J&J Snack Foods Q4 2024 Earnings Call Transcript

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March 6, 2025

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to Cherry Hill Mortgage Investment Corporation Fourth Quarter twenty twenty four Earnings Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Garrett Eton with ICR.

Operator

Please proceed.

Speaker 1

We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's fourth Quarter twenty twenty four Conference Call. In addition to this call, we have issued a press release that was distributed earlier this afternoon and posted that press release and a fourth quarter twenty twenty four investor presentation to the Investor Relations section of our website at www.chmirinc.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 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.

Speaker 1

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, Chief Investment Officer and Michael Hutchby, the Chief Financial Officer. Now, I will turn the call over to Jay.

Speaker 2

Thanks, Garrett, and welcome to our fourth quarter twenty twenty four 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 hinting to a Fed pause to the rate cut cycle, the Fed went ahead and cut rates 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 ten year ending at 2024 at 4.57, nearly 80 basis points higher quarter over quarter.

Speaker 2

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 reactive 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.

Speaker 2

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 commence operations as a fully integrated internally managed mortgage REIT. This was the right decision for shareholders for several reasons. First, internalizing management more strongly aligns management and shareholders by a 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.

Speaker 2

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 $1,100,000 to $1,600,000 or $0.03

Speaker 3

to $0.05

Speaker 2

per common share. I'm proud of our team for their relentless work through the summer and the fall of 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 $3,300,000 or $0.1 per share. EAD for the quarter was impacted by approximately $0.02 per share of expenses related to the Special Committee's efforts. The Special Committee concluded in November and therefore it will not impact results going forward.

Speaker 2

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 $5,500,000 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 $46,000,000 of unrestricted cash on the balance sheet, maintaining a solid liquidity profile.

Speaker 2

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 present 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. Thank you, Jay.

Speaker 3

During the fourth quarter, mortgage spreads widened and volatility increased due to concerns about the U. S. Election and future debt levels. Those factors despite two twenty five basis point eases by the Fed led to higher interest rates, longer mortgage durations and increased hedging costs. Current coupon mortgages widened approximately six basis points and the move index rose to 98.8 during the quarter.

Speaker 3

Constant 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 inter day 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.

Speaker 3

In the near term, we expect volatility to continue and expect rate 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 $17,300,000,000 and a market value of approximately $234,000,000 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. Prepayment 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.

Speaker 3

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 continues to be minimal for this portfolio given the portfolio's loan rate. Going 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's characteristics. Meanwhile, the RMBS portfolio's prepayment speeds remain relatively low, but rose modestly as expected given lower interest in mortgage rates in the third quarter.

Speaker 3

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 months CPR was approximately 5.7% compared to approximately 5.4% in the third quarter. As of December 31, the RMBS portfolio inclusive of TBAs stood at approximately $723,000,000 compared to $866,000,000 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.

Speaker 3

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, BB-eight 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 and earnings. I will now turn the call over to Mike for our fourth quarter financial discussion.

Speaker 4

Thank you, Julian. GAAP net income applicable to common stockholders for the fourth quarter was $9,100,000 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 $1,500,000 or $0.05 per weighted average diluted shares. Our earnings available for distribution attributable to common stockholders were $3,300,000 or $0.1 per share. And EAD is inclusive of approximately $0.02 per share of expenses related to the Special Committee's work.

Speaker 4

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, TPAs and treasury futures, all of which had a combined notional amount of approximately $8.00 $9,000,000 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.

Speaker 4

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 $4,500,000 for the quarter, which included those special committee related expenses. On 12/12/2024, our Board of Directors declared a dividend of $0.15 per common share for the fourth quarter of twenty twenty four, which was paid in cash on 01/31/2025. 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 01/15/2025. At this time, we will open up the call for questions.

Speaker 4

Operator?

Operator

Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone and wait for your name to be announced. And it's from the line of Randy Binner with B. Riley Securities. Please proceed.

Speaker 5

Hey, there. Good evening. I just wanted to excuse me, I may have missed it, but I think the you said the drag of $0.02 for the special committee in the fourth quarter, was that in the SG and A line? And is that also where we should see 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.

Speaker 6

Yes, sure. Hey, 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 and 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.

Speaker 6

So there's that direct swap there. And then we'll have within SG and 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 and A and comp and benefits, replacing essentially the SG and A and management fee from before, if that makes sense.

