Cherry Hill Mortgage Investment Corporation

Good day and welcome to the Cherry Hill Mortgage Investment Corporation's first quarter 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Garrett Edson with ICR. Please go ahead.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2025 conference call. In addition to this call, we have issued a press release that was distributed earlier this afternoon and posted that press release in a first quarter 2025 investor presentation to the investor relations section of our website at .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 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 first quarter 2025 earnings call. The first quarter of 2025 was anything but calm. The reaction from markets domestically has been very aggressive during the first hundred days of the new administration amidst a backdrop of increased uncertainty, disruption, and meaningful policy changes coming out of D.C. Rates pushed lower in March, partly driven by rhetoric from Washington, and the 10-year recession ended the quarter at 4.25%, approximately 30 basis points lower quarter over quarter. That, however, was quickly overshadowed by the run-up to the Liberation Day tariff announcements on April 2nd. Suddenly, rates spiked on fears of a broader economic recession and stagnation. While the administration put a pause on the majority of the reciprocal tariffs for 90 days to reach new agreements, investors are in -and-see mode to determine whether the administration can negotiate trade deals or if we will return to potentially unprecedented volatility. Going forward, we expect rates will continue to be highly reactive to both global political agendas and domestic economic data. This uncertainty has pushed us to position the portfolio more neutral to rates to withstand the daily volatility. For the first quarter, we generated gap net loss applicable to common stockholders of 29 cents per diluted share. Book value per common share finished the quarter at $3.58 compared to $3.82 on December 31st. On an NAB basis, which includes preferred stock and prior to any ATM capital raised in the quarter, NAB was down approximately $7.5 million or .2% relative to December 31st. Financial leverage at the end of the quarter remained consistent at 5.2 times as we continued to stay prudently levered. We ended the quarter with $47 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. We were pleased to complete our first full quarter as an integrated, internally managed mortgage rate. In line with our prior quarter comments, operating expenses declined quarter over quarter due to the elimination of the management fee. As we proceed through 2025, we will continue to closely manage our operating expenses as we look to responsibly grow Cherry Hill, which will ultimately improve both our expense ratio and our capital structure over time. Looking ahead, we are watching the macro environment and the tariff situation very closely and are stressing our portfolio for numerous scenarios in light of the forthcoming tariff deadline. In the near term, we plan to deploy capital as appropriate into agency RBS and select which still present strong risk-adjusted return profiles while maintaining strong liquidity and prudent leverage. With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the first quarter. Thank you, Jay.

Mortgages started the quarter well. Tightening for the first two months only to end the quarter marginally wider is pending to increase volatility into the administration's announcement on Liberation Day. Overall, rates ended the quarter lower and mortgage performance was mixed. Despite the rally in interest rates, higher coupon mortgages outperformed lower coupon mortgages. While our coupon positioning for the quarter was good, our portfolio needed to be longer in duration and

the

lower coupon portion of our portfolio simply did not keep pace with our hedges in the interest rate rally. As we look ahead, like everyone else, we are watching the macro environment very closely as we await tariff deals to be hopefully announced in the weeks and months ahead. In the near term, volatility will likely continue and we will expect rates to remain elevated until there is some clear certainty with respect to go-forward macro policy. At quarter end, our MSR portfolio had a UPB of $17 billion and a market value of approximately $227 million. The MSR and related net assets represented approximately 44% of our equity capital and approximately 24% of our investable assets excluding cash at quarter end. Meanwhile, our RMBS portfolio accounted for approximately 39% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented 76% excluding cash at quarter end. Pre-payment speeds for our MSR and RMBS portfolios remained relatively steady compared to the prior quarter despite rates rallying in the first quarter. Our MSR portfolio's net CPR averaged approximately .1% for the first quarter, down modestly from the previous quarter. The portfolio's recapture rate was de minimis as the incentive to refinance continues to be minimal for this portfolio given the portfolio's loan rate. Going forward with rates remaining elevated amid the macro uncertainty, we continue to expect a lower capture rate and a relatively low net CPR in the near term given our portfolio's characteristics. Meanwhile, the RMBS portfolio's pre-payment speeds remain low with mortgage rates fluctuating between .5% and 7% the past few months. If mortgage rates stabilized within this range, we would expect pre-payment speeds to remain moderate in the second quarter. For the first quarter, the RMBS portfolio's weighted average three-month CPR was approximately .8% compared to .7% in the fourth quarter. As of March 31st, the RMBS portfolio inclusive of TBA stood at approximately $733 million compared to $723 million at the previous quarter end. As we modestly shifted our RMBS positioning during the quarter, and the portfolio remained higher coupon mortgage focused. For the first quarter, our RMBS net interest spread was 3.55%, higher than the prior quarter, driven by improved dollar roll income and repo expenses, which were partially offset by reduced income from swaps. Overall, our hedge strategy remains largely intact, and we will continue to use a combination of swaps, TBA securities, and treasury futures to hedge the portfolio. Treasury futures have become a larger portion of hedges, especially given the recent tightening of swap spreads. As the year progresses, we would expect the RMBS portfolio's NIMS to normalize towards historical levels in the next quarter, as dollar roll income is less special and swap income is reduced if swaps mature. Moving forward, we will continue to proactively manage our portfolio while continuing to shift our overall capital structure to add value for shareholders through improved performance and earnings. I will now turn the call over to Mike for our first quarter financial discussion.

