Cherry Hill Mortgage Investment Q1 2025 Earnings Call Transcript

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May 6, 2025

There are 9 speakers on the call.

Operator

Good day, and welcome to the Cherry Hill Mortgage Investment Corporation First Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

Operator

I would now like to turn the call over to Garrett Edson with ICR. Please go ahead.

Speaker 1

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's First Quarter twenty twenty five Conference Call. In addition to this call, we have issued a press release that was distributed earlier this afternoon and posted that press release and a first quarter twenty twenty five investor presentation 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.

Speaker 1

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 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.

Speaker 2

Thanks, Derek, and welcome to our first quarter twenty twenty five earnings call. The first quarter of twenty twenty five was anything but calm. The reaction from markets domestically has been very aggressive during the first hundred days of the new administration amidst a backdrop of increased uncertainty, disruption, and meaningful policy changes coming out of DC. Rates pushed lower in March, partly driven by rhetoric from Washington, and the ten year ended the quarter at 4.25%, approximately 30 basis points lower quarter over quarter. That, however, was quickly overshadowed by the run up to the Liberation Day tariff announcements on April 2.

Speaker 2

Suddenly, rates spiked on fears of a broader economic recession and stagflation. While the administration put a pause on the majority of the reciprocal tariffs for ninety days to reach new agreements, investors are in wait and see mode to determine whether the administration can negotiate trade deals or if we will return to potentially unprecedented volatility. Going forward, we expect rates will continue to be highly reactive to both global political agendas and domestic economic data. This uncertainty has pushed us to position the portfolio more neutral to rates to withstand the daily volatility. For the first quarter, we generated GAAP net loss applicable to common stockholders of $0.29 per diluted share.

Speaker 2

Book value per common share finished the quarter at $3.58 compared to $3.82 on December 31. On an NAV basis, which includes preferred stock and prior to any ATM capital raised in the quarter, NAV was down approximately $7,500,000 or 3.2% relative to December 31. Financial leverage at the end of the quarter remained consistent at 5.2 times, as we continued to stay prudently levered. We ended the quarter with $47,000,000 of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. We were pleased to complete our first full quarter as an integrated, internally managed mortgage REIT.

Speaker 2

In line with our prior quarter comments, operating expenses declined quarter over quarter due to the elimination of the management fee. As we proceed through 2025, we will continue to closely manage our operating expenses as we look to responsibly grow Cherry Hill, which will ultimately improve both our expense ratio and our capital structure over time. Looking ahead, we are watching the macro environment and the tariff situation very closely and are stressing our portfolio for numerous scenarios in light of the forthcoming tariff deadline. In the near term, we plan to deploy capital as appropriate into Agency RMBS and select MSRs, which still present strong risk adjusted return profiles, while maintaining strong liquidity and prudent leverage. 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.

Speaker 3

Thank you, Jay. Mortgages started the quarter well, tightening for the first two months only to end the quarter marginally wider as pending tariffs increased volatility into the administration's announcement on Liberation Day. Overall, rates ended the quarter lower, and mortgage performance was mixed. Despite the rally in interest rates, higher coupon mortgages outperformed lower coupon mortgages. While our coupon positioning for the quarter was good, our portfolio needed to be longer in duration, and the lower coupon portion of our portfolio simply did not keep pace with our hedges in the interest rate rally.

Speaker 3

As we look ahead, like everyone else, we are watching the macro environment very closely as we await tariff deals to be hopefully announced in the weeks and months ahead. In the near term, volatility will likely continue, and we will expect rates to remain elevated until there is some clear certainty with respect to go forward macro policy. At quarter end, our MSR portfolio had a UPB of $17,000,000,000 and a market value of approximately $227,000,000 The MSR and related net assets represented approximately 44% of our equity capital, and approximately 24% of our investable assets, excluding cash, at quarter end. Meanwhile, our RMBS portfolio accounted for approximately 39% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented 76%, excluding cash, at quarter end.

Speaker 3

Prepayment speeds for our MSR and RMBS portfolios remained relatively steady compared to the prior quarter despite rates rallying in the first quarter. Our MSR portfolio's net CPR averaged approximately 4.1% for the first quarter, down modestly from the previous quarter. The portfolio's recapture rate was de minimis as the incentive to refinance continues to be minimal for this portfolio given the portfolio's loan rate. Going forward, with rates remaining elevated amid the macro uncertainty, we continue to expect a lower capture rate and a relatively low net CPR in the near term given our portfolio's characteristics. Meanwhile, the RMBS portfolio's prepayment speeds remain low with mortgage rates fluctuating between six and a half and 7% the past few months.

