Cherry Hill Mortgage Investment Corporation

Greetings. Welcome to the Cherry Hill Mortgage Investment Corporation fourth 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. And please note that this conference is being recorded. I will now turn the conference over to Garrett Edson, Investor Relations. Thank you. You may begin.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth 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.chmiread.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. 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, 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. The fourth quarter of 2021 appeared as if it was going to be a breakout quarter for rates as we made progress through mid-November until COVID concerns returned in late November and remained a major factor through the end of the year. The Fed also signaled its timeframe for exiting its bond purchase program, which impacted mortgage spreads going into the end of the quarter. To top it off, the Fed backed off its transitory stance around inflation, as it was clear that inflation was going to be persistent. Ultimately, a key rate for our sector, the U.S. 10-year Treasury, finished the quarter essentially flat to the previous two quarters. Interestingly, though, Shorter dated rates did sell off through the quarter and the yield curve flattened with a two-year, 10-year spread tightening by over 40 basis points. Economic conditions domestically remained strong throughout the quarter and data, broadly speaking, did not disappoint. Volatility persisted through the quarter as well. This theme has continued into the first quarter of 2022 and rates have lifted off meaningfully in anticipation of a rate hike this week. Unfortunately, the events in Ukraine over the past couple of weeks have become a significant concern globally and are making for a volatile near-term economic environment. While we still believe rates will rise longer term, as the Fed has signaled a clear need to fight inflation, we are keeping a watchful eye on our portfolio and maintaining our strong liquidity. For the quarter, improving prepayment speeds continue to aid our earnings available for distribution, or EAD. In the fourth quarter, we generated gap net income applicable to common shareholders of $4.1 million, or $0.23 per share, and EAD of $0.32, exceeding our quarterly common dividend level. As a reminder, EAD is just one of several factors we consider in setting our dividend policy. Book value per common share finished at $8.56 as of December 31st. As other agency REITs have stated, mortgage spreads widened quarter over quarter, particularly in the higher coupons, and were responsible for a significant portion of the decline. The interaction between the hedges and the composition of the portfolio accounted for a portion of the decline as well. Julian will provide more details on the portfolio's performance shortly. As we noted on our prior call, our current book value performance is a function of preferred stock making up a significant portion of our overall equity profile. On a net asset value basis, which doesn't account for the difference in common or preferred equity, our performance in the quarter was more effective with NAV down 3.3% quarter over quarter before taking into account any stock issuances. That said, we remain committed to beginning to drive improvement in our NAV and book value in 2022. We remain constructive on the MSR segment of our business, given our view on interest rates over the near term. We have been disciplined in our approach to investing in MSRs, given sizable competition and robust pricing, which we expect to continue well into 2022. As prepayment speeds further decline in a higher rate world and behavioral modeling risk increases, we continue to believe the best approach remains being selective in adding or replenishing MSR assets. During the fourth quarter, we acquired approximately 1.2 billion UPB and Fannie and Freddie MSRs. We continue to believe the strategy of marrying MSRs with agency RMBS provides for attractive risk-adjusted returns and aids in protecting the portfolio from the full extent of current coupon spread widening. On our last call, we noted that we expected our leverage to gradually rise again. And at the end of the quarter, leverage was a modest half turn higher at 3.6 times from 3.2 times at the end of the prior quarter. The leverage increase was mainly driven by our utilization of the new Fannie Mae facility for MSR advances, as well as converting some TBA securities into specified pools during the quarter. Our recapture efforts remain strong. with a 23.1% recapture rate on our MSRs in the quarter. We expect that recapture rates will decline as mortgage rates rise, though prepayment speeds net of recapture should continue to improve. We ended the year with $64 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. As we move forward in 2022, our expectation is for continued volatility as the Fed begins to tighten monetary policy. While higher rates should improve asset yields on reinvested capital, the pace of the tightening may result in a further flattening of the yield curve, impacting borrower costs, resulting in NIM compression for the aggregate portfolio. We believe the composition of our hedges and higher hedge ratio aids in mitigating some impacts from such Fed tightening. We believe there will be opportunities in agency RMBS as spreads normalize and rates begin to peak. As such, we are keeping a firm hand on our balance sheet, and when we see attractive investment opportunities, we will look to invest prudently. With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the fourth quarter.