Thank you, Julian. Gap net loss applicable to common stockholders for the first quarter was $9.3 million, or 29 cents, per weighted average diluted share outstanding during the quarter. Comprehensive loss attributable to common stockholders, which includes the mark to market of our available for sale RMBS, was $2.6 million, or 8 cents, per weighted average diluted share. Our earnings available for distribution, or EAD, attributable to common stockholders were $5.4 million, or 17 cents, per share. EAD in the quarter benefited from outsized dollar roll income and income received from the larger hedges before it matured at the end of the quarter. To that end, because that larger hedge has matured and will no longer receive income from it, we would expect EAD to be lower moving forward. However, as we have stated consistently, EAD is not the sole barometer for setting our common dividend and that our board also considers factors such as the prevailing market environment, portfolio return potential, our level of taxable income including potential hedge gain impact, and the degree of certainty regarding forward investment return economics. Our book value per common share as of March 31st was $3.58, compared to a book value of $3.82 at the end of December. 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 first quarter, we held interest rate swaps, TBAs, and treasury futures, all of which had a combined notional amount of approximately $489 million. You can see more details with respect to our hedging strategy in our 10Q, as well as in our first quarter presentation. For gap purposes, we have not elected to apply hedge accounting for our interest rate derivatives, and as a result, we record the change in estimate of fair value as a component of the net gain or loss on those interest rate derivatives. Our operating expenses were $3.8 million for the quarter. On March 13th, 2025, our board of directors declared a dividend of 15 cents per common share for the first quarter of the year, which was paid in cash on April 30th. We also declared a dividend of 51.25 cents per share on our .2% series A cumulative preferred stock, and a dividend of 63.72 cents on our .25% series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on April 15th, 2025. At this time, we will open up the call for questions. Operator?

Thank you. If you'd like to ask a question, please press star 11. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from Randy Binner with B Raleigh Securities. Your line is open.

Hey, thanks. Good evening. Yeah, I thought, you know, it was like a helpful commentary there. I think the question I have is, and I know this was covered, Jim, in the opening commentary, but is, I guess, what would it take for you to allocate more to the RMBS portfolio? I think we've seen a little bit more growth from some others so far this quarter. Not that that's right or wrong, but there is this period of uncertainty, but it, you know, the core, you know, the core EAD is lower, as you said, you know, I go for a basis if that portfolio doesn't grow. And so, you know, maybe a little more color on what it takes to turn to a point where you're able to acquire more and grow the portfolio.

Hey, Randy, how are you? Did you say MSR or MBS?

I mean, I guess my question was more on MBS, but, you know, hearing about them would be helpful.

Yeah, so all of the reinvestment amortization income that we get in has been reinvested in MBS. I can tell you we haven't purchased an MSR in quite some time, so while it may not look like the portfolio composition has changed a lot, the only true way to change that material is for us to sell a portion of the MSR in favor of MBS. So, you know, definitively I can say for the past several quarters plus we have, you know, primarily if not exclusively been reinvesting income or reinvesting amortization into MBS.

Okay, that's helpful. And then just on GSE reform, if I can get this one in, this is just something we've been gathering information on from and cats throughout the industry. And so, you know, pretty clear movement at FHFA as far as, you know, de-risking staffing, etc. You know, do you see, you know, movement there being priced into the market? Do you have a view of what you're looking for and how that might affect, you know, how you allocate capital in the portfolio and how you run the business? Or too early to tell?

Hey, Randy, this is Julian. I think it's a little too early to tell. There's obviously, as you've noted, there has been some definitive movements going around at the GSE. I think they've been primarily focused on, you know, expense deduction and everything, reduction and things like that. As we move forward, I think the biggest thing we'd like to see is obviously, is you want a complete resolution to what they really want to do with the GSEs whenever they enter a package on out. You don't want it to just be notes on a particular piece of paper. You like something in terms of a complete and well thought out idea in terms of what they want to do to the GSEs given the impact that they'll have on housing. In terms of it really kind of being priced into the market, I'd have to say no, I don't really think it's priced into the market because at some point we have to find out if they move towards privatization, what they're going to do with the government guarantee on the securities and how they're going to treat that. And I don't say currently, I think the market is making an assumption that that government guarantee is safe and sound at the moment. But we haven't seen any specifics, any detailed plans on that at all. So I think we're kind of, would be cautious on it. My estimation is that they will put out something complete in terms of GSE reform. But in terms of the government guarantee, that hasn't been well defined yet.

