Greetings, and welcome to the Cherry Hill Mortgage Investment Corporation’s First Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Michael Hutchby, Controller..

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's First Quarter 2018 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 core and comprehensive income.

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 available on the company's website. Today's conference call is hosted by Jay Lown, President and CEO of Cherry Hill.

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

Thanks, Mike, and welcome to today's call. As many of our peers have highlighted, the first quarter saw interest rates pushed higher toward 3% for the first time since Cherry Hill went public in the fall of 2013.

That coupled with a constant barrage of geopolitical news, both domestically and abroad, contributing to occasional meaningful swings in the capital markets.

The rapid movement in rates early in the quarter created a sense of uncertainty with respect to the residential mortgage REIT sector, as the market try to understand the impact on earnings and book value.

Earnings results digested thus far suggest that diversified strategies are most strongly positioned to protect book value in this interest rate environment. It’s also clear that a flatter yield curve will have an impact on earnings, forcing money to increase leverage to meet current dividend levels.

Despite the uncertainty and increased volatility, Cherry Hill strategy has remained intact and we made meaningful progress in terms of our overall MSR strategy in the first quarter.

Purchases came from both the bulk and flow channels, and at the end of the first quarter, the MSR portfolio stood at $15.7 billion, representing 34% of our equity capital at quarter end.

While we were pleased with our progress in growing MSR portfolio, we’ve also taken note in recent months that MSRs have increasingly been trading near full value, most notably in the bulk acquisition area.

While we certainly want to be as aggressive as we can as we grow this portfolio, we remain extremely mindful of our goal to acquire MSRs and an appropriate yield that bodes the textbook value and is not meaningfully diluted to earnings.

To that end, we expect that in the near term we will be leaning more heavily on our co-issue program to selectively acquire assets that meet our comprehensive investment criteria. Overall for the first quarter, strong performance from our RMBS portfolio, along with the growing MSR portfolio, helped reduce core earnings of $0.52 per share.

We close the quarter with a book value of $20.15, a decrease of $0.29 or 1.4% from December 31, 2017. Looking forward into 2018, we’re anticipating at least two more rate hikes this year by any significant macroeconomic stocks as that remains committed to a gradual rate hike policy.

By continuing to add more servicing-related assets as we did in the first quarter, we believe we will be able to withstand further tightening over the near term.

Overall, we continue to believe our strategy is the correct course for Cherry Hill’s pursue today, and we will continue to be prudent about using our deep investment experience to deploy capital at appropriate risk return levels. Most of all, we remain excited and optimistic about our future in creating further long-term shareholder value.

With that, I'll turn the call over to Julian, who will cover more detailed highlights of our investment portfolio and its performance over the quarter..

Thank you, Jay. Slide 5 highlights our aggregate investment portfolio composition. As Jay mentioned, our servicing-related investments comprise solely of full MSRs, represented approximately 34% of our equity capital and approximately 11% of our investable assets, excluding cash at quarter-end.

Servicing-related assets as a percentage of equity increased 8% due to the redeployment of RMBS assets in cash into select MSR investments during the quarter. As a result, our RMBS portfolio accounted for approximately 61% of our equity, a 7% reduction from the previous quarter.

As a percentage of our investible asset, RMBS represented approximately 89%, excluding cash at quarter-end. As of March 31, we held MSRs with a UPB of $15.7 billion and a market value of approximately $188 million, as shown on Slide 6. Total MSR portfolio prepayments fees continue to improve during the first quarter.

Life-to-date, our conventional MSR CPRs has averaged approximately 9.7%, while our government MSR CPRs have averaged 10.2%. As of March 31, the RMBS portfolio stood at approximately $1.6 billion, as shown on Slide 7, a reduction from where we stood at December 31.

As we have previously noted, we expect to continue to opportunistically redeploy a portion of the RMBS firms into MSRs. At quarter end, our RMBS portfolio’s 30-year securities position stood at 71%, while the 20- and 15-year fixed rate pools as well as shorter duration assets represent at the balance of RMBS portfolio.

In the first quarter, the RMBS portfolio continued to perform well, posting a weighted average 3-month CPR of approximately 6.85%, slightly higher than the previous quarter, as shown on Slide 8. Overall, the portfolio continue to benefit from its collateral composition and continue to [divest any] aggregate prepayments fees during the quarter.

