Cherry Hill Mortgage Investment Corporation Price & Performance (CHMI)

In addition to this call, we have issued a press release that was distributed earlier this afternoon posted that press release and the fourth quarter twenty twenty four investor presentation to the Investor Relations section of our website at www.chl.com. On today's call, management's prepared remarks and answers to your questions contain forward looking statements that are subject to risks and uncertainties that could cause actual results to 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 in 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 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 Lau, President and CEO Julian Evans, 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 fourth quarter twenty twenty four earnings call. On our last call, we had just completed the election and we're watching market and economic reaction closely. While sentiment was broadly bullish, for the new administration to come in and open up the economy, What was a bit unexpected was the stubbornness of inflation. Despite a number of indicators and the market hemming to a Fed pause to the rate cut cycle, Fed went ahead and cut rates a third time in mid December. As a result, investors concerned about stubborn inflation drove up long term yields to seven month highs.

With the ten year ending at 2024, at 4.57% nearly 80 basis points higher quarter over quarter. Concerns over persistent inflation and uncertainty about economic growth due to the fast pace of policy changes by the new administration has shifted both Cherry Hill's toward a position that additional rate cuts in 2025 will be fewer than expected last year and continue to remain data dependent. The relationship between short and longer dated rates has been and will continue to be highly reactive to both political agendas globally and domestic economic data. Our RMBS portfolio was impacted in the fourth quarter by higher rates increased volatility and spread widening mitigated by our MSR portfolio which saw nice gains quarter over quarter. Julian will discuss this in more detail shortly. Looking forward, remain thoughtful of the macro and geopolitical environment and expect to maintain our current investment strategy. In November, in concert with the conclusion of the company's special committee review, we were very pleased to complete the internalization of management and officially commence operations as a fully integrated internally managed mortgage REIT.

This was the right decision for shareholders for several reasons. First, internalizing management more strongly aligns management and shareholders. By a direct ownership by our internally managed structure. Second, it also eliminates potential conflicts of interest inherent in an external management structure and improves our overall transparency. Third, management now has a much more streamlined and efficient decision making process with direct control. Thanks to the elimination of external management fees, as well as some operational synergies inherent through internalizing. We expect the internalization will reduce our operating expenses in 2025 by $1,100,000 to $1,600,000 or $0.03 to $0.05 per common share. I'm proud of RTU for their relentless work through the summer and the fall of last year to get the process completed. For the fourth quarter, we generated GAAP net income applicable to common stockholders of $0.29 per diluted share. And we generated earnings available for distribution or EAD a non GAAP financial measure of 3,300,000.0 or $0.1 per share. EAD for the quarter was impacted by approximately $0.02 Cherry share of expenses related to the special committee's efforts.

The Special Committee concluded in November and therefore it will not impact results going forward. As we have stated consistently for a few quarters, EAD is not the only barometer our Board utilizes for setting our dividend. Book value per common share finished the year at $3.82 compared to $4.02 on September 30. On an NAV basis, which includes preferred stock, and excluding special committee expenses, NAV was down approximately 5,500,000.0 or 2.3% relative to September 30. Financial leverage at the end of the quarter remained consistent at 5.3 times as we continue to stay prudently levered. We ended the quarter with $46,000,000 of unrestricted cash on the balance sheet, maintaining a solid liquidity profile. Looking ahead, we will continue to monitor the macro environment closely. And are positioning our portfolio in the near term [indiscernible] toward higher for longer. We will continue to employ capital as appropriate [indiscernible] and select MSRs 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 fourth quarter Thank you, Jay. During the fourth quarter, mortgage spreads widened and volatility increased due to concerns about the U. S. Election.

And future debt levels. Those factors despite two twenty five basis point eases by the Fed led to higher interest rates longer mortgage durations, and increased hedging costs. Current coupon mortgages widened approximately six basis points and the move index rose to 98,580 constant volatility throughout the quarter caused mortgage performance to vary each month In general, higher coupon mortgages performed relatively well compared to the rest of the coupon stack. In addition, MSR values increased as insurance and mortgage rates rose. Thus far in 2025, mortgages have performed well despite the inter day volatility. That remains elevated given the pace of reforms from the current administration and the concern that tariffs will lead to more sustained inflation and reduced growth. In the near term, we expect volatility to continue. And expect rates to remain higher until there are clear signs that either inflation is moderating or that the economy falters under the weight of pending policy changes. At the quarter end, our MSR portfolio had a UPB of $17,300,000,000 and a market value of approximately $234,000,000 The MSR and related net assets represent approximately 46% of our equity capital and approximately 24% of our investable assets, excluding cash, at the end of the quarter, Meanwhile, our RMBS portfolio accounted for approximately 38% of our equity capital.

