Q4 2023 Cherry Hill Mortgage Investment Corp Earnings Call

Participants

Garrett Edson; Investor Relations; ICR

Jay Lown; President & Chief Executive Officer; Cherry Hill Mortgage Investment Corp

Julian Evans; Chief Investment Officer; Cherry Hill Mortgage Investment Corp

Michael Hutchby; Chief Financial Officer, Treasurer, Secretary; Cherry Hill Mortgage Investment Corp

Mikhail Goberman; Analyst; Citizens JMP Securities, LLC

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Cherry Hill Mortgage Investment Corporation fourth-quarter 2023 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Garrett Edson with Investor Relations. Please go ahead.

Garrett Edson

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth-quarter 2023 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 earnings available for distribution or EAD, and comprehensive income.
Forward-looking statements represent management's current estimates and Cherry Hill assumes no obligation to update any forward-looking statements 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, Chief Financial Officer. Now I will turn the call over to Jay.

Jay Lown

Thanks, Gary, and welcome to our fourth quarter 2023 earnings call. On our prior call we talked about how we were laser focused on risk management as the 10-year crossed 5% and agency mortgage spreads significantly widen. To that end, we proactively positioned our portfolio for flat to higher rates and to mitigate the spread widening we were seeing in the summer and early fall by hedging out a portion of our basis risk in our RMBS portfolio with TBAs. By doing this, we had a strong third quarter and successfully preserved the vast majority of our shareholders' equity, while others, such as agency rates were considerably impacted by the spread widening through our positioning. We were aware that should mortgage spreads compress. We would also not participate as much in any upside shortly after our third quarter call.
The Fed unexpectedly pivoted towards a much more accommodative tone, all but signaling that it would consider cutting rates beginning in early to mid 2024. The Fed further reinforced their tone in December despite the data continuing to support a higher for longer strategy. As a result, rates plummeted in the final two months of 2023, lower coupon MBS outperformed higher coupon MBS and spreads tightened. As a result, our book value was impacted by this near term movement. That said, we've seen a reversal thus far in 2024 as the data continues to track in line with how we initially positioned.
Our portfolio. Inflation remains hot with the PCA still elevated, which has compelled the Fed to telegraph a more patient posture around future rate cuts. The market has gradually followed and rates have risen in the first two months of this year. We are watching the Fed and economic indicators closely as we position our portfolio moving forward and believe our overall strategy of pairing MSR with Agency RMBS remains the proper strategy for the current environment.
For the fourth quarter, we generated GAAP net loss applicable to common stockholders of $1.29 per diluted share. And we generated earnings available for distribution or EAD., a non-GAAP financial measure of $4.5 million or $0.17 per share, which once again covered our quarterly distribution.
As we've noted before, EAD. is only one of several factors considered in setting our dividend policy. Additional factors such as the existing market environment and portfolio return, potentially our level of taxable income, including hedge gain impacts and a degree of certainty regarding forward investment return economics, all contribute to determining what we believe is the appropriate dividend level.
Book value per common share finished the year at $4.53, down 9.2% from September 30th, primarily driven by portfolio positioning combined with lower MSR marks as well as having a negative duration positioning, all of which was marginally offset by spread tightening on an NAV basis, which includes preferred stock and the calculation NAV would have been down approximately 4.3% relative to September 30th. If we were to exclude the capital raise through the ATM, we've consistently noted that our existing mix of common and preferred equity amplified the total changes in our total equity or common book value compared to our NAV we've shared in the past the creating a more stable equity profile is a top priority.
In terms of our overall strategy, in the fourth quarter, we began to put that strategy to work. We raised $11.8 million through our at-the-market common share program, and we utilized over $6 million of the funds raised early this year to repurchase some of our Series B preferred shares. We believe it is the right step for the company to put us on a much firmer footing with respect to our capital structure. This approach benefit common shareholders as the repurchase of Series B preferred shares ultimately reduces the amount we pay for preferred dividends once the Series B transitions to a floating rate.
As we move through 2024, we will continue focusing on similar measures to further enhance our equity profile while remaining mindful of our balance sheet strength and our investment portfolio.
At the end of the year, financial leverage reduced slightly to 4.2 times as we continue to stay prudently levered as the volatile market dynamics persist and selectively deploy capital. We ended the quarter with $53 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Looking ahead, we continue to manage our portfolio closely and focus on risk management. In these volatile times. We will continue to selectively deploy capital into additional agency RMBS, which still presents a strong risk-adjusted return profile compared to MSRs and will remain hard at work improving our equity profile for the ultimate benefit of common shareholders while not sacrificing our strong liquidity and levers.
With that, I will turn the call over to Julian, who will cover more details regarding our investment portfolio and it's performance over the fourth quarter.

