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Operator
The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
Matt
Thank you for standing by and welcome to the conference call, the Cherry Hill Mortgage Investment Corporation's fourth quarter 22 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Garrett Edson of ICR. Please go ahead.
Garrett Edson
We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth 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 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 Lownd, 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.
Jay Lownd
Thanks, Garrett. Welcome to our fourth quarter 2022 earnings call. Our efforts were effective in the fourth quarter to protect book value as investment markets remained in a challenging economic environment. High inflation and a well-supported U.S. employment market led the Fed to hike rates 125 basis points during the fourth quarter, and it appeared that the Fed was making headway with its efforts to lower inflation back to its target level. Volatility subsided during the quarter, and spread sector assets recovered some of the losses experienced in the third quarter. As many of our peers have noted, the mortgage basis improved throughout the quarter as well. The US Treasury yield curve, however, remained inverted and has shown no signs of steepening thus far this year, which has significantly impacted the earnings power of many companies in our sector. Given the most recent economic data, markets are bracing for a higher for longer scenario and the potential for a recession later this year. The combination of our efforts to refine our investment and hedging strategies has enabled us to be successful at stabilizing and protecting book value in recent quarters. Given the expectation of continued interest rate hikes and the evolving macro environment, we remain positioned for additional rate hikes. To that point, we continue to utilize TBAs to partially offset spread-widening risk as we await the Fed to convey when it expects to end its tightening cycle, at which point we could look to increase our risk profile. For the fourth quarter, while we generated a gap net loss applicable to common stockholders of $1.59 per diluted share, we generated earnings available for distribution, or EAD, a non-GAAP financial measure of $5.3 million, or $0.24 per share. It bears repeating that EAD is only one of several factors considered in setting our dividend policy. Thus, while not aligned this quarter, our Board continues to monitor our earnings capabilities to ensure our dividend is at an appropriate level. Book value per common share finished at $6.06 as of December 31st, up a penny from the prior quarter. We believe creating a more stable book value profile is in our shareholders' best interest and remains a top priority for us. When you consider that our preferred stock makes up a significant portion of our overall equity profile, we were pleased that on an NAV basis and before taking into account any issuances of equity through our common stock ATM program, we posted a stable NAV relative to the third quarter. As such, During the second half of 2022, NAV was off approximately 5.1%, which we believe compares favorably to the performance of many others in our industry and speaks well to our ability to navigate a very challenging macro environment and the unprecedented speed of Fed rate hikes. During the fourth quarter, we acquired approximately $780 million in UPV with Fannie and Freddie MSRs, via flow and bulk purchases. Pre-payment speeds on our MSR portfolio remain low, and thus the pace of reinvestment to maintain the allocation of capital to the asset class has decelerated. Recapture rates on MSRs also slowed to the low single digits as expected, given the higher interest rate levels. Our strategy of pairing MSRs with agency RMBS, along with proactive portfolio management and hedging, has continued to benefit shareholders. At the end of the year, financial leverage improved modestly to 3.8 times as we took a more targeted and disciplined approach in the fourth quarter with respect to deploying capital. Given the ongoing market volatility, we believe we remain prudently levered and expect to be opportunistic in deploying capital and increasing our leverage in 2023. we ended the year with $57 million in unrestricted cash on the balance sheet, maintaining a solid liquidity profile. As we look forward in 2023, we expect to maintain our conservative and proactive approach to portfolio management. Where there are risk-adjusted opportunities to selectively deploy capital, we will take advantage. Additionally, we anticipate our hedge ratio will likely remain elevated given our expectations of ongoing Fed rate hikes to further combat stubborn inflation. Our priority remains to protect book value, and we will remain mindful of our liquidity and leverage profile, given the environment. 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.