Speaker 3

If mortgage rates stabilize within this range, we would expect prepayment speeds to remain moderate in the second quarter. For the first quarter, the RMBS portfolio's weighted average three month CPR was approximately 5.8% compared to 5.7 in the fourth quarter. As of March 31, the RMBS portfolio inclusive of TBA stood at approximately 7 and 33,000,000 compared to 723,000,000 at the previous quarter end as we modestly shifted our RMBS positioning during the quarter and the portfolio remained higher coupon mortgage focused. For the first quarter, our RMBS net interest spread was 3.55%, higher than the prior quarter, driven by improved dollar roll income and repo expenses, which were partially offset by reduced income from swaps. Overall, our hedge strategy remains largely intact, and we will continue to use a combination of swaps, TBA securities, and treasury futures to hedge the portfolio.

Speaker 3

Treasury futures have become a larger portion of hedges, especially given the recent tightening of swap spreads. As the year progresses, we would expect the RMBS portfolio NIM to normalize towards historical levels in the next quarter, as dollar roll income is less special and swap income is reduced as swaps mature. Moving forward, we will continue to proactively manage our portfolio while continuing to shift our overall capital structure to add value for shareholders through improved performance and earnings. I will now turn the call over to Mike for our first quarter financial discussion. Thank you, Julian.

Speaker 4

GAAP net loss applicable to common stockholders for the first quarter was $9,300,000 or $0.29 per weighted average diluted share outstanding during the quarter, while comprehensive loss attributable to common stockholders, which includes the mark to market of our available for sale RMBS, was $2,600,000 or $08 per weighted average diluted share. Our earnings available for distribution, or EAD, attributable to common stockholders were $5,400,000 or $0.17 per share. EAD in the quarter benefited from outsized dollar roll income and income received from one of our larger hedges before it matured at the end of the quarter. To that end, because that larger hedge has matured and will no longer receive income from it, we would expect EAD to be lower moving forward. However, consistently, EAD is not the sole barometer for setting our common dividend and that our board also considers factors such as the prevailing market environment, portfolio return potential, our level of taxable income, including potential hedge gain impacts, and the degree of certainty regarding forward investment return economics.

Speaker 4

Our book value per common share as of March 31 was $3.58 compared to a book value of $3.82 at the December. 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, TBAs, and treasury futures, all of which had a combined notional amount of approximately $489,000,000 You can see more details with respect to our hedging strategy in our 10 Q, as well as in our first quarter presentation. For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives, and as a result, we record the change in estimated fair value as a component of the net gain or loss on those interest rate derivatives. Our operating expenses were $3,800,000 for the quarter.

Speaker 4

On 03/13/2025, our Board of Directors declared a dividend of $0.15 per common share for the first quarter of the year, which was paid in cash on April 30. We also declared a dividend of $0.05 $1.02 $5 per share on our 8.2% Series A Cumulative Redeemable Preferred Stock, and a dividend of $0.06 $3.07 $2 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on 04/15/2025. At this time, we will open up the call for questions. Operator?

Operator

Thank you. Our first question comes from Randy Binner with B. Riley Securities. Your line is open.

Speaker 5

Hey, thanks. Good evening. Yeah, I thought it was like a hopeful commentary there. I think the question I have is and I know this was covered, Jay and team in the opening commentary, but is, I guess, what would it take for you to allocate more to the RMBS portfolio? I mean, I think we've seen a little bit more growth from some others so far this quarter, not that that's right or wrong, but there is this period of uncertainty, but the core EAD is lower, as you said, on a go forward basis if that portfolio doesn't grow.

Speaker 5

And maybe just a little more color on kind of what it takes to turn to a point where you're able to acquire more and grow the portfolio.

Speaker 2

Hey, Randy, how are you? Did you say MSR or MBS?

Speaker 5

I mean, I guess my question was more on MBS, but hearing about both would be helpful.