As a percentage of investable assets, the RMBS portfolio represented approximately 76% excluding cash at quarter end, Prepayment speeds for our MSR and RMBS portfolios continue to remain relatively steady compared to the prior quarter, as rates rose in the fourth quarter, Despite cuts by the Fed, our MSR portfolio's net CPR averaged approximately 4.7% for the fourth quarter down modestly from the previous quarter. The portfolio's recapture rate remained low at approximately 0.6% as the incentive to refinance continues to be minimal for this portfolio given the portfolio's looming. Going forward, with stubborn inflation, and rates continuing to hold at higher levels, we continue to expect low recapture rate a relatively low net CPR in the near term, Meanwhile, the RMBS portfolio's prepayment speeds remain relatively low but rose modestly as expected given lower interest and mortgage rates in the third quarter. Those refinancing started to impact mortgage collateral in the fourth quarter the loans were processed. With mortgage rates remaining around 7%, we would expect prepayment speeds to moderate in the first quarter. For the fourth quarter, the RMBS portfolio's weighted average three month CPR was approximately 5.7%, compared to approximately 5.4% in the third quarter. As of December 31, the RMBS portfolio inclusive of TBA's stood at approximately seven twenty three million compared to $866,000,000 at the previous quarter end.

As we reduced our RMBS positioning as interest rates and volatility increased during [indiscernible] We continue to ship the portfolio into higher coupon mortgages as well as increasing our TBA hedges. For the fourth quarter, our RMBS net interest spread was 2.9%, lower than the prior quarter as improved repo costs were offset by a reduction in swap and dollar roll income. Overall, Our hedge strategy remains largely intact and we will continue to use a combination of swaps [indiscernible] and Treasury Futures to hedge the portfolio. Moving forward, we will continue to proactively manage our portfolio while continuing to shift our overall capital [indiscernible] for shareholders through improved performance and earnings. I will now turn the call over to Mike for our fourth quarter financial discussion. Thank you, Julian. GAAP net income applicable to common stockholders for the fourth quarter was $9,100,000 or $0.29 per weighted average diluted While comprehensive loss attributable to common stockholders which includes the mark to market of our available for sale RMBS, was $1,500,000 or $0.05 per weighted average diluted Cherry. Our earnings available for distribution attributable to common stockholders were $3,300,000 or $0.1 per share.

And EAD is inclusive of of approximately $0.02 per share of expenses related to the special committee's work. As Jay mentioned, we have stated for a while that EAD is not the sole barometer for setting our common dividend dividend and that the Board also considers factors such as prevailing market environment, our level of taxable income including potential hedge gain impacts and the degree of certainty regarding forward investment return economics. Our book value per common share as of December 31 was $3.82 compared to a book value of $4.02 as of September 30. 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 TPAs and treasury futures all of which had a combined notional amount of approximately $8.00 $9,000,000 You can see more details with respect to our hedging strategy in in our 10 ks 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 $4,500,000 for the quarter which included those special committee related expenses. On December 12, 2024, our Board of Directors declared a dividend of $0.15 per common share for the fourth quarter of which was paid in cash on 01/31/2025 Cherry. We also declared a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of $0.6739 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock both of which were paid on 01/15/2025 Cherry. At this time, we will open up the call for questions. Operator?

Thank you so much. And it's from the line of Brandy Binner with B. Riley Securities. Please proceed.

Hey Cherry, good evening. I just wanted to excuse me, I may have missed it, but I think the said the drag of $0.02 for the special committee in the fourth quarter was was that in the SG and A line? And is that also where we should see the $0.03 to $0.05 of benefit from internalization you mentioned in 2025?

Just trying to find the right geography in the model for those items. Yes, sure.

Hey, it's Mike. So yes, to your first question, the special committee expenses all throughout last year and again in the fourth quarter.

Would be found in the SG and A [indiscernible] On the income statement. So that's where they flow through. And then on a go forward basis, you would see the benefits that we highlighted in the presentation. So spread out really for expenses in general, but it's obviously you have the management fee rolling off and being replaced with comp and benefits. So Cherry that direct swap there. And then we'll have within SG and A going forward, some of the additional processes that we brought in house as part of the internalization. So going to see SG and A and comp and benefits replacing essentially the SG and A and management fee from before, if that makes sense.

