Cherry Hill Mortgage Investment Corporation

Greetings and welcome to Cherry Hill Mortgage Investment Corporation first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Rory Rumar of ICR. Thank you. You may begin.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2021 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.chmireet.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 to 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.

Thanks, Rory, and welcome to today's call. In the first quarter of 2021, we continued to reposition our portfolio while maintaining a solid balance sheet as rates continued to climb off historic lows. Despite the rising rate dynamic, elevated prepayment speeds persisted throughout the quarter, due in part to the delay between locks and closings on new loans. At the same time, mortgage rates did not keep pace with the broader rate sell-off. as MBS spreads remain at historic tights. This diversion swing in rates continues and has had a near-term impact on the portfolio's performance. However, with two recent rounds of stimulus and an economic recovery seemingly fully underway, we believe rates are positioned to head higher in the coming quarters. As the shift evolves, we believe MBS spreads will normalize to higher levels, which better align with our hybrid strategy of pairing RMBS with MSRs. In the first quarter, we generated core earnings of 21 cents. We have emphasized in previous calls that core earnings is one of several factors we consider in setting our dividend policy. During previous quarters, where core income far exceeded the distribution level, We were clear that we expected core to normalize over the coming quarters as amortization expenses increased due to higher prepayment speeds. We remain confident in the near-term sustainability of our dividend, and assuming rates remain at these levels or move higher and prepayments further slow, we expect core earnings to realign with the distribution level. For the first quarter, we maintained a strong liquidity position, ending the quarter with $62 million in unrestricted cash on the balance sheet. We continued purchasing MSRs through our flow program and expect the market for MSRs to remain competitive in this higher interest rate environment as new buyers enter the market. The MSR strategy has been a part of our DNA since inception. We believe our ability to manage this asset exceeds those who opportunistically enter and leave this space, whether large or small. Our RMBS portfolio underwent significant changes during the quarter as we worked to reposition its composition in a higher interest rate environment and to control our exposure to spread duration. We believe that a portfolio of lower coupon 15-year and 30-year TBA married with higher coupon pools is the appropriate positioning as rates move higher. Throughout the quarter, we increased our TVA position at the expense of whole loan pools as price premiums for many prepayment protection stories suffered in a higher interest rate environment and performance for select assets underperformed expectations. Company leverage was reduced to 3.4 times from four times at the end of the prior quarter. This was primarily due to the company not taking on additional leverage available to us on the MSR portfolio towards the end of the quarter. Subsequent to the first quarter, we elected to draw on those lines and expect leverage at the end of the second quarter to retrace somewhat towards levels in prior quarters. We believe our portfolio remains well-positioned relative to our view on the revitalization of the economy and an expectation of higher rates over time, allowing us to take advantage of future investment opportunities that offer attractive risk-adjusted rates of return. As the economy has continued to rebound, forbearance statistics have also further improved. As of April 27th, borrowers in active forbearance were at 3.6%. a decline of approximately 2.3% from year end. With our solid liquidity position, we are sufficiently capitalized to satisfy all of our servicing advance obligations for the foreseeable future. Book value per common share finished at $10.83 as of March 31st. The primary reasons for the change in book value quarter over quarter were related to volatility spiking in the second half of February, the change in the shape of the yield curve relative to our hedge position, and higher tax provision expenses partially offsetting the related increase in MSR mark to market. We continue to adjust the composition of our portfolios and hedges in order to drive performance and preserve book value. Ongoing elevated prepayment speeds for our RMBS and MSR portfolios also impacted our first quarter performance. We believe speeds in the MSR portfolio peaked in the fourth quarter and will continue to tail off amid a higher interest rate environment and the ongoing reduction in the weighted average note rate of the loans underlying our MSRs. During the first quarter, we acquired approximately $2.5 billion in Fannie and Freddie MSR utilizing our flow purchase program. We continue to make significant improvement in our recapture efforts. with a 24.5% recapture rate on our MSRs in the quarter. The portion of the MSR portfolio serviced by Round Point experienced a recapture rate of approximately 30% for the first quarter, which was the primary driver for the meaningful increase quarter over quarter. As we move forward, our team will continue to proactively manage our portfolio to ensure that we are in a position to take advantage of attractive investment opportunities when presented. we would expect to invest further in MSRs to take advantage of potential rate increases and generate value for the company and our shareholders. 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.