Cherry Hill Mortgage Investment Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company invests in residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs), and is externally managed.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $10.0m | $19.4m | $40.4m | $53.6m |
| Net interest income | $10.0m | $6.7m | $24.7m | $18.5m |
| Net servicing income | $9.1m | $14.6m | $34.2m | $42.2m |
| Net loss | $(0.7)m | $(4.3)m | $(62.3)m | $(55.2)m |
| Net loss applicable to common stockholders | $(3.2)m | $(6.7)m | $(68.5)m | $(61.2)m |
| GAAP loss per common share | $(0.19) | $(0.40) | $(4.06) | $(3.65) |
| Core earnings attributable to common stockholders (non-GAAP) | $8.2m; $0.48/share | $7.0m; $0.41/share | $23.8m; $1.41/share | $25.7m; $1.53/share |
At September 30, total assets were $1.83bn, total liabilities $1.51bn and total equity $322.2m, down from $2.94bn, $2.55bn and $399.4m, respectively, at December 31, 2019. RMBS were $1.49bn; MSRs were $162.6m. Cash and cash equivalents were $95.2m, with another $32.8m restricted. Debt comprised $1.365bn in repurchase agreements and $114.3m in notes payable. Repurchase borrowing carried a 0.25% weighted-average rate and averaged 44 days remaining maturity.
For the first nine months, operating cash flow was $52.6m and investing cash flow was $1.041bn, largely reflecting RMBS sales; financing cash flow was $(1.057)bn. Cash, cash equivalents and restricted cash totaled $128.0m at period-end. The RMBS period-end net interest spread was 2.23%, versus 0.73% at year-end 2019; the quarter-end average net interest rate spread including swaps was 3.34%.
Changes and notable items
- COVID-19 market disruption prompted RMBS sales to restore liquidity and reduce leverage. RMBS fell from $2.51bn at year-end 2019 to $1.49bn at September 2020; repurchase debt declined from $2.34bn to $1.37bn. Interest income fell year over year, while lower borrowing costs helped raise net interest income.
- MSR fair-value losses were $21.0m in Q3 and $131.9m for the nine months, compared with $37.5m and $108.7m in the respective 2019 periods. MSR carrying value declined to $162.6m from $291.1m at year-end. Servicing fee income also declined and servicing costs increased.
- On June 30, the company sold its Ginnie Mae MSR portfolio to Freedom Mortgage, a related party, for approximately $15.8m. It recorded an $11.3m realized loss, including previously recognized valuation losses, and used proceeds to repay the associated MSR term and advance facilities. The company retained certain servicing responsibilities while specified delinquent or defaulted loans and advances are resolved.
- Common dividends were reduced from $0.40 per share to $0.27 for each of Q2 and Q3. The Q1 $0.40 dividend was paid partly in common shares. Series A and B preferred dividends remained $0.5125 and $0.5156 per share, respectively, for the quarter.
- The filing revises previously reported comparative information to correct immaterial prior-period errors, including deferred-tax calculations and other items. Management concluded the errors were not material to prior periods; the reported current-period information incorporates the revisions.
Outlook, risks and contingencies
- No quantitative earnings or portfolio guidance is provided. Management said it expects cash on hand and operating cash flow to meet anticipated liquidity needs over the next 12 months, including potential margin calls and operating costs. It is retaining elevated unrestricted cash amid economic uncertainty and may deploy more as conditions become clearer.
- The company reported meeting all margin calls received and said COVID-19 had not adversely affected access to traditional funding on the same or reasonably similar terms. However, repurchase agreements are uncommitted, short-term financing; spread widening, collateral marks or reduced lender availability could force asset sales or additional collateral.
- As of September 30, 8.4% of borrowers on Aurora-serviced loans were in active forbearance; 27.4% of that group continued scheduled payments. Management believed it could satisfy servicing obligations in 2020, but pandemic-related borrower stress could increase delinquencies, defaults, servicing advances and dividend pressure.
- MSR valuation depends on significant estimates, including prepayment speeds, delinquencies, servicing costs and discount rates. MSRs are Level 3 fair-value assets; the filing’s sensitivity analysis shows substantial value exposure to changes in prepayment assumptions. RMBS and derivative fair values also face market and interest-rate risks.
- The company reported no material legal proceedings, no required legal accruals and no off-balance-sheet arrangements. It disclosed related-party management and servicing relationships, including Freedom Mortgage’s ownership of RoundPoint, an Aurora subservicer.
- The board-approved common dividend remains discretionary and may change. REIT status generally requires distributing at least 90% of REIT taxable income; the filing notes distributions may be partly in stock and that this can create tax liabilities exceeding cash received.
Important facts for investors to verify
- Whether elevated cash and current repo/MSR financing remain available on acceptable terms, and how much collateral could be required if spreads or asset values deteriorate.
- Subsequent MSR valuations and the assumptions driving them, especially prepayments, delinquencies and servicing costs.
- Forbearance, delinquencies and advance obligations across the serviced portfolio, plus the timing and remaining obligations from the Ginnie Mae MSR sale.
- The sustainability of the $0.27 common quarterly dividend relative to taxable income, cash generation, preferred dividends and funding requirements.
- The effect of the disclosed financial statement revisions and the company’s deferred-tax asset assumptions in future filings.
- Exposure and governance safeguards involving the external manager and related-party counterparties; the management agreement was due to expire October 22, 2021, with automatic renewal absent timely notice.