped back. The CRT market took much longer, relatively speaking, and it's still somewhat dislocated relative to what we think the ultimate performance will be.

And then around origination, I think that's probably the most esoteric asset that we own. And so I would expect that that takes longer to come back relative to the other 2 assets, but I think it's less related to performance and more related to just people's lack of clarity into all things related to what's happening with respect to the COVID issue and forbearance. As you get more clarity into how many people in forbearance, the cash requirements to service the asset relative to making the advances, I expect to see people come back into the space. I don't think that people are not buying assets today because they don't see the value.

I think that when we look at where things might be trading today relative to value, to us, it seems like a pretty good investment. And I would expect that as we get through the summer, that you would see that asset return to more normal levels relative to where they price and where they trade. Will they get back to where they were? I mean that's a very tough question to answer; because tell me what note rate, tell me what the geos are and tell me what the collateral characteristics are around those portfolios, and I'll give you a better answer.

But broadly speaking, I think people feel good about the interest rates where loans are being originated today and the value inherent in that asset. But again, relative to what the government did around forbearance and all things related to what's a servicer's responsibility versus the GSEs versus anything the government provide, I think that's just a matter of transparency. Does that help?

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Kevin James Barker, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [30]

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Yes, that's helpful. I think we all can have our own views on where it's going to go and how it's going to play out, but it's certainly volatile and certainly quite a bit of things that need to be figured out before we get there.

So -- and then a follow-up on some of your comments around asset yields, which were incredibly resilient this quarter just given the volatility. And you mentioned in your prepared remarks, better amortization expense, improved swap income, amongst other things. And obviously, it's going to be volatile going forward. But when you think about the biggest headwind or tailwind that you see within the asset yield going forward, what's your biggest concern? And what do you see so far this quarter that's impacting that asset yield?

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Julian B. Evans, Cherry Hill Mortgage Investment Corporation - CIO [31]

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Jay, you want me to take that?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [32]

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You want to take that?

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Julian B. Evans, Cherry Hill Mortgage Investment Corporation - CIO [33]

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Yes. I'll take that. I still think it's amortization. I think in the early parts of -- I should say, the latter part of March, early parts of April, I think that the originators are still ramping up the capacity front. So I still think you've still got -- there's a lot that still has to get through the python here, and that will maybe take a little bit longer.

In terms of the repo cost, we're seeing improvements there. I think you saw a small portion of the improvement going from the fourth quarter to the first quarter. I know where our repo rates were being able to execute now on a 3-month repo. It's close to 30 to 50 basis points. That's a pretty much significant drop from where we currently quoted here in the first quarter, so we'll see some significant improvement there.

In terms of swaps, obviously, with LIBOR coming down versus your fixed cost, if you're resetting your swaps, I think the advantage that you had between paying fixed and receiving floating will be less. But I think -- currently, I think the change in repo costs should be able to offset that. So if that's the case, it really just comes down to amortization, coupon selection and amortization here by prepays. So that's where my concern is here in terms of the RMBS is putting together a portfolio that you think can prepay modestly. You're not going to be able to avoid prepays, but prepay modestly.

And as for what I've seen so far in the second quarter, I like what I've seen. Our collateral has been able to hold up. Knocking on wood, it'll continue to do that. But it's the thing that I worry about the most.

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Kevin James Barker, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [34]

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Okay. And there's been some increased discussions or at least chatter around potential modification programs for potentially refi programs similar to HARP that could play out when this forbearance program ends, or at least something to solve the issues with elevated amount of forbearance and then what happens to those loans afterwards. Is there anything you can do to try to protect the portfolio from rapid amortization if one of those programs were to play out? And how do you view that?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [35]

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Ray, do you want to step in on this one?

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Raymond Slater, Cherry Hill Mortgage Investment Corporation - Senior VP & MSR Portfolio Manager [36]

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Sorry, I missed the last part of your question there.

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Kevin James Barker, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [37]

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Yes. So there's a talk about just significant amounts. I mean a potential for a refi program similar to HARP or potentially a modification program that could occur, whether it's at FHA or at the GSEs. Is there anything you do to protect the portfolio if something more like that were to play out? And if something were to play out, I mean, do you think there will be -- what would be the ramifications? Or how do you think about the impact on the portfolio?

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Raymond Slater, Cherry Hill Mortgage Investment Corporation - Senior VP & MSR Portfolio Manager [38]

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So I mean, it's going to be somewhat difficult depending on how it's implemented. If it's more of a, call it, like a streamlined modification-like program, the impact from a servicing standpoint could be minimal because the loan would still sit there. It's just been modified in a streamlined fashion. The issue is whether or not this is going to create buyouts on pools. Typically, with a modification, unlike a repayment plan or a deferment where the loan stays in the pool, if they were to create something more like a HARP, where it's more of a true refi, and so the new loan has different characteristics and is taken out of the portfolio or the pool, then that may cause a prepayment event on the MBS. However, it really depends how they enact that, more as like a modification program or as a true HARP-type program.

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Operator [39]

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The next question comes from Henry Coffey of Woodbridge Securities.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [40]

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Yes, going back to Kevin's question, we're all sort of picking up the same expectations, rumors, stories, whatever you want to call them, about how they're going to deal with forbearance, 4 or 12 months forward. You're probably a little closer to the dialogue. I mean what of discussion -- what of substance is being suggested? And how does this affect the whole servicing advance equation? Or are you just sort of where we are, waiting for details?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [41]

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It's a -- we're -- I think everybody is waiting. I think what's happening now is the programs that have announced, they're waiting to see how things shake out a little bit relative to what happens with forbearance and how many people pay and don't pay.