Garrett
Thank you, Jay. Investment themes that were prominent in the third quarter rolled over into the fourth quarter. Heightened volatility, thinly liquid investment markets, widening spread sectors, and a weakening equity markets were all influenced by a Fed determined to reduce inflation. All changed after the October and November CPI reports, as the reported inflationary numbers suggested that inflation was moderating faster than expected. Post the inflationary numbers, spread sector and equity markets tightened and interest rate markets firmed as investor sentiment changed. The sentiment change was driven by a perception that the Fed might end up doing fewer Fed fund rate increases than were initially expected. With that said, most inflationary measures have moderated but remained elevated above the Fed's 2% target for the first two months of 2023. Stubbornly high inflation has led to renewed predictions of the Fed having to increase the Fed's funds rate greater than what the market had initially perceived. The market is currently expecting a terminal Fed's fund rate level between 5.25 and 5.75. As a result, we continue to employ a thoughtful hedging strategy in the fourth quarter to protect our book value, and we believe those efforts have largely been working as intended. This investment strategy has carried over into the first quarter of 2023. At year end, our MSR portfolio had a UPB of 21.7 billion and a market value of approximately 280 million. During the quarter, we purchased approximately 780 million UPB of new MSRs through our bulk and flow programs. At year end, the MSRs and related assets represented approximately 38% of our equity capital and approximately 30% of our investable assets excluding cash. Meanwhile, our RMBS portfolio accounted for approximately 45% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented approximately 70% excluding cash at year end. During the quarter, we continued to experience CPR improvements in both our MSR and RMBS portfolios. Our MSR portfolio's net CPR averaged approximately 5% for the fourth quarter, down from approximately 7% net CPR in the previous quarter. The decline was mainly driven by seasonality and the change in mortgage production coupons, which drove slower prepayment speeds in the quarter. The portfolio's recapture rate was lower at approximately 2% versus approximately 7% in the third quarter. As expected, with mortgage rates rising, as the incentive to refinance has lessened. Moving forward, we continue to expect lower capture rates and stable or improved net CPRs for the foreseeable future, given the current levels of interest and mortgage rates. The RMBS prepayment speeds remain low. The lower CPR was driven by a combination of new asset purchases, as well as the fact that the current higher mortgage rate environment is compressing CPRs for the existing portfolio. As of today, the majority of the mortgage universe remains out of the money in terms of refinancing. We would expect prepayments to remain at low levels as long as interest rates stay at these levels or move higher. For the quarter, the RMBS portfolio's weighted average three-month CPR reduced to approximately 3.8% compared to approximately 4.7% in the third quarter. As of December 31st, the RMBS portfolio, inclusive of TBAs, stood at approximately 646 million compared to 759 million at the previous quarter end. Quarter over quarter, the spec pool portion of the portfolio continued to grow as we opportunistically took advantage of higher interest rate levels and lower price premiums by putting new cash to work, as well as converting a few dollar rolls into pools as dollar rolls weakened further. The RMBS portfolio numbered lower as we further utilized TBA securities to hedge a portion of the portfolio. We also continued to proactively change the portfolio's composition, moving into higher coupons and reducing spread duration for the portfolio. At the end of the fourth quarter, the 30-year securities position represented the entire RMBS portfolio, up from 96% at the end of the third quarter. For the fourth quarter, we saw an increase in our RMBS net interest spread to 3.77% as compared to 3.49% net interest spread reported for the third quarter. The improved NIM was driven by previously mentioned factors. One, we took advantage of wider mortgage spreads and higher yield levels by putting new money to work throughout the quarter. Two, we rotated our portfolio, swapping out of low yielding assets and purchasing higher coupon mortgages with better yields. Overall expenses were greater but were more than offset by increased income, which was driven by the previously mentioned reasons. At year end, the portfolio's financial leverage stood at approximately 3.8 times at the aggregate portfolio, and the portfolio was managed with a negative duration gap. Looking forward, we remain mindful of the current environment, as we expect the investment markets to remain choppy until there is a clear sense that the Fed is reaching its terminal rate. I will now turn the call over to Mike for a fourth quarter financial discussion.
Jay
Thank you, Julian. Our gap net loss applicable to common stockholders for the fourth quarter was $34.5 million, or $1.59 per weighted average diluted share outstanding during the quarter, while comprehensive income attributable to common stockholders, which includes the mark-to-market of our held-for-sale RMBS, was $6.2 million, or $0.29 per weighted average diluted share. Our earnings available for distribution attributable to common stockholders were $5.3 million or 24 cents per share. Our book value per common share as of December 31st, 2022 was $6.06 compared to a book value of $6.05 as of September 30th, 2022. We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings. At the end of the fourth quarter, We held interest rate swaps, TBAs, Treasury futures, and options on Treasury futures, all of which had a combined notional amount of $930 million. You can see more details with respect to our hedging strategy in our 10-K, as well as in our fourth quarter presentation. For GAAP purposes, we've not elected to apply hedge accounting for our interest rate derivatives. And as a result, we record the change in estimated fair value as a component of the net gain or loss on interest rate derivatives. Operating expenses were $3.2 million for the quarter. On December 15th, 2022, the Board of Directors declared a dividend of 27 cents per common share for the fourth quarter of 2022, which was paid in cash on January 31st, 2023. We also declared a dividend of 51.25 cents per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of 51.5625 cents On our 8.25%, Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on January 17, 2023. At this time, we will open up the call for questions. Operator?
