Okay, hello everybody, and thank you for joining us today. My name is Brendan McCarthy, I'm an analyst here at Sidoti, and presenting with us we have Cherry Hill Mortgage Investment Corporation. Leading the discussions from the company will be CEO Jay Lown and CFO Michael Hutchby. Before I hand it over, a quick reminder: the Q&A tab is located right at the bottom of your screen there. Feel free to type in any questions throughout the presentation and we can save time for Q&A towards the end. With that said, Jay, take it away.
Thanks. So welcome everybody. This is more of a group meeting, so we're going to do things a little bit differently just to try to keep some structure to the meeting. With me on the call today is Michael Hutchby, our CFO, Julian Evans, our CIO, and Ray Slater, who is Senior Portfolio Manager and runs the servicing portfolio and a member of the Senior Executive Team. Some background on us: we're a publicly traded REIT in the residential mortgage space. We went public in October of 2013. We specialize in the residential side of the mortgage arena, and our strategy, broadly speaking, has been pretty consistent over the last 10 years.
As you can see on the slide on the screen, our primary strategy, our main strategy, is to acquire and service a diversified portfolio of agency MSRs, and MSRs stand for Mortgage Servicing Rights, and agency RMBS assets. Our goal is to be strategically positioned to benefit from multiple-rate environments so that we're not dependent upon any one cycle, and also to generate attractive yields to investors. Currently, the current dividend yield to book value is in the neighborhood of 13.9%. So we're trying to deliver compelling returns. We think we do that today using a moderate amount of leverage. Relative to our peer group, we are on the lower side of our space, and we think that that's prudent today given all the volatility related to the macroeconomic environment we exist in.
Another thing to note around the portfolio is, given that we invest in agency products and we don't do non-agency or non-agency loans or anything in the buy-to-rent or outside of the agency space, we take very limited credit risk. The majority of the risk that we take on a daily basis is interest rate risk. We'd like to think we have a diversified portfolio. Our servicing rights are nationwide. We have about $20 billion worth of servicing rights, and that's across the country, with the top state, I think, being California, somewhere in the neighborhood of 13%. So from that perspective, we think we're pretty well diversified and don't have a lot of exposure to any specific geo. If you go to the next slide, from an investment highlights perspective, we're very disciplined in terms of our asset selection.
On the MBS side of the house, that team spends a lot of time trying to find assets that they think add value to the balance sheet relative to how they think about prepays and how the assets perform in different scenarios. And those guys are very active in managing that portfolio on a day-to-day basis. And we look for our assets to provide cash flow and an opportunity for capital appreciation. The MSRs, broadly speaking, gain value in a higher-rate environment, and the MBS is the offset to that. These two asset classes, broadly speaking, act as pretty good hedges to each other relative to how we think about managing our duration risk. The MSR portfolio carries a negative duration to it, and the MBS carries a positive duration to that.
And how we think about the portfolio, which Julian will go into later on, is we think about the assets individually with their associated hedges and in the aggregate, and we manage the portfolio in all those respects. One thing that we feel strongly about is around our liquidity profile. I think you're supposed to learn some things along the way, and through COVID, we learned that we may have needed to run a little bit stronger cash position going into that, obviously not knowing that was coming. But coming out of COVID, it was clear to us that we wanted to maintain a stronger liquidity profile, and we've done that consistently over the last four years and have been running a pretty strong balance sheet post-COVID.
The other thing, as I previously mentioned, our leverage, from our perspective, is conservative, and we sit at about 4.5 times currently relative to the assets. The MBS is obviously levered more than the MSRs, as you can imagine. Our goal is also to protect book value in multiple economic environments. We think that the two asset classes help us accomplish that, and so it's important to us to run a balanced portfolio with complementary interest rate-sensitive strategies. Since going public, our dividend yield has been 10% plus today, running higher, broadly speaking, especially given the stock's trading at a discount to book. But we think that companies in our space, including us, offer compelling yields to investors on a risk-return basis. And from the perspective of who's running the business, this team has it says over 75.
It's closer to 90 years of combined investment management and operational experience in our space, and we think that that is very relevant to how you might think about who's driving the bus here. Again, the next slide is just a short slide on our bios. I have over 30 years. Julian's 25+. Michael's 20+. Ray's the baby in the house at 15+. Next slide, Mike. I'm going to turn this over to Julian, our CIO, and he'll start giving you a feel for the portfolio and how we think about it and how it's currently constructed today.
