Cherry Hill Mortgage Investment Corporation (NYSE:CHMI) Q4 2024 Earnings Call Transcript

Cherry Hill Mortgage Investment Corporation (NYSE:CHMI) Q4 2024 Earnings Call Transcript March 6, 2025

Cherry Hill Mortgage Investment Corporation reports earnings inline with expectations. Reported EPS is $0.1 EPS, expectations were $0.1.

Operator: Hello, everyone, and welcome to Cherry Hill Mortgage Investment Corporation Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To participate, you will need to press star one one on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star one one again. Please be advised that today’s conference is being recorded. Now it’s my pleasure to turn the call over to Garrett Edson with ICR. Please proceed.

Garrett Edson: We’d like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation’s fourth quarter 2024 conference call. In addition to this call, we have issued a press release that was distributed earlier this afternoon. We have posted that press release and the fourth quarter 2024 investor presentation to the Investor Relations section of our website at www.chmireit.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 recaps rates, delinquencies, and non-GAAP financial measures such as earnings available for distribution, or EAD, and comprehensive income.

Forward-looking statements represent management’s current estimates and Cherry Hill assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company’s filings with the SEC and the definitions contained in the financial presentations available on the company’s website. Today’s conference call is hosted by Jay Lown, President and CEO, Julian Evans, Chief Investment Officer, and Michael Hutchby, Chief Financial Officer. Now I will turn the call over to Jay.

Jay Lown: Thanks, Garrett. And welcome to our fourth quarter 2024 earnings call. On our last call, we had just completed the election and were watching market and economic reaction closely. While sentiment was broadly bullish, 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 heading to a Fed pause to the rate cut cycle, the 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 eighty 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 have shifted both Cherry Hill’s and market sentiment 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, we remain thoughtful of the macro, 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.

Q&A Session

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 $1.1 to $1.6 million or three to five cents per common share. I’m proud of our team 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 $3.3 million or ten cents per share. EAD for the quarter was impacted by approximately two cents per 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 30th. On an NAV basis, which includes preferred stock, and excluding special committee expenses, NAV was down approximately $5.5 million or 2.3% relative to September 30th.

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 million 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 toward higher for longer. We will continue to employ capital as appropriate into agency RMBS 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.

Julian Evans: Thank you, Jay. During the fourth quarter, mortgage spreads widened and volatility increased due to concerns about the US 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 during the quarter. 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 interest and mortgage rates rose. Thus far, in 2025, mortgages have performed well despite the intraday 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 $17.3 billion and a market value of approximately $234 million. The MSR and related net assets represent approximately 46% of our equity capital and approximately 24% of our invested 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. 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 may lower approximately 0.6% as the incentive to refinance continues to be minimal for this portfolio given the portfolio’s loan rate. Going forward, with stubborn inflation and rates continuing to hold at higher levels, we continue to expect low recapture rates and a relatively low net CPR in the near term given the portfolio’s characteristics. 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 as 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 31st, the RMBS portfolio inclusive of TBAs stood at approximately $723 million compared to $866 million at the previous quarter end. As we reduced our RMBS positioning as interest rates and volatility increased during the quarter, we continue to shift 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, TBA security, and treasury futures to hedge the portfolio. Moving forward, we will continue to proactively manage our portfolio while continuing to shift our overall capital for shareholders to improve performance and earnings. I will now turn the call over to Mike for our fourth quarter financial discussion.

Michael Hutchby: Thank you, Julian. GAAP net income applicable to common stockholders for the fourth quarter was $9.1 million or $0.29 per weighted average diluted share outstanding during the quarter. While comprehensive loss attributable to common stockholders includes the mark to market of our available for sale RMBS, was $1.5 million or $0.05 per weighted average diluted shares. Our earnings available for distribution attributable to common stockholders were $3.3 million or $0.10 per share, and EAD is inclusive of approximately two cents 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 and that the Board also considers factors such as prevailing market environment, portfolio return potential, 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 31st was $3.82 compared to a book value of $4.02 as of September 30th. 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, and treasury futures, all of which had a combined notional amount of approximately $809 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 $4.5 million for the quarter, which included those special committee-related expenses. On December 12th, 2024, our board of directors declared a dividend of $0.15 per common share for the fourth quarter of 2024, which was paid in cash on January 31st, 2025. We also declared a dividend of $51.25 per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of $67.39 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on January 15th, 2025. At this time, we will open up the call for questions. Operator?

Operator: Thank you so much. And as a reminder, to ask a question, simply press star one one on your telephone and wait for your name to be announced. To withdraw the question, press star one one again. And it’s from the line of Brandy Binner with B. Riley Securities. Please proceed.

