Cherry Hill Mortgage Investment (CHMI) - 2024 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q4 2024, the company generated GAAP net income applicable to common stockholders of $9.1 million or $0.29 per diluted share, while earnings available for distribution (EAD) were $3.3 million or $0.10 per share, impacted by approximately two cents per share of expenses related to the special committee's efforts [12][25][26] - Book value per common share decreased to $3.82 from $4.02 as of September 30, 2024, with NAV down approximately $5.5 million or 2.3% relative to the previous quarter [13][26] - Financial leverage remained consistent at 5.3 times, with $46 million of unrestricted cash on the balance sheet, indicating a solid liquidity profile [14] Business Line Data and Key Metrics Changes - The MSR portfolio had a UPB of $17.3 billion and a market value of approximately $234 million, representing about 46% of equity capital and 24% of invested assets excluding cash [19] - The RMBS portfolio accounted for approximately 38% of equity capital, with prepayment speeds for both MSR and RMBS portfolios remaining steady compared to the prior quarter [20][22] - The RMBS portfolio's weighted average three-month CPR was approximately 5.7%, up from 5.4% in the third quarter, with the portfolio's net interest spread at 2.9% lower than the prior quarter [22][23] Market Data and Key Metrics Changes - Long-term yields rose to seven-month highs, with the ten-year yield ending at 4.57%, nearly eighty basis points higher quarter over quarter, driven by concerns over persistent inflation [7][8] - The relationship between short and longer-dated rates has been highly reactive to political agendas and domestic economic data, impacting the company's RMBS portfolio [8] Company Strategy and Development Direction - The company completed the internalization of management, which is expected to reduce operating expenses in 2025 by $1.1 million to $1.6 million, enhancing alignment between management and shareholders [9][11] - The investment strategy will continue to focus on agency RMBS and select MSRs that present strong risk-adjusted return profiles while maintaining strong liquidity and prudent leverage [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the macroeconomic and geopolitical environment, anticipating fewer rate cuts in 2025 than previously expected, and indicated that the investment strategy will remain data-dependent [8][14] - The company expects continued volatility in the near term, with rates likely to remain higher until inflation shows signs of moderating or economic growth falters [18] Other Important Information - Operating expenses for the quarter were $4.5 million, including special committee-related expenses, and dividends declared included $0.15 per common share for Q4 2024 [28] Q&A Session Summary Question: Clarification on special committee expenses and internalization benefits - Management confirmed that special committee expenses were included in the SG&A line item and that benefits from internalization would be reflected in SG&A and compensation moving forward [31][33] Question: Expectations for repo costs and portfolio growth - Management noted that elevated repo costs were partly year-end expenses but have since decreased, and they expect to grow the portfolio through capital raising [35][36][42] Question: Capital allocation between MSR and RMBS - Management indicated that the increase in servicing equity was due to a rise in MSR values rather than new purchases, and they will continue to favor RMBS for better returns in the current environment [48][51] Question: Impact of Fed rate cuts on investment strategy - Management acknowledged that expectations for rate cuts could influence their investment decisions, particularly regarding the MSR portfolio, which has higher financing costs [55][57] Question: Current refinanceability and spec pools - Management estimated that about 5-10% of the market is refinanceable, with a need for mortgage rates to drop further to stimulate significant refinancing activity [71][73]