Greetings. Welcome to the Charry Hill Mortgage Investment Corporation Fourth Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And please note that this conference is being recorded. I will now turn the conference over to Garrett Edson, Investor Relations. Thank you. You may begin.

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth quarter 2021 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 earnings available for distribution or EID 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.

Thanks, Garrett, and welcome to today's call. The fourth quarter of 2021 appeared as if it was going to be a breakout quarter for rates as we made progress through mid-November until COVID concerns returned in late November and remained a major factor through the end of the year. The Fed also signaled its time frame for exiting its bond purchase program, which impacted mortgage spreads going into the end of the quarter. To top it off, the Fed backed off its transitory stance around inflation as it was clear that inflation was going to be persistent. Ultimately, a key rate for our sector, the U.S. 10-year treasury, finished the quarter essentially flat to the previous two quarters. Interestingly, though, shorter-dated rates did sell off through the quarter and the yield curve flattened with a two year 10-year spread tightening by over 40 basis points. Economic conditions domestically remained strong throughout the quarter, and data, broadly speaking, did not disappoint. Volatility persisted through the quarter as well. This theme has continued into the first quarter of 2022 and rates have lifted off meaningfully in anticipation of a rate hike this week. Unfortunately, the events in Ukraine over the past couple of weeks have become a significant concern globally and are making for a volatile near term economic environment. While we still believe rates will rise longer term, as the Fed has signaled a clear need to fight inflation, we are keeping a watchful eye on our portfolio and maintaining our strong liquidity. For the quarter, improving prepayment speeds continue to aid our earnings available for distribution, or EAD. In the fourth quarter, we generated GAAP net income applicable to common shareholders of $4.1 million or $0.23 per share and EAD of $0.32, exceeding our quarterly common dividend level. As a…

Thank you, Jay. During the quarter, there were two diverging main themes that impacted the credit spread and interest rate markets. One was the Fed's announcement of pending policy changes based on elevated levels of inflation and the other was the expediated rise of the latest COVID variant, both themes increased market volatility and change the shape of the U.S. yield curve, which impacted mortgage performance during the quarter. The Fed announcement was an admission that inflation was not transitory and an indicator to the market that policy was changing. Not only was the Fed about to raise interest rates but it also indicated that a reduction to their balance sheet as possible and might occur sooner than previously thought. At the same time, markets were reacting to another widespread coded variant that threatened global growth. On paper, it might seem as though interest rate markets were calm during the fourth quarter as 10-year treasuries remain relatively steady. However, there was plenty of volatility that drove the U.S. 10-year as high as 170 and as low as 135 only to settle 3 basis points higher at 151. Despite the movement in the 10-year, two-year treasuries rose 46 basis points, flattening the spread between the two-year and the 10-year curve based on the Fed's announcement. The yield curve changed rising volatility and previously mentioned themes weighed on the mortgage sector and our portfolio. The middle of the coupon stack as well as higher coupons underperformed during the quarter. At quarter end, MSRs had a UPB of approximately $21 billion and a market value of approximately $219 million. During the quarter, we purchased $1.2 billion UPB of new MSRs through our flow programs as Jay mentioned. At the end of the fourth quarter, the MSR portfolio represented approximately 42% of our equity…

Thank you, Julian. Our GAAP net income applicable to common stockholders for the fourth quarter was $4.1 million or $0.23 per weighted average share outstanding during the quarter while comprehensive loss attributable to common stockholders, which includes the mark-to-market of our held-for-sale RMBS, was $4 million or $0.22 per share. Our earnings available for distribution attributable to common stockholders was $5.8 million or $0.32 per share. As a note, for the fourth quarter of 2021, we enhanced the calculation of unrealized gain or loss on investments in MSRs used to calculate EAD by backing out hedging income or expense, financing interest expense and any administrative servicing costs. We believe this change better presents EAD generated by investments in MSRs with EAD generated by investments in RMBS. Our book value per common share as of December 31 was $8.56 compared to a book value of $9.07 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, swaptions, TBAs and treasury futures, all of which had a combined notional amount of $2 billion. 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 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 the net gain or loss on interest rate derivatives. Operating expenses were $3.5 million for the quarter. On December 9, our Board of Directors declared a dividend of $0.27 per common share for the fourth quarter of 2021, which was paid in cash on January 25, 2022. We also declared a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of $0.515625 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on January 18, 2022. At this time, we will open up the call for questions. Operator?