Matt
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. To ask a question, please press star 11.
spk12
One moment, please. Thank you. One moment.
Matt
Our first question comes from the line of Miguel Goberman of JMP Securities. Your line is open.
Miguel Goberman
Hey, good afternoon, gentlemen. Thanks for taking the question. Could you perhaps expand a little bit further on the comment about the viability of the dividend versus what sort of sustainable level of core earnings you might see going forward given the especially given Powell's comments today about where rates are headed. And also, I don't know if I heard you guys correctly, but did you say that book value was down 5% thus far this quarter?
Jay Lownd
Hey, Mikhail, how are you? The second question is, no, we didn't say that at all. Book value at the end of February prior to the dividend is flat.
Mikhail
That's right. Okay, thank you. Apologies for that.
Jay Lownd
No worries. With respect to the dividend, look, I think, you know, you've heard from us before and you'll continue to hear that we consider EAD as a measure. And I think we alluded to that in the script. But, you know, we look at total return. You know, we obviously think about where rates may go and how sustainable the dividend is over time. And, you know, broadly speaking, the board meets every quarter and we'll continue to evaluate strength of the dividend relative to earnings power and the requirements of the market relative to our space. And we expect to provide more information on that later this week.
Miguel Goberman
All right. Thank you. And just going forward, how do you guys think about the tradeoff between building the portfolio towards agency RMBS and MSRs if interest rates do keep sort of breaking through Um, the five and a quarter to five and three quarter expected rate. If we start going into a six handle, how do you start thinking about your portfolio then? Thanks.
Garrett
Um, um, you know, look, I think the early read is that, uh, we have preferred our agency RMBS at these particular levels, which we would say is kind of in the mid teens that we kind of see the returns. We have also aiding, I think, some of the performance. We have a rather large swap portfolio, which is kind of moved and kind of coincided with repo rates rising almost on a one-to-one basis for us. So that has offset some of the rising repo costs that we've seen. So if the Fed is moving higher, that portfolio has kind of benefited us. In terms of MSR and kind of the returns that we're seeing right now in terms of the portfolio, I would say kind of low to mid-teens is kind of what we're seeing for those type of returns. But in general, we're evaluating that constantly over time. But I would say just from a spread-widening perspective, agency RMBS looks rather attractive.
Miguel Goberman
All right. Thank you, gentlemen. Appreciate it. Good luck going forward.
spk11
Thanks, Mikael.
Matt
Thank you. One moment, please. Our next question comes from the line of Mr. Howlett of B.R. Rowley. Your line is open. Matthew Howlett.
Howlett
Oh, hey, guys. Hey, Jay. Thanks for taking my question. Hi, Matt.
Jay
I would love to hear from the team. How do you characterize the risk profile of the company today? I mean, clearly leverage is low from a historical basis. It went down in the fourth quarter. I look at your sensitivities and, you know, in terms of interest rates, it's nothing one way or the other. The book doesn't change all that much. You're off the overhead. How do you characterize it? And, you know, without asking an obvious question, what's it going to take to begin, you know, taking, you know, increasing leverage, taking advantage of, you know, these underpriced market, these cheap MBS values and so forth? I'd just love to hear you put that in the context in terms of where the company is versus historically where it's operated.
Garrett
It's Julian again. You know, look, I think we sit here and say, look, the market looks very attractive, but I think you need better clarity from the Fed. Clearly, you know, Paul had statements today, and in the statements he's kind of alluded to interest rates and the Fed funds rate moving kind of higher. The market is kind of projecting it at this point in time to be 5.25%, somewhere between 5.25% and 5.75%. I would say, you know, if we just take a month ago outside of the more improved data that we got from January, the market was probably expecting the Fed to stop somewhere between five and five and a quarter at that point in time. I think if we get greater clarity from the Fed in terms of the directionality or how high they want to take rates, I think that becomes your opportunity time to kind of take probably increased leverage and take more advantage of the market.
