Cherry Hill Mortgage Investment (CHMI) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 2024, the company reported a GAAP net loss applicable to common stockholders of $14.8 million or$ 0.49 per diluted share, while comprehensive income attributable to common stockholders was $1.3 million or$ 0.04 per diluted share [28] - Earnings available for distribution (EAD) were $2.5 million or$ 0.08 per share, impacted by approximately $0.045 per share of expenses related to a special committee [10][29] - Book value per common share decreased to$ 4.02 from $4.15 as of June 30, with approximately$ 0.06 of the change attributed to special committee and ATM issuance [12][29] - Financial leverage rose to 5.3 times, maintaining a solid liquidity profile with $50 million of unrestricted cash on the balance sheet [13] Business Line Data and Key Metrics Changes - The mortgage servicing rights (MSR) portfolio had an unpaid principal balance (UPB) of$ 17.6 billion and a market value of approximately $227 million, representing about 42% of equity capital [21] - The residential mortgage-backed securities (RMBS) portfolio accounted for approximately 42% of equity capital, with a total value of approximately$ 866 million, up from $674 million in the previous quarter [21][25] - Prepayment speeds for the MSR portfolio averaged approximately 5.5%, while the RMBS portfolio's weighted average three-month CPR increased to approximately 5.4% from 4.6% in the second quarter [22][25] Market Data and Key Metrics Changes - The U.S. 10-year Treasury yield ended the quarter at 3.78%, down 62 basis points quarter-over-quarter, as the market anticipated significant rate cuts [7] - The interest rate curve steepened, with lower coupon 30-year mortgages performing best during the quarter [19] Company Strategy and Development Direction - The company plans to continue pairing MSRs with agency RMBS and is focused on deploying capital into agency RMBS, which presents a strong risk-adjusted return profile [14] - The management is closely monitoring the macroeconomic environment and political developments, particularly the impact of a potential second Trump presidency on the economy and inflation [8] Management's Comments on Operating Environment and Future Outlook - Management expressed that while the macroeconomic environment remains volatile, they expect to gain confidence that volatility will moderate as they approach 2025 [8] - The company anticipates that the potential for at least one more rate cut in 2024 will influence their portfolio management strategies [20] Other Important Information - Operating expenses for the quarter were$ 5.1 million, which included $1.4 million of special committee-related expenses [31] - The company declared a dividend of$ 0.15 per common share for Q3 2024, paid on October 31 [31] Q&A Session Summary Question: Trade-off between agency MBS and MSR - Management indicated that while short-dated rates are expected to move lower, MBS still presents a better return profile than MSRs on a levered basis [35][36] Question: Leverage increase potential - Management noted that while leverage increased to 5.3, they are cautious about extending it further due to recent market volatility and margin calls [38][39] Question: Book value performance in Q4 - Management estimated a decline of about 4% to 5% in book value per share as of the previous Friday, before any fourth-quarter dividend accrual [40] Question: EAD outlook - Management agreed that as short-dated rates fall, the MSR portfolio should benefit, leading to a potential increase in EAD over time [45] Question: Future of internalization process - Management refrained from providing details on the timing of the internalization process, stating they are not prepared to discuss it [57]