Cherry Hill Mortgage Investment Corporation — Q1 2022 Form 10-Q
Business context and period. The company is an externally managed residential mortgage REIT investing primarily in Agency mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). This summary covers the quarter ended March 31, 2022; balance-sheet comparisons are to December 31, 2021.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q1 2022 | Comparison / period-end |
|---|---|---|
| Interest income / expense | $5.5 / $1.6 | Net interest income $3.9, versus $3.0 in Q4 2021 and $1.8 in Q1 2021 |
| Net servicing income | $9.9 | $9.6 in Q4 2021; $10.5 in Q1 2021 |
| Net income | $28.7 | $6.7 in Q4 2021; $21.2 in Q1 2021 |
| Net income attributable to common stockholders / diluted EPS | $25.6 / $1.40 | $4.1 / $0.23 in Q4 2021; $18.3 / $1.07 in Q1 2021 |
| Earnings available for distribution (non-GAAP) attributable to common / per diluted share | $6.2 / $0.34 | $5.8 / $0.32 in Q4 2021; $3.5 / $0.21 in Q1 2021 |
| Comprehensive income attributable to common | $(17.9) | Includes $44.5 of unrealized RMBS losses in other comprehensive income |
| Cash flow | $13.8 operating; $57.6 investing; $(68.8) financing | Cash, cash equivalents and restricted cash rose $2.6 to $79.4 |
| Assets / liabilities / equity | $1,212.0 / $952.4 / $259.7 | At March 31, 2022 |
| Debt | $924.0 total | $764.9 repo borrowings and $159.1 notes payable; total debt was $1,010.8 at year-end |
| Portfolio and funding spread | $774.1 RMBS; $246.1 MSRs | RMBS end-period net interest spread 3.06%; aggregate MSR underlying UPB $20.4 billion |
Material changes and management commentary
- Q1 net income rose from Q4 primarily as derivative results and MSR fair-value gains improved. These gains were partly offset by $13.2 of realized RMBS losses and $10.6 of realized derivative losses. Net income is therefore materially affected by market-value changes, not just recurring income.
- Compared with Q4, RMBS interest income increased $1.0, mainly from lower premium amortization as prepayments slowed. Management cited rising rates as the reason for Q1 RMBS sales and the associated realized losses.
- RMBS fair value fell to $774.1 from $953.5 at year-end, while MSR fair value rose to $246.1 from $218.7. Stockholders’ equity declined to $259.7 from $278.8, including the impact of RMBS unrealized losses.
- The company declared common dividends of $0.27 per share for the quarter; preferred dividends totaled $2.5. The filing cautions that future distributions depend on board authorization, taxable income, cash availability, debt service and other factors.
- The company sold 505,000 common shares through its ATM program for approximately $4.1 gross proceeds. It reported no share repurchases in the quarter.
- Management said available liquidity, together with operating cash flow, is expected to meet anticipated needs for the next 12 months, including financing needs and potential margin calls. It also described maintaining elevated unrestricted cash while expecting to invest more if economic conditions normalize.
Outlook, risks and unusual items
- No quantitative earnings, dividend or portfolio guidance is provided. Management noted the Federal Reserve raised its target rate in March and ended monthly asset purchases, including Agency RMBS purchases. Higher rates may raise funding costs and affect asset values; slower prepayments may support MSR values and reduce RMBS premium amortization, but volatility and hedging costs may offset benefits.
- Funding is substantially reliant on short-term, uncommitted repurchase agreements: $764.9 outstanding, with a 33-day weighted-average remaining maturity and a 4.2% average haircut. Collateral calls, refinancing access and counterparty exposure are key liquidity risks.
- Interest-rate, spread, prepayment and extension risks can affect both RMBS and MSR values and hedge performance. MSR valuations use significant unobservable Level 3 assumptions; RMBS were all Agency-guaranteed, and management recorded no credit-loss allowance at quarter-end.
- As of March 31, 1.3% of borrowers underlying Aurora’s MSRs were in active forbearance; 10.6% of those borrowers continued regular payments. The company said it believed it could meet servicing obligations for the next 12 months.
- The company is externally managed under a related-party agreement, with a 1.5% annual management fee based on defined stockholders’ equity. The agreement was extended through October 22, 2022; non-renewal or certain terminations may trigger a fee.
- The filing reports no material legal or regulatory claims and no new risk factors. Disclosure controls were deemed effective, with no material quarterly changes in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile GAAP net income and $1.40 diluted EPS with non-GAAP EAD of $0.34 per diluted share; EAD excludes significant realized and unrealized gains and losses and is not a liquidity measure.
- Assess whether short-term repo financing, collateral haircuts and available cash remain adequate under further rate or spread volatility and refinancing stress.
- Review the assumptions supporting the $246.1 MSR valuation and the sensitivity of MSRs and RMBS to rates, prepayments and servicing costs.
- Confirm the sustainability and coverage of common and preferred dividends against taxable income, cash generation and debt obligations.
- Track the impact of common-stock ATM issuance on per-share results and book value, as well as related-party management costs and contract terms.