Jay
In terms of the Fed, what they do with the balance sheet, any sort of thoughts regarding their MBS holdings? What are your thoughts there?
Garrett
I think the initial reception is that basically that the Fed would not sell MBS. They've had multiple opportunities to kind of sell MBS throughout this time period that they've been actually raising the Fed funds rate. I think that's their most effective tool, at least from their perception. is that they'd like to continue to raise the Fed funds rate to levels they perceive that will kind of slow down the economy and retain the balance sheet. I can't allude to that at some point, if continuing to raise the Fed funds rate proves to be ineffective, that they might try to do something on the balance sheet. It's a possibility, but it wouldn't be, in my mind, a high percentage that that's what they would like to do.
Jay
Gosh, it makes a lot of sense, doesn't it? Look, moving to servicing, it's been a great asset and a great strategy for you. I mean, if you look at it, where MSR values are today, obviously rates, you have a low coupon, an underlying coupon in the servicing. Would you look, if there's a scenario where some are forecasting the Fed to cut at some point, maybe later this year or early next year, would you look to reallocate to more MBS? Does servicing sort of run its course, or do you feel like you know, that profile with your recapture is still going to be a core asset if, you know, going forward or if the interest rate cycle does change. I'm just curious how you look at servicing, you know, this year.
Jay Lownd
Yeah, sure, Matt. So the portfolio has a note rate of, let's just call it three and a half. Right. And the current interest rate on mortgages is, let's just round at six and a half. So, you know, from the perspective of That portfolio, the way we look at that portfolio is there's a lot of runway in terms of having pretty strong cash flows before that portfolio is in danger of refinancing outside of normal life events. And so we really feel good about the strength of the cash flows in that portfolio, despite the rates at this point, given the duration and the convexity of that portfolio. which is almost non-existent at this point. We think there's a lot of room to run on that portfolio should the Fed cut rates at some point in time before we have to even start thinking about recapture and things around the degradation of that portfolio. So we feel really good about the profile of that portfolio today because the reality is speeds are your enemy. you know, you can hedge a lot of things rate-wise, but speeds are your worst enemy. And from our vantage point, given the quality characteristics that are inherent in the portfolio today, we think that asset, you know, is going to continue to perform pretty strong.
Jay
Yeah, look, the speeds, I mean, what were they, under five? I've never seen them this low in my lifetime, in my career. I don't know if you've seen, I don't know how much lower they can go, but I mean, it's been just a, incredible to see the speeds fall where they are in it. I know you're prepaid and protected on the MBS side. I'm just curious on the service. It makes a lot of sense with the strong cash flows. On that scenario, would you be more active in the bulk market with some of these small originators that are selling or going out of business? It seems like the value has cheapened up a little bit earlier this year. Would you look to blow that portfolio, Jay, given the given what looks like to be a lot of sellers out there, even some big sellers?
Jay Lownd
So we look at portfolios every day. And for the smaller originators, it's our expectation that there's a concession in price, which is favorable to us in terms of yield. And so we absolutely look at and see a lot of those portfolios on a regular basis. If you're asking me if we're seeing a lot of small guys sell, I wouldn't say we're seeing a lot of small guys sell. We're seeing, you know, a decent steady flow of volume away from what I would call, you know, the Wells dynamic going on today. But there is an opportunity to acquire the asset, you know, at levels that I would say that are slightly lower than, you know, the craziness in the fourth quarter.
Jay
Yeah, right, exactly. That might be an opportunity for you guys. Well, look, I'll just say that the performance has been terrific. I mean, the yield curve's inverted, and you guys are generating, you know, this positive economic return that looks just terrific. And really congratulating on really some great results and, you know, hopefully a very strong 23. Thanks a lot. Thanks, Matt.
Matt
Thank you. I'm showing no questions at this time. I'd like to turn the call back over to management for any closing remarks.
Jay Lownd
Thank you, Operator. Thank you, everybody, for joining us on our fourth quarter 2022 earnings call. We look forward to updating you on our first quarter results sometime in May. Have a good evening.
Matt
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating.
spk12
You may now disconnect. Have a great day.