Speaker 5

Yes, that's super helpful. And then I guess on the it was a 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 costs? And is there a way to mitigate that?

Speaker 5

And do you is the only way to kind of grow out of it and increase the size of the portfolio?

Speaker 3

Hey, Randy, it's Julian. In terms of some of the repo costs, I think some of the higher costs 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 seen some benefits in the first quarter.

Speaker 5

Okay. Well, that's good. And then, so I guess, just my last one is just on like 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?

Speaker 2

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

Speaker 5

Of the RMBS portfolio.

Speaker 2

Oh, you mean in terms of taking up leverage and things like that or more just in terms of?

Speaker 5

Well, I mean, yes, I mean, I'd say, yes, 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.

Speaker 2

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.

Speaker 2

And then with respect to leverage, I'll let Julian pick up from there.

Speaker 3

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 of 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.

Speaker 5

Okay, understood. Thank you for the answers.

Operator

Thank you. Our next question, one moment, is from Mikhail Goverman with Citizens. Please proceed.

Speaker 7

Hey, good afternoon, gentlemen, and congrats on getting this internalization in rearview mirror.

Speaker 2

Thanks, Mikhail.

Speaker 7

Yes, great stuff. 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? I see you guys took up the servicing equity composition to 46% from 42%. Can we expect that to drift higher given the expectation for a higher rate environment?

Speaker 2

So I'll take a piece of that and let Julian talk about more. So some of the change in the percentages 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 ten year level.

Speaker 2

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.

Speaker 3

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 that changes in the returns on MSR become more favorable, we'll look to invest some cash there.

Speaker 7

Got you. 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?

Speaker 2

It's possible for sure. It's been incredibly interesting is probably a politically correct way of saying how we've 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 daily 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 September. Our view is still that that's the case as the economy continues to remain fairly strong.

Speaker 2

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 returns improve on that in that asset class, we would definitely think about the levered returns on that portfolio so differently.

Speaker 5

Right.

Speaker 2

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. Julien?

Speaker 3

Yes, I would just say, look, 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.

Speaker 7

Great. Thank you for that color. That's really good. And I know you're not going to let me sign off without asking one final question about where current book value is. So

Speaker 2

I wait every quarter to hear you ask the

Speaker 6

Yes. So at the 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.

Speaker 5

Right.

Speaker 7

All right. Thank you very much gentlemen. Best of luck in this volatile environment. Thanks.

Speaker 2

Thanks, Mikhail. Appreciate it.

Operator

Thank you. Our next question comes from Jason Stewart with Janney Montgomery Scott. Please proceed.

Speaker 2

Hi, thank you. 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 re finance ability 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? 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 based scenario for that portfolio given the collateral composition.

Speaker 2

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 we'll put 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.

Speaker 3

Yes. In terms of the refinance ability of the market, I think currently we stand about 5% to 10% refinanceable in terms of that market. I think as this morning, the mortgage rate was like six percent, six point five percent. 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%, five point seven % in terms of mortgage rates.

Speaker 3

Obviously, everybody who kind of refinanced, I'm sorry, everybody who got originated loans, they have 7%, seven point five % type mortgages will be able to refinance themselves. But in order to get a majority of your 5.5% s and some of your your 5% s kind of into the category of being refinanceable, I think you need to get down to about 5.7%, five point eight % in terms of the mortgage rate. So we've got further to go. The ten year would need to drop, perhaps get itself around $3.80 in order that to happen. In terms of you were asking about also what we have found attractive in terms of spec pools.

Speaker 3

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 weights 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 to $250,000 within that range. Some geo type pools.

Speaker 3

But we've been going back and forth between low pay up stories and loan balance. Anytime 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 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 $2,000 and $250,000 some of these unknown, but cheap stories of $300,000 and $350,000 I would expect those to kind of prepay 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.

Speaker 3

I think there are stories when the entire refinancibility of the market is not around, but once you begin to have some refinance ability, the homeowner gets cured and those loans will get refinanced over time.

Speaker 2

Got it. Okay. That's helpful. 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?

Speaker 3

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. Also say on the MSR side, you're probably seeing something that's around, call it low teens.

Speaker 2

Great. Thanks for taking the question. Appreciate it.

Operator

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

Speaker 2

Thank you everybody for joining us on our fourth quarter twenty twenty four earnings call and we look forward to updating you in coming months for our first quarter twenty twenty five earnings report. Have a good evening everyone.

Operator

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

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