Cherry Hill Mortgage Investment Corporation

Greetings. Welcome to the Cherry Hill Mortgage Investment Corporation first quarter 2022 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'll now turn the conference over to your host, Garrett Edson. You may begin.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2022 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 earnings available for distribution, or EID, 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. First quarter was certainly eventful for both Cherry Hill and other agency-focused REITs, as markets endured the considerable widening of mortgage spreads, inflation hitting 40-year highs, a war in Eastern Europe, and continued market concerns about supply chains not at full capacity. As the Fed began to telegraph its strategy to fight inflation, rates spiked meaningfully during the quarter, and that has further progressed into May. The U.S. 10-year Treasury finished the quarter at 2.34%, 83 basis points above year-end. At the same time, economic data held the line for most part, with unemployment remaining near historic lows and close to or at full employment levels. The Fed has telegraphed significant rate hikes in the months ahead to combat high inflation, and started with a 50 basis point move last week. Markets globally are digesting the velocity of future hikes and the Fed's intentions around reducing its balance sheet. We are actively adjusting our investment portfolio as we evaluate the impact these actions will ultimately have on the broader economy as well as mortgage-related assets. For the quarter, Improving prepayment speeds continue to aid our earnings available for distribution, or EAD, a non-GAAP financial measure. In the first quarter, we generated GAAP net income applicable to common stockholders of $25.6 million, or $1.40 per share, and EAD of $6.2 million, or $0.34 per share, exceeding our quarterly dividend level of $0.27 per share. On an annualized basis, our dividend yield is 16% based on the recent average of our closing price of our common stock. As a reminder, EAD is just one of several factors we consider in setting our dividend policy. Book value for common share finished at $7.27 as of March 31st. During the quarter, we reduced the size of our RMBS portfolio in an attempt to mitigate the impact of spread widening and minimize the impact on book value and NAV. Spreads widened during the quarter on average about 25 basis points, which accounted for nearly three quarters of the decline in book value in this period, in line with our previously provided fourth quarter basis risk sensitivity profile. We were able to stabilize the book value reduction in March and we are pleased to report that the book value was up slightly in April. Julian will provide more details on our portfolio performance shortly. As a reminder, our current book value performance per common share 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 approximately 8% quarter over quarter, before taking into account any common stock issuances pursuant to our ATM program. We believe our NAV performance shows our strategy of pairing RMBS with agency MSRs partially mitigated the full effect of spread widening in agency RMBS. That said, we remain committed to stabilizing and growing our NAV and book value. We continue to be constructive on MSRs given our view on interest rates over the near term, and they provided a good amount of assistance relative to our book value performance in the quarter. We would note, however, that with the 10-year at the 3% mark, the ability for the MSR portfolio to continue to hedge the RMBS portfolio begins to become less effective as the current coupon for agency RMBS is now well above the weighted average note rate of our MSR portfolio. That said, we continue to believe MSR and RMBS assets complement each other well. As a result, we expect to remain disciplined in our approach to investing in MSRs given the rise in rates, the competition, and robust pricing. 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 first quarter, we acquired approximately 500 million UPP and Fannie and Freddie MSRs via flow purchases. As noted before, 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. At the end of the quarter, leverage was 3.6 times. comparable with the end of the prior quarter. We ended the quarter with $52 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. Our recapture efforts remain strong, with a 19.6% recapture rate on our MSRs in the quarter. Recapture rates should continue to decline as mortgage rates rise, though prepayment speeds net of recapture should continue to improve. Looking ahead, as the Fed continues meaningfully tightening rates and providing greater clarity around its balance sheet reduction program, we believe the mortgage basis should stabilize later in the year. Our intention is to raise leverage back to more historical levels and to take advantage of opportunities in agency RMBS as spreads normalize and rates begin to peak. In the meantime, we continue to keep a firm hand on our balance sheet, And when we see attractive investment opportunities, we will look to invest prudently. With that said, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the first quarter.