Michael Hutchby - Controller Jay Lown - President Julian Evans - Chief Investment Officer Marty Levine - CFO.

Tim Hayes - FBR Capital Markets.

Welcome to the Cherry Hill Mortgage First Quarter 2016 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Mr. Michael Hutchby. Please go ahead, sir..

We would like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2016 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.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to interest income, financial guidance, IRRs, future expected cash flows, as well as prepayment and recapture rates, delinquencies and non-GAAP financial measures, such as comprehensive income and core earnings.

Forward-looking statements represent management's current estimates and Cherry Hill assumes no obligation to update any forward-looking statements in the future.

We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC and the definitions contained in the financial presentations on the Company's website. Today's conference call is hosted by Jay Lown, President of Cherry Hill.

Also present on the call today are Julian Evans, our Chief Investment Officer; and Marty Levine, our Chief Financial Officer. Now I will turn the call over to Jay..

Thanks Mike. And thank you everyone for your continued support of Cherry Hill Mortgage Corporation. Last December we saw our first rate hike in nearly 10 years. At the time, the market believed that we were on a path towards a rising rate environment.

The volatility in the global marketplace in the first quarter caused the 10-year treasury to decline 50 basis points subsequent to the rate hike. Despite the continuation of that volatility, recent Fed remarks suggest that at least one rate hike is on the table this year.

We're mindful of that possibility and maintain our flexibility to capitalize on growing our servicing-related assets portfolio, as we manage our long term investment strategy. Overall, our strategy remains focused on transitioning towards a more operational business.

During the quarter, we closed on the acquisition of a $460 million Fannie Mae MSR portfolio which is being sub-serviced by Freedom. Securing liquidity to fund our MSR strategy is a high priority for the Company.

We continue to emphasize preservation of capital with our current investments and any new investment opportunities that may present themselves. Turning to our quarterly results as shown on slide 5, first quarter core earnings were $0.54 per share, dividend eligible earnings were $0.55 per share, both well above our historical norms.

The rise in both core and dividend eligible earnings is more a result of both our RMBS and our servicing weighted assets folios performing better than expected, rather than a permanent transition. We expect to see core and dividend eligible earnings to return to historical norms next quarter.

With that said, we still expect our current dividend level to be sustainable in the near term. For the first quarter we distributed a $0.49 per share dividend to our shareholders and we have now distributed nearly $5 per share in dividends since we went public in late 2013. For the first quarter our book value declined 2.2% to $19.68.

As Julian will elaborate on shortly, approximately half of our investment portfolio in terms of equity invested remains in servicing related assets. It's no surprise that given the movement in long term interest rates in Q1, this portfolio declined in value quarter over quarter.

However, our RMBS portfolio performed well this quarter, minimizing the overall impact to our book value. When accounting for the book value decline and dividend paid to shareholders, we generated a positive 0.2% quarterly economic return on common equity.

As we stated in our earnings release earlier today, I am pleased to announce that we have promoted Julian Evans to Chief Investment Officer of Cherry Hill. In recognition of the outstanding work he has accomplished over the past few years working side-by-side with me, managing our investment portfolio.

I look forward to continue to closely with him over the coming years. With that I will turn over the call to Julian will who cover some more detailed highlights of our investment portfolio and its performance over the quarter..

Thanks Jay, I look forward to working with you and the team in my new role as CIO. Now I will provide some additional commentary on the market and mortgage performance over the quarter. As Jay mentioned, 2015 market themes that were a concern extended into 2016.

The new year brought with it increased market volatility, credit spread whitening, reduced market liquidity, global stock market disruption and lower interest rates.

During the quarter, these market disruptions lasted until central banks globally, ECB, Bank of China and Japan as well as U.S., provided additional monetary stimulus to provide a foundation for financial assets. Post Central Bank stimulus credit, equity and commodity markets improved.

End of quarter, MBS spreads tightened from the wide, but lagged both treasury and swap hedges as the quarter closed. Despite additional monetary stimulus, agency mortgages lagged because of the absolute level of interest and mortgage rates at quarter end. Mortgages moved from being slightly refinanceable the entire coupon stack being refinanceable.

Given the extended drop in the U.S. tenure and mortgage rates, it makes clear sense that mortgages could not recover from their losses during the quarter as investors feared another prepayment wave. Moving forward, slide 6 highlights our aggregate investment portfolio composition.

At quarter end, our servicing related investments which include MSR and excess MSRs, represented approximately 47% of our equity capital and approximately 16% of our investable assets, excluding cash. Servicing related assets as a percentage of total assets declined 2 percentage points over the quarter.

Our RMBS portfolio at quarter end comprised approximately 47% of our equity and approximately 84% of our investable assets, excluding cash. As shown on slides 7 through 9, the current carrying value of our servicing related assets stood at approximately $93 million at quarter end.

Despite the average primary rate falling between 15 and 20 basis points quarter over quarter, our CPR held in well, with MSRs coming in unchanged quarter over quarter at 9% CPR and our excess MSR investment CPR performance increasing by 1% to 12% net of recapture.

Total recapture on loans underlying our excess MSRs remained solid with approximately $345 million of loans being recaptured during the quarter. With pool 1 posting a 24% recapture rate and pool 2 posting a 52% recapture rate. Overall, the excess MSR portfolio produced $6.4 million in cash flow, including $1.4 million in interest income.

In addition, we grew our MSR investments in the quarter to approximately $22 million as a result of the Fannie MSR acquisition completed in January. As of March 31, the RMBS portfolio stood at approximately $508 million as shown on slide 10. Comparable to the prior quarter's end.

