Cherry Hill Mortgage Investment Corp quarterly report, Q2 FY2023

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Cherry Hill Mortgage Investment Corporation (CHMI) — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. CHMI is an externally managed residential mortgage REIT investing primarily in Agency RMBS and mortgage servicing rights (MSRs).

Financial performance and position

MetricQ2 2023Prior comparable period
Interest income$12.5 million$6.0 million in Q2 2022
Interest expense$13.2 million$2.5 million in Q2 2022
Net servicing income$11.0 million$10.6 million in Q2 2022
Net income (loss)$1.6 million$(15.5) million in Q2 2022
Net income (loss) attributable to common stockholders$(0.9) million; $(0.03) per diluted share$(17.6) million; $(0.92) per diluted share
  • For the first six months, net loss was $17.7 million, versus net income of $13.3 million in 2022; loss attributable to common stockholders was $22.3 million, or $0.88 per diluted share, versus income of $8.1 million, or $0.43 per share.
  • Q2 earnings available for distribution (EAD), a company-defined non-GAAP measure, was $6.8 million, or $0.16 per diluted share attributable to common stockholders; down from $7.8 million, or $0.21, in Q1. First-half EAD was $14.7 million, versus $16.7 million in first-half 2022. The company cautions EAD is not GAAP income, liquidity, or REIT taxable income and may not be comparable across issuers.
  • Q2 net interest expense was $0.6 million. Management reported the period-end RMBS net interest spread, including swap benefits, at 3.84%, compared with 3.77% at year-end 2022. Rising funding rates weighed on net interest income.
  • At June 30, total assets were $1.44 billion, total liabilities $1.18 billion, and equity $262.6 million. RMBS were $1.05 billion and MSRs $264.9 million; the MSR portfolio represented approximately $20.8 billion of underlying unpaid principal balance.
  • Debt comprised $979.9 million of repurchase agreements and $175.0 million of MSR financing notes, up from total debt of $1.01 billion at year-end. Repurchase funding had a 5.26% weighted-average rate and 19-day weighted-average remaining maturity; it is uncommitted and collateralized.
  • Cash and cash equivalents were $53.0 million, with $7.9 million of restricted cash. First-half operating cash flow was $4.8 million, investing cash use was $163.1 million, and financing cash flow was $153.6 million; cash, cash equivalents and restricted cash declined $4.6 million.
  • Common shares outstanding rose to 27.0 million from 23.5 million at year-end. First-half ATM sales generated approximately $19.5 million gross proceeds from 3.43 million shares. The common dividend declared for Q2 was $0.15 per share; preferred dividends remained cumulative.

Changes versus prior periods and unusual items

  • Q2 2023 returned to consolidated net income after the Q1 loss, but common shareholders still recorded a loss after preferred dividends. Against Q2 2022, the net loss narrowed substantially, while interest expense increased sharply.
  • For the first half, interest income more than doubled year over year, but interest expense rose from $4.1 million to $25.1 million, contributing to the reversal from profit to loss.
  • Q2 included a $10.3 million realized RMBS loss, $11.6 million realized derivative gain, $6.6 million unrealized loss on RMBS measured through earnings, and $6.0 million unrealized MSR loss. The company attributed RMBS sales losses to greater sales in Q2 and MSR valuation changes to inputs and underlying loan paydowns.
  • Beginning January 1, 2023, CHMI elected fair-value-through-earnings accounting for RMBS acquired after that date; prior RMBS remain available-for-sale with unrealized changes generally recorded in other comprehensive income. This changed where some market-value movements appear in reported earnings.
  • MSR fair value declined to $264.9 million from $279.7 million at year-end. MSRs are Level 3 valuations using management assumptions, including prepayment speeds, discount rates, delinquencies and servicing costs.

Outlook, risks and contingencies

  • No specific earnings or dividend guidance was provided. Management believes available liquidity and operating cash flows should cover anticipated needs over the next 12 months, including financing, potential margin calls and operating expenses; longer-term liquidity may require further borrowings, equity issuance, asset sales or refinancing.
  • Management cited Federal Reserve tightening, elevated interest rates and balance-sheet reduction as factors that can raise funding costs, pressure spreads and asset values, and increase market volatility. Lower prepayments may support MSR cash flows and slow RMBS premium amortization, but that benefit may be offset by volatility and hedging costs.
  • Key exposures include short-term uncommitted repo funding, collateral and margin-call requirements, interest-rate and spread movements, prepayment/extension risk, derivative performance, MSR valuation uncertainty, borrower credit risk, subservicer and counterparty performance, and geographic concentration in MSR collateral.
  • CHMI reported no material legal or regulatory claims known to management and no material legal proceedings. It stated that disclosure controls were effective and reported no material change in internal control over financial reporting.
  • The Freddie Mac MSR revolver was amended in July 2023 to extend its revolving period; the filing reports this as a subsequent-period development. The external management agreement is due for automatic renewal in October 2023; no non-renewal notice had been provided as of the filing.

Important facts for investors to verify

  • Whether funding costs and repo availability remain manageable given the 19-day average repo maturity and rising borrowing rates.
  • Whether operating cash generation and available liquidity can support margin requirements, debt service and distributions under adverse market conditions.
  • How much of future results reflects recurring servicing income and financing economics versus realized trading results and fair-value changes.
  • The assumptions supporting Level 3 MSR values and the sensitivity of those values to prepayments, discount rates and servicing costs.
  • The effects of ATM share issuance and the reduced Q2 common dividend on per-share earnings, book value and future distributions.
  • The terms and renewal status of financing facilities and the external management agreement, including related-party arrangements.