Good afternoon. Thank you, Jay. Look, I think the most important thing that you kind of want to take from this page is Jay has mentioned that our portfolio is comprised of agency RMBS as well as agency MSRs. What differentiates us is the fact that we own about $19.6 billion UPB of MSRs in our portfolio. It has a market value as of 3/31 that's close approximately to $250 million. Move to the next slide, please. These next couple of slides just kind of give an overview of how the portfolio is positioned at the end of the first quarter here. In terms of total assets of our portfolio, we have about $1.3 billion in terms of assets. We've noted that the MSR is about $250 million or comprises about 28% of our investable assets.
The other 78% of our investable assets is a specified pools portfolio that my team spends a lot of time reviewing and going over, not just from the collateral stories but also from coupon positioning. Jay's also noted that our company leverage has been about 4.52 at the end of the first quarter. It's fluctuated around, but just modestly. It's been trending in that area for a consistent period of time. The other thing that we obviously hold a portfolio of mortgage-backed securities in terms of our specified pools, I would say the last quarter versus this quarter versus the previous quarter, our NIM has kind of fluctuated around, some of that being that the assets have improved in terms of their yield because the Fed has been raising interest rates, so it's allowed us to purchase assets on a cheaper side, higher yields, lower dollar prices.
But the other part of that is our financing costs have risen as well. In order to lever up the RMBS portfolio, we are financing those securities. Currently, we're about 9-9.5 times leverage approximately on the RMBS portfolio, and there is a cost to that, and those costs have risen as short-term rates have risen over that time. Our hedge ratio, which has simply been more the amount that we borrowed versus the amount of swaps that we use as hedges in the portfolio. And I should really start off by saying, Jay mentioned that we look at these portfolios kind of separately, and then we blend them together or marry them, the agency and the RMBS portfolio, to come up with what we call the aggregate portfolio. A lot of the stats you're seeing is on the aggregate side.
This is one that's on the individual side of the RMBS, and it really pertains to the fact that we start out with an RMBS portfolio of specified pools. We hedge a portion of that portfolio with interest rate swaps or various instruments, whether they be Treasury futures, absolute shorting Treasuries, and also buying payer swaps to hedge out some of our duration risk. I think it's one of the things we have to think about when we have this portfolio is what we'd like our duration profile to be. RMBS has a positive duration. The swaps will have negative durations. The futures will have negative durations. And our MSR, when we layer that on top of the portfolio to kind of form this aggregate portfolio, has a negative duration. So we're always trying to find what is the right duration mix on this portfolio.
Currently, we're, I would say, on a positive duration gap for the overall portfolio, but mildly within the range that we think is appropriate. The following page just kind of talks about the fact that, yes, we have a portfolio that's levered on an aggregate side of about 4.5. What we're trying to show you is in relationship how that has been over a longer, more extensive period of time, as well as showing you how it compares to some of our peers as we all try to generate returns that pay these particular dividends. I would say that we're on the lower third of the peer group, and that's on the bottom part of the chart. But these are some of the peers that we kind of compete with, whether they be an outright Agency REIT or as well as hybrid REIT.
We would consider ourselves to be a hybrid REIT because we have Agency securities in terms of RMBS, but we also have an MSR in the portfolio, mortgage servicing rights, which a lot of other REITs do not have. I think this just touches on some of the things that I've already noted. This particular page, we have about $1 billion in terms of investable assets. We've already described that 28% of those investable assets are called Agency MSR. We are trying to buy an asset right there that really performs well in a stable interest rate to rising interest rate environment and looking for some price dislocations that may be involved when we're out in the market trying to bid against our peers for the same assets. On the Agency side, we've noted that we had 72% of these assets.
Of our overall assets are investable in Agency RMBS. My team spends a lot of time trying to find assets that will perform in up-rate environments as well as in down-rate environments. Over an extended period of time, I would say a lot of the assets that we have recently purchased, we've owned these assets for 2-3 years. I'll now turn the presentation back over to Jay.
Thanks. Hey, Ray. Why don't you walk us through slide 10 and tell everybody how you think about MSRs as an asset class and its relation to how we think about running the company in the aggregate?
Sure. So to Julian's point, the MSR assets, especially what we're holding today, benefit in periods of stable interest rates or rising interest rates and act as an offset to the MBS assets that we have. On the flow agency, we have flow agency agreements with some of our subservicers in which we essentially have the ability to acquire on a flow basis, which would be month to month, MSR for purpose of replenishing the asset that's running off every month. To date, we have been a little bit less active just from the standpoint of relative value in the market. You figure with the financing cost being around 8.5% once you add the margin to the short-term SOFR rates, the MSR asset generally trades somewhere in the high single digits to low double digits.
