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spk02: 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.
spk00: 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.
spk03: 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.
spk01: Thank you, Jay. In the first quarter, the U.S. experienced higher interest and mortgage rates as expectations increased for potentially higher growth and inflation as a nationwide vaccine program was rolled out. The successful vaccine rollout, as well as two additional rounds of government stimulus, added further fuel to the economy. With many states reopening and relaxing most COVID-related protocols, there appears to be a solid foundation for upward economic growth in 2021. In the first quarter, we remained proactive in terms of adjusting our portfolio positioning and maintaining our liquidity position. We continue to closely monitor the overall environment and will remain opportunistic in making new investments throughout the year. At quarter end, our servicing-related investments comprised of full MSRs had a UPB of approximately $22 billion and a market value of approximately $217 million. During the quarter, we purchased $2.5 billion of new MSRs through our flow program. At the end of the first quarter, MSR investments represented approximately 48% of our equity capital and approximately 14% of our investable assets, excluding cash, well above where we stood at December 31st. Meanwhile, our RMBS portfolio counted for approximately 35% of our equity. As a percentage of investable assets, RMBS represented approximately 86%, excluding cash at quarter end. Our conventional MSRs averaged approximately 35% net CPR for the first quarter, down from 45% net CPR in the previous quarter, driven by better prepayment speeds as well as improved recapture, as Jay previously mentioned. We saw mortgage volumes begin to decline and mortgage speeds begin to decelerate from the record fourth quarter levels, in large part due to the increase in interest and mortgage rates. Meanwhile, the RMBS portfolio's weighted average three-month CPR rose for the first quarter to approximately 21%, relative to 20% in the fourth quarter. With mortgage rates higher but still at historically low levels, April CPRs remained similar as homeowners continued to take advantage of the environment. As of March 31st, the RMBS portfolio, inclusive of TBAs, stood at approximately $1.4 billion. down from $1.6 billion the previous quarter. During the first quarter, we continued to reposition and deliver our portfolio to maintain liquidity as well as invest in MSRs. As Jay mentioned, we sold specified pools and moved into TBA positions in 30-year and 15-year collateral. Quarter over quarter, we reduced our 30-year securities position from nearly 100% the previous quarter to 79% of the portfolio. As an offset, the 15-year securities position and other securities grew to 21% of the portfolio. For the first quarter, we posted a 1.57 RMBS net interest spread versus a 1.77% net interest spread reported for the fourth quarter. The reduction in spread was primarily driven by increased RMBS amortization expense. In the recent quarter, our amortization expense has increased as mortgage prepays have risen. Homeowners have taken advantage of historically low mortgage rates, and servicers have improved their refinancing capabilities. The increased amortization lowered yields, more than offsetting the decline in interest expense. As interest and mortgage rates rise, we believe amortization has the potential to improve as the year progresses for the RMBS and MSR portfolios. The current mortgage market is approximately 42% refinanceable, below where we started the year given the movement in interest rates. Mortgage volumes declined but remained elevated, and we expect that will remain the case in the near term as interest rates have firmed since quarter end. Despite the recent rate move, we believe improvements in amortization may show up in the second half of the year. Ripple costs should continue to remain low as the Fed remains committed to holding the Fed's funds rate near zero and allowing growth and inflation to run hotter than historical norms to make up for periods when inflation was run too low previously. At quarter end, the aggregate portfolio operated with leverage of approximately 3.4 times. I will now turn the call over to Mike for our first quarter financial discussion.
spk04: Thank you, Julian. Our gap net income applicable to common stockholders for the first quarter was approximately $18.3 million, or $1.07 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 approximately $600,000, or 4 cents per share. Our core earnings attributable to common stockholders were approximately $3.5 million, or 21 cents per share. Our book value per common share as of March 31st was $10.83, compared to a book value of $11.16 as of December 31st, 2020. We used 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 approximately $2 billion. You can see more details with respect to our hedging strategy in our 10Q, 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 interest rate derivatives. Operating expenses were $3.4 million for the quarter. On March 4th, 2021, Our board of directors declared a dividend of 27 cents per common share for the first quarter of 2021, which was paid in cash on April 27th, 2021. We also declared a dividend of 51.25 cents per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of 51.5625 cents on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock. both of which were paid on April 15, 2021. At this time, we will open up the call for questions. Operator?
spk02: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Mikael Guberman with JMP Securities. Please proceed.
spk06: Hi, Mikael. Please check and see if you have your line muted.
spk05: I'm sorry, I have my line muted. Thank you. Sorry about that. Good afternoon. I'm wondering how much you expect prepay speeds to slow in the second quarter thus far or how you're also thinking about leverage given how tight MBS spreads are currently. Thank you.
spk03: Are you talking about speeds on MBS or on MSRs or both?
spk06: Both.
spk03: So I'll take the MSR part. and I'll let Julian talk about the MBS and the leverage. We have seen speed slow down. April was a pretty good print for us, relatively speaking, given the past three or four quarters, and we expect that to persist, as I think I noted in the script, that through the turnover of the collateral, the weighted average note rate has come down in a decent amount over the last couple quarters. And as such, we have seen speed net of recapture fall. You know, the key is net of recapture because the reality with recapture is those outbound calls are going to increase your gross CPRs, and you're really focused on the net CPR after the recapture. But we have seen... continued through April, prints somewhere around 30, low 30 CPR net.
spk01: On the RMBS side, look, our April speeds came in line to where the March speeds were. There was a little bit of differential that we saw there. One of the things is we've been, and that's just on the specified pool portfolio. We have obviously increased the TBA portfolio, as Jay has kind of mentioned, as we've gone into TBAs in 30-year as well as in 15-year collateral, so for some diversification. So the overall speeds we're expecting to slow down if you include the combination of TBA as well as spec pools. But the spec pools, they were in the similar range. to where they were the previous month. In terms of the overall what we think of mortgages, mortgages are on the tight side. I think from a fundamental evaluation perspective, most people note that either on a nominal spread basis or on a LIBOR-AS basis, they are at their tights. The technicals are expected to remain strong and be with us throughout probably the second and third quarter. There is an expectation potentially if the U.S. data remains on good footing that the Fed might announce something later at Jackson Hole, but that will depend on the data, and then they will decide whether they will taper at that point in time. So mortgages, you know, we view them as on the richer side, but from a fundamental standpoint, but the technicals, they can still remain well bid here for a while.
spk05: Gotcha. And if I could just follow up on just the corresponding question on leverage. I believe, Jay, you mentioned that leverage would maybe drift back to historical levels. But is there sort of a range that you guys are targeting going forward?
spk03: As for a range, I wouldn't exactly – Pinpoint it to a range. I think it's a function. It'll be more a function of the asset allocation, you know with respect to equity and and how much equity we Decide to deploy, you know outside of RMBS and potentially into MSRs on a go-forward basis so like I mentioned in the script we in April we did take advantage of Money available to us on the MSRs and That brings us more in line with what I would say historical for the last couple quarters, somewhere around four.
spk05: Got it. Thank you very much, gentlemen.
spk02: As a reminder, to star one on your telephone keypad, if you would like to ask a question, we will just pause for a brief moment. There are no further questions at this time. I would like to turn it back over to management for closing remarks.
spk03: Thanks, everybody, for joining us on our first quarter call. We look forward to updating you in August on our second quarter's results. Have a great afternoon.
spk02: Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.
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