Thank you. At this time, we’ll be conducting a question-and-answer session. Our first question comes from the line of Mikhail Goberman with JMP Securities. You may proceed with your question.

Hello, everybody. Thanks for taking the call. Question, almost done amazingly with the first quarter here, mid-March. Wondering if you could provide a book value update where we are right now?

Hey, Mikhail, how are you?

How are you doing?

Great. So -- yeah, I appreciate the fact that it's March 15. And for the first two months of the first quarter, we show NAV down roughly 6.5% and book value per common share, down 12%, and that's before accounting for the common dividend. And I'd highlight that NAV -- I'd highlight the NAV because as you know, NAV comprises both common and preferred, and we believe that's the driver for the earnings power of the company and thus the dividend. And despite the inherent leverage that I would say is embedded in the composition of our capital structure, I think we're doing a good job weathering the storm around all the mortgage spread widening so far.

Got you. Good to hear. And I saw you guys had your 10-K come out just now. With respect to that DTA, I see it's at the end of the year, still around $20 million. Would -- can we expect a similar amount I guess, the quarter closing in a couple of weeks?

I'll let Mike take that.

Well, the DTA fluctuates in large part by changes in the mark-to-market value of the MSRs. And so to the extent that the mark-to-market of the MSRs increases, there would be a portion of a decrease in a DTA associated with that markup. But obviously, at this point in the period, we don't have insight into those numbers just yet. But broadly speaking, that's how it should work.

Okay. And one more, if I can. Just to kind of an upper level view of how you guys are thinking about portfolio construction. Thus far through the first quarter and of course, going forward, given what the Fed is about to do all the uncertainty in the market, how are you guys thinking about the mix of Agency MBS versus MSRs? And what kind of coupons within the agency MBS? Thank you.

Sure. So as we mentioned in the prepared remarks, speeds have dropped and the need to replenish the portfolio to keep it at the current size, obviously, drops as well. And so what I tried to imply in the remarks is we don't need to go out and buy a ton. And given that approximately 40% of the equity is in the asset. What we do in terms of thinking about adding to that is really more a function of value in addition to just the mix itself. And I think everybody on this call would tell you that they think that the asset class is at least fairly valued and potentially full value. So we're going to continue to stick to the flow program. We spatter in some bulk sales, but I wouldn't expect any meaningful changes to the composition the portfolio outside of potentially reducing some exposure to the RMBS sale through the -- or asset class during the quarter as a result of trying to protect and further spread winding. And in terms of coupons, I'll let Julian talk about that.

Yeah. I would say throughout the quarter, I mean, we've slowly progressed to higher coupons. But I would say that if you look over the performance of the first quarter, just the mortgage basis in general, it has widened somewhere between 40 and 45 basis points. But I would say all coupons have underperformed during the quarter. It hasn't just been one specific coupon. You could say in January, it was lower coupons. And then in February, it's been the middle of the coupon stack. So I wouldn't necessarily say there's been anywhere to really high in terms of this quarter in terms of mortgages. So -- but I would say, in general, we have moved up in coupon and continue to progress in that manner.

Okay. Thanks a lot, guys. Best of luck going forward than previous COVID environment for MBS. Thanks.

Thanks.

Thank you. At this time, there are no further questions. And I'd like to pass it back over to management for any closing remarks.

Great. Thank you. Thank you all for joining us on our fourth quarter 2021 call, and we look forward to updating you in May for the first quarter 2022. Have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.