So the spread's not really all that extensive in the current environment, but historically, that ebbs and flows with where short rates are essentially being put. We have multiple subservicers which act as a counterparty risk. Should any event happen with a subservicer, we have three other subservicers we could essentially maneuver the portfolio between, and all of them are servicing Fannie Mae and Freddie Mac collateral. And then in terms of targeting assets, we typically are looking for good counterparties, preferably with bifurcation on the reps and warrants, which is fairly typical in the flow space between origination and servicing, and looking at prepayment characteristics that generally exhibit better performance, lower events of default, and slower general prepayment speeds.
Awesome. Thanks, Ray. So Julian, why don't you spend a minute talking about how you think about RMBS and then bring it home around how you think everything comes together and how you think about the portfolio in the aggregate? You need to get off mute. Sorry. Julian, you're on mute.
There we go.
There you go.
Little operator error here we had today.
I'm sure you're going to blame myself.
When we kind of think about the agency portfolio, I'm cognizant of what the MSR portfolio that Ray just mentioned is, how that portfolio is established. I'm looking at the portfolio, I think, from a variety of different scenarios, not just today's scenario where rates are currently, but we look at it over a multitude of down-rate shock scenarios as well as higher-rate scenarios, curve shifts. We're always trying to figure out how we can optimally at least be able to perform within a variety of those particular scenarios when we kind of put the whole entire portfolio together. Some of that has to do with coupon positioning, which is within the RMBS portfolio.
You just can't say, "I want a whole portfolio of RMBS and have it all in one particular coupon." We have it kind of spread out, what I would call the coupon stack, and that can range from low coupons to high coupons. We monitor that and change that profile as new information comes out about how the economy is doing or what Fed policy may be and overall technicals between supply and demand that may be in rates but also within the mortgage universe. Currently, I think we are positioned with a slight positive duration. We're positioned for the curve to steepen over a period of time. We're not just thinking about this portfolio today. We're thinking about it, what it may look like 3 months to 6 months down the line.
Our perceived perception is that at some point, the Fed will be more active in terms of easing monetary policy. That may not be within the next six months, but I do believe within the next 9-12 months, we will perhaps see our first ease. So the curve portfolio is positioned for a curve steepening. We don't necessarily need the Fed to ease monetary policy given the amount of Treasury issuance that's coming to market, given the fact that the economy seems to be running relatively well with 3.5%, given the fact that inflation is still relatively high. We easily could see the back end of the yield curve move higher and the front end stay stable, and that would function as a curve steepener, which would benefit our portfolio.
As we move to the next page, Jay is kind of saying, "How are we positioned here outright for the longer term?" If I had to give you a couple of different takeaways, I'd say, "Look, we're positioned to succeed in a multitude of interest rate environments." I think I've kind of touched upon that, that we do use some analysis in terms of looking at how our portfolio will perform over these various rate scenarios and trying to come to some consensus of scenarios that we like and hopefully perform well in a multitude and not just one particular scenario. Look, we're out here trying to acquire MSR, whether through flow or bulk. We do that selectively and prudently.
There'll be times when we will be buying from a bulk standpoint, and there will be other times when we might try to choose our purchases through flow arrangements that we have. Look, I think the portfolio isn't. It's a dynamic entity. It lives and breathes, and so we have to manage that day to day. It just doesn't sit, and we try to stay on top of all the different macroeconomic events that are happening as well as geopolitical events. And look, the overall goal is to generate attractive long-term risk-adjusted returns for shareholders. And I'll now turn the presentation back to Jay.
Thanks, Julian So why Cherry Hill? Why invest in Cherry Hill, right? There's a lot of options out there, and why pick us? We offer a compelling differentiated strategy within the context of our peer group in the space. I think our investment strategy is tailored to weather multiple interest rate environments and storms around the volatility that we've seen in the economy and rates in our space over the last couple of years. I think our group has a good disciplined approach in terms of managing the portfolio, especially in volatile macroeconomic environments. The last four years have definitely been everything volatile. What used to be a couple-tick market every day is now a half-point move on any given day or more given the volatility and all things related to reactions to Fed policy, etc.
We think, as I said, pairing agencies and MSRs has worked well for investors over the years. We think we have a pretty strong track record of marrying these two asset classes together and managing the risk around that and minimizing risk to investors relative to all of the things that could trip up us being able to deliver returns to investors. We believe that the yield we deliver to people is compelling. As I said, it's been double-digit returns for the better part of or for all of our existence, and we think that's compelling. And I can't overemphasize that this team has a lot of experience doing what it does, and I think that this team has an enormous amount of product experience and has the ability to manage a portfolio of assets for our shareholder base.