Brandy Binner: Hey there. Good evening. I just wanted to excuse me. I may have missed it, but I think you said the drag of two cents for the special committee in the fourth quarter was that in the SG&A line? And is that also where we should see the three to five cents of benefit from internalization you mentioned in 2025? Just trying to find the right geography in the model for those items.

Michael Hutchby: Yeah. 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&A line item 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 spread out really for expenses in general, but it’s, you know, obviously, you have the management fee rolling off and being replaced with comp and benefits. So there’s that direct swap there. And then we’ll have within SG&A going forward, some of the additional processes that we brought in-house as part of the internalization. So you’re gonna see SG&A and comp and benefits replacing essentially the SG&A and management fee from before, if that makes sense.

Brandy Binner: Yeah. That’s super helpful. And then I guess on the if the the yeah. It was a good in-line core, but just the you know, your commentary about elevated rates seem to be hitting the the the cost of the the the repurchase agreement is quite bad. 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 in do you know, is is the is the only way to to kinda grow out of it? And and and increase the size of the portfolio.

Julian Evans: Hey, Randy. It’s Julian. In terms of some of the the repo cost, I think some of the the higher cost kinda were year-end expenses just as we were using kind of the street’s balance sheet as we were going from 2024 into 2025. We might have seen some elevated levels there. We have seen those come down and seen some benefits in the first quarter.

Brandy Binner: Okay. Well, that’s that’s good. And then so I guess this is my last one. Is the just on, like, growth. Is it I mean, as far as what is the expectation kinda for average balance size, and and it is ticking up. But is are you you know, is should we expect that to continue to see growth throughout 2025?

Michael Hutchby: I’m not sure exactly what the question is. The growth around the average balance around what?

Brandy Binner: Of the RMBS portfolio.

Michael Hutchby: Oh, you mean in terms of taking up leverage and things like that or more just in terms of

Brandy Binner: Well, I mean yeah. I mean, I’d say, yeah, taking up leverage and otherwise having a larger balance. I I didn’t 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.

Michael Hutchby: Sure. So I’ll I’ll I’ll answer just part of it. You know, 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 leverage, let Julian pick up from there.

Julian Evans: Yeah. I’ll just say that, look, we have the ability to increase our leverage, you know, I would expect that they increase the leverage over time. As we kinda get greater clarity on the Fed’s intentions, you know, administrative policies that are coming out, their impact on inflation. 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.

Brandy Binner: Okay. Understood. That that thank you for the answers.

Operator: Thank you. Our next question One moment. It’s from Mikhail Goberman with Citizens. Please proceed.

Mikhail Goberman: Hey. Good afternoon, gentlemen, and congrats on getting this internalization in the rearview mirror.

Michael Hutchby: Yeah. It’s great stuff.

Mikhail Goberman: Hire 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 a servicing equity composition to forty-six from forty-two percent. Could we expect that to drift higher given the expectation for a higher rate environment?

Michael Hutchby: So I’ll I’ll I’ll take a piece of that and let Julian talk about more. So some of the the change in the percentages was due to a pickup or 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 dividends, we have favored, as you know, for the past couple of quarters or or more, MBS on a letter basis, those those assets deliver better returns. And so you know, given some degree of uncertainty with respect to where long-term rates go, especially since Trump got elected and the desire for for them to reduce the the tenure level. We have not necessarily shied away from MSR, but have been more selective about what would what we’re going to invest in there.

The recapture efforts are important relative to current coupons. So if you’re pretty active in that space right now, and you have a view that the current administration is gonna be successful in managing the yield curve, you know, at least from the longer-dated side of it, then 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.

Julian Evans: Yeah. I think in the short term, what we’re looking at is investments in the RMBS, Jay kinda noted, the returns are better at the moment in terms of RMBS. And obviously, if that that changes in the returns on MSR become more favorable, we’ll look to invest some some cash there.

Mikhail Goberman: Gotcha. And how would the expectations for for Fed rate cuts affect that calculus? It seems like in recent weeks. The the expectations have gone a little higher for maybe two or even three cuts this year. So I’m if if that if that stays sort of in that seventy-five, maybe even a hundred basis points area. Would that affect your calculus at all? Or

Michael Hutchby: You know, it’s possible for sure. You know, it it’s been incredibly interesting. It’s probably a politically correct way of saying you know, how how we’ve managed through the set of rate cuts that were expected you know, in September versus the amount of rate cuts that the market expects today and even today you know, you just have Fed speakers that come out and say things on a on a daily basis relative to what their expectations are for the year. And you know, 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 end of September. Our view is still if that’s the case, you know, as the economy continues to remain fairly strong.