Operator
To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. music music
spk00
Thank you.
Matt
Thank you for standing by and welcome to the conference call, the Terry Hill Mortgage Investment Corporation's fourth quarter 22 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Garrett Edson of ICR. Please go ahead.
Garrett Edson
We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth 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.chmire.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 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 Lownd, 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.
Jay Lownd
Thanks, Garrett. Welcome to our fourth quarter 2022 earnings call. Our efforts were effective in the fourth quarter to protect book value as investment markets remained in a challenging economic environment. High inflation and a well-supported U.S. employment market led the Fed to hike rates 125 basis points during the fourth quarter, and it appeared that the Fed was making headway with its efforts to lower inflation back to its target level. Volatility subsided during the quarter, and spread sector assets recovered some of the losses experienced in the third quarter. As many of our peers have noted, the mortgage basis improved throughout the quarter as well. The US Treasury yield curve, however, remained inverted and has shown no signs of steepening thus far this year, which has significantly impacted the earnings power of many companies in our sector. Given the most recent economic data, markets are bracing for a higher-for-longer scenario and the potential for a recession later this year. The combination of our efforts to refine our investment and hedging strategies has enabled us to be successful at stabilizing and protecting book value in recent quarters. Given the expectation of continued interest rate hikes and the evolving macro environment, we remain positioned for additional rate hikes To that point, we continue to utilize TBAs to partially offset spread-widening risk as we await the Fed to convey when it expects to end its tightening cycle, at which point we could look to increase our risk profile. For the fourth quarter, while we generated a gap net loss applicable to common stockholders of $1.59 per diluted share, we generated earnings available for distribution, or EAD, a non-GAAP financial measure of $5.3 million, or $0.24 per share. It bears repeating that EAD is only one of several factors considered in setting our dividend policy. Thus, while not aligned this quarter, our Board continues to monitor our earnings capabilities to ensure our dividend is at an appropriate level. Total value per common share finished at $6.06 as of December 31st, up a penny from the prior quarter. we believe creating a more stable book value profile is in our shareholders' best interest and remains a top priority for us. When you consider that our preferred stock makes up a significant portion of our overall equity profile, we were pleased that on an NAV basis and before taking into account any issuances of equity through our common stock ATM program, we posted a stable NAV relative to the third quarter. As such, During the second half of 2022, NAV was off approximately 5.1%, which we believe compares favorably to the performance of many others in our industry and speaks well to our ability to navigate a very challenging macro environment and the unprecedented speed of Fed rate hikes. During the fourth quarter, we acquired approximately $780 million in UPV with Fannie and Freddie MSRs, via flow and bulk purchases. Pre-payment speeds on our MSR portfolio remain low, and thus the pace of reinvestment to maintain the allocation of capital to the asset class has decelerated. Recapture rates on MSRs also slowed to the low single digits as expected, given the higher interest rate levels. Our strategy of pairing MSRs with agency RMBS, along with proactive portfolio management and hedging, has continued to benefit shareholders. At the end of the year, financial leverage improved modestly to 3.8 times as we took a more targeted and disciplined approach in the fourth quarter with respect to deploying capital. Given the ongoing market volatility, we believe we remain prudently levered and expect to be opportunistic in deploying capital and increasing our leverage in 2023. we ended the year with 57 million in unrestricted cash on the balance sheet, maintaining a solid liquidity profile. As we look forward in 2023, we expect to maintain our conservative and proactive approach to portfolio management. Where there are risk-adjusted opportunities to selectively deploy capital, we will take advantage. Additionally, we anticipate our hedge ratio will likely remain elevated given our expectations of ongoing Fed rate hikes to further combat stubborn inflation. Our priority remains to protect book value, and we will remain mindful of our liquidity and leverage profile, given the environment. 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.
