Cherry Hill Mortgage Investment Corporation Q2 FY2025 earnings call

Jay Lown:

• Discussed the macro environment with 10-year ending at 4.23% marginally higher Q-over-Q. GAAP net loss applicable to common stockholders was $0.03 per diluted share. Book value per common share was $3.34 vs $3.58 prior. Raised ~$9 million via common ATM program, ended quarter with $58 million unrestricted cash. Entered strategic partnership with Real Genius LLC, a Florida-based digital mortgage technology company.

Julian Evans:

• Q2 divided into two periods: April with high volatility, May-June recovering but not fully offsetting April's impact. MSR portfolio net CPR averaged ~6% Q2, up modestly. RMBS portfolio prepayment speeds low at 6.1 CPR. RMBS net interest spread lower Q2 due to matured swap position and lower dollar roll income. Adjusted hedge strategy with reduced longer maturity SOFR swaps and replaced with treasury futures.

Apeksha Patel:

• GAAP net loss applicable to common stockholders $0.9 million or $0.03 per diluted share. Comprehensive loss $0.6 million or $0.02 per diluted share. EAD $3.2 million or $0.10 per share. Held interest rate swaps, TBAs, treasury futures with notional amount ~$446 million. Operating expenses $3.4 million. Dividends declared: $0.15 per common share, $0.5125 on Series A, $0.6413 on Series B preferred stock.

The second quarter saw the MSR portfolio with a UPB of $16.6 billion and a market value of approximately $225 million. This MSR and related net assets represented approximately 43% of equity capital and approximately 23% of investable assets, excluding cash at quarter end. The RMBS portfolio accounted for approximately 36% of equity capital and, as a percentage of investable assets (excluding cash), represented approximately 77% at quarter end. As of June 30, the RMBS portfolio, inclusive of TBAs, stood at approximately $756 million, compared to $733 million at the previous quarter end.

• Leverage expected to creep up as remainder of year progresses. Potential Fed rate cut in September could lead to a more risk-on investment strategy while maintaining strong liquidity and prudent leverage. Real Genius expected to be profitable within first 6-7 months, with dividends expected in first year of investment.

• Forward-looking statements subject to risks and uncertainties including interest income, financial guidance, IRRs, future expected cash flows, prepayment and recapture rates, delinquencies, and non-GAAP financial measures like EAD and comprehensive income.

Q: In terms of servicing costs, it came in lower than estimates. What went through that and why servicing costs were lower in the quarter?

A: Essentially, we had some deboarding fees that we had taken on in the prior quarter and we're able to work out of related to the whole Mr. Cooper acquisition from Flagstar. And then as the quarter has gone down, we've not added to the portfolio. So the total amount of loan count has continued to drop.

Q: As we look throughout the end of '25, where should we expect leverage to go from here? Should we expect it to kind of remain flat? Or will it change?

A: I would expect leverage to kind of creep up as we -- for the remainder of the year. I would say we've been running the portfolio kind of in a conservative pattern, mainly neutral on duration. And we've maintained the leverage pretty consistent over the last 3 quarters. I think it's increased kind of marginally. Obviously, the second quarter going in, we are expecting inflation to rise and volatility to remain at an elevated level. I would say that hasn't really changed as we've entered into the third and the fourth quarter, but there are some changes that have happened. Primarily, the weaker nonfarm payroll number probably brings the Fed into play sooner than we would have expected. We were expecting somewhere between 1 or 2 eases into the second half of the year. This probably pulls those eases from, let's say, October and December into September. So if the Fed is going to be accommodative and steepen out the yield curve, that does make mortgages and other spread assets very attractive. It will depend on where inflation is going, obviously. But I would say most likely, leverage should creep a little bit higher as we enter into the fall.

Q: Regarding this partnership with Real Genius, are there any numbers attached to it? Any sort of projections for accretion and time line on that? And you guys mentioned, I believe, a risk on investment strategy going forward. If I could maybe pick your brain as to what kind of stuff you could potentially be looking at going forward?

A: So the Real Genius, there is an expectation for them to be profitable within the first 6 or 7 months. So I would expect within the first year of the investment that we should be receiving dividends off of that investment. And I think it's just a testament to our ability to sort of be more as a part of the sausage making and to be able to make an investment around things other than just MSRs in the form of either co-issue or bulk. So we're excited to work with these guys. We think it's a good solid team. They're getting back on their feet. We're giving them time to get everything going, and we expect them to be profitable in the short term. On the other front, what was the other question?

Q: There's so many to ask, but the one that I'm really looking at right now is this one about current book value.

A: It's a new one. Hi Mikhail, it's Apeksha. We see our July 31 book value per share at about flat versus June 30, and that obviously is prior to any third quarter dividend accrual as the Board hasn't met yet to approve it.