Greetings, and welcome to the Cherry Hill Mortgage Investment Corporation Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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 second 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. Now I’ll turn the call over to Jay..

Thanks, Mike, and welcome to today’s call. The second quarter saw interest rates finally push 3% for the first time since December 2013, with the U.S. 10-year hitting a high of 3.11% before closing the quarter at 2.86%.

While the broader economy continues to hold its ground, geopolitical uncertainty contributed to ongoing volatility in the capital markets. But with the belief that the Fed remains committed to tightening monetary policy in the foreseeable future, our diversified strategy should continue to position us well.

During the second quarter, we continued to take considerable steps towards growing our business for the long term. In the quarter, we raised approximately $54 million in net proceeds from the sale of common stock and an additional $4 million from preferred stock sold pursuant to our aftermarket program.

In addition to the capital raised, we continued to make significant progress in terms of our overall MSR strategy. During the second quarter, we purchased nearly $4 billion in additional MSRs, mostly through our co-issue program.

At the end of the second quarter, the MSR portfolio stood at just over $19 billion, representing 39% of our equity at quarter end. And based on our performance in July, we are currently on pace to exceed our second quarter deployment levels of capital into MSRs.

As we stated last quarter, our current focus is on the acquisition of servicing through our co-issue program as larger bulk offerings remain less attractive today. Overall, for the second quarter, a solid performance from our RMBS portfolio, along with our growing MSR portfolio, helped produce core earnings of $0.50 per share.

We closed the quarter with a book value of $19.36, a decrease of $0.79 or 3.9% from March 31, a large majority of which was a function of the capital raise completed during the quarter. As we look to the balance of the year, we are confident our portfolio as currently constructed will be able to withstand further Fed tightening.

We expect to continue to add more servicing-related assets as we anticipate at least one more FOMC rate hike this year, with the potential for more should the economy hold strong and barring any significant macroeconomic shocks.

And as mentioned earlier, this year, we intend to further diversify our portfolio by adding non-agency securities at appropriate risk-adjusted returns. Overall, we remain on the course we began pursuing a couple of years ago to grow Cherry Hill for long-term success.

We continue to strengthen our overall positioning each quarter while always being mindful of protecting our book value. Further, we continue to use our deep investment experience to deploy our capital at appropriate risk return levels and ultimately create 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. Our aggregate investment portfolio composition is highlighted on Slide 5. And as Jay mentioned, our servicing-related investments, comprised solely of full MSRs, represented approximately 39% 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 5% due to the redeployment of RMBS assets and cash into select MSR investments during the quarter. As a result, our RMBS portfolio accounted for approximately 58% of our equity, a 3% reduction from the previous quarter.

As a percentage of investable assets, RMBS represented approximately 89%, excluding cash at quarter end. As of June 30, we held MSRs with a UPB of approximately $19 billion and a market value of approximately $232 million, as shown on Slide 6.

Total MSR portfolio prepayment speeds ticked up during the second quarter as we traditionally see higher speeds during the spring and summer. Life-to-date, our conventional MSRs have averaged approximately 8.9% CPR, while our government MSR have averaged 10.4% CPR.

As of June 30, the RMBS portfolio stood at approximately $1.8 billion, as shown on Slide 7, up from where we stood as of March 31 due to the capital raise completed in the second quarter and the subsequent deployment of proceeds into RMBS. As we have previously noted, we expect to continue to opportunistically redeploy our RMBS funds into MSRs.

At quarter end, our RMBS portfolio’s 30-year securities position stood at 73%, while the 20-year and 15-year fixed-rate pools as well as shorter-duration assets represented the balance of the RMBS portfolio.

In the second quarter, the RMBS portfolio continued to perform well, posting a weighted average three-month CPR of approximately 7.7%, slightly higher than the previous quarter, as shown on Slide 8.

Overall, the portfolio continues to benefit from its collateral composition and continued to vest Fannie Mae aggregate prepayment speeds during the quarter. For the second quarter, we posted a 0.94% RMBS NIM versus a 1.14% NIM for the first quarter.

