Cherry Hill Mortgage Investment Corporation

Good day, and thank you for standing by. Welcome to the Cherry Hill Mortgage Investment Court Third Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to your speaker for today, Garrett Edson. You may begin. Thank you, Garrett.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's third 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 our third quarter earnings call. Central bank policy and macroeconomic pressures persisted in the third quarter, which drove volatility higher and certainly impacted most mortgage assets. Persistently high inflation and a well-supported employment market led the Fed to enact two 75 basis point rate hikes in July and September and provided the Fed the cover to again raise rates earlier today. Fed has remained steadfast in telegraphing its mission to lower inflation to its target level and markets have reacted significantly to any rhetoric related to the path and pace of future tightenings in this cycle. This has helped fuel expectations for short-term rates to exceed the levels policymakers have previously outlined. Additionally, the U.S. Treasury two tens curve inverted 51 basis points over the quarter, moving from plus six basis points at 630 to minus 45 basis points at the end of September. signaling the potential for a forthcoming recession. While the U.S. 10-year Treasury finished the quarter at 3.8%, 78 basis points above its closing level at June 30th, it surpassed 4.25% at one point in October. The increase in rates and the shape of the yield curve were relevant to the performance of RMBS assets in our sector, and much has been discussed about how the rise in Treasury rates and increased volatility has impacted mortgage spread widening this year and its impact to REIT book values. While it is our view that Agency MBS looks attractive at these levels, the sector has continued to drift wider in October, as others have highlighted. Despite this, we do believe that we are approaching MBS valuations that are attractive and expect to capitalize on that over time. For now, We have positioned our portfolio for additional rate hikes and further mortgage spread widening as investors look to assess where the Fed will signal a slowdown in this tightening cycle. During the quarter, we worked to effectively minimize the embedded macro risks and focus on what we could control. We selectively deployed capital as we saw opportunities emerge while maintaining a leverage ratio that has room to increase. We were proactive in terms of our hedging strategy and coupon selection, which began at the end of the prior quarter, rotating out of lower coupon MBS into higher coupon MBS. The end result was a solid performance in a very difficult environment. Julian will provide more details on our efforts there shortly. For the third quarter, we generated GAAP net income applicable to common stockholders of $38.3 million. or $1.90 per diluted share, and we generated Earnings Available for Distribution, or EAD, a non-GAAP financial measure of $5.1 million, or 26 cents per share. This was just below our quarterly common dividend level of 27 cents per share. Our primary focus this quarter was to protect book value, given our view on MBS spread widening. As we've noted before, EAD is only one of several factors considered in setting our dividend policy, and we and our board continue to monitor our earnings capabilities to ensure our dividend is at an appropriate level. Book value per common share finished at $6.05 as of September 30th, and a material amount of this is simply a function of preferred stock still making up a significant portion of our overall equity profile. On an MAV basis, which does not account for the difference in common or preferred equity, our strategy of pairing RMBS with agency MSRs continues to effectively minimize risk and moderate the impact of spread widening on agency RMBS. NAV in the quarter was off approximately 5.1% quarter over quarter before taking into account any common stock issuances pursuant to our ATM program. We remain committed to stabilizing and growing our NAV and book value, and using all of our tools to navigate through the current environment. During the third quarter, we acquired approximately 1.2 billion UPB in Fannie and Freddie MSRs via flow and bulk purchases. Pre-payment speeds on our MSR portfolio have declined materially, and as such, the pace of reinvestment to maintain the allocation of capital to the asset class has slowed. Our strategy of pairing MSRs with agency RMBFs, along with proactive portfolio management and edging, benefited shareholders this quarter given the composition of the overall portfolio. Our recapture efforts remain solid, with a 7% recapture rate on MSRs in the quarter despite the ongoing rapid rise in mortgage rates. We would expect recapture rates should further decline at these higher interest rate levels, though, prepayment speeds, net of recapture should continue to remain low. At the end of the quarter, financial leverage increased modestly to 4.2 times as we saw opportunities late in the quarter to deploy capital opportunistically. Given the current heightened market volatility, we believe we remain prudently levered and we're cognizant not to be too aggressive in increasing our leverage. We ended the quarter with $43 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. Looking ahead, we will continue to selectively deploy capital where we see clear risk adjusted opportunities as we closely monitor central bank monetary policy actions and their impact on global markets and MBS spreads. We expect to maintain an elevated hedge ratio as we remain positioned for a bias towards further Fed tightening of monetary policy and a higher rate environment for the foreseeable future as inflation persists and we expect economic headwinds to carry into 2023. We will also continue to actively adjust our investment portfolio to protect the business and remain mindful of our liquidity and leverage profile in this dynamic environment to preserve book value. With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the third quarter.