Cherry Hill Mortgage Investment Corporation

Thank you for standing by. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Cherry Hill Mortgage Investment Corporation second quarter 2022 conference call. The lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad If you would like to withdraw your question, again, press star 1. Thank you. Garrett Edson, you may begin your conference.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's second 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 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 entire mortgage REIT sector was impacted by numerous macro and geopolitical concerns in the second quarter. In addition, the Fed turned aggressively hawkish to combat inflation, as anticipated, and hiked rates twice during the quarter, 50 basis points in May and 75 basis points in June. Last week, we navigated yet another 75 basis point hike. We continue to believe the Fed will remain aggressive with respect to tightening monetary policy in the near term, given their focus on bringing inflation down towards their target levels. In response, the U.S. 10-year Treasury rose to 3.5% by mid-June, and we were positioned well for the higher rate environment. However, recession fears gripped markets towards the end of June, leading to a rally in rates that continued through July. This, coupled with mortgage spreads widening during the quarter, most meaningfully at the end of June, negatively impacted our book value for the quarter. Ultimately, the U.S. 10-year Treasury finished the quarter at 3.02%, 68 basis points above its closing level at March 31st. Our portfolio strategy has remained intact, pairing MSR with agency MBS. We are constructive on agency mortgage spreads given the significant widening this year and believe our positioning there has had a positive impact on performance year to date. We continue to actively adjust our investment portfolio to protect the business and remain less levered relative to historic norms in this dynamic macro environment to preserve book value. Julian will provide more details on our efforts shortly. For the quarter, Improving prepayment speeds continue to aid our Earnings Available for Distribution, or EAD, a non-GAAP financial measure. For the second quarter, we generated a GAAP net loss applicable to common stockholders of $17.6 million, or $0.92 per diluted share, and we generated EAD of $5.2 million, or $0.28 per share, exceeding our quarterly common dividend level of $0.27 per share. On an annualized basis, our dividend yield is hovering in the mid-teens based on the recent average of our closing price of our common stock. Importantly, EAD is just one of several factors we consider in setting our dividend policy. Book value for common share finished at $6.73 as of June 30th. 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 4% quarter over quarter before taking into account any common stock issuances pursuant to our ATM program. We believe our NAV performance demonstrates that the actions we took during the first half of the year, along with our strategy of pairing RMBS with agency MSRs, contributed to mitigating risk and moderating the full impact of spread widening in agency RMBS. That said, we remain committed to stabilizing and growing our NAV and book value as we move ahead. We continue to believe the best approach to adding to our MSR portfolio is remaining selected given the macro environment, the competition, and robust pricing. During the second quarter, we acquired approximately 950 million new PB and MSRs via flow and bulk purchases. As we've said 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 3.4 times lower than the prior quarter as we remain mindful of the heightened market volatility in our current environment. We ended the quarter with $62 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. Our recapture efforts remain solid, with a 12.1% recapture rate on our MSRs in the quarter despite the rise in mortgage rates. That said, recapture rates should continue to decline at these higher levels, though prepayment speeds net of recapture should continue to remain low. Looking ahead, we will continue to closely monitor MBS spreads, and at the appropriate time, we will look to raise our leverage toward more normalized levels. Our proactive decision to de-risk the portfolio and sell securities helped mitigate the impacts of the rise in rates and spread widening during the first half of 2022. We remain positioned for a bias towards further Fed tightening of monetary policy and a higher rate environment for the foreseeable future, as the economy tackles the highest inflation it has seen in over 40 years. In the meantime, we are keeping a firm hand on our balance sheet, and when we see attractive investment opportunities, we will continue to selectively invest. With that, I will turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the second quarter.