Cherry Hill Mortgage Investment Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless stated otherwise, financial amounts below are in millions of dollars. CHMI is an externally managed residential mortgage REIT investing primarily in Agency RMBS and mortgage servicing rights (MSRs).
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $12.9 | $8.2 | $37.2 | $19.7 |
| Interest expense | $13.3 | $4.9 | $38.5 | $9.0 |
| Net interest income (expense) | $(0.5) | $3.3 | $(1.3) | $10.7 |
| Net servicing income | $10.4 | $10.7 | $32.4 | $31.2 |
| Net income (loss) | $15.9 | $41.7 | $(1.8) | $54.9 |
| Net income (loss) attributable to common stockholders | $13.1 | $38.3 | $(9.2) | $46.4 |
| Diluted EPS | $0.49 | $1.90 | $(0.35) | $2.42 |
- Q3 results included $20.7 million of realized derivative gains and $18.3 million of unrealized derivative gains, offset in part by a $19.8 million unrealized loss on RMBS carried through earnings and a $10.2 million realized RMBS loss.
- Nine-month operating cash flow was $22.1 million, investing cash outflow was $164.1 million, and financing cash inflow was $147.0 million. Cash, cash equivalents and restricted cash totaled $70.4 million at period-end, including $44.7 million unrestricted cash.
- At September 30, total assets were $1,427.5 million, total liabilities $1,170.0 million and stockholders’ equity $257.6 million. RMBS were $1,016.8 million and servicing-related assets $266.5 million; the MSR portfolio covered approximately $20.3 billion of unpaid principal balance.
- Debt totaled $1,139.3 million: $967.3 million in repurchase agreements and $172.0 million in MSR facilities. Repurchase borrowings carried a 5.48% weighted-average rate and had a 20-day weighted-average remaining maturity. Repo borrowings were uncommitted and subject to collateral/margin requirements.
- RMBS net interest spread was 3.60% at quarter-end, versus 3.77% at December 31, 2022. Management’s period-end average RMBS net interest rate spread, including swap benefits, was 3.79%, versus 3.96% at June 30, 2023.
- The company declared a $0.27 common dividend per share for Q3; preferred dividends were also declared. Dividends depend on board authorization, cash availability, taxable income and debt-service needs.
Changes versus comparable periods
- Q3 net income fell to $15.9 million from $41.7 million a year earlier, while common EPS fell to $0.49 from $1.90. Higher financing costs and RMBS valuation losses were material; derivatives provided substantial gains.
- For the first nine months, the company swung to a $1.8 million net loss from $54.9 million net income. Interest expense rose $29.4 million year over year, while interest income rose $17.5 million. Realized RMBS losses narrowed to $21.5 million from $69.0 million, but derivative gains and MSR fair-value results were less favorable overall than in 2022.
- Compared with year-end 2022, repo debt increased $141.3 million, while notes payable declined $11.9 million. Total equity declined $8.0 million. Common shares outstanding increased from 23.5 million to 27.0 million, including 3.43 million shares issued through the ATM program during the nine-month period.
- Common-stock issuance generated approximately $19.5 million gross proceeds at a weighted-average price of $5.68 per share. Approximately $16.8 million remained available under the ATM program at quarter-end.
Outlook, commentary and risks
- No specific earnings or dividend guidance was provided. Management said cash on hand and expected operating cash flow should meet anticipated liquidity needs over the next 12 months, including portfolio financing, potential margin calls and operating expenses.
- Management cited Federal Reserve rate increases of 550 basis points since March 2022, to a 5.25%–5.50% federal funds target range, and ongoing balance-sheet runoff. It warned that elevated rates may raise funding costs and volatility; slower mortgage prepayments may benefit MSR cash flows but can extend RMBS duration and weaken hedge effectiveness.
- Effective January 1, 2023, CHMI elected fair-value-through-earnings accounting for RMBS acquired thereafter; prior RMBS remain available-for-sale with unrealized changes generally recorded in other comprehensive income. This accounting mix affects the location and volatility of reported valuation changes.
- MSR fair values rely on Level 3 model assumptions, including prepayment speeds, discount rates and servicing costs. At September 30, MSRs were valued at $266.5 million, down from $279.7 million at year-end 2022; the nine-month fair-value loss was $13.1 million.
- Other material risks include short-term, uncommitted repo funding and refinancing needs; collateral calls; interest-rate, spread, prepayment and liquidity risk; dependence on subservicers and the external manager; and maintaining REIT and Investment Company Act status. The manager’s agreement renewed for one year in October 2023; the Fannie Mae MSR facility was extended in October 2023, and the Freddie Mac facility had been extended in July.
- Management reported no material legal or regulatory claims, no material changes in internal control, and effective disclosure controls. No risk-factor changes were reported in this filing.
Investor verification priorities
- Review the drivers and persistence of funding costs, derivative gains and RMBS fair-value losses; compare GAAP results with the company’s non-GAAP earnings available for distribution (EAD), which was $0.16 per diluted share for Q3 and $0.54 for the nine months.
- Assess repo renewal terms, collateral haircuts, margin-call capacity and the short maturity profile, alongside MSR facility rates, guarantees, extensions and repayment schedules.
- Evaluate dividend coverage and sustainability against taxable income, cash generation, preferred obligations and the stated REIT distribution requirement; EAD is not GAAP income, liquidity or REIT taxable income.
- Track common-share dilution and remaining ATM capacity, and assess the impact on per-share value and returns.
- Test MSR valuation sensitivity to prepayments, discount rates and servicing costs; also monitor portfolio concentration, subservicer performance and the company’s related-party management arrangements.
- Reconcile cash-flow disclosures if using quarterly figures: the primary cash-flow statement provides nine-month totals, while the MD&A gives separate three-month figures that are not detailed in that statement.