Lastly, I think that we're sort of in the latter innings of what I would call this cycle. We're very constructive on where we think the Fed and rates are going, and we think that while investors have been not as constructive as in the past in our space, that tide is turning, and we think that our space over the next couple of years is going to see much brighter days. And we're excited to take advantage of that and grow the company. With that, we are opening it up to questions. We have 5 minutes left or 4 minutes left. We did get 1 question, and this question comes up a lot. The question is, "What are investors missing given your valuation below book value?" I think a couple of things around that. One, we're microcap, and so I think liquidity plays into that.
And the larger guys enjoy more liquidity, and the smaller guys, given the lesser liquidity in the stock and float around the stock, there's a discount to that, broadly speaking. And that's sort of just a catch-22 until you grow bigger. The other thing is, the market speaks to us around the required dividend yield that it wants from the company given all things that they know about the company. We believe today that the stock trades too low. The stock has traded closer to book in recent history, and we think that our historical performance warrants that. But the stock price is something that day to day, you can't control, and so we try not to get too focused on it day to day.
I believe that today, sitting here, given what we're doing, where we think we are in the cycle, that the stock definitely should trade north of where it does.
I'll jump in with a question here. Just kind of looking at the portfolio breakdown, I think you mentioned 72% of the portfolio is in agency MBS or agency RMBS, I should say. But how's that breakdown trended in recent years, and what are some of the just driving factors behind positioning the portfolio?
Julian?
Okay. There you go. Okay. If you go back to page 15, I believe that's 15, that kind of gives a little breakdown of the investable assets and how it's trended in terms of the last couple, I would say, couple of years, I mean, back to the first quarter of 2023. So it's kind of fluctuated very similarly around here. We've tried to, I think, over the last couple of years, be relatively stable in terms of our positioning, whether it be RMBS as well as MSR. I think, look, we've had an inverted yield curve for a while, which hasn't made at times has made RMBS attractive, but yet at other times, it's made it less attractive. So we've tried to take advantage of some particular nuances here or there.
I think from a longer-term standpoint, if we go beyond what the chart is kind of showing here, we've had a greater percentage in RMBS at times. And that greater percentage of RMBS, I think, has been driven more by what we felt of the kind of alpha-generating situation that RMBS might bring. Yes, we think historically, spreads are wide right here. But we would also like a steeper yield curve. We'd like also to have some consistency with what the Fed has been saying. I think it's a mixed approach currently coming out of the committee. Obviously, they all speak with one voice under Powell. But if you look individually at some of the speakers, a lot would like to hold. Some would like to start the easing process.
I think once you get consistency like that, you get the yield curve kind of moving from being negative to being positively sloped. I think we wouldn't be surprised if our leverage went up in the portfolio to give us some additional opportunities to generate more alpha for shareholders.
Great. And turning to leverage, I think you mentioned it's right about 4.5 times in the portfolio. Similar question, just what are some of the factors that drive the decision-making behind leverage?
Repeat that once again. What are some of the factors that?
Sure. Just what are some of the factors that drive the decision-making behind where to position or how high to take leverage in the portfolio?
The economic, excuse me, the economic environment. In highly volatile markets, which I would say this is not as volatile of a market as we saw, especially around COVID. But I would still argue that it's pretty volatile. We're moving on average about 5-6 basis points per day is kind of our average that we're seeing in terms of the 10-year. And we're seeing volatility spike up and down as well as the basis widen and tighten. We've come off the wides in terms of the basis in terms of mortgages. We're at 1.190, but we clearly still have additional room to run. Currently, I think as of this morning, we're about 145. I think when we have more certainty and clarity about the path from the Fed, we could easily see leverage pick itself up. We've noted that the RMBS leverage at one point currently is 9.5 times.
That leverage we've had at several other times has been about 11x. It's also been lower as well. I think we've crept it up here to take advantage of some of the wider spreads. That obviously has pressure on the aggregate portfolio, so that has moved up slightly. But I think there's additional room for that to go higher. I think we just need to see a clearer, cleaner, and more defined path.
Got it. That makes sense. That's helpful. Unfortunately, we're up against a time limit here, but we really appreciate the overview and the insight. If anybody has any further follow-up questions, feel free to reach out to myself. My email is bmccarthy@sidoti.com or reach out to Cherry Hill Mortgage directly. Guys, thanks again for time. I really appreciate it.
Yep. Thanks for having us.
Thank you.
Guys, have a good day, everybody.
Take care, everyone.