All right, appreciate the comments. Thanks.

Thank you. Our next question comes from Jason Stewart with Jani Montgomery Scott. Your line is open.

Hey, good evening. Thanks. If I missed it, I apologize. But could you give us a book value update quarter to date in QQ?

Oh, man, you're stealing thunder from JMP.

Oh, sorry. Michael, my bad. That's just wrong. Michael?

Or Michael. Hey, Jason, it's Mike. So at the end of April, we see our NAV down about 3.7%, which then when you layer on the preferred multiple, you get to about a 7% book value per share. And that's before any dividends for the quarter as the board has not yet met to approve one.

Okay. Usually I'm last in the queue, so I have to clean up the question. So, Michael, I apologize. Thank you. And then in terms of the swap portfolio, could you remind us how much rolled off in one queue and then this one less than one year bucket? I mean, it's pretty small, 15 million that's left. When does that roll off?

So, yeah, in the first quarter, and you can go back and you can see that same page 11 in the first, in the prior quarter deck. So you can see that we had about 250 million of pair swaps that were rolling off in the quarter. It was about 0.2 years. And so if you see that same page 11 in this quarter's deck, you'll see that we've got about 15 million left in that one year bucket. And it's about 0.9 years left on that. There were a couple of receiver swaps that also paid off or ended in the quarter. But Julian's also been actively managing the swaps throughout the quarter as well.

Okay. So that's just the $1.50 million notional that will mature sometime in the first half of 2026. There's nothing else rolling off this year.

No, that's right. That's right. Yeah, if you look at that first row on page 11, the very top, everything in that first row is within 12 months of the report date. So this page is all essentially relative to March 31st, 2025.

Got it. And then one question on mortgages. You know, there's been more talk, and it applies to spec pools, I guess, about how builder buy downs are impacting the convexity of mortgages. Are you seeing that? Are you seeing opportunities in spec pools within the builder buy down space or with regard to rocket coop? How is this? Some people are looking at this thing rocket coop is now priced too fast in some models. Is this creating opportunities in loan pools for you? Or is this? How are you looking at this?

Hi, Jason. It's Julian. In terms of the builder buy downs, look, we've seen builder buy downs in the portfolios before. I guess it's become, you know, more of an unnoted type of traded. If people are like looking for some story to pick with, particularly type of trade, we've noticed it when we run our missed models and things like that. It hasn't been anything that we have tried to focus in on the portfolio. I think we've tried to, you know, keep the payups in the portfolio modest at this point. In addition to that, I think, you know, if we are getting into some type of refinance wave, tried and true has always been some type of loan balance story. You know, typically those get bid up as rates go down and prepayment speeds get faster. What doesn't have, you know, really translate often are some of these one-off stories and, you know, that really haven't been around for a while. You know, I think the bid seems to fade on those.

Okay, so the spike pool is keeping it pretty straightforward. Okay, got it. That's it for me. Thank you.

Thank you. As a reminder, to ask a question, please press star 11. Our next question comes from Mikhail Goberman with Citizens JMP. Your line is open.

Hey, guys. Hope everybody's doing well. I guess I lost the question there. No worries. No worries. Appreciate the apology, Jason. Totally unnecessary. We can have a battle. Who gets to that question first going forward? Congrats on your own Liberation Day, guys, and the first full quarter of that. And I guess if I have anything to ask, obviously we had the big rocket Cooper deal. I was wondering if you're seeing any effect post that deal on more MSR pricing and supply and just your general thoughts on the servicing space. I know you said you're not really adding at the margin to MSRs at the moment, but just your general thoughts post that massive deal.

Thanks. Sure. Ray, can you handle that?

Yeah, sure. Right now, I mean, it's been still pretty quiet. I think with the quarter as a whole, you've probably seen that volumes have been lower than they had been prior year. I suspect that going forward, assuming the completion of that, the combination of rocket and Cooper, the buying impact won't really be all that different than it was before. But we haven't really seen any substantial changes in pricing dynamics in the market right now.

Okay, I appreciate that. And as far as EAD goes, you said it might trend a little bit lower going forward. How much of the EAD in the first quarter was due to the roll off of those expenses associated with internalization?

With internalization and the G&A savings, we see at about two cents in the first quarter.

Okay, and forgive me if you mentioned this in your prepared remarks, but going forward, you said EAD was going to trend a little bit lower because of what exactly?

Because of the large swap that matured that we were chatting about earlier. So that large swap was contributing to EAD each quarter as well. And since that one matured in the middle of March, that one is no longer in the portfolio.

Got it. Great. Thank you guys. And of course, best of luck going forward in this interesting times. Yeah, thank you. Thanks, Miguel.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Jay Lown for closing remarks.

Thanks, operator. Thank you for joining us on our first quarter 2025 earnings call. We look forward to updating you on our second quarter results soon.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.