Cherry Hill Mortgage Investment Corporation — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter report. Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Interest income | $50.0 million | $29.6 million |
| Interest expense | $51.6 million | $17.6 million |
| Net interest income (expense) | $(1.7) million | $12.1 million |
| Net servicing income | $42.2 million | $41.6 million |
| Net income (loss) | $(35.5) million | $22.2 million |
| Net income (loss) attributable to common stockholders | $(44.6) million | $11.9 million |
| GAAP diluted earnings (loss) per common share | $(1.70) | $0.60 |
| Non-GAAP earnings available for distribution (EAD) per diluted common share | $0.70 | $1.10 |
| Cash from operating activities | $40.7 million | $59.9 million |
Interest income rose with new and higher-yielding RMBS and slower premium amortization, but financing costs increased faster. Net servicing income was broadly stable. EAD, a company-defined non-GAAP measure that excludes significant realized and fair-value items, declined about $3.4 million. The company cautions that EAD is not GAAP income, liquidity, or REIT taxable income and may not be comparable with peers.
At December 31, 2023, total assets were $1.393 billion, total liabilities $1.135 billion, and total stockholders’ equity $258.4 million. Investments comprised $1.012 billion of RMBS and $253.6 million of MSRs. Cash and cash equivalents were $52.9 million, with a further $16.4 million of restricted cash. Debt totaled $1.073 billion: $903.5 million of repurchase borrowings and $169.3 million of MSR financing. Repo borrowings had a 5.55% weighted-average rate, 21-day average remaining maturity, and 4.3% weighted-average haircut. The MSR facilities carried weighted-average rates of 7.7% and 7.8%.
The year-end RMBS net interest spread was 3.82%, compared with 3.77% a year earlier; the filing’s quarterly year-end average net interest rate spread measure was 3.81% versus 3.60%. These are distinct measures. The MSR portfolio had approximately $20.0 billion of underlying unpaid principal balance. The company reported a $25.9 million unrealized loss on servicing-related assets in 2023.
Material changes versus 2022
- Net income attributable to common stockholders swung to a $44.6 million loss from $11.9 million income, reflecting higher funding expense and unfavorable unrealized marks on derivatives and MSRs.
- Interest expense increased $34.1 million, while interest income increased $20.3 million. Net interest income consequently shifted from $12.1 million to a $1.7 million expense.
- Realized RMBS losses narrowed to $36.3 million from $99.7 million, largely because fewer securities were sold. Realized derivative gains increased to $33.8 million from $1.4 million, but unrealized derivative results shifted to a $43.1 million loss from a $61.9 million gain.
- MSR fair value declined to $253.6 million from $279.7 million; the annual fair-value result changed from a $23.0 million gain to a $25.9 million loss. RMBS carrying value increased to $1.012 billion from $931.4 million, while repo debt increased to $903.5 million from $826.0 million.
- Common shares issued and outstanding rose to 30.0 million from 23.5 million. The company sold 6.47 million shares through its common-stock ATM program at a weighted-average $4.87 per share for $31.5 million gross proceeds.
- Common dividends declared were $0.72 per share for 2023, down from $1.08 in 2022. The quarterly rate was reduced from $0.27 to $0.15 beginning with the second quarter of 2023. The fourth-quarter 2023 dividend was payable in January 2024.
Outlook, risks, and unusual items
- Management said cash on hand and expected operating cash flow should cover anticipated liquidity needs for the next 12 months, including current portfolio financing, potential margin calls, and operating expenses. This is management’s assessment, not a guarantee.
- The Federal Reserve raised its target rate to 5.25%–5.50% by 2023 year-end and reduced its balance sheet. Management noted that elevated rates can increase funding costs and volatility; lower prepayments may benefit MSRs and slow RMBS premium amortization, but those effects can be offset by higher funding and hedging costs. No quantitative earnings guidance was provided.
- Key risks include short-term, uncommitted repo financing and margin calls; rate, spread, prepayment, extension, and valuation risk; dependence on third-party subservicers; and reliance on Level 3 MSR valuation assumptions. A sharp decline in collateral values or reduced financing availability could pressure liquidity and force asset sales.
- The company is externally managed under a related-party arrangement. The 1.5%-of-adjusted-stockholders’-equity management fee is not performance-based, and certain termination or non-renewal scenarios carry a fee. The agreement was scheduled to expire October 22, 2024, subject to renewal provisions.
- Series B preferred dividends were scheduled to move from a fixed 8.25% rate to a floating rate on April 15, 2024. The filing anticipates a successor benchmark of three-month CME Term SOFR plus a 0.26161% adjustment, subject to calculation-agent determinations; the contractual spread is also relevant. The company may redeem Series B at its option beginning April 15, 2024.
- A $50 million preferred-stock repurchase authorization was adopted in December 2023; no preferred or common shares were repurchased under the respective programs during 2023. The common ATM program had approximately $4.8 million remaining at year-end; the Series A preferred ATM program ended January 29, 2024.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. MSR valuation was identified as a critical audit matter because of significant judgment and unobservable assumptions. No material legal or regulatory proceedings were reported as of year-end, and management said no cybersecurity threats had materially affected or were reasonably likely to materially affect the company.
Important facts for investors to verify
- Reconcile the sharp increase in repo costs with current funding rates, hedges, and the durability of the reported net interest spread.
- Review MSR valuation sensitivity and assumptions, including prepayment speeds, discount rates, servicing costs, and the impact of delinquencies.
- Assess near-term refinancing, renewal, collateral, and margin-call exposure across repo borrowings and MSR facilities.
- Compare common and preferred distributions with cash generation and REIT taxable income; GAAP earnings and EAD are not substitutes for taxable income or cash available for dividends.
- Track dilution and capital deployment following the 2023 ATM issuance, and confirm any subsequent common or preferred repurchases.
- Confirm the Series B floating-rate calculation and actual dividend terms after April 15, 2024, and review any management-agreement renewal or change.