Cherry Hill Mortgage Investment Corp (CHMI) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Cherry Hill Mortgage Investment Corporation First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Michael Hutchby, Controller.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's First Quarter 2018 Conference Call. In addition to this call, we have filed the press release that was distributed earlier this afternoon and posted 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 recapture rates, delinquencies and non-GAAP financial measures such as core 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 of Cherry Hill. Also present on the call today are Julian Evans, our Chief Investment Officer; and Marty Levine, our Chief Financial Officer.

And now I will turn the call over to Jay.

Thanks, Mike, and welcome to today's call. As many of our peers have highlighted, the first quarter saw interest rates pushed higher towards 3% for the first time since Cherry Hill went public in the fall of 2013. That coupled with a constant barrage of geopolitical news, both domestically and abroad, contributed to occasional meaningful swings in the capital markets.

The rapid movement in rates early in the quarter created a sense of uncertainty with respect to the residential mortgage REIT sector, as the market tried to understand the impact on earnings and book value. Earnings results digested thus far suggest that diversified strategies are more strongly positioned to protect book value in this interest rate environment. It's also clear that a flatter yield curve will have an impact on earnings, forcing many to increase leverage to meet current dividend levels.

Despite the uncertainty and increased volatility, Cherry Hill's strategy has remained intact, and we've made meaningful progress in terms of our overall MSR strategy in the first quarter. Purchases came from both the bulk and flow channels. And at the end of the first quarter, the MSR portfolio stood at $15.7 billion, representing 34% of our equity capital at quarter-end.

While we were pleased with our progress in growing the MSR portfolio, we've also taken note in recent months that MSRs have increasingly been trading near full value, most notably in the bulk acquisition area. While we certainly want to be as aggressive as we can as we grow this portfolio, we remain extremely mindful of our goal to acquire MSRs at an appropriate yield that both protects book value and is not meaningfully dilutive to earnings.

To that end, we expect that in the near term, we will be leaning more heavily on our co-issue program to selectively acquire assets that meet our comprehensive investment criteria.

Overall for the first quarter, strong performance from our RMBS portfolio, along with the growing MSR portfolio, helped produce core earnings of $0.52 per share. We closed the quarter with a book value of $20.15, a decrease of $0.29 or 1.4% from December 31, 2017.

Looking forward into 2018, we're anticipating at least 2 more rate hikes this year barring significant macroeconomic shocks, as the Fed remains committed to a gradual rate hike policy. By continuing to add more servicing-related assets, as we did in the first quarter, we believe we will be able to withstand further Fed tightening over the near term.

Overall, we continue to believe our strategy is the correct course for Cherry Hill to pursue today, and we will continue to be prudent about using our deep investment experience to deploy capital at appropriate risk-return levels. Most of all, we remain excited and optimistic about our future in creating further long-term shareholder value.

With that, I'll turn the call over to Julian, who will cover more detailed highlights of our investment portfolio and its performance over the quarter.

Thank you, Jay. Slide 5 highlights our aggregate investment portfolio composition. As Jay mentioned, our servicing-related investments comprised solely of full MSRs, represented approximately 34% of our equity capital and approximately 11% of our investable assets, excluding cash at quarter-end.

Servicing-related assets as a percentage of equity increased 8% due to the redeployment of RMBS assets in cash into select MSR investments during the quarter. As a result, our RMBS portfolio accounted for approximately 61% of our equity, a 7% reduction from the previous quarter.

As a percentage of investable assets, RMBS represented approximately 89%, excluding cash, at quarter-end. As of March 31, we held MSRs with the UPB of $15.7 billion and a market value of approximately $188 million, as shown on Slide 6.

Total MSR portfolio prepayment speeds continued to improve during the first quarter. Life-to-date, our conventional MSR CPRs have averaged approximately 9.7%, while our government MSR CPRs have averaged 10.2%.

As of March 31, the RMBS portfolio stood at approximately $1.6 billion, as shown on Slide 7, a reduction from where we stood at December 31. As we have previously noted, we expect to continue to opportunistically redeploy a portion of the RMBS funds into MSRs. At quarter-end, our RMBS portfolio 30-year securities position stood at 71%, while the 20-year and 15-year fixed-rate pools as well as shorter-duration assets represented the balance of the RMBS portfolio.

In the first quarter, the RMBS portfolio continued to perform well, posting a weighted average 3-month CPR of approximately 6.85%, slightly higher than the previous quarter, as shown on Slide 8. Overall, the portfolio continued to benefit from its collateral composition and continued to vest Fannie aggregate prepayment speeds during the quarter.

