Cherry Hill Mortgage Investment Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Dollar amounts below are in millions unless stated otherwise. Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency RMBS and mortgage servicing rights (MSRs).
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $7.0 | $10.0 | $20.1 | $40.4 |
| Net interest income | $6.4 | $10.0 | $18.9 | $24.7 |
| Net servicing income | $10.8 | $9.1 | $30.9 | $34.2 |
| Net income (loss) | $(3.8) | $(0.7) | $5.8 | $(62.3) |
| Net income (loss) attributable to common stockholders | $(6.2) | $(3.2) | $(1.7) | $(68.5) |
| Basic and diluted EPS | $(0.36) | $(0.19) | $(0.10) | $(4.06) |
- Balance sheet at September 30: Assets $1,214.4; total liabilities $931.9; total equity $282.5. Cash and cash equivalents were $62.9, plus restricted cash of $16.2.
- Debt: Repurchase-agreement borrowings were $777.4 and MSR-related notes payable were $135.0, for total debt of $912.4. Repo borrowings carried a 0.11% weighted-average rate and had a 38-day weighted-average remaining maturity.
- Portfolio: RMBS fair value was $865.9, all Agency RMBS at quarter-end; MSRs were valued at $210.8 and represented approximately $20.8 billion of underlying loan UPB. The reported RMBS yield was 2.94%; period-end RMBS net interest spread was 2.26% versus 1.78% at December 31, 2020. Management reported a 2.31% average net interest rate spread at quarter-end, including related swap benefits.
- Cash flows, nine months: Operating activities provided $42.0; investing activities provided $283.7; financing activities used $376.8. Cash, cash equivalents and restricted cash declined $51.1 to $79.2.
- Distributions and equity: The company declared a $0.27-per-share common dividend in Q3 and paid $21.4 in dividends during the first nine months. Common shares outstanding were 17.7 million at quarter-end and 17.9 million as of November 9, 2021.
- Non-GAAP measure: Earnings available for distribution attributable to common stockholders were $4.2, or $0.25 per diluted share, in Q3, compared with $8.2, or $0.48, in Q3 2020. For the nine months, the measure was $12.5, or $0.73 per diluted share, versus $23.8, or $1.41. The filing cautions that this measure is not GAAP earnings, liquidity, or REIT taxable income and may not be comparable across issuers.
Material changes versus comparable periods
- Q3 net loss widened to $3.8 from $0.7 million a year earlier; common-stockholder loss rose to $6.2 from $3.2 million. Nine-month results improved substantially from the prior-year $62.3 million net loss to $5.8 million net income, but common stockholders still had a $1.7 million loss.
- Interest income fell $3.0 million in Q3 and $20.3 million for the nine months, primarily because RMBS had been sold. Lower repo borrowings contributed to nine-month interest expense falling to $1.2 million from $15.7 million.
- Q3 net servicing income rose to $10.8 million from $9.1 million as servicing costs declined, despite lower servicing-fee income. Nine-month net servicing income fell to $30.9 million from $34.2 million.
- Q3 MSR fair-value losses were $7.9 million, versus $21.0 million in Q3 2020. Nine-month MSR fair-value losses were $6.0 million, versus $131.9 million in 2020. Derivative fair-value losses were $5.5 million in Q3 and $10.0 million for the nine months; the prior-year nine-month period recorded a $51.3 million gain.
- Total assets declined to $1,214.4 million from $1,593.5 million at year-end 2020, while debt fell to $912.4 million from $1,261.4 million. Equity declined to $282.5 million from $312.6 million, including a $19.8 million nine-month reduction in accumulated other comprehensive income, attributed mainly to higher Treasury rates.
Outlook, risks and unusual items
- Management gave no numerical earnings or portfolio guidance. It said available cash and operating cash flow were expected to cover anticipated liquidity needs over the next 12 months, including potential margin calls, and that it believed it could meet servicing obligations during 2021. The company maintained elevated unrestricted cash amid COVID-19 and policy uncertainty.
- At September 30, 2.4% of borrowers underlying Aurora’s MSRs were in active forbearance; 6.3% of those borrowers continued scheduled payments. The filing highlights uncertainty around pandemic-related forbearance and foreclosure measures.
- A one-time state-regulator claims settlement contributed to higher Q3 general and administrative expense. The filing describes the matter as concerning whether Aurora needed a mortgage-servicer license to hold MSRs; the settlement amount is not clearly stated in the supplied filing text.
- On October 26, 2021, Aurora and QRS III entered a replacement Fannie Mae MSR revolving facility with a maximum credit amount of $150 million, replacing the prior facility. The company guaranteed the new facility.
- Material exposures include interest-rate and spread movements, RMBS prepayment or extension risk, MSR valuation uncertainty, margin calls, short-term uncommitted repo funding, borrower credit and servicing performance, and REIT qualification. MSR fair value is a Level 3 measurement based on significant unobservable assumptions. The company also noted LIBOR transition exposure in debt facilities.
- The manager is a related party; the management fee is 1.5% annually of defined stockholders’ equity. The management agreement automatically renewed through October 22, 2022. The company reported no material legal or regulatory proceedings and no risk-factor changes in this filing.
Most important facts for investors to verify
- Whether recurring earnings and dividend capacity support the $0.27 quarterly common dividend; compare GAAP results, EAD, and REIT taxable income rather than treating them as interchangeable.
- How the reduced RMBS portfolio and related funding affect recurring net interest income, spread, leverage, and sensitivity to rates and prepayments.
- Whether the $150 million replacement MSR facility was completed on the disclosed terms, and how its borrowing costs, covenants, collateral requirements, and guarantee affect liquidity.
- Whether MSR fair-value assumptions and forbearance, delinquency, prepayment, and servicing trends materially change portfolio value or cash flows.
- The amount and implications of the state-regulator settlement, and continuing related-party, subservicing, and counterparty exposures.