For the quarter, we posted a 1.14% RMBS NIM versus a 1.27% NIM for the fourth quarter.

The decrease in NIM was driven by the increased amortization cost, higher prepayments fees, rising repo cost and timing differentials related to the redeployment of RMBS into MSRs, all of which will partially offset by the portfolio’s collateral compensation and reduced [swap] costs.

During the quarter, the aggregate portfolio operated with the leverage of 4.9x and a negative duration GAAP. As shown on Slide 9, we ended the quarter with an aggregate portfolio duration GAAP of minus 1.86 years. Going forward, we expect to continue to evaluate and also the portfolio as the year progresses.

I'll now turn the call over to Marty for our first quarter financial discussion..

Thank you, Julian. Our GAAP net income applicable to common stockholders for the first quarter was $33.6 million or $2.64 per weighted average share outstanding during the quarter. Our comprehensive income attributable to common stockholders, we include the mark-to-market of our held-for-sale RMBS, was $2.9 million or $0.23 per share.

Our core earnings, as detailed on Slide 18, was $6.6 million or $0.52 per share. As Jay mentioned, our book value as of March 31 was $20.15, a reduction of $0.29 per share or 1.4% from December 31.

As detailed on Slide 21, 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 and swaptions and were short TBAs and treasury futures, all of which had a combined notional amount of $1.16 billion.

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

Operating expenses for the quarter were $2.2 million, of which approximately $317,000 was related to our taxable REIT subsidiary.

On March 8th of 2018, we declared dividend of $0.29 per common share for the first quarter of 2018, which was paid on April 24, as well as a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock, which was paid on April 16, 2018.

Our goal remains to distribute regular quarterly dividend overall substantially all our taxable income to holders of our common stock and to the extent authorized by our Board of Directors. Now I'd like to turn the call back to Jay..

Thanks, Marty. At this time, we'll open up the call for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Tim Hayes, B. Riley FBR. Please proceed with your question..

Hey, guys. Thanks for taking my questions here. Just to start, Jay, how much of the $4.3 billion came from the [indiscernible] flow versus bulk in the quarter..

About $3 billion, close to $3.5 billion of the purchases were bulk..

Okay. And so that's from a flow stand point, I guess, that seems a little bit wider than you had been. I guess it’s a function of just doing so much bulk in the quarter.

But should we -- what's the time for getting up to about $1 billion per month from round point, which I believe is kind been your stated target?.

I think that you're going to see more volume coming out from the [indiscernible] side in the second quarter relative to things like seasonals. Remember, first quarters and last quarters of the year will probably be lowest quarter of the year for origination in general. So what we've seen so far this quarter is a decent pickup.

So we're looking to get closer to $1 billion, if not $1 billion, a month in the fruition..

Okay. Got it. Thanks.

And then can you give us -- is there any update on conversations you had with your counterparty? Are you getting any closer to securing additional MSR financing?.

We had a number of quick conversations, and right now I think we feel pretty good about the amount of capacity that we have in place with our current counterparties. And we had an increase to one of the facilities that I think we think on the Fannie Mae side is plenty for now, and we're working on the Fannie Mae – oh, Freddie Mac line..

Okay.

And then I saw in April you entered into preferred stock ATM, and just wondering if you’ve capped [any of that yet] and how you kind of think about using that going forward?.

We did do that, and we have capped into it very lately so far. I think we did a100,000 shares. And then we took a breather. But the general statement, it is a good source capital relative to where we think we can deploy the capital overall. So we’re trying to be careful and prudent.

And again, I think we will probably pick it up again at some point, but we took a little bit of breather to 100,000 shares..

Our next question comes from Steve Delaney of JMP Securities. Please proceed with your question..

Congratulations on a good performance in a volatile quarter. Book value is very much in line with your estimates and very strong compares to peers too as well. Jay, you’ve seen this rate cycle backing up and you know the mortgage banking industry. So it’s obviously a period where it's great if you earn MSRs. It’s not so much if you’re a buyer.

But at some point, if we don’t where rates will go, but I realize we’re going into a seasonal purchase money period. But at some point, did the mortgage banking shops just have to start selling MSRs to offset the losses and their origination bids? Just curious. You’ve seen more of those cycles than I have.