Garrett
Thank you, Jay. Investment themes that were prominent in the third quarter rolled over into the fourth quarter. Heightened volatility, thinly liquid investment markets, widening spread sectors, and a weakening equity markets were all influenced by a Fed determined to reduce inflation. All changed after the October and November CPI reports, as the reported inflationary numbers suggested that inflation was moderating faster than expected. Post the inflationary numbers, spread sector and equity markets tightened and interest rate markets firmed as investor sentiment changed. The sentiment change was driven by a perception that the Fed might end up doing fewer Fed fund rate increases than were initially expected. With that said, most inflationary measures have moderated but remained elevated above the Fed's 2% target for the first two months of 2023. Stubbornly high inflation has led to renewed predictions of the Fed having to increase the Fed's funds rate greater than what the market had initially perceived. The market is currently expecting a terminal Fed's fund rate level between 5.25 and 5.75. As a result, we continue to employ a thoughtful hedging strategy in the fourth quarter to protect our book value, and we believe those efforts have largely been working as intended. This investment strategy has carried over into the first quarter of 2023. At year end, our MSR portfolio had a UPB of 21.7 billion and a market value of approximately 280 million. During the quarter, we purchased approximately 780 million UPB of new MSRs through our bulk and flow programs. At year end, the MSRs and related assets represented approximately 38% of our equity capital and approximately 30% of our investable assets excluding cash. Meanwhile, our RMBS portfolio accounted for approximately 45% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented approximately 70% excluding cash at year end. During the quarter, we continued to experience CPR improvements in both our MSR and RMBS portfolios. Our MSR portfolio's net CPR averaged approximately 5% for the fourth quarter, down from approximately 7% net CPR in the previous quarter. The decline was mainly driven by seasonality and the change in mortgage production coupons, which drove slower prepayment speeds in the quarter. The portfolio's recapture rate was lower at approximately 2% versus approximately 7% in the third quarter. As expected, with mortgage rates rising, as the incentive to refinance has lessened. Moving forward, we continue to expect low recapture rates and stable or improved net CPRs for the foreseeable future, given the current levels of interest and mortgage rates. The RMBS prepayment speeds remain low. The lower CPR was driven by a combination of new asset purchases, as well as the fact that the current higher mortgage rate environment is compressing CPRs for the existing portfolio. As of today, the majority of the mortgage universe remains out of the money in terms of refinancing. We would expect prepayments to remain at low levels as long as interest rates stay at these levels or move higher. For the quarter, the RMVS portfolio's weighted average three-month CPR reduced to approximately 3.8% compared to approximately 4.7% in the third quarter. As of December 31st, the RMVS portfolio, inclusive of TBAs, stood at approximately $646 million compared to $759 million at the previous quarter end. Quarter over quarter, the spec pool portion of the portfolio continued to grow as we opportunistically took advantage of higher interest rate levels and lower price premiums by putting new cash to work, as well as converting a few dollar rolls into pools as dollar rolls weakened further. The RMBS portfolio numbered lower as we further utilized TBA securities to hedge a portion of the portfolio. We also continued to proactively change the portfolio's composition, moving into higher coupons and reducing spread duration for the portfolio. At the end of the fourth quarter, the 30-year securities position represented the entire RMBS portfolio, up from 96% at the end of the third quarter. For the fourth quarter, we saw an increase in our RMBS net interest spread to 3.77% as compared to 3.49% net interest spread reported for the third quarter. The improved NIM was driven by previously mentioned factors. One, we took advantage of wider mortgage spreads and higher yield levels by putting new money to work throughout the quarter. Two, we rotated our portfolio, swapping out of low yielding assets and purchasing higher coupon mortgages with better yields. Overall expenses were greater but were more than offset by increased income, which was driven by the previously mentioned reasons. At year end, the portfolio's financial leverage stood at approximately 3.8 times at the aggregate portfolio, and the portfolio was managed with a negative duration gap. Looking forward, we remain mindful of the current environment, as we expect the investment markets to remain choppy until there is a clear sense that the Fed is reaching its terminal rate. I will now turn the call over to Mike for a fourth quarter financial discussion.
Jay
Thank you, Julian. Our gap net loss applicable to common stockholders for the fourth quarter was $34.5 million, or $1.59 per weighted average diluted share outstanding during the quarter, while comprehensive income attributable to common stockholders, which includes the mark-to-market of our held-for-sale RMBS, was $6.2 million, or 29 cents per weighted average diluted share. Our earnings available for distribution attributable to common stockholders were $5.3 million or 24 cents per share. Our book value per common share as of December 31st, 2022 was $6.06 compared to a book value of $6.05 as of September 30th, 2022. We use a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings. At the end of the fourth quarter, We held interest rate swaps, TBAs, Treasury futures, and options on Treasury futures, all of which had a combined notional amount of $930 million. You can see more details with respect to our hedging strategy in our 10-K, as well as in our fourth quarter presentation. For GAAP purposes, we've not elected to apply hedge accounting for our interest rate derivatives. And as a result, we record the change in estimated fair value as a component of the net gain or loss on interest rate derivatives. Operating expenses were $3.2 million for the quarter. On December 15th, 2022, the Board of Directors declared a dividend of 27 cents per common share for the fourth quarter of 2022, which was paid in cash on January 31st, 2023. We also declared a dividend of 51.25 cents per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of 51.5625 cents on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on January 17th, 2023. At this time, we will open up the call for questions. Operator?
