Participants

Garrett Edson; Investor Relations; ICR

Jeffrey Lown; President, Chief Executive Officer, Director; Cherry Hill Mortgage Investment Corp

Julian Evans; Chief Investment Officer; Cherry Hill Mortgage Investment Corp

Michael Hutchby; Chief Financial Officer, Treasurer, Secretary; Cherry Hill Mortgage Investment Corp

Randy Binner; Analyst; B. Riley Securities

Mikhail Goberman; Analyst; Citizens JMP Securities LLC

Jason Stewart; Analyst; Janney Montgomery

Presentation

Operator

Hello, everyone, and welcome to Cherry Hill Mortgage Investment Corporation fourth-quarter 2024 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded.
Now, it's my pleasure to turn the call over to Garrett Edson with ICR. Please proceed.

Garrett Edson

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth-quarter 2024 conference call. In addition to this call, we have issued a press release that was distributed earlier this afternoon, and posted their press release and the fourth-quarter 2024 investor presentation 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 for 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 earnings available for distribution or EAD 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; Julian Evans, the Chief Investment Officer; and Michael Hutchby, the Chief Financial Officer.
Now I will turn the call over to Jay.

Jeffrey Lown

Thanks, Garrett, and welcome to our fourth-quarter 2024 earnings call.
On our last call, we had just completed the election and we're watching market and economic reaction closely. While sentiment was broadly bullish for the new administration to come in and open up the economy, what was a bit unexpected was the stubbornness of inflation.
Despite a number of indicators and the market heading to a Fed pause to the rate cut cycle. The Fed went ahead and cut it a third time in mid-December. As a result, Investors concerned about stubborn inflation drove up long-term yields to seven-month highs with the 10-year ending at 2024 at 4.57% nearly 80 basis points higher quarter over quarter.
Concerns over persistent inflation and uncertainty about economic growth due to the fast pace of policy changes by the new administration has shifted both Cherry Hill's and market sentiment toward a position that additional rate cuts in 2025 will be fewer than expected last year and continue to remain data dependent. The relationship between short and longer data rates has been and will continue to be highly active to both political agendas globally and domestic economic data.
Our RMBS portfolio was impacted in the fourth quarter by higher rates, increased volatility and spread widening, mitigated by our MSR portfolio, which saw nice gains quarter over quarter. Julian will discuss this in more detail shortly.
Looking forward, we remain thoughtful of the macro and geopolitical environment and expect to maintain our current investment strategy. In November, in concert with the conclusion of the company's special committee review, we were very pleased to complete the internalization of management and officially commenced operations as a fully integrated internally managed mortgage REIT.
This was the right decision for shareholders for several reasons. First, internalizing management more strongly alliance management and shareholders via direct ownership by our internally managed structure. Second, it also eliminates potential conflicts of interest inherent in an external management structure and improves our overall transparency.
Third, management now has a much more streamlined and efficient decision-making process with direct control. Thanks to the elimination of external management fees as well as some operational synergies inherent through internalizing, we expect the internalization will reduce our operating expenses in 2025 by $1.1 million to $1.6 million or $0.03 to $0.05 per common share.
I'm proud of our team for their relentless work through the summer and the fall last year to get the process completed. For the fourth quarter, we generated GAAP net income applicable to common stockholders of $0.29 per diluted share, and we generated earnings available for distribution or EAD, a non-GAAP financial measure of $3.3 million, or $0.10 per share, EAD for the quarter was impacted by approximately $0.02 per share of expenses related to the special committee efforts. The special committee concluded in November, and therefore, it will not impact results going forward.
As we have stated consistently for a few quarters, EAD is not the only barometer our board utilizes for setting our dividend. Book value per common share finished the year at $3.82 compared to $4.02 on September 30.
On an NAV basis, which includes preferred stock and excluding special committee expenses, NAV was down approximately $5.5 million or 2.3% relative to September 30. Financial leverage at the end of the quarter remained consistent at 5.3 times as we continue to stay prudently levered. We ended the quarter with $46 million of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.
Looking ahead, we will continue to monitor the macro environment closely and are positioning our portfolio in the near term back toward higher for longer. We will continue to deploy capital as appropriate into Agency RMBS and select MSRs, which still presents strong risk-adjusted return profiles while maintaining strong liquidity and prudent leverage.
With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the fourth quarter.

