Cherry Hill Mortgage Investment Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 10, 2020. Cherry Hill is an externally managed residential mortgage REIT investing primarily in mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs).
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $10.1 | $17.2 | $30.4 | $34.2 |
| Net interest income | $6.7 | $5.5 | $14.7 | $11.7 |
| Net servicing income | $11.4 | $14.3 | $24.8 | $27.6 |
| Net loss | $(10.1) | $(27.2) | $(54.9) | $(48.3) |
| Net loss attributable to common stockholders | $(12.4) | $(29.3) | $(58.8) | $(51.9) |
| Loss per common share | $(0.73) | $(1.75) | $(3.51) | $(3.11) |
- Balance sheet at June 30: Total assets were $1,948.2 million and stockholders’ equity was $350.8 million, versus $2,956.6 million and $411.6 million, respectively, at December 31, 2019.
- Portfolio: RMBS carrying value was $1,548.1 million, down from $2,508.4 million at year-end. MSRs were $177.3 million, down from $291.1 million. The remaining conventional MSR portfolio represented approximately $24.1 billion of unpaid principal balance.
- Debt and liquidity: Repurchase agreements totaled $1,395.3 million, down from $2,337.6 million; other notes payable were $131.8 million, down from $167.0 million. Cash and cash equivalents were $94.5 million, with $33.4 million of restricted cash. The company reported sufficient liquid assets for short-term recourse liabilities and expected cash and operating flows to meet anticipated needs over the next 12 months.
- Cash flows, six months: Operating activities provided $29.8 million; investing activities provided $1,010.2 million, primarily reflecting RMBS sales; financing activities used $1,003.9 million. Cash, cash equivalents and restricted cash increased by $36.1 million to $127.8 million.
- Net interest spread: RMBS portfolio spread was 1.64% at June 30, versus 0.73% at December 31, 2019. The reported period-end average RMBS asset yield was 2.48% and average interest expense 0.84%. Company-wide Q2 period-end average net interest rate spread was 3.15%.
Changes and unusual items
- Q2 net loss narrowed year over year, mainly as the MSR fair-value loss was $17.0 million versus $44.0 million in Q2 2019, alongside lower interest expense. Six-month net loss widened, including a $110.9 million MSR fair-value loss, compared with $71.2 million a year earlier.
- Interest income fell as RMBS sales reduced the portfolio; lower repurchase balances and rates reduced interest expense. Servicing costs rose to $6.6 million in Q2 from $4.1 million a year earlier, reducing net servicing income.
- The company sold its Ginnie Mae MSR portfolio to affiliated Freedom Mortgage on June 30 for approximately $15.8 million, recording an $11.3 million realized loss that included previously recognized valuation losses. Proceeds repaid the related MSR term and advance facilities; approximately $1.2 million was receivable after quarter-end.
- COVID-19 market volatility and widening spreads prompted RMBS sales and deleveraging. The company said it met all margin calls and held increased unrestricted cash. Repurchase borrowings fell substantially, while the company continued monitoring market conditions and borrower forbearance.
- The common dividend was reduced from $0.40 per share for Q1, paid partly in stock, to $0.27 per share in cash for Q2. No assurance was given that future distributions or their level would continue. Preferred dividends remained payable.
- Core earnings, a non-GAAP measure, were $10.5 million for Q2 2020 ($0.47 per diluted share attributable to common stockholders) and $21.0 million for the first half ($0.94 per diluted share); the company cautions that this measure is not standardized or a substitute for GAAP results.
Outlook, risks and other disclosures
- Management expected available cash and operating cash flow to cover anticipated liquidity needs for the next 12 months, including financing and potential margin calls; no specific earnings or dividend guidance was provided.
- Key risks include COVID-related borrower delinquencies and forbearance, mortgage-market and spread volatility, repo funding and margin-call exposure, interest-rate and prepayment changes, and the sensitivity of MSR values to assumptions. MSRs are Level 3 fair-value assets valued using significant unobservable inputs.
- The company stated that it expected to meet its servicing obligations in 2020. Freedom Mortgage continued servicing certain legacy delinquent Ginnie Mae loans; timing of the related servicing agreement’s termination was uncertain due to pandemic-related forbearance.
- The Manager is an affiliate and receives a fee equal to 1.5% annually of defined stockholders’ equity. The management agreement was scheduled to expire October 22, 2020, with automatic renewal unless notice was given; termination without cause may trigger a fee.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Track subsequent MSR valuations, underlying prepayment and delinquency assumptions, and realized proceeds relative to carrying values.
- Verify repo availability, collateral haircuts, margin requirements, and liquidity as market conditions change; confirm the maturity and renewal terms of MSR facilities.
- Assess borrower forbearance, servicing advances and potential credit losses, particularly following the Ginnie Mae portfolio sale.
- Review future common and preferred dividend declarations, their funding sources, and the impact of the Q1 stock-and-cash distribution.
- Confirm the management agreement’s renewal status and evaluate related-party arrangements, including the Freedom Mortgage transaction.