But you know, how we think about investment portfolio relative to those rate cuts. But the MSR portfolio, the MF 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 differently. Right. But, you know, with what I’ll say is every day is a different day. You know, as you know. Under the current administration and how they think about controlling interest rates makes our job a little bit more difficult but you know, definitely has some impact in terms of how we think about the allocation of the asset classes. Julian.

Julian Evans: Yeah. 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. Obviously, the market’s expectations that you you have noted has increased to about three eases this year. Soft data is obviously been kind of in I think inching expectations higher for 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.

Mikhail Goberman: Great. Thank you for that color. That’s really that’s really good. And I know you’re not gonna let me sign off without asking one final question about where our current book value is?

Julian Evans: So I wait every quarter to to hear you ask the question. Yeah. So at the end of February, we see book value about flat as to as compared to year-end. And, of course, that is before any first-quarter dividend accrual because the board has not yet met.

Mikhail Goberman: Right. Alright. Thank you very much, Shannon. Best of luck in this volatile environment.

Michael Hutchby: Thanks. Thanks, Miguel. Appreciate it.

Operator: Thank you. Our next question comes from Jason Stewart with Janney Montgomery Scott. Please proceed.

Jason Stewart: Alright. Thank you. You know, just given the 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 we where you see speeds going, the refinance ability of the marginal mortgage sort of your take on you know, call it a wavelet of refi activity that’s potential, and then take that to where you see value in spec pools.

Michael Hutchby: So I’ll 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-threes, and we have a 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, you know, is really your best-case base. Based scenario for that portfolio, given the collateral composition. So we we really feel good about that portfolio in terms of being able to withstand anything material related to the efforts to lower the the long end of the curve, which would obviously impact mortgage rates. So we’ll go back portfolio should be able to withstand a lot of things that might happen with the current administration. On the RMBS side because there are a lot more coupons about that, I would let Julian answer that.

Julian Evans: Yeah. In terms of the refinance ability of the market, I think currently we stand about five to ten percent refinanceable in terms of that market. I think it’s this morning, the mortgage rate was, like, six and six and a half. Obviously, it’s come down over the past couple weeks. From seven. In order to get kind of, I think, a decent you know, refinancing wave to hit the market. I think you’re gonna have to get to about 5.8, 5.7 in terms of mortgage rates. You know, obviously, everybody who kinda refinanced I’m sorry. Everybody who got originated loans. You know, they have seven, seven and a half type mortgages would be able to refinance themselves. But in order to get you know, a majority of your five and a halves and some of your fives kind of into the category of being refinanceable.

I think you need to get down to about 5.7, 5.8. The ten-year would need to drop in terms of mortgage rate. So we’ve got further to go. Perhaps get itself around 3.80. For that to happen. Okay. In terms you were asking about also you know, what we have found attractive in terms of spec pools. You know, in terms of that market, we’ve been really playing in terms of our specified pool story, right below or near par. So where we have significant weights in terms of our spec pools is in fives and five and a half. The stories that we have played have been loan balance. We’ve been incrementally picking up loan balance, let’s call it two hundred k, two fifty k, within that range. Some GEO type pools, but we’ve been, you know, going back and forth between low pay-up stories and and loan balance.

Anytime loan balance has kinda gotten up, we we go to pick it up. If we’ve 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 two and two fifty. Some of these own unknown, but cheap stories of three hundred and three hundred fifty k, I would expect those to kinda prepay quickly. I think Florida and Texas, given their loan balances on the size of those pools that’s kinda coming through, especially on new production, will pick up speeds as well. I think there’s stories when the entire you know, entire refinance ability of the market is not around, but once you begin to have some refinance ability, homeowner gets cured and those loans will get refinanced over time.

Jason Stewart: Got it. Okay. That’s helpful. And then just pulling way up, you know, if we look at the portfolio on a just a cash carry basis, what’s your estimate for current ROEs on a blended basis? You know, across the whole portfolio.

Julian Evans: Across the whole portfolio, I think as you’re talking about you know, look, new RMBS you’re putting into the portfolio, you’re looking at something that’s around, I wanna say, fourteen to seventeen percent, and that’s with kind of the market’s moving around. Also, say, on the MSR side, you’re probably seeing something that’s around call is low teens.

Jason Stewart: Great. Thanks for taking the question. Appreciate it.

Operator: Thank you. And this concludes our Q&A session. I will turn it back to Jay Lown for his final remarks.

Jay Lown: Thank you, everybody, for joining us on our fourth quarter 2024 earnings call. We look forward to updating you in the coming months for our first quarter 2025 earnings report. A good evening, everyone.

Operator: And thank you all for participating, and you may now disconnect.