Welcome to the Cherry Hill Mortgage Investment Corporation First Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Michael Hutchby, Controller. Please go ahead..

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's first quarter 2017 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 Web site 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 Web site. 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 everyone to today's first quarter earnings call. On the heels of a transformative fourth quarter for Cherry Hill, we continue to take significant steps in the first quarter to grow our business for the long term.

In early February, we completed the sale of our remaining excess MSR portfolio and took payment in the form of Ginnie Mae whole MSRs, with an unpaid principal balance of approximately $4.5 billion.

This acquisition more than doubled the size of our MSR portfolio and diversifies our investment in the strategy across all three agencies, which we believe is important to our ability to grow.

As many of you know, the road to securing Ginnie Mae's approval to purchase MSRs was a long one, but one worth the time and we believe this investment lays the groundwork for additional acquisitions down the road. Prior to the end of the quarter, we raised $81 million in net proceeds from the sale of common stock.

This placed us in the strongest position in the company's history to be able to support our long-term growth strategy. The MSR opportunities now available to us are significantly larger than they were prior to the capital raise.

We believe that our increased financial strength allows us to participate in a larger universe of offerings and should assist us in creating some strategic relationships that are accretive to our business. Looking at our first quarter results, we had another strong quarter with core earnings per share of $0.63.

This elevated level of core earnings was attributable to various factors in connection with the sale of the excess MSRs and the acquisition of the Ginnie Mae MSRs, which Marty will discuss shortly. With that said, we generated dividend-eligible earnings per share of $0.51 for the quarter, which is consistent with past quarters.

We closed the quarter with a book value of $20.10, down 1.9% from December 31, 2016. Overall, we are pleased with the first quarter results and the significantly stronger position of the company.

We will continue to utilize our deep experience and build upon past success to generate optimal risk adjusted returns and create further value for our long term shareholders. With that, I'll turn the call over to Julian, who will cover some more detailed highlights of our investment portfolio and its performance over the quarter..

Thank you, Jay. The first quarter started with immense optimism for potential President Trump policies, but has waned by disjointed Republican Party and the reality that the policies take longer to implement than campaign rhetoric. As a result, interest rates firmed and investors moved to other global and political concerns.

On the interest rate front, the Fed raised rates for the second consecutive quarter in March based on continued U.S. economic improvement. The hike was anticipated only after frequent Fed speak. We expect the Fed to follow through on its desire to raise the Fed funds rate an additional two times in 2017, assuming the U.S.

economy continues to perform to its expectations and there are no global distractions to change its focus. Moving forward, Slide 5 highlights our aggregate investment portfolio composition.

At quarter end, our servicing related investments, which now consist solely of MSRs due to the sale of the remaining excess MSRs, represented approximately 25% of our equity capital and approximately 7% of our investable assets, excluding cash.

Servicing related assets as a percentage of total assets declined due to the follow-on offering completed at the end of March and the subsequent temporary deployment of the cash proceeds from the follow-on offering into the RMBS portfolio.

As a result, our RMBS portfolio accounted for approximately 50% of our equity and approximately 93% of our investable assets, excluding cash at quarter end.

As shown on Slide 6, as of March 31 we held MSRs with a UPB of $7.6 billion and a carrying value of approximately $77 million, as we acquired $4.5 billion of Ginnie and Ginnie Mae MSRs as consideration for closing on the sale of Pool 2 from our excess MSR portfolio.

With the interest rates in the first quarter remaining at elevated levels as compared to the past year, our conventional MSR CPRs further improved averaging approximately 8% for the first quarter. Our government MSR CPRs averaged 7% for the two months of the quarter in which we held them.

As of March 31, the RMBS portfolio grew to approximately $1.08 billion, as shown on Slide 7, an increase from $666 million as of December 31. The increase was driven by the deployment of proceeds for the sale of Excess MSRs, as well as the follow-on offering at the end of the quarter.

During the quarter, we slightly increased our 30-year securities position of our RMBS portfolio to 68%. 20-year and 15-year fixed rate pools as well as shorter duration assets represented 32% of the RMBS portfolio at quarter end.

In the first quarter, the RMBS portfolio posted a weighted average three month CPR of approximately 5.5%, an improvement from 7.7% posted in the previous quarter, as shown on Slide 8. Overall, the portfolio continued to benefit from collateral composition during the quarter.

The portfolio CPR was driven by the slower winter seasonals, coupled with higher interest and mortgage rates. In the first quarter 2017, price premiums spec pools were covered marginally as rates firmed and moved lower. In the first quarter we took advantage of these lower price premiums as we put capital to work.

For the first quarter, we posted a 1.42% to RMBS NIM versus 1.49% NIM for the fourth quarter. The NIM reduction was driven by the extra capital that was position into the RMBS segment two days prior to month end. Like other REITs, we experienced higher repo cost in the first quarter.

Repo cost averaged 104 basis points versus averaging 93 basis points in the fourth quarter. The increased costs were partially offset by increased three month LIBOR, which affected the receiving portion of our swap hedges. Going forward, we expect our NIM to fluctuate based on higher repo cost in additional portfolio hedges.

During the quarter the aggregate portfolio operated with leverage of 3.06 times and a negative duration GAAP. As shown on Slide 9, we ended the quarter with an aggregate portfolio duration gap of minus 0.73 years. I'll now turn the call over to Marty for a financial discussion of our first quarter results..

Thank you, Julian. Our GAAP net income applicable to common stockholders for the first quarter was $22.2 million, or $2.90 per weighted average share outstanding during the quarter. Our comprehensive income attributable to common stockholders, which includes the mark-to-market of our held for sale RMBS, was $23.8 million or $3.12 per share.

Core earnings, as detailed on Slide 18, was $4.8 million or $0.63 per share, and we recorded dividend eligible income of $0.51 per share. Core earnings were positively impacted by the performance of our servicing portfolio.

Our CPR, the runoff rate, of our conventional loans for the first quarter was nearly half the speed of the fourth quarter of 2016s. Additionally, we had EPO, early payoff protection, on the newly acquired Ginnie Mae MSR portfolio, which contributed approximately 5.5 cents of core earnings this quarter.

One note, that EPO protection will continue until the end of May and that will translate to an additional $0.02 per diluted share to our core earnings in the second quarter. We would expect beginning in the second quarter, that core earnings will return to a more normalized level.

As detailed in Slide 21, we used a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchased borrowings. At the end of the first quarter, we held interest rate swaps, swaptions, treasury futures and options on treasury futures, with a combined notional amount of $742.5 million.

For GAAP purposes, we have now elected to apply hedge accounting for our interest rate derivatives and as a result we record the change in estimated fair value as a component of the net gain or loss on interest rate derivatives.

Operating expenses were $1.9 million for the quarter, of which approximately $214,000 was related to our taxable REIT subsidiary. On March 8, 2017, we declared a dividend of $0.49 per share for the first quarter of '17, which was paid April 25, 2017.

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. Again, as we look ahead, we would expect beginning in the second quarter that core earnings will return to a more normalized level.

And as we've consistently noted, we expect there will continue to be a slight difference between core earnings and dividend eligible income due to ongoing portfolio acquisitions. That said, we believe our current quarterly dividend level will remain sustainable in the near-term. 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, everyone, for joining us on today's call and we look forward to updating you soon on our second quarter results. Thanks..

That concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..