Cherry Hill Mortgage Investment Corp Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Macro Environment: Stubborn inflation and Fed rate cuts led to higher long-term yields and increased volatility. The new administration's policy changes created uncertainty in economic growth.
• Internalization: Completed internalization of management in November, aligning management and shareholders, eliminating conflicts of interest, and expected to reduce operating expenses in 2025 by $1.1 to $1.6 million or 3 to 5 cents per common share.
• Financial Results: GAAP net income applicable to common stockholders for the fourth quarter was $9.1 million or $0.29 per weighted average diluted share. Earnings available for distribution (EAD) was $3.3 million or $0.10 per share. Book value per common share finished the year at $3.82.
• Portfolio Management: Shifted the RMBS portfolio into higher coupon mortgages and increased TBA hedges. Monitors the macro and geopolitical environment and positions the portfolio toward higher for longer rates, employing capital in agency RMBS and select MSRs with strong risk-adjusted returns.

Segment Performance

• MSR Portfolio: At quarter end, the MSR portfolio had a UPB of $17.3 billion and a market value of approximately $234 million. This represents approximately 46% of equity capital and approximately 24% of invested assets excluding cash. For the fourth quarter, the MSR portfolio's net CPR averaged approximately 4.7%, down modestly from the previous quarter, and the recapture rate may lower approximately 0.6%.
• RMBS Portfolio: The RMBS portfolio inclusive of TBAs stood at approximately $723 million at quarter end, down from $866 million at the prior quarter end. The weighted average three-month CPR for the RMBS portfolio was approximately 5.7% in the fourth quarter, up from approximately 5.4% in the third quarter. The RMBS portfolio accounted for approximately 38% of equity capital and represented approximately 76% of investable assets excluding cash.

Guidance

• Expense Reduction: Expect to reduce operating expenses in 2025 by $1.1 to $1.6 million or 3 to 5 cents per common share through internalization benefits.
• Portfolio Positioning: Continue to monitor the macro environment closely and position the portfolio toward higher for longer rates, employing capital in agency RMBS and select MSRs with strong risk-adjusted returns while maintaining strong liquidity and prudent leverage.
• Leverage: Expect to increase leverage over time as clarity on the Fed's intentions and administrative policies improves.

Risks

• Inflation and Rate Uncertainty: Stubborn inflation and policy changes by the new administration create uncertainty in interest rates and economic growth.
• Market Volatility: Higher rates and volatility impact mortgage spreads and portfolio performance.
• Prepayment Speeds: Low recapture rates and uncertain prepayment speeds affect portfolio cash flows due to the portfolio's characteristics and market conditions.

Question and Answer

• Q: Drag of special committee expenses and benefit from internalization? A: Special committee expenses all throughout last year and in the fourth quarter are found in the SG&A line item. The internalization benefits will replace management fees and affect SG&A and comp/benefits going forward, reducing operating expenses.
• Q: Repo costs and portfolio growth? A: Year-end repo costs were elevated but have come down; expect growth through capital raising and potential leverage increase as clarity on the Fed's intentions and administrative policies improves.
• Q: Capital allocation between MSR and RMBS? A: MSR value increased, but MBS on a letter basis deliver better returns currently. Will be selective with MSR investments based on market conditions and returns, favoring MBS for better returns in the near term.
• Q: Refinance speeds and spec pools? A: MSR portfolio has runway before speeds are impacted; RMBS refinance ability needs mortgage rates to drop to ~5.7-5.8%; spec pools with loan balance in certain ranges are expected to perform better as refinance ability improves.
• Q: ROEs on blended portfolio? A: New RMBS in the portfolio have an ROE around 14-17%, and the MSR side has an ROE around low teens on a cash carry basis.