Matt
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. To ask a question, please press star 11. One moment, please. Our first question comes from the line of Miguel Goberman of JMP Securities. Your line is open.
Miguel Goberman
Hey, good afternoon, gentlemen. Thanks for taking the question. Could you perhaps expand a little bit further on the comment about the viability of the dividend versus what sort of sustainable level of core earnings you might see going forward, especially given Powell's comments today about where rates are headed? And also, I don't know if I heard you guys correctly, but did you say that book value was down 5% thus far this quarter?
Jay Lownd
Hi, Mikel. How are you? The second question is, no, we didn't say that at all. Book value at the end of February prior to the dividend is flat. That's right.
Mikhail
Okay. Thank you. Apologies for that.
Jay Lownd
No worries. With respect to the dividend, look, I think, you know, you've heard from us before, and you'll continue to hear that we consider EAD as a measure, and I think we alluded to that in the script, but, you know, We look at total return. We obviously think about where rates may go and how sustainable the dividend is over time. And broadly speaking, the board meets every quarter, and we'll continue to evaluate the strength of the dividend relative to earnings power and the requirements of the market relative to our space. And we expect to provide more information on that later this week.
Miguel Goberman
All right. Thank you. Just going forward, how do you guys think about the trade-off between building the portfolio towards agency RMBS and MSRs if interest rates do keep sort of breaking through the five and a quarter to five and three quarter expected rate if we start going into a six handle? How do you start thinking about your portfolio then? Thanks.
Garrett
Hi, Mikael. You know, look, I think the early read is that we have preferred our agency RMBS at these particular levels, which we would say is kind of in the mid-teens that we kind of see the returns. We have also aiding, I think, some of the performance. You know, we have a large, rather large swap portfolio, which has kind of moved and kind of coincided with repo rates rising. almost on a one-to-one basis for us. So that has offset some of the rising repo costs that we've seen. So if the Fed is moving higher, that portfolio has kind of benefited us. In terms of MSR and kind of the returns that we're seeing right now in terms of the portfolio, I would say kind of low to mid-teens is kind of what we're seeing for those type of returns. But in general, we're evaluating that constantly over time. But I would say just from a spread-widening perspective, agency RMBS looks rather attractive.
Miguel Goberman
All right. Thank you, gentlemen. Appreciate it. Good luck going forward.
spk11
Thanks, Mikael.
Matt
Thank you. One moment, please. Our next question comes from the line of Mr. Howlett of BRR. Your line is open. Matthew Howlett.
Howlett
Oh, hey, guys. Hey, Jay. Thanks for taking my question. Hi, Matt.
Jay
I would love to hear from the team. How do you characterize the risk profile of the company today? I mean, clearly the leverage is low from a historical basis. It went down in the fourth quarter. I look at your sensitivities and, you know, in terms of interest rates, it's nothing one way or the other. The book doesn't change all that much. You're off the overhead. How do you characterize it? And, you know, without asking an obvious question, what's it going to take to begin investing? you know, taking, you know, increasing leverage, taking advantage of, you know, these underpriced market, these cheap MBS values and so forth. I'd just love to hear you put that in the context in terms of where the company is versus historically where it's operated.
Garrett
It's Julian again. You know, look, I think we sit here and say, look, the market looks very attractive, but I think you need better clarity from the Fed. Clearly, you know, Paul had statements today, and in the statements, he's kind of alluded to interest rates and the Fed funds rates moving kind of higher. The market is kind of projecting it at this point in time to be 5.25, somewhere between 5.25 and 5.75. I would say, you know, if we just take a month ago, outside of the more improved data that we got from January, the market was probably expecting the Fed to stop somewhere between five and five and a quarter at that point in time. I think if we get greater clarity from the Fed in terms of the directionality or how high they want to take rates, I think that becomes your opportunity time to kind of take probably increased leverage and take more advantage of the market.
