Cherry Hill Mortgage Investment Corporation — FY2022 Form 10-K
Business context and reporting period. Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). This annual filing covers the fiscal year ended December 31, 2022; it is not a quarterly-only report. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | FY2022 / Dec. 31, 2022 | Comparable FY2021 / Dec. 31, 2021 |
|---|---|---|
| Interest income | $29.6 million | $15.0 million |
| Interest expense | $17.6 million | $5.8 million |
| Net interest income | $12.1 million | $9.2 million |
| Net servicing income | $41.6 million | $40.5 million |
| Net income | $22.2 million | $12.5 million |
| Net income applicable to common stockholders | $11.9 million; $0.60 per diluted share | $2.4 million; $0.14 per diluted share |
| Common-stockholder earnings available for distribution (non-GAAP) | $21.8 million; $1.10 per diluted share | $18.3 million; $1.06 per diluted share |
| Total assets / total equity | $1.409 billion / $265.5 million | $1.303 billion / $278.8 million |
| Debt | $1.010 billion | $1.011 billion |
| Cash and cash equivalents | $57.3 million; restricted cash $8.2 million | $63.9 million; restricted cash $12.9 million |
| Operating cash flow | $59.9 million | $48.0 million |
| Investing cash flow | $(128.2) million | $166.5 million |
| Common dividend declared | $0.27 per share quarterly; $1.08 for the year | $0.27 per share quarterly; $1.08 for the year |
At year-end, RMBS were $931.4 million and MSRs were $279.7 million, supporting an underlying mortgage UPB of approximately $21.7 billion. RMBS net interest spread was 3.77% at year-end, versus 2.46% a year earlier; the filing’s fourth-quarter average net interest rate spread was 3.60%, versus 2.31% in fourth-quarter 2021. These spread measures are not equivalent to company-wide profit margins.
Material changes versus the prior year
- Net income rose to $22.2 million from $12.5 million, while common-stockholder net income increased to $11.9 million from $2.4 million. Non-GAAP earnings available for distribution to common stockholders increased to $21.8 million from $18.3 million; the company cautions that this measure is not GAAP income, liquidity, or REIT taxable income.
- Interest income increased $14.6 million, attributed to securities purchased with ATM proceeds, portfolio reinvestment in higher-yielding RMBS, and slower prepayments reducing premium amortization. Interest expense rose $11.8 million as rates and notes payable increased.
- The company recognized a $99.7 million realized loss on RMBS sales, compared with a $0.5 million gain in 2021, as it sold securities amid rising rates and reinvested in higher-yielding assets. Derivatives generated a $61.9 million unrealized gain, and MSRs generated a $23.0 million unrealized gain.
- Despite reported annual net income, comprehensive loss was $14.4 million, including a $36.6 million unrealized loss on available-for-sale RMBS recorded in other comprehensive income. Year-end accumulated other comprehensive loss was $29.1 million.
- Common shares outstanding increased from 18.3 million to 23.5 million. The company sold 5.2 million shares through its ATM program for $33.9 million gross proceeds at a weighted-average $6.50 per share; approximately $36.3 million remained available under the expanded program.
Liquidity, debt and outlook
RMBS were principally financed through short-term, uncommitted repurchase agreements: $826.0 million outstanding at a 4.41% weighted-average rate, with an 18-day weighted-average remaining term and a 4.3% average haircut. MSR facilities had $184.5 million outstanding against stated facility limits totaling $250 million. Repo borrowings declined from $865.5 million year over year, while MSR financing increased. The company reported sufficient liquidity for short-term obligations and expected cash on hand and operating cash flow to meet anticipated needs over the next 12 months; that assessment depends on market access, collateral values, and future cash flows.
Management described sharply higher rates and Federal Reserve balance-sheet reduction as sources of spread, valuation, and financing pressure. Lower mortgage prepayments may support MSR values and slow RMBS premium amortization, but could be offset by volatility and higher hedging costs. No quantitative earnings or dividend guidance is provided. The board determines distributions; the 2022 common dividend was maintained at $0.27 quarterly, but future payments are not assured.
Risks, contingencies and unusual items
- Leverage and short-term repo funding expose the company to refinancing risk, margin calls, collateral liquidation, and rapidly changing financing costs. Rising rates can raise funding costs faster than asset yields adjust.
- MSR valuation relies on Level 3 discounted-cash-flow models and significant unobservable assumptions, including prepayment speeds, discount rates, delinquency, and servicing costs. The auditor identified MSR valuation as a critical audit matter; the financial-statement and internal-control opinions were unqualified.
- Servicing assets depend on third-party subservicers and Agency consents. The filing also describes potential conflicts involving the external Manager, Freedom Mortgage, and related-party servicing arrangements; the management fee is based on equity rather than investment performance.
- REIT qualification and the company’s Investment Company Act exceptions constrain asset choices and distributions. The tax treatment of Excess MSRs and TBAs involves uncertainty. The taxable REIT subsidiary’s corporate tax provision was $5.1 million in 2022.
- The 2022 dividend was partly classified as return of capital for tax purposes: 60% ordinary income and 40% return of capital. The filing warns taxable income and GAAP earnings may differ.
- Series B preferred dividends are fixed at 8.250% through April 14, 2024, then float under a successor-rate mechanism; the filing anticipates three-month CME Term SOFR plus a 0.26161% adjustment, but determinations by the calculation agent could affect the rate.
- The company disclosed no material legal or regulatory proceedings as of year-end. It reported two prior data breaches at a subservicer’s third-party vendor; the breaches did not affect company systems or operations, according to the filing.
Most important facts for investors to verify
- Whether recurring operating cash generation supports the common and preferred dividends, particularly given volatile GAAP results and the difference between GAAP earnings, non-GAAP EAD, and REIT taxable income.
- Current repo and MSR financing rates, maturities, collateral haircuts, covenant headroom, and liquidity available to meet potential margin calls.
- MSR valuation assumptions and sensitivity to prepayments, discount rates, servicing costs, and delinquencies; also check the effect of any changes in model inputs.
- The impact of the $99.7 million realized RMBS loss and the remaining unrealized RMBS marks on book value, alongside hedge performance and exposure to further rate or spread changes.
- Share dilution from ATM issuance, the use of remaining offering capacity, and the terms and renewal status of the external management agreement, which had a stated term expiration of October 22, 2023 and a termination fee in specified circumstances.