Cherry Hill Mortgage Investment Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless otherwise noted, amounts are in millions of dollars. Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency RMBS and mortgage servicing rights (MSRs).
Financial results and position
- Q3 earnings: GAAP net income was $41.7 million; income attributable to common stockholders was $38.3 million, or $1.91 basic and $1.90 diluted per share. This compares with a $15.5 million net loss and $0.92 diluted loss per share in Q2 2022, and a $6.2 million common-stockholder loss in Q3 2021.
- Nine-month results: Net income was $54.9 million and income attributable to common stockholders was $46.4 million, or $2.42 per diluted share, versus $5.8 million net income and a $1.7 million common-stockholder loss for the first nine months of 2021.
- Non-GAAP earnings available for distribution (EAD): Common-stockholder EAD was $5.1 million, or $0.26 per diluted share, in Q3, versus $5.2 million, or $0.28, in Q2. Nine-month EAD was $16.6 million, or $0.86 per diluted share, versus $12.5 million, or $0.73, in 2021. The company cautions that EAD is not GAAP income, liquidity, or REIT taxable income and may not be comparable across issuers.
- Income and spread: Q3 net interest income was $3.3 million, up from $2.2 million in Q3 2021 but down from $3.5 million in Q2 2022. Net servicing income was $10.7 million, about flat quarter over quarter. At quarter-end, the reported RMBS average net interest rate spread was 3.13%, versus 3.25% at June 30; the RMBS portfolio net interest spread was 3.49%, versus 2.46% at December 31, 2021.
- Cash flow: For the first nine months, operating activities provided $44.7 million, investing activities used $137.1 million, and financing activities provided $81.3 million. Cash, cash equivalents and restricted cash ended at $65.7 million, down $11.0 million from the start of the period; unrestricted cash was $42.7 million.
- Assets, debt and equity: Total assets were $1.366 billion and total equity was $250.8 million at September 30, versus $1.303 billion and $278.8 million at December 31, 2021. Debt totaled $1.043 billion: $865.4 million in repurchase agreements and $177.3 million in notes payable. Repurchase borrowing rates averaged 3.04% at quarter-end, up from 0.14% at year-end 2021; weighted-average remaining maturity was 29 days. The company reported $23.0 million of restricted cash, principally collateral for repo borrowing.
- Portfolio and distributions: Agency RMBS fair value was $868.0 million, down from $953.5 million at year-end; MSRs were valued at $279.0 million, supporting approximately $21.4 billion of unpaid loan principal. The company declared common dividends of $0.27 per share per quarter in the periods shown and paid $22.7 million of dividends during the first nine months.
Material changes and notable items
- Rising rates and portfolio repositioning contributed to a $69.0 million realized RMBS loss for the first nine months of 2022, compared with a $2.0 million gain in the comparable 2021 period. Q3’s realized RMBS loss was $9.7 million, down from $46.0 million in Q2.
- Q3 derivative gains included $33.3 million of unrealized gains; nine-month unrealized derivative gains were $75.4 million. These valuation movements materially influenced reported GAAP earnings.
- RMBS generated a $46.6 million Q3 unrealized loss in other comprehensive income; nine-month unrealized losses were $78.3 million. Accumulated other comprehensive loss reached $70.8 million. Management attributed the RMBS declines primarily to market rates and spreads, not credit impairment, and reported no allowance for credit losses.
- MSR fair value rose by $30.2 million year to date, including purchases and valuation changes; the nine-month servicing-fee decline versus 2021 reflected a smaller MSR portfolio. Servicing costs also declined year over year.
- The company issued 2.69 million common shares through its ATM program in the first nine months for approximately $19.0 million gross proceeds; 1.34 million shares were issued in Q3. Common shares outstanding increased to 20.99 million from 18.26 million at year-end 2021.
Outlook, risks and contingencies
- Management said it believed available liquidity was sufficient for short-term recourse obligations and anticipated needs over the next 12 months, including potential margin calls. It expects cash and operating cash flows to meet near-term needs; longer-term funding may include borrowings, equity issuance, or asset sales/refinancing. This is management’s assessment, not a guarantee.
- The filing provides no quantified earnings or distribution guidance. The board determines dividends based on taxable income, cash, operating needs, financing obligations and other factors; future distributions are not assured.
- Management described Federal Reserve rate increases and balance-sheet reduction as sources of higher financing costs, market volatility and potential spread compression. Lower mortgage prepayments may support MSR values and reduce RMBS premium amortization, but greater volatility and hedging costs may offset benefits.
- Key exposures include short-term, uncommitted repo financing and collateral/margin calls; interest-rate, spread, prepayment and extension risk; MSR valuation sensitivity and reliance on subservicers; and liquidity and funding-market access. Repo borrowings were collateralized, with weighted-average haircut of 4.2%.
- The company’s management agreement with its affiliate automatically renewed through October 22, 2023; termination or non-renewal in specified circumstances can trigger a termination fee. The filing reports no material legal or regulatory claims, no material subsequent events, and effective disclosure controls. No risk-factor changes were reported in this 10-Q.
Important facts for investors to verify
- How much of Q3 and year-to-date GAAP income reflects noncash derivative and MSR fair-value changes, and how those gains compare with recurring earnings and cash generation.
- The sensitivity of liquidity and equity to further rate/spread moves, repo collateral calls and refinancing of short-term borrowing.
- The assumptions and valuation sensitivity for Level 3 MSRs, including prepayment speeds, discount rates and servicing costs.
- Whether common dividends remain supported by REIT taxable income and cash available after preferred dividends, debt service and operating requirements; reconcile this with the company’s non-GAAP EAD measure.
- The impact of ATM share issuance on per-share economics, and the terms and transition arrangements for LIBOR-linked facilities and Series B preferred dividends.