Cherry Hill Mortgage Investment Corporation — Q2 2021 Form 10-Q
Business context and period: The externally managed residential mortgage REIT reported for the quarter and six months ended June 30, 2021. Its portfolio comprises Agency mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Amounts below are in U.S. dollars; balance-sheet comparisons are with December 31, 2020.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $6.6 million | $6.7 million | $12.5 million | $14.7 million |
| Net servicing income | $9.7 million | $11.4 million | $20.1 million | $25.1 million |
| Net income (loss) | $(11.6) million | $(12.7) million | $9.6 million | $(61.5) million |
| Net income (loss) applicable to common stockholders | $(13.8) million | $(14.9) million | $4.5 million | $(65.3) million |
| GAAP diluted EPS | $(0.81) | $(0.88) | $0.26 | $(3.90) |
| Operating cash flow | Not presented by quarter | $28.2 million | $29.8 million |
Q2 included $20.5 million of unrealized losses on servicing-related assets and $10.1 million of realized derivative losses, partly offset by $3.5 million of unrealized derivative gains. Six-month GAAP net income included a $2.0 million unrealized gain on servicing-related assets, while realized and unrealized derivative losses totaled $19.4 million.
- Balance sheet at June 30: Assets were $1.335 billion, liabilities $1.048 billion, and total stockholders’ equity $287.0 million. Cash and cash equivalents were $54.4 million; restricted cash was $9.8 million.
- Debt and collateral: Repurchase agreements totaled $897.0 million, down from $1.150 billion at year-end 2020. Notes payable were $135.0 million, up from $111.4 million. RMBS pledged as repurchase-agreement collateral had a carrying value of $933.1 million.
- Portfolio: RMBS fair value was $998.8 million, all Agency RMBS at quarter-end, versus $1.228 billion at year-end. MSRs were valued at $212.0 million and covered loans with $21.5 billion of unpaid principal balance.
- Spread: Management reported a 2.32% average RMBS net interest spread at quarter-end, compared with 1.78% at December 31, 2020. The quarter-end average net yield spread was 2.32%, down from 2.52% at March 31, 2021.
- Non-GAAP core earnings: $7.4 million, or $0.28 per diluted share, for Q2; $13.5 million, or $0.48 per diluted share, for the first half. These were below the comparable prior-year amounts of $10.5 million/$0.47 and $21.0 million/$0.93, respectively. The company cautions that its core-earnings definition may not be comparable across issuers.
Changes versus comparable periods
- Q2 common-stockholder loss narrowed to $13.8 million from $14.9 million a year earlier; diluted loss per share improved to $0.81 from $0.88.
- For the first half, the company reported $9.6 million of net income versus a $61.5 million net loss in 2020. The prior-year period included substantial MSR fair-value losses; the comparison also reflects different derivative valuation results.
- Interest income declined to $7.1 million in Q2 from $10.1 million and to $13.1 million for the first half from $30.4 million. Management attributed the decline primarily to RMBS sales during 2020 to rebuild unrestricted cash amid COVID-related uncertainty.
- Interest expense fell to $0.4 million for Q2 from $3.4 million and to $0.6 million for the first half from $15.7 million, reflecting reduced repurchase borrowings and lower repurchase rates.
- Net servicing income fell year over year in both periods, while MSR fair value increased $2.0 million in the first half, compared with a $110.9 million decline in the prior-year period. Q2 alone recorded a $20.5 million MSR valuation loss.
- RMBS-related accumulated other comprehensive income declined by $21.4 million in the first half, which management associated with a 52-basis-point increase in the 10-year U.S. Treasury rate and credit-spread widening.
Outlook, risks and unusual items
- Management said cash on hand and operating cash flows should meet anticipated liquidity needs for the next 12 months, including potential margin calls and operating expenses. It maintained elevated unrestricted cash because of economic and reopening uncertainty and expected to deploy more cash into targeted assets as reopening became more established. No quantitative earnings or dividend guidance was provided.
- Management stated it believed it could meet servicing obligations in 2021. At June 30, 3.0% of borrowers underlying Aurora’s MSRs were in active forbearance; 6.8% of those borrowers were making scheduled monthly payments.
- The $72 million Fannie Mae MSR Financing Facility was due to mature in September 2021. A replacement was under negotiation, but the filing cautioned that it might not be completed on attractive terms or at all before maturity. The company guarantees this facility. Separately, the MSR Revolver had $63 million outstanding; its revolving period was extended in July 2021.
- Repurchase agreements are short-term, uncommitted financing, with a 41-day weighted-average remaining maturity and a 4.8% average haircut at June 30. Collateral calls, refinancing availability and interest-rate or spread moves could affect liquidity and results.
- MSR valuations rely on significant unobservable assumptions, including prepayment speeds, delinquencies, discount rates and servicing costs. Faster prepayments can reduce MSR value; slower prepayments can extend RMBS duration and weaken hedge effectiveness. Derivative results may be volatile.
- The company reported no material legal or regulatory proceedings, no off-balance-sheet arrangements, and no material changes in internal control. It identified no additional subsequent event requiring disclosure.
- The manager agreement was scheduled for automatic renewal on October 22, 2021; no non-renewal notice had been given. The manager is paid 1.5% annually of defined stockholders’ equity, and termination in certain circumstances may trigger a fee. The manager and related servicing arrangements involve related parties.
Important facts for investors to verify
- Whether the Fannie Mae MSR financing facility was refinanced or repaid before its September 2021 maturity, and on what terms.
- Subsequent unrestricted cash, repurchase-agreement balances, collateral requirements and borrowing availability, given the short maturities and uncommitted nature of repo financing.
- How MSR fair value and cash flows respond to actual prepayments, delinquencies and servicing advances, compared with management’s valuation assumptions.
- Whether servicing income, RMBS net interest spread and core earnings can support common and preferred distributions; the common dividend declared was $0.27 per share for each of Q1 and Q2 2021.
- The filing’s reported $287.0 million of total equity includes preferred equity; confirm the appropriate common-equity and per-share book-value calculation before comparing it with market price.