Cherry Hill Mortgage Investment Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 15, 2022. The filing also reports fourth-quarter 2021 results. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Its results depend on asset yields, financing costs, interest rates, mortgage prepayments, servicing performance and fair-value estimates. It operates under REIT rules and seeks to avoid registration as an investment company.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $15.0 million | $42.8 million |
| Interest expense | $5.8 million | $22.1 million |
| Net interest income | $9.2 million | $20.7 million |
| Net servicing income | $40.5 million | $43.3 million |
| Net income (loss) | $12.5 million | $(53.2) million |
| Net income (loss) attributable to common stockholders | $2.4 million; $0.14 diluted EPS | $(62.1) million; $(3.67) diluted EPS |
| Earnings available for distribution (non-GAAP), attributable to common stockholders | $18.3 million; $1.06 per diluted share | $30.1 million; $1.78 per diluted share |
The filing gives no conventional operating margin measure. At year-end, the RMBS portfolio’s net interest spread was 2.46%, compared with 1.78% a year earlier; quarter-end average net interest spread was 2.31% in both Q4 and Q3 2021. EAD is a company-defined non-GAAP measure and is not equivalent to GAAP earnings, liquidity or REIT taxable income. The company also said that applying its enhanced EAD calculation retrospectively would yield $1.09 per common share for 2021 and $1.57 for 2020.
At December 31, 2021, total assets were $1.303 billion, total liabilities $1.024 billion and total stockholders’ equity $278.8 million. Cash and cash equivalents were $63.9 million, with restricted cash of $12.9 million. Debt comprised $865.5 million of repurchase agreements and $145.3 million of MSR financing. Repurchase debt had a 0.14% weighted-average rate, 38-day weighted-average remaining maturity and 4.6% average haircut. RMBS of $953.5 million and MSRs of $218.7 million were carried at fair value.
Cash from operating activities was $48.0 million and cash from investing activities was $166.5 million. Cash, cash equivalents and restricted cash totaled $76.8 million at year-end, down from $130.2 million. Management said available liquidity and expected operating cash flows should cover anticipated needs over the next 12 months, including potential margin calls and operating expenses.
Changes versus 2020 and fourth-quarter results
- Net income improved from a $53.2 million loss to $12.5 million of income. The main improvement was the smaller unrealized loss on servicing-related assets: $11.1 million versus $141.9 million in 2020. Derivatives shifted from a $48.1 million unrealized gain in 2020 to a $1.7 million unrealized loss in 2021.
- Interest income declined by $27.9 million, primarily because of RMBS sales; interest expense fell by $16.4 million as repurchase borrowings and rates decreased. Net interest income consequently fell by $11.5 million.
- Servicing fee income declined to $54.2 million from $66.0 million, and servicing costs declined to $13.6 million from $22.6 million, largely following the 2020 sale of Ginnie Mae MSRs and portfolio runoff.
- Year-end RMBS declined to $953.5 million from $1.228 billion; the portfolio held only Agency RMBS at year-end 2021. MSR fair value rose to $218.7 million from $174.4 million, while underlying loan UPB declined to $20.8 billion from $21.6 billion.
- Total debt declined to $1.011 billion from $1.261 billion, while equity declined to $278.8 million from $312.6 million. AOCI fell to $7.5 million from $35.6 million, reflecting a $28.1 million unrealized RMBS loss.
- Q4 2021 net income was $6.7 million, or $0.23 per common share. The company declared a $0.27-per-share common dividend for each 2021 quarter, totaling $1.08 per share declared for the year. The filing classifies 2021 common distributions as 100% return of capital for tax purposes; the Q4 dividend was payable in January 2022.
Outlook, risks and unusual items
- Management expected to meet servicing obligations in 2022 and said cash on hand plus operating cash flow should meet anticipated near-term liquidity needs. It also expected to deploy more excess cash into targeted assets if economic normalization continued. These are expectations, not guarantees.
- In January 2022, the Federal Reserve signaled an end to asset purchases and likely rate increases. The company warned that rate and spread changes could reduce net interest income, change asset values and prepayment speeds, and affect distributions.
- Material risks include short-term repo refinancing and margin-call exposure; interest-rate, spread, prepayment and extension risk; valuation uncertainty for Level 3 MSRs; dependence on third-party servicers; and the possibility of reduced or suspended dividends. MSR valuations rely on assumptions including prepayment speeds, discount rates and servicing costs.
- COVID-19-related uncertainty continued. At year-end, 1.7% of borrowers underlying Aurora’s MSRs were in active forbearance; 5.0% of those borrowers continued making scheduled payments. The filing also disclosed a 2021 data incident at a subservicer’s third-party vendor that exposed personal information of certain borrowers; the subservicer reported no material effect on its ability to perform, and the incident did not affect CHMI’s systems.
- In 2021, CHMI issued 1.15 million common shares through its ATM program for approximately $10.2 million gross proceeds. It did not repurchase common shares during the year. No material legal or regulatory claims were identified as of year-end.
- The auditor gave unqualified opinions on the financial statements and internal controls. Valuation of servicing-related assets was identified as a critical audit matter because it involves significant judgment and unobservable assumptions.
Important facts for investors to verify
- Whether MSR fair values and their key assumptions remain supportable, given the sensitivity to prepayments, discount rates and servicing costs.
- Liquidity, collateral headroom and refinancing capacity for short-dated repo borrowings, particularly under adverse rate or spread moves.
- Dividend sustainability: compare cash available, taxable income and the company’s non-GAAP EAD; do not treat these measures as interchangeable.
- The effects of Federal Reserve policy changes, hedging results and benchmark-rate transitions on financing costs and asset values.
- Servicer and related-party exposure, including the Manager’s 1.5% annual equity-based fee, termination provisions, subservicing relationships and the disclosed borrower-data incident.