Julian Evans

Thank you, Jay. As Jay noted, we had appropriately positioned our portfolio for the higher for longer rate environment. That economic and inflation data continue to support and we benefited in the third quarter as well as in the October from that positioning in November. Despite the data still supporting our position, we were surprised by the Fed's sudden shift in policy away from higher for longer and clearly intimating that they would be looking to cut interest rates multiple times in 2024. Interest rates rallied the yield curve flatten and mortgage spreads tightened over the next two months.
Ultimately, lower coupon RMBS outperformed the higher coupon RMBS, where we were primarily invested. Our MSRs were impacted and our portfolio's negative duration was not positioned for the rate rally leading to our book value performance thus far in 2024, we've seen another pivot in the Fed's policy, partially stepping back from the aggressive language has the economic and inflation data further booster our thesis that our portfolio was appropriately positioned. We are prevailing thus far in the first quarter. We continue to closely watch the Fed and will further proactively adjust our portfolio as necessary given the ongoing volatility.
At year end, our MSR portfolio had a UPB of $20 billion and a market value of approximately $254 billion. The MSR and related net assets represented approximately 44% of our equity capital and approximately 28% of our investable assets excluding cash at the end of the quarter. Meanwhile, our RMBS portfolio accounted for approximately 39% of our equity capital as a percentage of investable assets.
The RMBS portfolio represented approximately 72% excluding cash at year end. Prepayment speeds for our MSR and RMBS portfolios continue to remain relatively steady compared to the prior quarter. Given the elevated mortgage rate above our MSR portfolio's net CPR averaged approximately 4.2% for the fourth quarter, modestly down from 5.6% net CPR in the previous quarter. Portfolio's recapture rate remained consistent but low at approximately 1% has the incentive to refinance continues to be minimal.
Moving forward, we continue to expect low recapture rates and a stable net CPR for at least the near term, which should the Fed pursue rate cuts would expect both matrix to right over time.
The RMBS portfolio's prepayment speeds remained low as expected, driven by a combination of new asset purchases purchases as well as the fact that the current higher mortgage rate environment continues to compress CPRs for the existing portfolio. As of today, the majority of mortgage universe remains out of the money. In terms of refinancing, we would expect prepayments to remain at low levels as long as the interest rates remain at these levels, but should there be rate cuts later this year.
Prepayments will begin to rise for the quarter. The RMBS portfolio's weighted average three-month CPR, it was slightly higher at approximately 4.9% compared to approximately 4.4% in the third quarter. As of December 31st, the RMBS portfolio, inclusive of TBAs, stood at approximately $655 million compared to $583 million at the previous quarter end quarter. Over quarter, we reduced some of our TBA hedges in the portfolio as we shifted towards a more neutral posture given the Fed's pivot on their policy stance towards potential rate cuts.
For the fourth quarter, RMBS net interest spread was 3.2% increase from the prior quarter was driven by lower repo costs due to lower repo balances and improved amortization expenses. At year end, the portfolio's financial leverage remained at approximately 4.2 times and the 30-year securities position continued to represent 100% of the RMBS portfolio. Looking forward, we expect volatility to remain elevated for at least the near term. Our macro growth and particularly inflation to have a significant impact on the upcoming Fed decisions. We will continue to manage our portfolio thoughtfully while looking to shift our overall capital structure to further add value for shareholders.
Through improved performance and earnings.
I will now turn the call over to Mike for fourth quarter financial discussion.