I completely understand why the bulk business is got really extensive. I mean, if people needed a wakeup call to buy MSRs, they got that. And I’m just curious if we look out over the next year so, how that might play out..

It’s a great question, Steve. So one, I think a lot of the bulk MSRs that we see had a seasoning anywhere from like 15 to 20 months. And so at this stage they are clearing out their seasons. First thing. They’ve been able to carry on for the later part of one to two years. And given that, the gross [VAT] on those loans in the high 3s to low 4s.

And so those factors are commanding very high multiples relative to where we are in rates today in the expectation of high rate. So we think that, one, as the market catches up current coupon, that will ship will right itself, relatively speaking around some of the pricing because those won’t become more in the money and then [complexity].

And two, to your point, yes, as rates rise and originators see it drop in volume, they will clip their margins and cut margins to stay in business and keep volume growing before they have to settling of people. So we do expect to see continued supply in bulk from non-banks as they need to kind of keep cash available to run the business..

And I will telling you, so far this year we’ve seen a healthy supply in the bulk side, way more we did in last part of the fourth quarter and early part of the first quarter as people will kind to digest what was happening in the rates. But we definitely see regular packages coming out. There are few more players. The banks are involved again.

And it's been healthy competition. And like I said on the call, we feel today they’re trading close to, if not full value. And from that perspective, given where we can acquire the assets co-issue, we are definitely trying to be more aggressive in [Indiscernible] side..

And obviously, the RoundPoint relationship just gives you another option to keep you out of the bulk market, so….

It's working very well. It’s a great partner. We work very - and the team work is very closely together. And like I said, I'm looking to a good second quarter relative to volume..

And, Julian, I have one for you. Obviously a lot of chatter on earnings calls in the last few weeks about the spread between LIBOR and repo. I was looking at your deck, or I guess it was a press release, and noticed your average receive rate looks to be high 180s, 190 basis points.

So that tells me that you’re indexed to one month LIBOR rather than three months LIBOR. And I think that rate is pretty much kind of right on where 30-day, 60-day repo is trading today.

So am I right in assuming that maybe the lift that people are talking about are these 30 to 40 basis-point arms what they are getting? I think they are using three month receive.

But am I interpreting right in your case that, because you guys chose, I assume it appropriately because one month LIBOR matches 30-day repo, but is it accurate that you are not positioned with your swaps to really benefit from that spread?.

No, I would say that our swaps have three months LIBOR that we will be receiving. It's really a timing differential. I would say, in the second quarter of this year I'm expecting all my majority of the swaps position, I would say the net of the swap position, will be receive position. When we really started the REIT, we started it back in October.

So a lot of our swaps put on in October of that particular year. So as we move into the spring of this year, there will be resetting. So definitely I would expect to all of a sudden to be a net receiver in terms of our swap position.

And I think, if you look at the previous presentation, you'll notice a pretty big increase on that receive side of the portfolio as well..

Got it. My bad. I was looking at this deck, the slide. That’s okay. Well, that's the implied -- that's the March 31 receive. I think what you are saying is you were set -- for the first quarter you were set at the end of 2017 as to what you would receive.

But now going into 2Q, you will be receiving something that looks more like 230 or I guess – yes, 230.

Is that about?.

Yes, that’s exactly what I’m saying. There is a catchup period that will take place within the second quarter there. And yes. So given where our fixed rate is and given where currently three-month LIBOR is there, it should be pretty attractive for us..

Excellent. Well, thank you for getting my head straight on that one, because – that’ve very helpful and positive obviously for you guys. My last point is just leverage, and your 4.9 blended at March 31versus 5.3, you increased your equity to MSRs and reduced RMBS.

So was this decline is that just a function of the additional MSRs? Or I was just curious if it was reflecting a little more caution just given rate volatility..

I mean, I think you can attribute for both. I think, at the end of the day, obviously we've been redeploying assets that are RMBS which have -- we've been running at a higher leverage than what the leverage would be with these running on the MSRs. So that's one.

And two, rates have been moving higher and I think it's been our growing focus to redeploy those assets as MSRs. So it's kind of, I would say, a combination. And I would say that you can continue to expect that kind of on a going forward..

Thank you for the comments..

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Jay Lown for closing remarks..

Thanks, and thank you for joining us on today's call and we look forward to updating you soon on our second quarter results. Have a good afternoon..

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