For the quarter, we posted a 1.14% RMBS NIM versus 1.27% NIM for the fourth quarter. The decrease in NIM was driven by the increased amortization cost, higher prepayment speeds, rising REPO cost and the timing differentials related to the redeployment of RMBS into MSRs, all of which were partially offset by the portfolio's collateral composition and reduced swap cost.

During the quarter, the aggregate portfolio operated with a leverage of 4.9x and a negative duration gap. As shown on Slide 9, we ended the quarter with an aggregate portfolio duration gap of minus 1.86 years.

Going forward, we expect to continue to evaluate and alter the portfolio as the year progresses.

I'll now turn the call over to Marty for our first quarter financial discussion.

Thank you, Julian. Our GAAP net income applicable to common stockholders for the first quarter was $33.6 million or $2.64 per weighted average share outstanding during the quarter. Our comprehensive income attributable to common stockholders, which includes the mark-to-market of our held-for-sale RMBS, was $2.9 million or $0.23 per share.

Our core earnings, as detailed on Slide 18, was $6.6 million or $0.52 per share.

As Jay mentioned, our book value as of March 31 was $20.15, a reduction of $0.29 per share or 1.4% from December 31.

As detailed on Slide 21, we used 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 and swaptions and with TBAs and treasury futures, all of which had a combined notional amount of $1.16 billion.

For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives. And as a result, we record the change in estimated fair value as the component of net gain or loss on interest rate derivatives.

Operating expenses for the quarter were $2.2 million, of which approximately $317,000 was related to our taxable REIT subsidiary.

On March 8, 2018, we declared dividend of $0.49 per common share for the first quarter of 2018, which was paid on April 24 as well as a dividend of $0.5125 per share on our 8.2% Series A Cumulative Redeemable Preferred Stock, which was paid on April 16, 2018.

Our goal remains to distribute regular quarterly dividend of all or substantially all our taxable income to holders of our common stock and to the extent authorized by our Board of Directors.

Now I'd like to turn the call back to Jay.

Thanks, Marty. At this time, we'll open up the call for questions. Operator?

(Operator Instructions) Our first question comes from Tim Hayes, B. Riley FBR.

Just to start, Jay, how much of the $4.3 billion came from the RoundPoint flow versus bulk in the quarter?

About close to $3.5 billion of the purchases were bulk.

Bulk, okay. And so that's -- from a [pro] standpoint, I guess, that seems a little bit lighter than you had been? I guess, it's a function of just doing so much bulk in the quarter. But should we -- what's the timing for getting up to about $1 billion per month from RoundPoint, which I believe has kind of been your stated target?

I think that you're going to see more volume coming out of us on the cautious side in the second quarter relative to things like seasonal. So remember, the first quarter is lowest quarters of the year for -- and will probably the lowest quarter of the year for origination in general. So what we've seen so far this quarter is a decent pickup. So we're looking to get closer to $1 billion, if not at $1 billion a month in the co-issue.

Okay. Got it. And then is -- can you give us -- is there any update on conversations you've had with your counterparties? Are you getting any closer to securing additional MSR financing?

We've had a number of good conversations. And right now, I think we feel pretty good about the amount of capacity that we have in place with our current counterparties. And we had an increase to one of the facilities that we think on the Fannie Mae side is plenty for now. And we're working on Fannie Mae -- or Freddie Mac on.

Okay. And I then saw in April, you entered into a preferred stock ATM. And just wondering if you've tapped into that yet and how you kind of think about using that going forward?

We did do that. And we've tapped into it very lightly so far. I think we did 100,000 shares.

100,000.

And then we took a breather. But as a general statement, it is a good source of capital relative to where we think we can deploy the capital overall. So we're trying to be capital prudent. And again, I think we'll probably pick it up again at some point, but we took a little bit of a breather after 100,000 shares.

Our next question comes from Steve Delaney, JMP Securities.

Congratulations on a good performance in a volatile quarter. Book values very much in line with their estimates and very strong compared to the peers too as well. Jay, you've seen this rate cycle backing up and you know the mortgage banking industry. So it's, obviously, a period where it's great if you own MSRs, and it's not so much if you're a buyer. But at some point, if rates -- we don't know where rates will go, but we'll -- and I realized we're going into a seasonal purchase money period. But at some point, the mortgage banking shops just have to start selling MSRs to offset the losses in their origination biz. Just curious -- you've seen more of the cycles and I haven't. I completely understand why the bulk business has got really expensive. I mean, if people needed a wake-up call to buy MSRs, they got that. And I'm just curious if we look out over the next year or so, how that might play out.