Yes, that's super helpful. And then I guess on the [indiscernible] Yes, it was a good in line quarter, but just your commentary about elevated interest rates seems to be hitting the the cost of the repurchase agreements quite a bit. And so like in a not favorable way, And so is there do we expect that same level of cost in is there a way to mitigate that in [indiscernible] Is the only way to kind of grow out of it? And increase the size of the portfolio. Hey, Randy, it's Julian.

In terms of some of the repo costs, I think some of the higher cost kind of were year end expenses just as we were using kind of the Street's balance sheet as we were going from '24 into '25. We might have seen some elevated levels there. We have seen the those come down and in the first quarter.

Okay. Well, that's good. And then I guess just my last one is just on growth. Is that I mean, as far as What is the expectation Kind of for average balance size and it is ticking up but should we expect that to continue to see growth throughout 2025?

I'm not sure exactly what the question is, the growth around the average balance around what?

Of the RMBS portfolio. You mean in terms of taking up leverage and things like that or more just in terms of Well, I mean, yes, I mean, I'd say, yes, taking up leverage and otherwise having a larger balance. I didn't catch in the commentary if that's a goal or if that's a way to I guess, manage a higher interest rate environment?

Sure. So I'll answer just part of it. Obviously, We're looking to grow through capital raising and things like that. So that would not impact leverage. So to the extent that we're able to raise capital, We would grow in that way. And then with respect to Liberacelet, let Julian pick up from there.

Yes.

I'll just say that, look, we have the ability to increase our leverage I would expect us to increase the leverage over time.

As we kind of get greater clarity on the Fed's intentions administrative policies that are coming out, and their impact [indiscernible] I think we'll begin to we have greater clarity on a few of those things, I would expect us to kind of increase our leverage over time.

Okay, understood. Thank you for the answers.

Thank you. Our next question One moment. It's from Mikael Government with Citizens. Please proceed.

Hey, good afternoon, gentlemen, and congrats on getting this internalization in the rearview mirror. [indiscernible] Higher for longer interest rate environment. How do we sort of think about that in terms of capital allocation between the two major investment bins I see you guys took up the servicing [indiscernible] composition to 46% from 42% Could we expect that to drift higher given the expectation for a higher rate environment?

So I'll take a piece of that and let Julian talk about more some of the the change in the percentages was due to a pickup or an increase in the value on the MSR, not necessarily us buying MSRs. We still think broadly speaking, the asset class is priced fairly rich.

And so within the context of delivering returns that are accretive to the dividend, we have favored, as you know, for the past couple of quarters or more. MBS On a lettered basis, those assets deliver better returns. And so given some Degree of uncertainty with respect to where long term rates go, especially since Trump got elected and the desire for the for them to reduce the [indiscernible] necessarily shied away from MSR, but have been more selective about what what we're going to invest in there. Cherry recapture efforts are important relative to current coupons. So if you're active in that space right now and you have a view that administration is going to be successful in managing the yield curve at least from the longer dated side of it than You would definitely have a view on your ability to to recapture and maintain returns that you expect relative to the purchase price. But outside of that, I'll let Julian handle the rest of that.

Yes. I think in the short term, what we're looking at is investments into RMBS, As Jay kind of noted, the returns are better at the moment in terms of RMBS. And obviously that changes in the returns on NIM. MSR become more favorable, we'll look to invest some cash there.

Got you. And how would the expectations for Fed rate cuts affect that calculus? It seems like in recent weeks, The expectations have gone little higher for maybe two or even three cuts this year. So I'm If that If that stays Sort of in that 75, maybe even 100 basis points Cherry, would that affect your calculus at all? Or It's possible for sure. It's been incredibly interesting is probably a politically correct way of saying we've managed through the set of rate cuts that were expected in September versus the amount of rate cuts that the market expects today and even today you just have Fed speakers that come out and say things on a daily basis relative to what their expectations are for the year and clearly, as we noted in the script that there's an expectation for less cuts this year versus where we thought we would be sitting at the September. Our view is still that's the case. As the economy continues to remain fairly strong.

But how we think about the investment portfolio relative to those rates cuts Look, the MSR portfolio, the financing on the MSR portfolio is mutually higher than the MBS portfolio. So to the extent that we do get those rate cuts and the returns improve on that in that asset class. We would definitely think about the levered returns on that portfolio. So [indiscernible] [indiscernible] But What I'll say is every day is a different day As you know, under the current administration and how they think about controlling interest rates makes our job a little bit more difficult but definitely has some impact in terms of how we think about the allocation of the asset classes [indiscernible] Yes.

