Cherry Hill Mortgage Investment Corporation — Q1 2024 Form 10-Q
Reporting period: Quarter ended March 31, 2024. Cherry Hill is an externally managed residential mortgage REIT investing primarily in Agency mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
- Income: Interest income was $12.7 million and interest expense was $13.6 million, producing $0.9 million of net interest expense. Net servicing income was $10.3 million. Total income was $16.3 million; net income was $12.1 million, or $0.32 per diluted common share. Income applicable to common stockholders was $9.7 million after noncontrolling interests and preferred dividends, including a $0.15 million gain on preferred-stock repurchases.
- Valuation and hedging: Net realized derivative gain was $6.3 million and net unrealized derivative gain was $12.3 million. These were partly offset by an $8.3 million unrealized RMBS loss through earnings and a $3.3 million unrealized loss on servicing-related assets. Available-for-sale RMBS also generated a $6.6 million other comprehensive loss; comprehensive income attributable to common stockholders was $3.2 million.
- Cash flow: Operating activities used $19.1 million and investing activities used $55.6 million; financing activities provided $58.0 million. Cash, cash equivalents and restricted cash ended at $52.8 million, including $47.5 million of unrestricted cash.
- Balance sheet and debt: Total assets were $1.406 billion and stockholders’ equity was $250.1 million. RMBS were $1.047 billion and servicing-related assets were $250.4 million. Repurchase agreements totaled $965.0 million; notes payable totaled $166.4 million. Repurchase borrowings carried a 5.46% weighted-average rate and had a 22-day weighted-average remaining maturity. MSR facility borrowing rates were 8.2% for Freddie Mac and 8.1% for Fannie Mae.
- Portfolio and margins: The company held $19.6 billion of MSR underlying unpaid principal balance. At quarter-end, the disclosed RMBS net interest spread was 3.42%, down from 3.82% at December 31, 2023; the broader average net interest rate spread, including swap benefits, was 3.75%, versus 3.81% at year-end.
- Distributions and non-GAAP earnings: The company declared a $0.15-per-share common dividend for the quarter. Earnings available for distribution (EAD), a company-defined non-GAAP measure, was $6.4 million, or $0.13 per diluted share, before preferred dividends and noncontrolling interests; EAD attributable to common stockholders was $4.0 million.
Changes versus comparable periods
- Year over year: Net income improved from a $19.3 million loss in Q1 2023 to $12.1 million income in Q1 2024; common-stockholder results improved from a $21.4 million loss to $9.7 million income. The swing reflects, among other items, derivative results: Q1 2024 recorded net realized and unrealized derivative gains, compared with substantial derivative losses in Q1 2023. Net servicing income decreased to $10.3 million from $11.1 million, while interest income rose to $12.7 million from $11.8 million and interest expense rose to $13.6 million from $12.0 million.
- Sequentially: Versus Q4 2023, net income improved from a $33.6 million loss. Q1 2024 had $8.3 million of unrealized RMBS losses, compared with $36.3 million of gains in Q4, but derivative marks moved favorably: $12.3 million of unrealized gains versus $56.0 million of losses. EAD attributable to common stockholders declined to $4.0 million from $4.5 million, or $0.13 from $0.17 per diluted share. Management cited interest-rate changes and higher expenses.
- Repurchase-agreement debt increased $61.5 million from December 31, 2023, primarily due to purchases of RMBS. Total stockholders’ equity decreased $8.2 million, reflecting the available-for-sale RMBS mark-to-market loss, dividends and preferred repurchases, partly offset by net income.
Outlook, risks and notable items
- Management stated that cash on hand and operating cash flow are expected to cover anticipated liquidity needs over the next 12 months, including portfolio financing, potential margin calls and operating expenses. Longer-term liquidity may depend on additional borrowing, equity issuance, asset sales or refinancing. No specific earnings or dividend guidance was provided.
- Management described uncertainty around Federal Reserve policy and inflation, noting that persistent high rates may increase funding costs and market volatility. Higher rates may slow mortgage prepayments, which can support MSR cash flows but may also extend RMBS duration; lower rates can accelerate prepayments and reduce MSR values.
- Key exposures include short-term, uncommitted repo financing and refinancing needs; collateral and margin-call requirements; interest-rate, spread, prepayment and extension risk; MSR valuation estimates using significant Level 3 assumptions; borrower and servicer risk; and REIT qualification and distribution requirements. All RMBS held at quarter-end were Agency RMBS. Management reported no allowance for credit losses on available-for-sale securities.
- The company repurchased 296,972 Series B preferred shares during the quarter for an average $23.44 per share, using approximately $7.0 million including commissions, and recognized a $0.15 million gain. Series B dividends began floating after April 15, 2024 at three-month CME Term SOFR plus 5.89261%.
- On April 18, 2024, after quarter-end, ownership of the external Manager transferred from a blind trust to Stanley Middleman. The management agreement expires October 22, 2024 and renews automatically absent timely non-renewal; certain termination or non-renewal scenarios can require a fee. Management reported effective disclosure controls, no material control changes, no material legal proceedings known, and no new risk factors in this filing.
Most important facts for investors to verify
- Whether recurring earnings and cash generation can support the common dividend, given Q1 negative operating cash flow and the gap between GAAP earnings, EAD and taxable income.
- Repo refinancing, borrowing costs, collateral haircuts and margin-call capacity, especially with $965.0 million of repo debt at a 22-day weighted-average remaining maturity.
- How sensitive MSR and RMBS values are to interest rates, prepayments, spreads and valuation assumptions; MSRs are Level 3 assets.
- The impact of the Manager ownership transfer and the upcoming management-agreement renewal, including fees, oversight and potential termination costs.
- Execution and pricing of any further preferred-stock repurchases, and the effect of the Series B floating-rate dividend on future cash requirements.