I can tell you that I think we saw approximately -- over 40% made their April payment for loans that were in forbearance. And so far, for May, I think we've seen close to 20% make their payment. So it's -- the only information you really truly get is by talking to some of the industry groups like the MBA, and every week they have a call. But I think we're all waiting to see what's going to happen relative to how long some of this stuff persists.

Again, like I said, we feel pretty good that we're good through the end of the year. Once the country starts reopening, you'll start to see people come off forbearance. And so really, the question becomes how many of these people do you think stay on forbearance and ultimately become delinquent. And I think that we're still a little bit early in the game to kind of make those conclusions. But as we think about how we stress the portfolio, again, the statement remains the same.

But we don't get a ton of information from either Treasury or anything with respect to the GSEs around what their plans are, at least over the last couple of weeks since they came out with those statements. So we're doing what we're supposed to be doing relative to making sure that all borrowers get the assistance they need, and then we'll go from there.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [42]

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The -- it doesn't sound, in listening to you, that servicer advance is a big point of anxiety at Cherry Hill, that you can readily carry the loans -- you can do the P&I advance for 4 months, and then taxes and insurance is less of a burden. And you also have some escrow you can eat up there, and it just doesn't -- and you have the available lines. So it doesn't sound like you're talking about this as a crisis point in the organization; more, it's just something to be dealt with.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [43]

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Again, it's something to be dealt with. It's the reason why we're holding a decent amount of liquidity today. And as we get more transparency into the absolute and overall numbers of people that go into forbearance, we'll make the adjustments. But I wouldn't say that it's not something that we're concerned about. I just don't think it's something that we think is going to be life-threatening.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [44]

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So in addition to your liquidity that you discussed, and I know you went into your servicer advanced lines, but I was wondering if we could go through those again. You have Fannie, you have Freddie and then you have the Ginnie Mae business. And those are all different products, right? I mean the servicer advance -- yes.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [45]

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Yes, sure. So it's all in the Qs and Ks. But broadly speaking, we obviously own Fannie Mae, Freddie Mac and Ginnie Mae servicing. We have a Ginnie Mae servicing facility where we finance the asset, and we have a separate facility for the servicing advances. And we believe that under the current -- given the current dynamics that those lines are not to cover us through the time period I mentioned.

On the Freddie Mac side, that is -- pardon me? On the Freddie Mac side, we have a facility to finance the MSRs as well, and the servicing advances are part of the borrowing base. So we can borrow against those advances up to the limit of the line. And the line and all the information is in the Qs and the K. So with respect to Freddie, those are scheduled actual, so scheduled interest, actual principal. And so we believe that we're in pretty good shape relative to the overall size of the line versus the borrowings -- the borrowing base today against the asset. So that line is for the Freddies.

On the Fannies, we have a separate line for that as well, and that is only for the asset. It doesn't cover the servicing advances. And so that's something that we're thinking about and talking to people about now. But to my earlier point, 75% of our Fannie Mae servicing is actual/actual versus scheduled/scheduled. And for those -- for that population, we don't have to advance P&I. So we're only on the hook for T&I.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [46]

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And so in your discussions, I know some of your subservicers are banks, and you obviously have good relationships with The Street. What is the expectation that if you needed liquidity for this, it'd be readily available?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [47]

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If we needed liquidity in what sense?

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [48]

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If you needed to add borrowing capacity, above and beyond anything you have in place, what is the tone of your various counterparties, one of whom is a bank?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [49]

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Sure. I think -- well, that's right. One of them is a bank, and one of them is a Wall Street firm. I would say that we have plenty of capacity for the Fannie side relative to just financing the asset. But again, we don't have a financing facility in place for the servicing advances.

The Freddie Mac line, again, I think we have sufficient room relative to the usage. I think the usage for the Freddie line is about 50%. So we have a pretty good cushion there.

And on the Ginnie side, that's a very different facility. And we feel that if we needed additional liquidity on the advance side, we could have productive conversations with the bank.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [50]

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So net-net, you're in an okay position. Does this affect your -- and I know, but you said you're only buying flow MSRs right now. You're not looking at any bulk portfolios?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [51]

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That's right. We're not doing any bulk purchases right now. And over the last 45 days, we haven't really added anything in terms of flow either.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [52]

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And then if -- I mean if you have the resources in place, isn't this -- given all the volatility and the uncertainty and the anxiety, isn't this a good time to be buying MSRs?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [53]

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I think it is. That's essentially what I tried to say in the prepared remarks. And what I would say to you though is the previous 60 days weren't as transparent. And so without some of that transparency about your responsibilities, we dialed it back a little bit. And now we're getting ready to kind of jump back in the water. But we agree that we're at the current levels relative to being able to purchase it, it's a good risk/return opportunity.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [54]

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Great. And just the last question. I don't think you brought this up, but what is the size of your agency book right now as of April?

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [55]

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Of the Agency RMBS portfolio?

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [56]

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Yes.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [57]

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Yes. Julian, do you want to take that?

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Julian B. Evans, Cherry Hill Mortgage Investment Corporation - CIO [58]

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Yes. The purchase -- the size of the portfolio is about $1.3 billion, approximately.

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Operator [59]

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This concludes our question-and-answer session. I would like to turn the conference back over to Jay Lown for any closing remarks.

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Jeffrey B. Lown, Cherry Hill Mortgage Investment Corporation - President, CEO & Director [60]

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Thanks. Thanks, everybody, for joining us in today's call, and we look forward to updating you soon on our second quarter results, and we hope you remain safe and healthy. Have a good night.

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Operator [61]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.