Cherry Hill Mortgage Investment Corporation (CHMI) CEO Jay Lown on Q1 2019 Results - Earnings Call Transcript

About: Cherry Hill Mortgage Investment Corporation (CHMI)
by: SA Transcripts
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Earning Call Audio

Cherry Hill Mortgage Investment Corporation (NYSE:CHMI) Q1 2019 Earnings Conference Call May 9, 2019 5:00 PM ET

Company Participants

Michael Hutchby - Controller

Jay Lown - President & Chief Executive Officer

Julian Evans - Chief Investment Officer

Marty Levine - Chief Financial Officer

Ray Slater - MSR Portfolio Manager

Conference Call Participants

Tim Hayes - B Riley FBR


Greetings and welcome to the Cherry Hill Mortgage Investment Corporation First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Michael Hutchby, Controller. Please go ahead sir.

Michael Hutchby

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2019 conference call. In addition to this call, we've filed a press release that was distributed earlier this afternoon and posted to the Investor Relations section of our web site at

On today's call, managements' 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 of Cherry Hill. Also present on the call today are Julian Evans, our Chief Investment Officer; and Marty Levine, our Chief Financial Officer.

And now, I'll turn the call over to Jay.

Jay Lown

Thanks, Mike, and welcome to today's call. Overall, Cherry Hill turned in a solid performance for the first quarter of 2019, a double-stead posture highlighted by a surprise shift in their stance on future rate hikes led to another volatile quarter end.

Despite the market's reaction post the [Indiscernible] meeting which drove U.S. 10 year Treasury yields to 15 month lows. Our earnings remain strong and our book value held. Both prepayment fees within our MSR and RMBS portfolios persisted and we once again out-earned our quarterly dividend.

Specifically, for the first quarter of 2019, we generated core earnings per share of $0.60. Although we expect the velocity of prepayments will rise in the quarters ahead as is the seasonal norm, we believe our MSR and RMBS portfolio is constructive today and positioned well to succeed in this lower rate environment.

Book value per share was down marginally by 0.2% to $17.54 at the end of the first quarter net of our common dividend.

Like many we were surprised by the Fed's reversal on future rate hikes in March, but we remain nimble and proactively repositioned our portfolio throughout the quarter in order to protect it against a larger potential book value reduction. Julian will elaborate in his remarks shortly, but we continue to closely watch the global macro economic environment as we evaluate the composition of the portfolio over the coming quarters.

We remain committed to our proven MSR strategy and during the first quarter, we grew that portfolio by approximately 11% through both bulk and flow acquisitions. At the end of the quarter, the MSR portfolio represented approximately 39% of our equity capital, compared to 41% at the end of 2018. Additionally, we continue to be selective in adding to our non-Agency RMBS investments that meet our risk return hurdles.

On the capital front, we completed our second preferred equity offering during the quarter raising approximately 48 million in net proceeds that we deployed to both servicing related assets and RMBS.

Looking ahead for the remainder of 2019, we will remain disciplined in our portfolio construction. Our management team will continue to utilize our collective investment experience to proactively manage our portfolio with the goal of preserving our book value and continuing to generate compelling returns for our shareholders.

Longer term, we believe we remain well-positioned to succeed across multiple interest rate environments and ultimately create additional shareholder value over time.

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

Julian Evans

Thank you, Jay. During the first quarter, mortgages as well as other spread sector assets and global equity indices performed well and followed closely by other central banks move towards the patient policy stance and cleared away from tightening policy stance, bringing interest in mortgage rates to the 15 month lows.

Mortgages outperformed in the quarter, benefiting from the combination of tighter nominal spreads and lower volatility. Mortgage performance was additionally aided by solid supply and demand technical and improved price premiums for specified pool despite lower interest rates.

For the first quarter, we deployed the preferred offering proceeds into both RMBS and MSR securities. After the deployment there were slight changes to the equity composition portfolio quarter-over-quarter.

As shown on slide 5, servicing related investments comprised of full MSRs, represented approximately 39% of our equity capital and approximately 12% of our investable assets excluding cash at quarter end.

