Business Context and Reporting Period
Company: Cherry Hill Mortgage Investment Corporation (CHMI)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2024
Business Overview: CHMI is a publicly traded mortgage REIT focused on acquiring and managing residential mortgage assets, specifically Agency Residential Mortgage-Backed Securities (RMBS) and Mortgage Servicing Rights (MSRs). The Company is externally managed by Cherry Hill Mortgage Management, LLC, though it announced plans in July 2024 to internalize management and terminate the external management agreement.
Key Financial Metrics
| Metric | Q3 2024 (3 Months) | Q3 2023 (3 Months) | YTD 2024 (9 Months) | YTD 2023 (9 Months) |
|---|---|---|---|---|
| Net Interest Income | $109,000 | ($473,000) | ($631,000) | ($1,267,000) |
| Net Servicing Income | $8,475,000 | $10,356,000 | $27,626,000 | $32,437,000 |
| Total Income (Loss) | ($7,077,000) | $20,527,000 | $15,850,000 | $9,691,000 |
| Net Income (Loss) | ($12,444,000) | $15,885,000 | $396,000 | ($1,811,000) |
| Net Loss Applicable to Common Stockholders | ($14,792,000) | $13,117,000 | ($6,990,000) | ($9,167,000) |
| Diluted EPS (Common) | ($0.49) | $0.49 | ($0.23) | ($0.35) |
| Total Assets | $1,551,389,000 | N/A | N/A | N/A |
| Total Liabilities | $1,311,693,000 | N/A | N/A | N/A |
| Stockholders' Equity | $239,696,000 | N/A | N/A | N/A |
| Cash and Cash Equivalents | $50,152,000 | N/A | N/A | N/A |
Note: Q3 2024 results were significantly impacted by unrealized losses on derivatives and servicing related assets, offset by unrealized gains on RMBS due to interest rate movements.
Material Changes vs. Prior Period
- Net Income Volatility: The Company reported a net loss of $12.4 million for Q3 2024, a reversal from the $15.9 million net income reported in Q3 2023. This swing is primarily driven by fair value adjustments rather than core operating performance.
- Derivative Performance: Unrealized losses on derivatives increased significantly to $21.3 million in Q3 2024 compared to an unrealized gain of $18.3 million in Q3 2023. Realized losses on derivatives were $8.0 million in Q3 2024 versus a gain of $20.7 million in the prior year.
- RMBS Valuation: Conversely, the Company recorded an unrealized gain on RMBS of $25.0 million in Q3 2024, compared to an unrealized loss of $19.8 million in Q3 2023, attributed to a drop in interest rates during the quarter.
- Servicing Assets: Net servicing income declined to $8.5 million in Q3 2024 from $10.4 million in Q3 2023 due to a reduction in the size of the MSR portfolio. Additionally, unrealized losses on servicing related assets were $7.5 million in Q3 2024.
- Balance Sheet Growth: Total assets increased to $1.55 billion as of September 30, 2024, from $1.39 billion at year-end 2023, driven by increased RMBS holdings ($1.21 billion vs. $1.01 billion) and higher repurchase agreement borrowings ($1.11 billion vs. $0.90 billion).
Guidance, Outlook, and Risks
- Management Internalization: In July 2024, the Board approved a plan to internalize management and terminate the agreement with Cherry Hill Mortgage Management, LLC. A dispute has arisen regarding a potential termination fee of approximately $18.4 million claimed by the Manager, which the Company intends to contest.
- Interest Rate Environment: The Federal Reserve lowered its federal funds rate target by 0.75% in September 2024. Management notes that lower rates generally lower funding costs but may increase prepayment speeds, potentially reducing the life of MSR cash flows and accelerating premium amortization on RMBS.
- Non-GAAP Measure (EAD): Earnings Available for Distribution (EAD) attributable to common stockholders was $2.5 million ($0.08 per share) for Q3 2024, compared to $2.3 million ($0.08 per share) for Q2 2024. This metric excludes fair value changes to better reflect operational performance.
- Risk Factors: Key risks include interest rate volatility, prepayment risk, counterparty risk in repurchase agreements, and the uncertainty surrounding the management internalization process and potential litigation.
Investor Verification Checklist
- Management Dispute: Verify the status of the dispute regarding the $18.4 million termination fee with the external manager and the timeline for the internalization process.
- Derivative Hedging Effectiveness: Review the composition of the derivative portfolio (swaps, TBAs, futures) to understand the source of the $21.3 million unrealized loss and its impact on future earnings volatility.
- MSR Portfolio Runoff: Monitor the Unpaid Principal Balance (UPB) of the MSR portfolio, which decreased to $17.6 billion from $20.0 billion at year-end 2023, and assess the impact of higher prepayment speeds on future servicing income.
- Liquidity Position: Confirm the adequacy of cash reserves ($50.2 million) and available borrowing capacity under repurchase agreements to meet margin calls and dividend obligations.
- Preferred Stock Dividends: Note the revision of the Series B Preferred Stock dividend rate to a floating rate (SOFR + spread) effective April 2024 and the associated cash flow requirements.