Speaker 1

Yeah, so

Speaker 2

all of the reinvestment amortization income that we get in has been reinvested in MBS. I can tell you we haven't purchased an MSR in quite some time. So while it may not look like the portfolio composition has changed a lot, the only true way to change that materially is for us to sell a portion of the MSR in favor of MBS. So definitively I can say for the past several quarters plus, we have primarily, if not exclusively, been reinvesting income or reinvesting amortization into MBS.

Speaker 5

Okay. That's helpful. And then just on GSE reform, if I can get this one in.

Speaker 6

This is just

Speaker 5

something we've been gathering information on from throughout the industry. And so pretty clear movement at FHFA as far as de risking staffing, etcetera. Do you see movement there being priced into the market? Do have a view of what you're looking for and how that might affect how you allocate capital in the portfolio and how you run the business? Or is it too early to tell?

Speaker 3

Hey, Randy, this is Julian. I think it's a little too early to tell. There's obviously, as you've noted, there has been some definitive movements going around at the GSEs. I think they've been primarily focused on, you know, expense deduction and everything reduction and things like that. As we move forward, I think the biggest thing we'd like to see is obviously is you want a complete, resolution to what they really want to do with the GSEs whenever they enter a package on out.

Speaker 3

You don't want it to just be notes on a on a particular piece of paper, you'd like something in terms of a complete and well thought out idea in terms of what they want to do to the GSEs given the impact that they'll have on housing. In terms of it really kind of being priced into the market I'd have to say no I don't really think it's priced into the market because at some point we have to find out if they move towards privatization what they're going to do with the government guarantee on the security

Speaker 6

Right.

Speaker 3

How they're going to treat that and I don't that currently I think the market is making an assumption that that that government guarantee is safe and sound at the moment but we haven't seen any specific any detailed plans on that at all. So I think we're kind of, would be cautious on it my estimation is that they will put out something complete, in terms of GSE reform but in terms of the government guarantee that hasn't been well defined yet.

Speaker 5

Alright appreciate the comments, thanks.

Operator

You. Our next question comes from Jason Stewart with Janney Montgomery Scott. Your line is open.

Speaker 6

Hey, good evening. Thanks. If I missed it, I apologize. But could you give us a book value update quarter to date in 2Q?

Speaker 2

Oh, man, you're stealing thunder from JMP.

Speaker 6

Oh, My bad.

Speaker 2

That's just wrong. Michael.

Speaker 5

Or Mikhail. Hey

Speaker 4

Jason, it's Mike. So at the April, we see our NAV down about 3.7%, which then when you layer on the preferred multiple, you get to about a 7% book value per share. And that's before any dividends for the quarter as the Board has not yet met to approve one.

Speaker 6

Okay. Usually I'm last in the queue,

Speaker 2

so I have to clean up the question. So, Mikael, I

Speaker 6

apologize. You.

Speaker 5

All good, man.

Speaker 6

And then in terms of the swap portfolio, could you remind us how much rolled off in 1Q and then this one less than one year bucket? I mean, it's pretty small $15,000,000 that's left. Does that roll when does that roll off?

Speaker 4

So, yeah, in the first quarter, and you can go back and you can see that same page 11 in the first in the prior quarter deck. So, you can see that we had about $250,000,000 of payer swaps that were rolling off in the quarter, it was about zero point two years. And so, if you see that same page 11 in this quarter's deck, you'll see that we've got about $15,000,000 left in that one year bucket. And it's about zero point nine years left on that. There were a couple of receiver swaps that also paid off or ended in the quarter.

Speaker 4

But Julian has also been actively managing the swaps throughout the quarter as well.

Speaker 6

Okay. So that's just the $150,000,000 notional that will mature sometime in 2026, first half of '20 '20 '6. There's nothing else rolling off this year.

Speaker 4

No, that's right. That's right.

Speaker 6

Yeah, if

Speaker 4

you look at that first row on page 11, the very top, everything in that first row is within twelve months of the report date. So this page is all essentially relative to 03/31/2025.

Speaker 6

Got it. And then one question on mortgages. There's been more talking, it applies to spec pools, guess, about how builder buy downs are impacting the complexity of mortgages. Are you seeing that? Are you seeing opportunities in spec pools within the builder buy down space or with regard to Rocket Coupe?