I would just say look, when we came into this year, we were at expectations that the Fed was probably one to maybe two eases this year potentially. Depending on inflation and depending on growth. Increased to about three this year.

Soft data is obviously been kind of inching expectations higher additional eases. The hard data has actually come in fairly decently.

Obviously, we are hearing and learning about various different policy changes that are going on with the administration and we will adjust the portfolio accordingly. As the facts come out.

Great. Thank you for that color. That's really That's really good. And I know you're not going to let me sign off without Asking one final question, [indiscernible] where our current book value is [indiscernible] I wait every quarter to hear you ask the question. Yes. So at the end of February, we see book value about flat as compared to year end. And of course, that is before any first quarter dividend accrual because the Board has not yet met Right. Thank you very much, gentlemen. Best of luck in this volatile environment.

Thanks. Thanks Mikhail. Appreciate it. Thank you. Our next question comes from Jason Stewart with Cherry Montgomery Scott.

Hi, thank you. Just given the the rate move that we've seen so far, in the quarter, maybe the last couple of weeks. Could I get your take on where you see speeds going, the refinance ability of the marginal mortgage, sort of your take on call it, a wavelet of refi activity that's potential and then take that to where you see value in spec pools? So I'll address the MSR portfolio first and then I'll let Julian address the RMBS On the MSR side, our weighted average note rate is in the mid-3s and we have a meaningful amount of runway on that portfolio before we think speeds are impacted. And as noted in the presentation, I believe we note that the speeds are in the mid single digits, which is really your best case base based scenario for that portfolio given the collateral composition So we really feel good about that portfolio in terms of being able to withstand anything material related to the efforts to lower the long end of the curve, which would obviously impact mortgage rates. So we'll pull back portfolio should be able to withstand a lot of things that might with the current administration.

On the RMBS side because are a lot more coupons about that, I'll let Julian answer that.

Yes.

In terms of the refinancing, the market, I think currently we stand about 5% to 10% refinanceable in terms of that market.

I think as this morning the mortgage rate was like 6.5%. Obviously it's come down over the past couple of weeks. In order to get kind of I think, decent refinancing wave to hit the market. Think you're going to have to get to about five point eight five point seven in terms of mortgage rates. Obviously, everybody who kind of refinanced I'm sorry, everybody who got originated loans They have seven, seven point five type mortgages will be able to refinance themselves. But in order to get a majority of your 5.5% and some of your 5% kind of into category of being refinanceable, I think you need to get down to about 5.7, 5.8 in terms of the mortgage rate. So we've got further to go.

The ten year would need to drop. Perhaps get itself around three eighty in order that to happen.

Okay. In terms of you were asking about also what we have found attractive in terms of spec pools. In terms of that market, we've been really playing in terms of our specified pool story. Right below or near par So we have significant weights in terms of our spec pools is in 5s and 5.5s. The stories that we have played have been loan balance.

We've been incrementally picking up loan balance, let's call it 200,000 to $250,000 within that range. Some GEO type pools between low pay up stories and loan balance. Anytime loan balance has kind of gotten up cheap, we go to pick it up. If we been swapping out of some pools that have loan balance, we look for additional loan balance Just in case there is a major move in rates, We think loan balance will perform better than some of these, let's say, and when I say loan balance, I'm really referring to like between 200 and $2.50.

Some of these unknown but cheap stories of 3 and $350,000 I would expect those to kind of prepay quickly.

I think Florida and Texas, given their loan balances on size of those pools that's kind of coming through, especially on new production will pick up speeds as well. I think Cherry stories when the entire refinance ability of the market is not around, but once you begin to have some refinancability homeowner gets cured and those loans will get refinanced. Over time.

Got it. Okay. That's helpful. And then just pulling way up, if we look at the portfolio on a just a cash carry basis, what's your estimate for current ROEs on a blended basis?

Across the whole portfolio?

Across the whole portfolio, I think as you look, new RMBS you're putting into the portfolio, you're looking at something that's around, I want to say 14% to 17% and that's with kind of the markets moving around. Also say on the MSR side, you're probably seeing something that's around call is low teens. Great. Thanks for taking the question. Appreciate it.

Thank you. And this concludes our Q and A session. I will turn it back to Jay Long for his final remarks.

Thank you everybody for joining us on our fourth quarter twenty twenty four earnings call. We look forward to updating you in coming months for our first quarter twenty twenty five.