Jay
And in terms of the Fed, what they do with the balance sheet and how much Any sort of thoughts regarding their MBS holdings? What are your thoughts there?
Garrett
I think the initial reception is that basically that the Fed would not sell MBS. They've had multiple opportunities to kind of sell MBS throughout this time period that they've been actually raising the Fed funds rate. I think that's their most effective tool, at least from their perception, is that they'd like to continue to raise the Fed funds rate to levels they perceive that will kind of slow down the economy and retain the balance sheet. I can't allude to that at some point, if continuing to raise the Fed's funds rate proves to be ineffective, that they might try to do something on the balance sheet. It's a possibility, but it wouldn't be, in my mind, a high percentage of that's what they would like to do.
Jay
Gosh, it makes a lot of sense. Look, moving to servicing, it's been a great asset and a great strategy for you. How do you, I mean, if you look at it where MSR values are today, I'm obviously, you know, rates, you have a low coupon, an underlying coupon in the servicing. Would you look, I mean, if there's a scenario where, you know, some are forecasting the Fed to cut at some point, maybe later next year, you know, later this year, early next year, would you look to reallocate to more MBS, the servicing sort of run its course, or do you feel like, you know, that profile with your recapture is still going to be a core asset, you know,
Jay Lownd
going forward or if the interest rate cycle does change i'm just curious how you look at servicing you know uh this year yes sure matt so the the portfolio has a a note rate of let's just call it three and a half right um and the current interest rate on mortgages is let's just round at six and a half so you know from the perspective of that portfolio the the way i you know we look at that portfolio is there's a lot of runway in terms of having pretty strong cash flows before that portfolio is in danger of refinancing outside of normal life events. And so we really feel good about the strength of the cash flows in that portfolio, despite the rates. At this point, given the duration and the convexity of that portfolio, which is almost non-existent at this point, we think there's a lot of room to run on that portfolio should the Fed cut rates at some point in time before we have to even start thinking about recapture and things around the degradation of that portfolio. So we feel really good about the profile of that portfolio today because the reality is speeds are your enemy. You can hedge a lot of things rate-wise, but speeds are your worst enemy. And from our vantage point, given the quieter characteristics
Jay
are inherent in the portfolio today we think that asset you know is going to continue to perform pretty strong yeah look at the speeds i mean what were they under five i've never seen them this low in my in my lifetime my career i don't know if you've seen i don't know how much lower they can go but i mean it's been just uh incredible to see the speeds fall um where they are in it and i asked that i know your people were your prepaid protected on the on the mbs side i was just curious on It makes a lot of sense with the strong cash flows. On that scenario, would you be more active in the bulk market with some of these small originators that are selling or going out of business? It seems like the value has cheapened up a little bit earlier this year. Would you look to grow that portfolio, Jay, given what looks like there'd be a lot of sellers out there, even some big sellers?
Jay Lownd
So we look at portfolios every day. And for the smaller originators, it's our expectation that there's a concession in price, which is favorable to us in terms of yield. And so we absolutely look at and see a lot of those portfolios on a regular basis. If you're asking me if we're seeing a lot of small guys sell, I wouldn't say we're seeing a lot of small guys sell. We're seeing a decent, steady flow of volume away from what I would call the Wells portfolio. dynamic going on today, but, um, there, there is an opportunity to acquire the asset, you know, at levels that I would say were, that are slightly lower than, you know, the craziness in the fourth quarter.
Jay
Yeah, right, right. Exactly. That's exactly where I was. Well, that might be an opportunity for you guys. Well, look, I'll just say that the performance has been terrific. I mean, the yield curve's inverted and you guys are generating, you know, this positive economic return that, that looks just terrific. And, uh, So really congratulating on all really some great results and, you know, hopefully a very strong 23. Thanks a lot. Thanks, Matt.
Matt
Thank you. I'm sure no questions at this time. I'd like to turn the call back over to management for any closing remarks.
Jay Lownd
Thank you, operator. Thank you, everybody, for joining us on our fourth quarter 2022 earnings call. We look forward to updating you on our first quarter results sometime in May. Have a good evening.
Matt
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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