However, the composition of the RMBS portfolio changed during the first quarter. At quarter end, the portfolio comprised 59% of the 30 year fixed-rate whole pools, up from 55% the previous quarter's end. The composition of 20 year and 15 year fixed-rate whole pools as well as quarter duration assets, represented 41% of the RMBS portfolio.

The RMBS portfolio remained primarily comprised of loan balance collateral as shown on slide 11. For the quarter, the portfolio posted a weighted average three-month CPR of approximately 6.4% which was in line with the previous quarter's CPR.

Going forward, we would expect CPRs to rise given the sustained low interest rate environment, coupled with a Fed that seems to be on hold for the foreseeable future. For the first quarter, we posted a 1.73 net interest margin versus a 1.46 NIM for the fourth quarter.

The increase in NIM was driven by the portfolio's addition allocation to 30 year collateral, coupled with a CPR that remained on par to the previous quarters, as well as reduced interest costs related to swaps. All of which offset the increase in repo cost.

As Jay stated earlier, we believe our NIM will return to historical numbers in light of our expectation of higher prepayment speeds and repo cost.

During the quarter, the aggregate portfolio operated with leverage of 3.15 times and the negative duration gap, as shown on slide 12 we ended the quarter with an aggregate portfolio duration gap of minus 2.11 years.

The composition of the RMBS portfolio, associated hedges and the fact that 47% of the Company's equity was invested in servicing related assets, including excess MSRs and full MSRs during first quarter of 2016, drove the portfolio's duration gap. I'll now turn the call over to Marty for a first quarter financial discussion..

Thank you Julian. While our GAAP net loss applicable to common stockholders for the first quarter was $7.1 million or $0.94 per share, our comprehensive income which includes the mark to market of our held for sale RMBS, was $0.2 million or $0.02 per share.

Our core earnings as detailed on slide 24 were $4 million or $0.54 per share, while our dividend eligible income was $0.55 per share. For GAAP, we're continuing to reclassify the catch-up of premium amortization from our excess MSRs. We also believe our core earnings will normalize back to previous levels in the ensuing quarters.

Throughout 2016 we expect there will continue to be a slight difference between core earnings and dividend eligible income due to ongoing portfolio acquisition expenses. Notably, we expect to generate enough dividend eligible income to allow us to sustain our current dividend in the near term.

As detailed in slide 27, we used 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 and treasury futures with a combined notional amount of $374.8 million.

For GAAP purposes, we have not elected to apply hedge accounting to our interest rate derivatives and as a result we record the change in estimated fair value as the component of the net gain or loss on interest rate derivatives.

Operating expenses were $1.5 million for the quarter, of which approximately $190,000 was related to our taxable REIT subsidiary. For the quarter, our total operating expense ratio as a percentage of average equity was 4%. On March 8, 2016, we declared a dividend of $0.49 per share for the first quarter of 2016 which was paid on April 26.

Our goal remains to distribute regular quarterly dividends of all or substantially all, of our taxable income to holders of our common stock and to the extent authorized by our Board of Directors. Now I would like to turn the call back to Jay for closing remarks..

Thanks, Marty. Sometimes a quiet quarter is a good quarter. And in light of the ongoing dislocation globally, we believe this past quarter produced results that should be appealing to our shareholders. This time we will now open up the call for questions.

Operator?.

[Operator Instructions]. Our first question today is coming from Paul Miller from FBR & Co. Please proceed with your question. .

This is Tim Hayes for Paul Miller. This is a multi-part question packaged into one.

You made some progress in repaying your FHLB advances, where did that capital come from and how should we think about the pace of repayment throughout the rest of the year? And then, how should we think about the new investment versus -- with what you're seeing in the market today, versus repayment? Is one thing prioritized over another?.

In terms of the advances from Federal Home Loan Bank, we were able to move those advances over to another counter-party, another couple of counter-parties. So there wasn't really any capital that was utilized to repay those particular securities. So those were moved on over.

In terms of your second question, I think it's more related to securities investments that we're kind of seeing and one versus the other. Obviously, this is kind of a very troubling time. The markets are kind of on hold in terms of what we have in terms of interest rates. I think the main thing that we think about is preservation of book value.

We also think about, at some point the Fed has alluded to the fact that they may raise rates this year, at least at one point in time if not two. And I think third is kind of the juxtaposition, kind of between RMBS assets, kind of some non-agency assets and MSR assets are out there. I guess there is a fine line between all three of them.

Obviously if we knew that rates were just going to rise up substantially then we would like to put those assets into MSR assets because we do worry about the preservation of capital. And I do think there's a line between adding additional RMBS on top of that, in terms of just replacing kind of the securities that have been amortized down here.

That's it. I will turn it over to Jay, if he has additional comments..

No, that's a good answer. That was a few things in a long-winded sentence..

Yes and I guess just to hit on one part of that which is just the pace repayment of FHLB or if you're moving any of that more over to another counter-party, how should we think about that going away through the course of the year?.

We have been pretty clear that the amount of borrowings that we've had with the FHLB and our lack of access to them going forward should not be something that would be punitive to us on a go forward basis.

We have had no problems moving those borrowings to other counter-parties and we have, as you can see on one of the pages in the presentation, a number of relationships with a fair amount of borrowing capacity. We're pretty happy about where we stand with respect to winding down that relationship..

[Operator Instructions]. We have reached the end of our question-and-answer session, I would like to turn the floor back over to management for any further or closing comments..

Thank you everybody for joining us today on our first quarter earnings call today. We look forward to updating you on our progress next quarter. Have a good afternoon..

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..