Servicing assets were lower as a percentage of equity from the previous quarter as MSR valuations declined alongside interest rates, despite additional asset purchase. Meanwhile, our RMBS portfolio accounted for approximately 52% of our equity, a few percentage points lower than the previous quarter. As a percentage of investable assets, RMBS represented approximately 88% excluding cash at quarter-end.

As of December 31, we held MSRs with the UPB of approximately $28 billion and a market value of approximately $304 million. We grew our MSR portfolio by approximately 11% quarter-over-quarter as equity proceeds were put to work. During the quarter, our MSR portfolio continued to perform well as prepayment speeds remain low. As the spring and summer months approach, we would expect to see a pickup in the prepayment speeds given seasonality and lower mortgage rates.

Our conventional MSR and government MSR, CPRs averaged approximately 6% and 9.1% respectively for the first quarter. Conventional MSR speeds rose from 5.2% in the prior quarter, while the government MSR speeds were down from 10.3% posted during the same timeframe. Both the MSR and RMBS portfolios benefited from prepayment speeds, which were driven by the portfolio's collateral composition.

As of March 31, the RMBS portfolio stood at approximately $2.2 billion, up from $1.8 billion in the previous quarter as RMBS assets increased in value as interest rates declined. In addition, RMBS assets rose as we deployed proceeds from a preferred offering as shown on slide 7. Quarter-over-quarter, the RMBS portfolio's composition shifted as capital was deployed. The 30 year securities position stood at 78%, up from 74% as of December 31, and the remaining assets represented 22%.

During the quarter RMBS spread tightened and specified pool price premiums improved as the Fed over the course of two FOMC meetings, moved towards a neutral policy stance and removed the potential of any rate tightenings in 2019. In the third quarter, the collateral composition of the RMBS portfolio continue to perform well, posting a weighted average three-month CPR of approximately 5.48%, a slight increase from the previous quarter and continue to best Fannie Mae aggregate prepayment speeds.

As rates remain low for 2018, we were starting to see faster speeds as a result of lower interest in mortgage rates. Over the next few months, speeds are expected to rise based on the low mortgage rates and seasonality. For the first quarter, we posted 1.25% RMBS NIM versus 1.31% NIM for the fourth quarter. The NIM decline was driven by rising financing costs, which were partially offset by the portfolios composition and improved amortization costs based upon prepayment speeds.

Near term, we expect our NIM to shift based upon lower mortgage rates, fluctuating financing costs and seasonality of the housing market, some of which will be offset by the received portion of our swap portfolio.

And quarter end, the aggregate portfolio operated with leverage of approximately 4.7 times and a slightly positive duration gap. We ended the quarter with an aggregate portfolio duration gap of a positive 0.22 years a significant change from the previous quarters.

We moved the portfolio duration gap close to zero due to global geopolitical risk and trade uncertainties, as well as limited clarity from the Fed. To move the aggregate portfolio plus fee income we reduced our payer swap positions and added receiver swap hedges to the portfolio.

A continuous rally, in interest in mortgage rates these shorten mortgage durations and thus make the RMBS Portfolio only a partial hedge for the MSR portfolio. To offset the impact of reduced mortgage durations, receiver swaps were added to the portfolio, namely 10 year receiver swaps. As we move forward we will continue to evaluate and alter the portfolio as necessary.

I'll now turn the call over to Marty for a first quarter financial discussion.

Marty Levine

Thank you, Julian. Our GAAP net loss applicable to common stockholders for the fourth quarter was $22.6 million or $1.36 per weighted average share outstanding.

While our comprehensive loss attributable to common stockholders, which includes the mark-to-market of our held for sale RMBS was $8.8 million or $0.53 per share. Our core earnings were $10 million or $0.60 per share.

As Jay mentioned, our book value of March 31, 2019 was $17.54, a decrease of $0.4 per share from December 31, 2018 or 0.2% negative in the first quarter 2019 dividend.

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 have interest rate swaps, swaptions, TBAs and Treasury futures and our third options on Treasury futures, all of which had a combined notional amount of $1.9 billion.

For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives. And as a result, we would record the change in estimated value as the component of net gain or loss on interest rate derivatives.