The decrease in NIM was driven by the increased amortization costs, based upon higher prepayment speeds, rising REPO costs and the timing differential related to the redeployment of RMBS into MSRs, all of which were slightly offset by the portfolio’s collateral composition and reduced swap costs.

In the near term, we continue to expect our NIM to fluctuate on increased REPO costs. During the quarter, the aggregate portfolio operated with leverage of 4.7 times and a negative duration gap. As shown on Slide 9, we ended the quarter with an aggregate portfolio duration gap of minus 1.53 years.

Going forward, we expect to continue to evaluate and alter the portfolio as the year progresses. I’ll now turn the call over to Marty for our second quarter financial discussion..

Thank you, Julian. Our GAAP net income applicable to common stockholders for the second quarter was $12.4 million or $0.91 per weighted average share outstanding during the quarter, while our comprehensive income attributable to common stockholders, which includes the mark-to-market of our held-for-sale RMBS, was $4.5 million or $0.33 per share.

Our core earnings, as detailed on Slide 18, was $6.8 million or $0.50 per share. As Jay mentioned, our book value as of June 30 was $19.36, a reduction of $0.79 per share or 3.9% from March 31. Of the $0.79 reduction, approximately $0.60 was related to capital raise we completed during the second quarter.

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 second quarter, we held interest rate swaps, swaptions and short TBAs and treasury futures, all of which had a combined notional amount of $1.36 billion.

For GAAP purposes, we have not 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 net gain or loss on interest rate derivatives.

Operating expenses were $2.3 million for the quarter, of which approximately $4.2,000 was related to our taxable REIT subsidiary.

On June 14, 2018, we declared a dividend of $0.49 per common share for the second quarter, which was paid on July 31, 2018, as well as a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock, which was paid off on July 16, 2018.

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’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. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Hayes from B. Riley FBR. Please proceed with your question..

Hey, good evening guys.

Can you give us an update on the non-agency initiative right now? Have you been in the market so far this quarter acquiring assets? And can you just talk about what types of assets look interesting to you right now and the types of returns you’re seeing on them versus your other strategies?.

Hi, Tim. This is Julian. We have been in the market – we started adding a little bit in the late part of the second quarter as we were kind of filling in for the capital raise. And for the start of the third quarter, we’ve also begun adding some additional securities.

The returns that we’re kind of seeing in there are probably between 11% to, I want to say, 15%. It varies where in the capital structure you are, not just from a credit standpoint but whether you’re in fund cash flows or kind of mezz or last cash flows. So we’ve been slowly but surely nibbling in into the market..

Okay.

And can you just maybe talk about how you see this strategy evolving over time and if there’s any internal capital allocation goals or just kind of growth targets around that? Or is it just kind of we’re going to take it quarter-by-quarter and see how it goes?.

I think we’re going to take it quarter-by-quarter and see how it goes. I think the primary focus still remains on investing in MSRs. From the longer standpoint, we still have a belief that rates will continue to rise. We don’t believe that the Fed is done in terms of raising interest rates this year as well as next year.

The economy continues on the trend that it has been. We should see above 3% in terms of the 10-year. So based on that, I would think that’s our primary focus. Secondarily, I think we are selectively moving into nonagency, moving some of the RMBS positions into that.

And we’ll do that selectively as we see – one, we see securities that we want to buy; and two, kind of meet our risk and return objectives..

Okay. And then can you just give us a quarter-to-date update so far on how volume has been? Or at this point, just kind of your expected pace for where the portfolio could be at quarter end..

You mean MSRs? I think….

Yes, sorry. Switching gears a little bit..

During the recorded quarter, I think I broadly said that we’re on pace to do more volume than we did last quarter. And I would say that we are definitely outpacing the, let’s just call it, $3.5 billion we did last quarter. And I would say that we should do $1 billion plus more of that..

Okay, great. Thanks for taking my questions..

Thanks, Tim..

[Operator Instructions] There are no further questions at this time. And I would like to turn the call back to Jay for closing remarks..

Thanks. Thank you, guys, for joining us in today’s calls, and we look forward to updating you soon on our third quarter results. Have a good day..

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