Julian Evans

Thank you, Jay. During the fourth quarter, mortgage spreads widened and volatility increased due to concerns about the US election and future debt levels. Those factors despite 225 basis point eases by the Fed, led to higher interest rates longer mortgage durations and increased hedging costs.
Coupon mortgages widened approximately 6 basis points, and the MOVE Index rose to 98.580 during the quarter. Content volatility throughout the quarter caused mortgage performance to vary each month. In general, higher coupon mortgages performed relatively well compared to the rest of the coupon stack. In addition, MSR values increased as interest in mortgage rates rose.
Thus far in 2025, mortgages have performed well despite the interday volatility that remains elevated given the pace of reforms from the current administration and the concern that tariffs will lead to more sustained inflation and reduced growth. In the near term, we expect volatility to continue and expect rates to remain higher until there are clear signs that either inflation is moderating or that the economy falters under the weight of pending policy changes.
At quarter end, our MSR portfolio had a UPB of $17.3 billion and a market value of approximately $234 million. The MSR and related net assets represent approximately 46% of our equity capital and approximately 24% of our investable assets, excluding cash at the end of the quarter.
Meanwhile, our RMBS portfolio accounted for approximately 38% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented approximately 76% excluding cash at quarter end. Pre-payment speeds for our MSR and RMBS portfolios continue to remain relatively steady compared to the prior quarter as rates rose in the fourth quarter despite cuts by the Fed.
Our MSR portfolio's net CPR averaged approximately 4.7% for the fourth quarter, down modestly from the previous quarter. The portfolio's recapture rate remained low at approximately 0.6% as the incentive to refinance continue to be minimal for this portfolio, given the portfolio's loan rate. So on forward, with stubborn inflation and rates continuing to hold at higher levels, we continue to expect low recapture rate and a relatively low net CPR in the near term given the portfolio is characterized.
Meanwhile, the RMBS portfolio's prepayment speeds remained relatively low, but rose modestly as expected given lower interest and mortgage rates in the third quarter. Those refinancing started to impact mortgage collateral in the fourth quarter as the loans were processed.
With mortgage rates remaining around 7%, we would expect prepayment speeds to moderate in the first quarter. For the fourth quarter, the RMBS portfolio's weighted average three-month CPR was approximately 5.7% compared to approximately 5.4% in the third quarter. As of December 31, the RMBS portfolio inclusive of TBA stood at approximately $723 million compared to $856 million at the previous quarter end as we reduced our RMBS positioning as interest rates and volatility increased during the quarter.
We continue to shift the portfolio into higher coupon mortgages as well as increasing our TBA hedges. For the fourth quarter, our RMBS net interest spread was 2.9% lower than the prior quarter as improved repo costs were offset by a reduction in swap and dollar roll income.
Overall, our hedge strategy remains largely intact, and we will continue to use a combination of swaps, TBA securities and treasury futures to hedge the portfolio. Moving forward, we will continue to proactively manage our portfolio while continuing to shift our overall capital to add value for shareholders through improved performance in earnings.
I will now turn the call over to Mike for our fourth-quarter financial discussion.

Michael Hutchby

Thank you, Julian. GAAP net income applicable to common stockholders for the fourth quarter was $9.1 million, or $0.29 per weighted average diluted share outstanding during the quarter, while comprehensive loss attributable to common stockholders, which includes the mark-to-market of our available for sale RMBS, was $1.5 million, or $0.05 per weighted average diluted share. Our earnings available for distribution attributable to common stockholders were $3.3 million, or $0.10 per share and EAD is inclusive of approximately $0.02 per share of expenses related to the special committee's work.
As Jay mentioned, we have stated for a while that EAD is not the sole barometer for setting our common dividend and that the Board also considers factors such as prevailing market environment, portfolio return potential, our level of taxable income, including potential hedge gain impacts and the degree of certainty regarding forward investment return economics. Our book value per common share as of December 31 was $3.82 compared to a book value of $4.02 as of September 30.
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 fourth quarter, we held interest rate swaps, TBAs, and treasury futures, all of which had a combined notional amount of approximately $809 million. You can see more details with respect to our hedging strategy in our 10-K as well as in our fourth quarter presentation.
For GAAP purposes, we've 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 the net gain or loss on interest rate derivatives. Operating expenses were $4.5 million for the quarter, which included those special committee related expenses.
On December 12, 2024, our Board of Directors declared a dividend of $0.15 per common share for the fourth quarter of 2024, which was paid in cash on January 31, 2025. We also declared a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of $0.6739 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on January 15, 2025.
At this time, we will open up the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Randy Binner, B. Riley Securities.

Randy Binner

I may have missed it, but I think the -- you said that drag of two stems for the special committee in the fourth quarter, was that in the SG&A line? And is that also where we should speed the $0.03 to $0.05 of benefit from internalization you mentioned in 2025? Just trying to find the right geography in the model for those items.

