Greetings and welcome to Cherry Hill Mortgage Investment Corporation First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to Rory Rumore of ICR. Thank you. You may begin. .

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2021 conference call. In addition to this call, we have filed a press release that was distributed earlier this afternoon and posted to the Investor Relations section of our website at www.chmireit.com. .

Thanks, Rory. And welcome to today's call. In the first quarter of 2021, we continued to reposition our portfolio, while maintaining a solid balance sheet as rates continued to climb of historic lows.

Despite the rising rate dynamic, elevated prepayment speeds persisted throughout the quarter due in part to the delay between locks and closings on new loans. At the same time mortgage rates did not keep pace with the broader rate sell off, as MBS spreads remain at historic tights.

This divergence swing in rates continues and has had a near-term impact on the portfolio's performance. However, with two recent rounds of stimulus and an economic recovery seemingly fully underway, we believe rates are positioned to head higher in the coming quarters.

As the shift evolves, we believe MBS spreads will normalize to higher levels, which better align with our hybrid strategy of pairing RMBS with MSRs. In the first quarter, we generated core earnings of $0.21. We have emphasized in previous calls that core earnings is one of several factors we consider in setting our dividend policy.

During previous quarters where core income far exceeded the distribution level, we were clear that we expected core to normalize over the coming quarters as amortization expenses increased due to higher prepayment speeds.

We remain confident in the near-term sustainability of our dividend and assuming rates remain at these levels or move higher and prepayments further slow, we expect core earnings to realign with the distribution level. .

Thank you Jay. In the first quarter, the U.S. experienced higher interest and mortgage rates as expectations increased potentially higher growth in inflation as a nationwide vaccine program was rolled out. The successful vaccine rollout as well as two additional rounds of government stimulus added further fuel to the economy.

With many states reopening and relaxing most COVID related protocols, there appears to be a solid foundation for upward economic growth in 2021. In the first quarter, we remained proactive in terms of adjusting our portfolio positioning and maintaining our liquidity position.

We continue to closely monitor the overall environment and we remain opportunistic in making new investments throughout the year. At quarter end, our servicing-related investments comprised of full MSRs at a UPB of approximately $22 billion and a market value of approximately $217 million.

During the quarter, we purchased $2.5 billion of new MSRs through our flow program. At the end of the first quarter, MSR investments represented approximately 48% of our equity capital and approximately 14% of our investable assets excluding cash well-above where we stood at December 31st..

Thank you, Julian.

Our GAAP net income applicable to common stockholders for the first quarter was approximately $18.3 million or $1.07 per weighted average share outstanding during the quarter, while comprehensive loss attributable to common stockholders which includes the mark-to-market of our held for sale RMBS was approximately $600,000 or $0.04 per share.

Our core earnings attributable to common stockholders were approximately $3.5 million or $0.21 per share. Our book value per common share as of March 31 was $10.83 compared to a book value of $11.16 as of December 31, 2020.

We use 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, swaptions, TBAs and treasury futures all of which had a combined notional amount of approximately $2 billion.

You can see more details with respect to our hedging strategy in our 10-Q as well as in our first quarter presentation. For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives. And as a result we recorded the change in estimated fair value as a component of the net gain or loss on interest rate derivatives.

Operating expenses were $3.4 million for the quarter. On March 4, 2021, our Board of Directors declared a dividend of $0.27 per common share for the first quarter of 2021, which was paid in cash on April 27, 2021.

We also declared a dividend of $0.5125 per share on our 8.2% Series A Cumulative Redeemable Preferred Stock and a dividend of $0.515625 on our 8.25% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, both of which were paid on April 15th, 2021. At this time, we will open up the call for questions.

Operator?.

Thank you. Our first question is from Mikhail Goberman with JMP Securities. Please proceed..

Hi Mikhail..

Please check and see if you have your line muted..

I'm sorry, I have my line mute. Thank you. Sorry about that. Good afternoon. I'm wondering how much you expect prepay speeds to slow in the second quarter thus far, or how you're also thinking about leverage given how tight MBS spreads are currently? Thank you..

Are you talking about speeds MBS or MSRs or both?.

Both..

So, I'll take the MSR part and I'll let Julian talk about the MBS and the leverage. We have seen speed slow down. April was a pretty good print for us relatively speaking given the past three or four quarters and we expect that to persist.

As I think I noted in the script that through the turnover of the collateral, the weighted average note rate has come down a decent amount over the last couple of quarters and as such we have seen speeds net of recapture fall.

The key is net of recapture because the reality which we capture is your -- those outbound calls are going to increase your gross CPRs and you're really focused on the net CPR after the recapture, but we have seen continued through April print somewhere around 30 low 30 CPR net..

On the RMBS side, look our April speeds came in line to where the March speeds were. There was slightly -- a little bit of differential that we saw there. One of the things is we've been -- and that's just on the specified pool portfolio.

We have obviously increased the TBA portfolio as Jay has kind of mentioned, as we've gone into TBAs in 30-year as well as in 15-year collateral. So, for some diversification. So, the overall speeds we're expecting to slow down if you include the combination of TBA as well as spec pools.

But the spec pools they were similar to where they were the previous month. In terms of the overall -- what we think of mortgages, mortgages are on the tight side. I think from a fundamental valuation perspective, most people note that either on a nominal spread basis or on a LIBOR-OIS basis they are at their tights.

The technicals are expected to remain strong and be with us throughout probably the second and third quarter.

There is an expectation potentially if the US data remains on good footing that the Fed might announce something later at Jackson Hole, but that will depend on the data and -- well, then they will decide whether they will taper at that point in time.

So, mortgages, we view them as on the richer side, but from a fundamental standpoint, with the technical, they can still remain well bid here for a while..

Got you. And if I could just follow-up on just the corresponding question on leverage.

I believe Jay you mentioned that leverage would maybe drift back to historical levels, but is there sort of a range that you guys are targeting going forward?.

As for a range, I wouldn't exactly pinpoint it to a range. I think it's a function -- it will be more a function of the asset allocation with respect to equity and how much equity we decide to deploy outside of RMBS and potentially into MSRs on a go-forward basis.

So, like I mentioned in the script, in April, we did take advantage of money available to us on the MSRs and that brings us more in line with what I would say historical over the last couple of quarters somewhere around 4%..

Got it. Thank you very much gentlemen..

There are no further questions at this time. I would like to turn it back over to management for closing remarks..

Thanks everybody for joining us on our first quarter call. We look forward to updating you in August on our second quarter results. Have a great afternoon..

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