Speaker 6

You know, how is this? Some people are are looking at this thing Rocket Coupe is now priced too fast, in some models. Is this creating opportunities in in loan pools for you? Or is this, and how are you looking at this?

Speaker 3

Hi, Jason. It's Julian. In in terms of the builder buy downs, look, we we've seen builder buy downs in the portfolios before. I guess it's become, you know, more of an a noted type of traded, if people are like looking for some story to pick with particularly type of trade. We've noticed it, when we run our miss models and things like that.

Speaker 3

It hasn't been anything that we have tried to focus in on the portfolio I think we've tried to you know keep the pay ups in the portfolio modest at this point in addition to that I think you know if we are getting into some type of refinance wave tried and true has always been some type of loan balance story. You know, typically those get bid up as rates go down and prepayment speeds get, get faster. What doesn't have, you know, really translate often are some of these one off stories and, you know, that really haven't been around for a while. You know, I think the the bid team seems to fade on those.

Speaker 6

Okay. So the SPECT pool is keeping it pretty straightforward. Okay. Got it. That's it for me.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from Mikhail Goberman with Citizens JMP. Your line is open.

Speaker 7

Hey, guys. Hope everybody's doing well. I guess I lost a question there. No worries. No worries.

Speaker 7

Appreciate the apology, Jason. Totally unnecessary. We have a battle who gets that question first going forward. Congrats on your own Liberation Day guys and the first full quarter of that. And I guess if I have anything to ask, obviously, we had the big Rocket Cooper deal.

Speaker 7

I was wondering if you're seeing any effect post that deal on more MSR pricing and supply and just your general thoughts on the servicing space. I know you said you're not really adding at the margin to MSRs at the moment, but just your general thoughts post that massive deal. Thanks.

Speaker 2

Sure. Ray, can you handle that?

Speaker 8

Yeah, sure. Right now, I mean, it's been still pretty quiet. I think with the quarter as a whole, you've probably seen that volumes have been lower than they had been prior year. I suspect that going forward, assuming the completion of that, the combination of Rocket and Cooper, the buying impact won't really be all that different than it was before. But we haven't really seen any substantial changes in pricing dynamics in the market right now.

Speaker 7

Okay. I appreciate that. And as far as EAD goes, you said it might trend a little bit lower going forward. How much of the EAD in the first quarter was due to the roll off of those expenses associated with internalization?

Speaker 4

With internalization and the G and A savings, see at about $02 in the first quarter.

Speaker 7

Okay. And forgive me if you mentioned this in your prepared remarks, but going forward, you said EAD was going to trend a little bit lower because of what exactly?

Speaker 4

Because of the large swap that matured that we were chatting about earlier. That large swap was contributing to EAD each quarter as well. And since that one matured in the March, that one is no longer in the portfolio.

Speaker 7

Got it. Great. Thank you, guys. And of course, best of luck going forward in this interesting times.

Speaker 2

Yes. Thank you. Thanks, Miguel.

Operator

Thank you. There are no further questions at this time. I'd to turn the call back over to Jay Lown for closing remarks.

Speaker 2

Thanks, operator. Thank you for joining us on our first quarter twenty twenty five earnings call, and we look forward to updating you on our second quarter results soon.

Operator

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.

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Key Takeaways

  • During Q1, CHMI reported a GAAP net loss of $9.3M ($0.29 per share), a book value decline to $3.58 per share, and a NAV decrease of ~3.2%, while maintaining 5.2x leverage.
  • Markets experienced heightened volatility due to new administration policies and tariff uncertainty, prompting CHMI to position its portfolio neutral to rates and stress-test for multiple scenarios.
  • As of quarter-end, the MSR portfolio held $17B UPB (market value $227M, ~44% of equity) with a 4.1% net CPR, and the RMBS portfolio accounted for 39% of equity with a 5.8% CPR and a 3.55% net interest spread.
  • Liquidity remained solid with $47M unrestricted cash on the balance sheet, and operating expenses declined post internalization, supporting responsible growth and an improved expense ratio.
  • Looking ahead, CHMI plans to deploy capital into agency RMBS and select MSRs with strong risk-adjusted returns, while preserving liquidity, prudent leverage, and a disciplined dividend policy.
AI Generated. May Contain Errors.
Earnings Conference Call
Cherry Hill Mortgage Investment Q1 2025
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