Michael Hutchby

Thank you, Julien. Our GAAP net loss applicable to common stockholders for the fourth quarter was $35.5 million or $1.29 per weighted average diluted share outstanding during the quarter, while comprehensive loss applicable to common stockholders, which includes the mark-to-market of our available for sale RMBS was $6.5 million or $0.24 per weighted average diluted share. Our earnings available for distribution attributable to common stockholders were $4.5 million or $0.17 per share. Our book value per common share as of December 31st was $4.53 compared to book value of $4.99 as of September 30th.
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 fourth quarter, we held interest rate swaps, TBAs and treasury futures, all of which had a combined notional amount of approximately $955 million. And you can see more details with respect to our hedging strategy in our 10-K as well as in the fourth quarter presentation.
For GAAP purposes, we have not elected to apply hedge accounting for interest rate derivatives. And as a result, we recorded a change in estimated fair value as a component of the net gain or loss on interest rate derivatives operating expenses were $3.5 million for the quarter. On December eighth, 2023, our Board of Directors declared a dividend of $0.15 per common share for the fourth quarter of 2023, which was paid in cash on January 31st, 2024. 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 January 16th, 2024. At this time, we will open up the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Mikael Goberman, Citizens JMP.

Mikhail Goberman

Hey, thanks. Thanks for taking my questions, guys. I hope everyone's doing well. I guess the first one I have is on what are you guys' thoughts on appetite for leverage going forward, given it some kind of in a and the lowest level of recent memory, I guess I could say and done. I guess the second question would be perhaps an update on book value thus far in the first quarter?

Julian Evans

In terms of leverage, I think we will adjust that over time from right now. We feel as if the market is still very volatile spreads in terms of RMBS are still attractive, but they're on the lower side of where they've been over the last year. I think the average has been about 150 basis points. And right now we're trading a little bit through that probably have some further downside to go, but could easily see given the headlines and what the Fed actually decides to do with the next couple of meetings to still see on the markets be very volatile. Longer term, we do think that the Fed will ease later this year. They've moved obviously from a tightening bias from to more of a neutral bias and at some point they will get to an easing bias once they feel that inflation has gotten to the level that they feel comfortable with.

Michael Hutchby

Let me touch on a book value for you. We see our February 29th book value per share at about flat versus year end quarter end and that's prior to any first quarter dividend accrual as Board has not yet met to approve it.

Mikhail Goberman

Great. Thank you, Julie and Michael and Al, as far as the preferred stock repurchases of of the $6.1 million in the in the last quarter. Can we expect sort of a similar pace going forward quarterly or are something Emeka?

Julian Evans

I think that I can give you a definitive answer there, but it's clear that we're trying to rightsize the leverage calculation here and that Series B becomes floating in April. So it is our strong desire to do that. I think the hard part about answering your question about the pace of that is around trying to be mindful about the dilution impact. And we're trying to do it with as minimal impact as we can. So the pace I think Keynote depends on a few things, but it's definitely our desire to keep going gadget.

Mikhail Goberman

Thank you. And if I could squeeze in one more, any any sort of thoughts on this potential MSR sales from my NYCB?

Julian Evans

And so I don't have any color on that of what we have been in our conversations with Flagstar have been pretty high level and macro relative to their relationship on the servicing front. But I can't imagine that if they do that it would be ins and a small block. So I imagine that others who have the ability to purchase something or $10 billion or higher are probably going to get a better look at that than us. But today we have no color relative to whether or not that's just a rumor or what I think the I think the capital they got was a huge step towards stabilizing things. And the I just have no insight into what they're thinking relative to future moves to either appease the regulators or prop up the balance sheet Yes, fair enough.

Mikhail Goberman

Thanks, guys.

Operator

(Operator Instructions) I'm showing no further questions at this time.
I would now like to turn the conference back to Jay for closing remarks.

Jay Lown

Thank you, operator, and thank you for joining us on our fourth quarter 2023 call. We look forward to updating you in a few months on our first quarter 2024 call. Have a good evening.

Operator

This concludes today's conference call. Thank you for participating. You may now.