Cherry Hill Mortgage Investment (CHMI) - 2021 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q2 2021, the company generated core earnings of $0.28 per share, covering its quarterly dividend [7] - GAAP net loss applicable to common stockholders was $13.8 million or $0.81 per share, while comprehensive loss was $15.8 million or $0.92 per share [24] - Book value per common share decreased to $9.63 as of June 30, 2021, down from $10.83 at the end of Q1 2021 [25] Business Line Data and Key Metrics Changes - The company acquired approximately $1.6 billion of Fannie and Freddie MSRs during the quarter, with the MSR portfolio representing about 43% of equity capital [12][18] - The MSR portfolio averaged approximately 27% net CPR for Q2, down from approximately 35% in the previous quarter, indicating slower prepayment speeds [19] - The RMBS portfolio's weighted average three months CPR improved to approximately 18% compared to approximately 21% in Q1 [19] Market Data and Key Metrics Changes - The mortgage market saw a significant increase in refinancing incentives, with 45% of the market having a 50 basis point incentive to refinance [22] - The company noted that mortgage volumes remained elevated towards the end of Q2, and this trend is expected to continue as interest rates have recently decreased [22] Company Strategy and Development Direction - The company plans to remain positioned for a potential increase in interest rates, aligning with its hybrid strategy of pairing RMBS with MSRs [6][13] - The management emphasized the importance of actively managing the portfolio to take advantage of attractive investment opportunities [13] - The company is focused on maintaining a strong balance sheet while navigating the competitive MSR market [9] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in the near-term sustainability of dividends despite fluctuations in rates and potential impacts on prepayments and asset yields [8] - The company remains constructive on the U.S. economy's recovery from the pandemic, despite concerns regarding the Delta variant [13] - Management believes that the recent rally in rates is not sustainable and anticipates a bounce higher in rates as economic fundamentals remain strong [6] Other Important Information - The company’s leverage increased slightly to 3.6x from 3.4x at the end of the prior quarter [10] - Operating expenses for the quarter were reported at $3.7 million [26] Q&A Session Summary Question: What does the business' earnings potential look like going forward if interest rates remain unchanged? - Management indicated that the MSR portfolio has become more stable, and they expect earnings to persist in the near term despite potential volatility in the MBS portfolio [29][30] Question: Are originators looking to sell more MSRs to compensate for reduced gain on sale spreads? - Management noted that flow deals have historically worked better for the company than bulk deals, and they expect to see more acquisition through flow versus bulk [39] Question: What are the normalized CPRs and multiples on MSRs in a higher rate environment? - Management stated that historically, buyers are at 4x and sellers at 5x for MSRs, and they believe CPRs could reach 10-12 if rates rise above 1.75% [44][45]