Cherry Hill Mortgage Investment Corporation

Greetings, ladies and gentlemen, and welcome to Cherry Hill's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Mr. Garrett Edson. Thank you, sir. You may begin.

I'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's second 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 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.

Thanks, Garrett, and welcome to today's call. In the second quarter of 2021, we continued to actively manage our portfolio while maintaining a strong balance sheet. With the two rounds of stimulus and the ongoing economic recovery, as well as a recent spike in inflation, our view was that rates would hold and we managed our portfolio accordingly. However, despite strong economic data, the Fed has continued to play a dominant role in Treasury asset purchases and interest rates marched lower through the quarter, finishing down about 30 basis points from the end of Q1. Second quarter performance was driven largely by this significant bull flattening of the yield curve and the widening of spreads, particularly on higher coupon MBS, which led to a decrease in the values of MSRs as well as MBS prices. We believe that the recent rally in rates is not sustainable and that rates will turn as the fundamentals of the economy remain strong. In addition, the Fed is closer to paring back its asset purchases and additional fiscal stimulus appears close. Accordingly, we will remain positioned for a bounce higher in rates, which aligns with our hybrid strategy of pairing RMBS with MSRs. In the second quarter, we generated core earnings of $0.28 per share, covering our quarterly dividend. Prepayment speeds improved quarter over quarter across the portfolio, positively contributing to earnings performance. Importantly, core earnings is just one of several factors we consider in setting our dividend policy. While we are watching closely the recent fluctuations in rates and the potential impact on prepayments and asset yields, we remain confident in the near-term sustainability of our dividend. For the second quarter, we continued purchasing MSRs through our flow program. Pricing for MSRs has been aggressive, particularly in the bulk space, where potential recapture origination economics often appear as a component to the pricing of in-the-money collateral. We expect the market for MSRs to remain competitive. That said, We believe our ability to manage this asset class effectively exceeds those who speculatively enter and leave this space, whether large or small. In our last call, we noted our intention to access funds available to us on the MSR financing facilities, and as a result, company leverage ticked up slightly to 3.6 times from 3.4 times at the end of the prior quarter. Book value for common share finished at $9.63 as of June 30. The change in book value on a quarter-over-quarter basis was primarily due to the impact of spread widening, which is not something for which we've historically hedged. We continue to proactively manage the composition of our portfolios and hedges in order to drive performance, preserve book value, and increase our shareholders' equity. In terms of prepayment speeds for our RMBS and MSR portfolios, we benefited in the quarter from lower speeds, RMBS positioning, and the ongoing reduction in the weighted average note rate of the loans underlying our MSRs. We continue to make significant progress in our recapture efforts, with a 27.6 recapture rate on our MSRs in the quarter. During the second quarter, we acquired approximately 1.6 billion in Fannie and Freddie MSRs, utilizing our full purchases program. We believe this approach provides benefits as it mitigates the impact of current coupon spread widening on our portfolio. As the economy has strengthened, forbearance statistics also continue to improve. As of July 13th, borrowers in active forbearance were at 2.9%, a 70 basis point improvement from our update on last quarter's call. With our liquidity, we are sufficiently capitalized to satisfy all of our servicing advance obligations for the foreseeable future. We ended the quarter with $54 million of unrestricted cash on the balance sheet. 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. We remain constructive on the U.S. economy and its recovery from the pandemic, the current bout of the Delta variant notwithstanding. We expect to further invest in MSRs to take advantage of an anticipated bounce in interest rates that we believe should 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 second quarter.