Michael Hutchby

Yeah, sure. It's Mike. So yes, to your first question, the special committee expenses all throughout last year and again, in the fourth quarter would be found in the SG&A line item on the income statement. So that's where they flow through. And then on a go-forward basis, you would see the benefits that we highlighted in the presentation, spread out really for expenses in general, but it's -- obviously, you have the management fee rolling off and being replaced with comp and benefits.
So there's that direct swap there. And then we'll have within SG&A going forward, some of the additional processes that we brought in-house as part of the internalization. So you're going to see SG&A and comp and benefits replacing essentially the SG&A and management fee from before, if that makes sense.

Randy Binner

And then I guess on the -- it was good in line quarter, but just your commentary about elevated interest rates seems to be hitting the cost of the repurchase agreements quite a bit. And so like in a not favorable way. And so is there do we expect that same level of cost? And is there a way to mitigate that? And do you -- is the only way is to kind of grow out of it and increase in the size of the portfolio?

Julian Evans

Brandy, it's Julian. In terms of some of the repo cost, I think some of the higher cost kind of were year-end expenses, just as we were using kind of the Street's balance sheet as we were going from '24 into '25. So we might have seen some elevated levels there. We have seen those come down and seeing some benefits in the first quarter.

Randy Binner

And then I guess this is my last one is just on growth. Is that -- I mean, as far as what is the expectation kind of per average balance size and it is ticking up, but should we expect that to continue to see growth throughout 2025?

Jeffrey Lown

I'm not sure exactly what the question is, the growth around the average balance around what?

Randy Binner

Of the RMBS portfolio.

Jeffrey Lown

You mean in terms of taking up leverage and things like that or more just in terms of?

Randy Binner

Yes. Well, I mean, yes, I mean I'd say, taking up leverage and otherwise having a larger balance. I didn't catch in the commentary if that's a goal or if that's a way to, I guess, manage a higher interest rate environment.

Jeffrey Lown

Sure. So I'll answer just part of it. Obviously, we're looking to grow through capital raising and things like that. So that would not impact leverage. So to the extent that we're able to raise capital, we would grow in that way.
And then with respect to leverage, I'll let Julian pick up from there.

Julian Evans

Yes. I'll just say that, look, we have the ability to increase our leverage. I would expect us to increase the leverage over time as we kind of get greater clarity on the Fed's intentions administrative policies that are coming out and their impact on inflation. I think we'll begin to -- once we have greater clarity on a few of those things, I would expect us to kind of increase our leverage over time.

Operator

Mikhail Goberman, Citizens.

Mikhail Goberman

And congrats on getting this internalization in the rearview mirror. Higher for longer interest rate environment, how do we sort of think about that in terms of capital allocation between the two major investment bins, so you guys took up servicing equity composition to 46% from 42%. Could we expect that to drift higher given the expectation for a higher rate environment?

Jeffrey Lown

So I'll take a piece of that and let Julian talk about more. So some of the change in the percentage was due to a pickup or an increase in the value on the MSR, not necessarily us buying MSRs. We still think -- Broadly speaking, the asset class is priced fairly rich. And so within the context of delivering returns that are accretive to the dividend we have favored, as you know, for the past couple of quarters or more MBS. On a letter basis, those assets deliver better returns.
And so given some degree of uncertainty with respect to where long-term rates go, especially since Trump got elected and the desire for them to reduce the 10-year level. We have not necessarily shied away from MSR but have been more selective about what we're going to invest in there. The recapture efforts are important relative to current coupons.
So if you're pretty active in that space right now and you have a view that current administration is going to be successful in managing the yield curve at least from the longer-dated side of it, then you would definitely have a view on your ability to recapture and maintain returns that you expect relative to the purchase price. But outside of that, I'll let Julian handle the rest of that.

Julian Evans

Yes. I think in the short term, what we're looking at is investments into RMBS. As Jay kind of noted the returns are better at the moment in terms of RMBS. And obviously, if that changes and the returns on MSR become more favorable, we'll look to invest some cash there.

Mikhail Goberman

And how would the expectations for Fed rate cuts affect that calculus? It seems like in recent weeks, the expectations have gone a little higher for maybe two or even three cuts this year. So if that stays sort of in that 75, maybe even 100 basis points area, would that affect your calculus at all or?

Jeffrey Lown

It's possible for sure. It's been incredibly interesting, is probably a politically correct way of saying how we managed through the set of rate cuts that were expected in September versus the amount of rate cuts that the market expects today. And even today, you just have Fed speakers that come out and say things on a go to basis relative to what their expectations are for the year.
And clearly, as we noted in the script, that there's an expectation for less cuts this year versus where we thought we would be sitting at the end of September. Our view is still that that's the case as the economy continues to remain fairly strong. But how we think about the investment portfolio relative to those rate cuts. But the MSR portfolio, the financing on the MSR portfolio is meaningfully higher than the MBS portfolio.
So to the extent that we do get those rate cuts and the tariffs improve in that asset class, we would definitely think about the levered returns on that portfolio so differently but what I'll say is every day is a different day, as you know, under the current administration and how they think about controlling interest rates makes our job a little bit more difficult, but definitely has some impact in terms of how we think about the allocation of the asset classes. Julian?