No. It's a great question, Steve. So one, I think a lot of the bulk MSRs that we see have a seasoning anywhere from like 15 months to 20 months. And so at this stage, they're clearing out their seasons sort of thing that they've been able to carry on for the better part of 1 year to 2 years. And given that, the gross WACC on those loans is in the high 3s to low 4s. And so those packages are commanding very high multiples relative to where we are in rates today and the expectation of higher rate. So we think that, one, as the market catches up to current coupon, that will -- that shift will right itself, relatively speaking, around some of the pricing, because those ones become more in the money and they have more convexity. And two, to your point, yes, as rates rise and originators see it drop in volume, they will clip their margins and cut margins to stay in business and keep volume going before they have to start laying off people. So we do expect to see continued supply in bulk from the nonbanks, as they need to kind of keep cash available to run the business. And I'll tell you, so far this year, we've seen a healthy supply in the bulk side, way more than we did in the last part of the fourth quarter and early part of the first quarter, as people were kind of trying to digest what was happening in rates. But we definitely see regular packages coming out. There are a few more players. The banks are involved again, and it's been healthy competition. And like I said on the call, we feel today, they're trading close to, if not, full value. And from that perspective, given where we can acquire the assets co-issue, we're definitely trying to be more aggressive on the co-issue side.

Got it. Okay, great. And obviously, the RoundPoint relationship just gives you another option to keep you out of the bulk market. So...

It's working very well. They're a great partner. We've worked very -- [Ray] and the team work very closely together. And like I said, talking to Tim, I'm looking for a good second quarter relative to volume.

Okay. And Julian, I have one for you. Obviously, a lot of chatter on earnings calls in the last 2 weeks about the spread between LIBOR and REPO. I was looking at your deck or in -- I guess, it was the press release and noticed your average receive rate looks to be high 180s, 190 basis points. So that tells me that you're indexed to 1-month LIBOR rather than 3-month LIBOR. And I think that rate is pretty much kind of right on where 30-day, 60-day REPO is trading today. So am I right in assuming that maybe the lift that people are talking about are these 30 to 40 basis point ARMs that they're getting? I think they're using 3-month receive. But am I interpreting you right in your case that because you guys chose, I assume, appropriately, because 1-month LIBOR matches 30-day REPO. But is it accurate that you're not positioned with your swaps to really benefit from that spread?

No. I would say that all our swaps have 3-month LIBOR that we will be receiving. It's really a timing differential. I would say, in the second quarter of this year, I'm expecting all -- majority of the swap position, I'll say, the net of the swap position to be in receive position. We -- when we really started the REIT, we started it back in October. So a lot of our swaps were put on in October of that particular year. So as we move into the spring of this year, they'll be resetting. So definitely, I would expect to -- all of a sudden to be a net receiver in terms of our swap position. And I think if you look at the previous presentation, you'll notice a pretty big increase on that receive side of the portfolio as well. So...

Got it. My bad, I was looking at this slide. That's okay. Well, that's the implied -- that's the March 31 receive rate. But I think what you're saying is you were set -- for the first quarter, you were set at the end of 2017 as to what you would receive. And -- but now going into 2Q, you will be receiving something that looks more like 2.30% or -- I guess, 2.30%. Is that about -- okay. Right, great.

Yes. Exactly. That's what I'm saying. There is a catch-up period that will take place within the second quarter here. And yes, so given where our fixed rate is and given where currently 3-month LIBOR is at, it should be pretty attractive for us.

Excellent. Well, thank you for setting -- getting me -- my head straight on that one, because -- that's very helpful and positive, obviously, for you guys. My last point is just leverage and 4.9 blended at March 31 versus 5.3. You increased your equity to MSRs and reduced RMBS. So is this -- the decline, is that just a function of the additional MSRs? Or I was just curious if it was reflecting a little more caution just given rate volatility?

I mean, I think you can you attribute for both. I think at the end of the day, obviously, we've been redeploying assets at our RMBS, which have how we've had. We've been running at a higher leverage than what the leverage we'd be running on the MSRs. So that's one. And two, rates have been moving higher. And I think it's been our goal and focus to redeploy those assets into MSR. So it's kind of a, I would say, a combination. And I would say that you can continue to expect that kind of on a going forward.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Jay Lown for closing remarks.

Thanks. And thank you for joining us on today's call, and we look forward to updating you soon on our second quarter results. Have a good afternoon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.