Cherry Hill Mortgage Investment Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Cherry Hill is an externally managed residential mortgage REIT investing primarily in agency mortgage-backed securities (RMBS) and servicing-related assets, including Excess MSRs and MSRs.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable |
|---|---|---|
| Interest income | $5.188 million | $5.827 million in Q1 2015 |
| Net interest income | $3.531 million | $4.592 million in Q1 2015 |
| Net servicing income | $1.093 million | No servicing income reported in Q1 2015 |
| Net loss attributable to common stockholders | $7.063 million; $0.94 per share | $2.412 million; $0.32 per share in Q1 2015 |
| Core earnings, non-GAAP | $4.032 million attributable to common stockholders; $0.54 per share | $3.770 million; $0.50 per share in Q1 2015 |
| Total assets / equity | $635.192 million / $148.957 million | $636.340 million / $152.337 million at year-end 2015 |
| Cash and restricted cash | $10.649 million / $12.906 million | $10.603 million / $9.942 million at year-end 2015 |
| Debt | $469.460 million total: $398.374 million repo, $47.250 million FHLBI advances, $23.836 million term loan | $472.123 million total at year-end 2015 |
Reported loss reflected valuation marks, including $5.198 million of unrealized derivative losses and $4.539 million of losses on servicing-related assets; the latter included a $2.232 million MSR valuation loss. RMBS fair-value gains produced $7.332 million of other comprehensive income. The filing reports a 1.86% period-end average net interest rate spread, including swaps; the RMBS portfolio spread was 1.73%.
Operating cash flow was $3.285 million and investing cash flow was $6.084 million; financing used $9.323 million. Cash and cash equivalents increased $46,000 during the quarter. The company declared a $0.49-per-share common dividend, totaling $3.684 million, payable after quarter-end.
Changes and notable developments
- Net loss widened from Q1 2015, while core earnings per share increased. Net interest income fell $1.061 million as interest income declined and interest expense rose; new servicing income partly offset the change.
- Cherry Hill added $463 million of Fannie Mae MSR unpaid principal balance through an Aurora acquisition in January. Total servicing-related assets were $92.604 million at quarter-end, against $97.803 million at year-end 2015.
- RMBS remained approximately $508.2 million. The portfolio’s gross unrealized position improved to $7.134 million net gains from a $185,000 net loss at year-end; the company reported no other-than-temporary impairment.
- The FHFA rule bars the captive-insurance subsidiary from new FHLBI advances or renewing existing ones and requires membership termination within one year. Existing advances were $47.250 million at quarter-end and must be repaid by the applicable termination date.
Outlook, risks and contingencies
Management said it expected cash on hand and operating cash flow to meet anticipated liquidity needs over the next 12 months, including financing needs and potential margin calls. Longer-term funding may rely on borrowings, asset sales or refinancing, and equity or debt issuance. It also said asset pricing had reduced available returns and described plans to broaden investments to seek a more diversified, stable revenue profile; execution requires capital, with no assurance it can be raised. No specific earnings or dividend guidance was provided.
Key exposures include interest-rate and spread movements, prepayment and extension speeds, leverage and short-term repo refinancing, collateral/margin calls, illiquid servicing assets, and model-dependent Level 3 valuations. The company relies on Freedom Mortgage for servicing and has affiliated-party management arrangements. Ginnie Mae approval of Aurora’s change in control remained unresolved. Under an acknowledgement agreement, Cherry Hill could face payment obligations if Freedom Mortgage fails to make specified Ginnie Mae payments; management assessed material loss risk as remote and accrued no liability.
On April 15, 2016, Freedom Mortgage announced a $113 million settlement with HUD over alleged FHA origination, underwriting and quality-control noncompliance; it neither admitted nor denied liability. Freedom Mortgage told Cherry Hill it did not expect a material adverse effect on its financial condition or results. Cherry Hill reported no material legal proceedings of its own. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation and refinancing capacity can support short-term repo maturities, margin requirements, and the required repayment of FHLBI advances.
- How much of the GAAP loss and equity movement reflects non-cash fair-value changes, and whether core earnings adequately represents ongoing performance.
- The assumptions and sensitivity of servicing-asset valuations to prepayments, discount rates, delinquencies, and servicing costs.
- Whether Freedom Mortgage’s HUD settlement or other legal, financial, or servicing developments affect Cherry Hill’s servicing assets, funding, or contractual exposures.
- The board’s future dividend decisions relative to taxable income, cash availability, and investment needs.