Operating expenses were $2.8 million for the quarter, of which approximately 538,000 was related to our taxable REIT subsidiaries. On March 5, 2019, we declared a dividend of $0.49 per common share for the first quarter, which was paid on April 30th. In addition, on March 15, 2019, we declared a dividend of $0.5125 per share on our 8.2% Series A cumulative Redeemable Preferred Stock, and a dividend of $0.3666 on our 8.25% Series B fixed-to-floating rate cumulative Redeemable Preferred Stock. Both of which were paid on April 15, 2019.

Our goal remains to distribute regular quarterly dividends of all or substantially all of our taxable income to holders of our common stock and to the extent authorized by our Board of Directors.

Now, I'd like to turn the call back to Jay.

Jay Lown

Thanks, Marty. At this time, we'll open up the call for questions. Operator?

Question-and-Answer Session


At this time, we'll be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Tim Hayes with B Riley FBR. Please proceed with your question.

Tim Hayes

Hey, good evening, guys. Thanks for taking my questions and nice job growing the MSR portfolio. My first one just revolves around the MSR mark. Looks like you wrote down the MSR by about 8 basis points this quarter after writing it down 7 the quarter before that. As you mentioned CPRs have remain low, but can you just talk about the moving parts around the value of the MSR and if the escrow hit you recognized last quarter was also at play this quarter?

Ray Slater

Yes, sure. This is Ray. As far as the escrow hit, it really wasn't a factor this quarter. This quarter really was around the prepayment speeds. Obviously, our quarter -- actual realized fees were well behaved, but all the models are suggestive of a lot of the origination from 2018, which was higher note rates compared to where we are today. And it's being picked up particularly around the summer time. So that's kind of factored into the market values.

Tim Hayes

I see. Okay. That's helpful. Thanks for the clarification there, Ray. And then, how much of the MSR acquisitions were bulk versus flow?

Ray Slater

It was 2 billion in bulk and the remainder was flow.

Tim Hayes

Okay. 2 billion bulk. And correct me if I'm wrong, I don't believe -- I believe it's been several quarters since you've executed on a bulk transaction. Just wondering how bids look today in the market versus maybe six months ago if you're seeing more opportunities there and where are these opportunities are coming from?

Ray Slater

Sure. In the bulk market it still maintains well bid. There's definitely portfolios that have been coming out a lot of them have been on the larger side. So call them 10 billion plus. We haven't seen as much of the typical call it 500 million to 3 billion coming to market as frequently as we did same time last year. But there's definitely a lot of supply it’s just coming in big blocks.

Tim Hayes

Okay. I know you mentioned that assets still remain well so bid despite the rally and rates are not really seeing kind of that much more of attractive opportunities out there?

Ray Slater

Yeah, I think so this has to do with a level setting once we see actual prints come -- you know folks maybe holding back on putting out their portfolios right now, after what they experienced in pricing Q3, Q4 before the rally. So I think that's a large factor and buyers have been eager to pick up the short amount of supply.

Tim Hayes

Okay. Understood. And then would you Ray or Jay or might be a question for Julian, but just maybe put -- can you kind of quantify the returns you're seeing on spec rule today versus the MSR?

Jay Lown

Yes, sure. I let Julian take that.

Julian Evans

In terms of spec rules, I mean, I think on leverage basis we're seeing anywhere, I want to say between 9% and 12% type of return on levered basis that also say if you throw in some 9 agencies they're kind of around the 9% to 11% in CRT is about 10$ to 12%, 14% all depending upon your financing that you're seeing there.

Jay Lown

To answer that one, I will let Ray.

Ray Slater

Yeah I mean, levered basis you're talking mid to high single-digits and then depending on your leverage you can get that into the low to mid-teens.

Tim Hayes

Okay. Got it. That's helpful. And then one more from me for now. Can you just remind me do you guys have a buyback program outstanding and at what valuation would you be interested in potentially using that if you have one?

Julian Evans

No, we currently do not have one in place. So that's something that we have been discussing with the board. I don't have a good answer for you on a specific number when and how we would put that in place, but it's something that we have been thinking about.

Tim Hayes

Okay. Fair enough. I appreciate the comments guys.

Jay Lown

No problem.


[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Jay Lown

Thank you very much today for joining us on today's call. We look forward to updating you soon on our second quarter results. Have a nice evening.


This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.