Cherry Hill Mortgage Investment Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. The company invests primarily in residential mortgage-backed securities (RMBS) and excess mortgage servicing rights (Excess MSRs), and is externally managed. It began operations in October 2013, so Q1 2014 was its first full comparable quarter.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Interest income | $6.472 million | $6.011 million |
| Interest expense | $1.235 million | $0.947 million |
| Net interest income | $5.237 million | $5.064 million |
| Net income (loss) attributable to common stockholders | $(2.412) million; $(0.32) per share | $0.730 million; $0.10 per share |
| Core earnings attributable to common stockholders (non-GAAP) | $3.770 million; $0.50 per share | $3.908 million; $0.52 per share |
| Operating cash flow | $4.699 million | $13.058 million |
| Cash and cash equivalents | $13.672 million | $12.447 million at Dec. 31, 2014 |
- Assets and equity: Total assets were $542.737 million, including $429.615 million of RMBS and $84.561 million of Excess MSRs. Total stockholders’ equity was $156.605 million, down from $160.318 million at year-end; accumulated other comprehensive income rose to $9.125 million from $6.641 million.
- Debt and liquidity: Repurchase-agreement borrowings were $373.868 million, versus $362.126 million at year-end. The company reported a 6.2:1 RMBS debt-to-equity ratio, a 5.3% average repo haircut, and a 55-day average remaining repo maturity. Borrowings were short-term and generally uncommitted. Management said liquid assets and expected operating cash flow should meet anticipated needs for the next 12 months, including potential margin calls.
- Margins: RMBS weighted-average asset yield was 3.04%, funding cost 1.34%, and net interest spread 1.70%, compared with 3.05%, 1.39%, and 1.67%, respectively, at year-end.
- Cash deployment: Investing activities used $8.025 million, including $72.544 million of RMBS purchases offset by sales and principal repayments. Financing activities provided $4.551 million; cash dividends paid were $3.830 million.
Material changes and unusual items
- GAAP results swung to a loss, despite higher net interest income. Other income included $1.242 million of realized derivative losses, $2.542 million of unrealized derivative losses, and a $2.762 million unrealized loss on Excess MSRs. These losses more than offset a $0.307 million realized RMBS gain.
- Management attributed the Excess MSR decline primarily to higher modeled prepayment speeds in Pool 1. Derivative fair values declined during the quarter amid movements in interest rates. Conversely, RMBS unrealized gains contributed $2.484 million to other comprehensive income; management linked approximately $2.5 million of the gain to a 25-basis-point decline in the 10-year Treasury rate.
- General and administrative expense increased by $0.268 million, primarily due to costs associated with CHMI Solutions and the newly operating captive insurer. Management fees to the affiliate manager were $0.690 million.
- RMBS carrying value increased to $429.615 million from $416.003 million. The portfolio included primarily Fannie Mae and Freddie Mac securities; the filing reported no other-than-temporary impairment charges.
Outlook, risks, and contingencies
- Distributions: Management said current asset pricing had reduced available returns and it was unlikely the company could maintain its 2014 dividend level in 2015. It planned to broaden investments to seek more diversified and stable revenue, while noting the strategy requires capital, carries execution risk, and may lower dividends. Distributions remain subject to board approval, cash availability, and REIT requirements.
- Acquisition: CHMI Solutions agreed to acquire Aurora Financial Group, a licensed mortgage originator and servicer. Aurora’s MSR portfolio had approximately $721 million of unpaid principal balance at March 31, 2015. Closing was expected by the end of Q2 2015, subject to agency and regulatory approvals; completion and timing were not assured.
- Subsequent financing: On April 20, 2015, the company entered a facility allowing up to $25 million of borrowing for general corporate purposes, secured by its Excess MSR portfolio. Advances bear interest at 90-day LIBOR plus 5.25%; no amount had been borrowed as of the filing.
- Key risks: Sensitivity to interest rates, mortgage prepayments, spreads, collateral calls and refinancing of short-term repo debt; Level 3 Excess MSR valuations depend on management assumptions for prepayment, delinquency and discount rates. Excess MSRs also depend on Freedom Mortgage’s servicing performance and recapture activity. The company noted uncertainty over whether its captive insurer could join a Federal Home Loan Bank and obtain financing on attractive terms.
- Contingencies and controls: Management reported no material legal or regulatory claims, no material changes to previously disclosed risk factors, and effective disclosure controls. The filing identified a potential payment obligation under Ginnie Mae acknowledgment arrangements if Freedom Mortgage fails to make required payments; management considered material loss remote and accrued no liability.
Important facts for investors to verify
- Whether dividend reductions followed, and how cash distributions compared with taxable income and recurring earnings.
- How the Aurora acquisition progressed, including approvals, closing terms, and integration or financing costs.
- Whether the new Excess MSR-secured facility was drawn and its effect on leverage, interest expense, and collateral availability.
- How Excess MSR valuations and cash flows responded to actual prepayment speeds, recapture performance, and changes in discount-rate assumptions.
- Repo renewal terms, haircuts, counterparty concentration, and liquidity available to meet margin calls.
Core earnings is a company-defined non-GAAP measure and excludes specified realized and unrealized gains and losses; it should not be viewed as a substitute for GAAP earnings or as a liquidity measure.