Cherry Hill Mortgage Investment Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. CHMI is an externally managed residential mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs).
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Interest income / expense | $11.8 million / $12.0 million; net interest expense $0.2 million | Q1 2022: $5.5 million / $1.6 million; net interest income $3.9 million |
| Net servicing income | $11.1 million | Q1 2022: $9.9 million |
| Net income (loss) | $(19.3) million; $(0.87) per common share | Q1 2022: $28.7 million; $1.40 per common share |
| Loss attributable to common stockholders | $(21.4) million | Q1 2022: income of $25.6 million |
| Comprehensive loss | $(4.7) million | Q1 2022: $(15.8) million |
| Cash flows | Operating +$3.6 million; investing $(157.3) million; financing +$157.4 million | Cash, cash equivalents and restricted cash ended at $69.4 million, up $3.8 million in the quarter |
| Assets / equity | Total assets $1.479 billion; stockholders’ equity $264.1 million | December 31, 2022: assets $1.409 billion; equity $265.5 million |
| Debt | Repurchase agreements $991.6 million; notes payable $177.9 million; total $1.170 billion | December 31, 2022: total $1.010 billion |
- Portfolio and servicing: RMBS fair value was $1.078 billion, up from $931.4 million at year-end. The portfolio consisted entirely of Agency RMBS. MSRs were valued at $270.9 million, down from $279.7 million; underlying unpaid principal balance was $21.3 billion, versus $21.7 billion.
- Margins and funding: The period-end RMBS net interest spread, including swap benefits, was 3.41%, compared with 3.77% at December 31, 2022. The separately reported average net interest rate spread was 3.68%, versus 3.60% in the prior quarter. Repurchase borrowings carried a 4.87% weighted-average rate, up from 4.41%; their weighted-average remaining maturity was 16 days.
- Liquidity: Cash and cash equivalents were $54.6 million, with another $14.8 million restricted. Management stated it believed available liquidity was sufficient for short-term recourse liabilities and anticipated needs over the next 12 months, including potential margin calls.
- Distributions and capital: The company declared a $0.27-per-share common dividend for the quarter and preferred dividends totaling $2.5 million. It issued 2.14 million common shares through its ATM program at a weighted-average $6.03 per share, raising approximately $12.9 million before fees. Common shares outstanding rose from 23.51 million at year-end to 25.65 million at quarter-end.
- Supplemental measure: Earnings available for distribution (EAD), a non-GAAP measure, was $7.8 million, or $0.21 per diluted share; EAD attributable to common stockholders was $5.2 million. The company cautions that EAD is not GAAP net income, taxable income, or a measure of liquidity.
Material changes versus prior periods
- Compared with Q1 2022, the company swung from $28.7 million net income to a $19.3 million net loss. Q1 2023 included $12.2 million of unrealized derivative losses, $8.7 million of unrealized MSR valuation losses, and $5.6 million of realized derivative losses. Net servicing income improved, but interest expense rose sharply.
- Management’s quarter-over-quarter discussion reports interest income up $1.9 million from Q4 2022, while interest expense increased $3.5 million, reflecting higher rates and more repurchase debt. Servicing income was broadly stable and servicing costs declined.
- RMBS fair value increased during Q1, and available-for-sale RMBS generated $14.6 million of other comprehensive income, reducing accumulated other comprehensive loss. Management attributed the gain to a decline in interest rates.
- Repurchase borrowings rose $165.7 million from year-end, alongside growth in RMBS purchases. The company also began electing fair-value-through-earnings accounting for RMBS acquired on or after January 1, 2023; previously, RMBS were classified as available-for-sale.
Outlook, risks and other notable items
- No specific earnings, asset-growth, or dividend guidance was provided. Management said it expected cash on hand and operating cash flows to meet anticipated liquidity needs for the next 12 months, while longer-term funding may rely on additional borrowings, securities offerings, or asset sales or refinancing.
- Management discussed Federal Reserve rate increases and quantitative tightening as factors that may raise funding costs, increase volatility, affect asset values and spreads, and adversely affect earnings, liquidity, and distributions. Slower mortgage prepayments may support MSR cash flows but can extend RMBS duration and complicate hedging.
- Key exposures include short-term, uncommitted repo financing and collateral/margin calls; interest-rate, spread, prepayment, extension, and valuation risk; dependence on subservicers and financing counterparties; and liquidity risk in less-traded MSRs. MSR valuations use significant unobservable inputs. Repo borrowings had a 4.1% weighted-average haircut, and no individual repo counterparty exposure exceeded 5% of equity.
- The management agreement is with an affiliated external manager, carries a 1.5% annual fee based on defined stockholders’ equity, and expires October 22, 2023 before automatic renewal. Non-renewal or certain termination scenarios may trigger a termination fee.
- The company reported no material legal or regulatory claims, no new risk factors in this quarterly filing, and no subsequent events requiring disclosure. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- How recurring funding costs, short repo maturities, collateral haircuts, and margin requirements may affect liquidity as rates and spreads change.
- Whether MSR fair values and EAD are sensitive to assumptions on prepayments, discount rates, servicing costs, and derivative treatment; assess EAD alongside GAAP results.
- Whether common and preferred distributions remain supported by taxable income, liquidity, and financing obligations, particularly given the quarterly GAAP loss and continued common-stock issuance.
- The maturity, renewal, and benchmark-rate terms of the MSR credit facilities and Series B preferred stock, including the anticipated transition from LIBOR to a successor rate.
- Potential dilution from the ATM program and the terms and implications of the external management agreement’s October 2023 renewal.