Julian Evans

Yes, I would just say, when we came into this year, we were at expectations that the Fed was probably one to maybe two eases this year, potentially depending on inflation and depending on growth. Obviously, the market's expectations as you have noted, has increased to about three eases this year.
Soft data has obviously been kind of inching expectations higher for additional eases. The hard data has actually come in fairly decently. Obviously, we are hearing and learning about various different policy changes that are going on with the administration, and we will adjust the portfolio accordingly as the facts come out.

Mikhail Goberman

And I know you're not going to let me sign off without asking one final question about where our current book value is.

Michael Hutchby

I wait every quarter to hear you ask the -- yes. So at the end of February, we see book value about flat as compared to year-end. And of course, that is before any first quarter dividend accrual because the board has not yet met.

Operator

Jason Stewart, Janney Montgomery Scott.

Jason Stewart

Just given the rate move that we've seen so far, in the quarter, maybe the last couple of weeks. Could I get your take on where you see speeds going, the refinanceability of the marginal mortgage sort of your take on call it, a wavelet of refi activity, that's potential and then take that to where you see value in spec pools?

Jeffrey Lown

So I'll address the MSR portfolio first, and then I'll let Julian address the RMBS portfolio. On the MSR side, our weighted average note rate is in the mid-3s, and we have a meaningful amount of runway on that portfolio before we think speeds are impacted. And as noted in the presentation, I believe we note that the speeds are in the mid-single digits, which is really your best case base scenario for that portfolio given the collateral composition.
So we really feel good about that portfolio in terms of being able to withstand anything material related to the efforts to lower the long end of the curve, which would obviously impact mortgage rates. So that portfolio should be able to withstand a lot of things that might happen with the current administration on the RMBS side because there are a lot more coupons about that.
I'll let Julian answer that.

Julian Evans

Yes. In terms of the refinanceability of the market, I think current, we stand about 5% to 10% refinanceable in terms of that market. I think as this morning, the mortgage rate was like 6.5%. Obviously, it's come down over the past couple of weeks from 7%. In order to get kind of, I think, a decent refinancing wave to hit the market.
I think you're going to have to get to about 5.8%, 5.7% in terms of mortgage rates. Obviously, everybody who kind of refinanced -- I'm sorry, everybody who got originated loans, they have 7%,7.5% type mortgages will be able to refinance themselves. But in order to get a majority of your 5.5% and some of your 5% kind of into the category of being refinanceable. I think you need to get down to about 5.7%, 5.8% in terms of the mortgage rate.
So we've got further to go. The 10-year would need to drop perhaps get itself around [3.80] in order for that to happen.

Michael Hutchby

In terms of -- you were asking about also what we have found attractive in terms of spec pools. In terms of that market, we've been really playing in terms of our specified pool story right below or near par. So where we have significant weight in terms of our spec pools is in 5's and 5.5's.
The stories that we have played have been loan balance. We've been incrementally picking up loan balance, let's call it, $200,000, $250,000 within that range. Some geo type pools but we've been going back and forth between low pay-up stories and loan balance.
Any time loan balance has kind of gotten cheap, we go to pick it up. If we've been swapping out of some pools that have loan balance, we'd look for additional loan balance, just in case there is a major move in rates, we think loan balance will perform better than some of these, let's say, and when I say loan balance, I'm really referring to like between [$200,000 and $250,000]. Some of these unknown but cheap stories of $300,000 to $350,000.
I would expect those to kind of be paid quickly. I think Florida and Texas, given their loan balances on the size of those pools that's kind of coming through, especially on new production will pick up speeds as well. I think there's stories when the entire refinanceability of the market is not around. But once you begin to have some refinanceability the homeowner gets cured and those loans will get refinanced over time.

Jason Stewart

And then just pulling way up, if we look at the portfolio on a -- just a cash carry basis, what's your estimate for current ROEs on a blended basis across the whole portfolio?

Julian Evans

Across the whole portfolio, I think -- as you're talking about, look, new RMBS you're putting into the portfolio, you're looking at something that's around, I want to say, 14% to 17%, and that's with kind of the markets moving around. I also say, on the MSR side, you're probably seeing something that's around, call it, low-teens.

Operator

Thank you. And this concludes our Q&A session. I will turn it back to Jay Lown for his final remarks.

Jeffrey Lown

Thank you, everybody, for joining us on our fourth-quarter 2024 earnings call, and we look forward to updating you in the coming months for our first-quarter 2025 earnings report. Have a good evening, everybody.

Operator

And thank you all for participating, and you may now disconnect.