Release Date: May 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cherry Hill Mortgage Investment Corp (CHMI, Financial) reported GAAP net income applicable to common stockholders of $0.32 per diluted share for Q1 2024.
- Earnings available for distribution (EAD) were reported at $4 million or $0.13 per share, reflecting a solid performance despite market challenges.
- The company's strategic positioning with respect to Mortgage Servicing Rights (MSRs) and investing in higher coupon Residential Mortgage-Backed Securities (RMBS) helped offset impacts of the flattening yield curve.
- CHMI maintained a strong liquidity profile with $48 million of unrestricted cash on the balance sheet at the end of the quarter.
- The company began repurchasing Series B Preferred shares, aiming to create a more stable equity profile and reduce preferred dividend payments.
Negative Points
- Book value per common share slightly decreased to $4.49 from $4.53 at the end of December 2023.
- The company's Net Asset Value (NAV) decreased by approximately 0.5% relative to December 31.
- Financial leverage increased slightly to 4.5 times by the end of the quarter, indicating higher risk exposure.
- Earnings available for distribution (EAD) may continue to remain under the dividend level in the near-term, suggesting potential challenges in sustaining dividend payments.
- The company's investment portfolio and earnings are highly susceptible to market volatility and changes in Federal Reserve policies, which could impact future performance.
Q & A Highlights
Q: Hey. Good afternoon, gentlemen. Hope everybody’s doing well. Just wanted to get your thoughts on how you’re seeing the servicing market as we head in deeper into the spring selling season from a bulk and flow perspective. And can we expect that UPB to continue to drift downwards at the pace that it has been over the last few quarters? Thanks.
A: Hey, Mikhail. How are you? It’s Jay. I’ll let Ray answer the -- some of the question relative to what the market looks like because he’s in the midst of it day-to-day. But, broadly speaking, I think, the biggest reason we’ve let it drift down is we saw a more compelling risk return profile from the RMBS versus the MSR, and so we’ve deployed amortization or excess capital into MBS for that reason relative to the potential returns on the MSRs given current pricing. But it’s not because of a lack of interest in the product. It’s just a function of getting the best return we can for shareholders in the near-term. With respect to volumes and the strength of the market, et cetera, I’ll let Ray chime in on some of that.
Q: Got you. Thank you, guys. And is there any appetite for maybe driving leverage a little bit higher in order to protect the EAD and the dividend coverage?
A: It’s definitely something we talk about. We don’t have any current plans to dramatically take it up. But as we get closer to some sense of where the Fed’s going and where the shape of the curve might end up towards the end of the year, I think, it’s possible that we could definitely consider that.
Q: Got you. And if I can squeeze in one more. Given the nice little mini bond rally, I’d say, of recent days, any update on book value thus far this quarter? Thanks.
A: I mean, it wouldn’t be a conference call if we didn’t get that question. Mike? That’s a fair point. As of Friday, we estimate that our book value per share was down about 3% from 3.31% and that is before any common dividend accrual as the Board has not yet met to approve the second quarter dividend.
: Hey. You guys -- look, you guys seem to own the playbook here on MBS spreads and interest rates. So I got to ask you, I think, I heard you say you expect near-term volatility, followed by, at some point, yield curve twists and steepening. I just love to hear the playbook, the CHMI here playbook, because you seem -- you guys have nailed it, really, the last year or maybe two years.
A: Hi, Matt. It’s Julian. Look, I think, when we look at the portfolio, we’re trying to look at it over a longer timeframe, not just maybe one quarter, but perhaps two quarters. We are currently positioned for convert yield curve steeper in the portfolio. We are along the front end and are short on the back end of the treasury curve at this point in time, whether that be through some type of derivatives play in terms of futures or via -- how we’re positioned on the coupon stack. So we’re playing it from both fronts. We do believe that at some point in time, the Fed will shift. They kind of, Paul, I think at the last meeting was pretty adamant that he would like to cut rates at some point in time. He perceived that there will be a cut more so than a hike, but he’s highly data-dependent. And I think the data will play out in terms of how the curve will play out, as well as how the next steps forward. We were asked if we would increase leverage. I think if we got some bit of certainty, as kind of Jay mentioned, or a little something that we would like to see that really affirms that this, we’re going to be here, but steeper over a longer timeframe, we probably do bring up our leverage.
Q: So, Jay, I got to ask a question. I don’t want to ask you any specifics about the special committee, but why now? I mean, why -- the company is so well positioned here for the next phase of the Fed and you really got it well. The preferred is coming down, the capital structure is improving. Everything you said here, the earnings power look like it’s terrific. What’s the -- why want to -- why look at a -- why apply special committee or why even look at one at this point, given how well positioned the company is?
A: Well, Matt, broadly speaking, we’re always looking to maximize shareholder value on any given day. I think from the perspective of the committee, you’d have to talk to them directly. But I can tell you that it’s our job to evaluate what we can do in the best interest of shareholders on any given day and the path going forward. But as the press release suggested, there are multiple avenues that the Board might pursue and some of those avenues result in something like an internalization. So I would think that the Board’s got a lot to consider. They’re taking their time, they’re being diligent, and at the right time, I’m sure they’ll feel compelled to share that with the markets.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
