Cherry Hill Mortgage Investment Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company invests in residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs); it is externally managed and has elected REIT tax treatment.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Interest income | $20.2 million | $17.0 million |
| Interest expense | $12.3 million | $10.7 million |
| Net interest income | $8.0 million | $6.2 million |
| Net servicing income | $13.4 million | $13.4 million |
| Net loss | $44.8 million | $21.1 million |
| Net loss attributable to common stockholders | $46.4 million; $2.79 per diluted share | $22.6 million; $1.36 per diluted share |
| Core earnings attributable to common stockholders (non-GAAP) | $7.8 million; $0.47 per diluted share | $10.0 million; $0.60 per diluted share |
| Cash from operating activities | $23.7 million | $13.4 million |
| Cash from investing activities | $800.4 million | Used $220.4 million |
| Cash, cash equivalents and restricted cash | $136.0 million | $91.7 million at year-end 2019 |
The quarter’s loss reflected a $93.9 million unrealized MSR valuation loss and $17.5 million net realized RMBS loss, partly offset by a $52.2 million unrealized derivative gain. Servicing costs rose to $6.1 million from $3.8 million; general and administrative expense increased to $2.8 million from $1.0 million, primarily due to professional fees.
At March 31, total assets were $2.137 billion, total liabilities $1.788 billion and total stockholders’ equity $348.6 million. Repurchase-agreement borrowings were $1.565 billion and notes payable were $171.8 million, for total debt of about $1.737 billion. At December 31, total debt was about $2.505 billion and equity was $411.6 million. The RMBS net interest spread at quarter-end was 1.25%, versus 0.73% at year-end; the reported average net interest rate spread was 2.19%, versus 1.88%.
Material changes and liquidity
- COVID-19-driven market dislocation widened RMBS spreads and triggered $77.7 million of margin calls from March 9–27; the company says it met all calls. It sold Agency RMBS to reduce leverage and replenish liquidity. Assets fell from $2.347 billion at year-end to $1.557 billion at quarter-end, while unrestricted cash rose from $24.7 million to $102.2 million.
- Repurchase borrowings declined to $1.565 billion from $2.338 billion. These facilities are uncommitted, generally short-term, and had a 34-day weighted-average remaining maturity and 3.8% average haircut at quarter-end.
- Investing cash inflow primarily reflected RMBS sales. Operating cash flow was positive despite the GAAP loss, which included substantial noncash fair-value adjustments.
- To conserve liquidity, the company suspended its flow MSR purchase program and arranged to pay for first-quarter MSR deliveries in three monthly installments. It also changed the previously declared $0.40 common dividend to a cash-and-stock payment, limiting cash payment to 50% of the otherwise payable amount. On April 28, it issued 527,010 common shares in partial payment.
Outlook, risks and unusual items
- Management said reduced income-producing assets, higher MSR servicing costs and cash retained for volatility were expected to diminish earning capacity for at least the next two quarters. No specific earnings or dividend guidance was provided.
- Management expected cash on hand and operating cash flow to cover anticipated liquidity needs over the next 12 months, including current-portfolio financing, potential margin calls and operating expenses. This outlook is subject to market and financing conditions.
- Forbearance and unemployment may increase delinquencies and servicing advances. Aurora must advance certain principal, interest, property-tax and insurance amounts; management said it believed it could meet near-term obligations but could not yet estimate borrower participation in forbearance.
- MSRs are Level 3 fair-value assets dependent on models and unobservable assumptions, including prepayment speeds, delinquencies and servicing costs. RMBS and derivatives are classified as Level 2. Market disruption may make valuations less reliable.
- Other risks include short-term refinancing and margin-call exposure, interest-rate and spread volatility, prepayment and extension risk, borrower credit risk, and the potential for reduced dividends. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- The company recorded no RMBS credit-loss allowance or impairment charge at quarter-end, attributing unrealized losses mainly to market factors. Management noted that estimates could change materially.
Important facts for investors to verify
- Subsequent liquidity, repo financing availability, collateral requirements and any further margin calls.
- Actual MSR valuation performance, servicing-advance needs and the impact of borrower forbearance.
- Whether the anticipated reduction in earning capacity lasts beyond the stated two-quarter period, and any subsequent dividend decisions.
- Cash-versus-stock dividend terms and the resulting share dilution; the April 28 issuance followed the quarter-end.
- Current fair-value assumptions and whether any RMBS sales, credit impairment or other realized losses emerge after quarter-end.
- Near-term maturity and renewal status of MSR financing facilities, including the MSR Revolver scheduled to renew or mature in 2020.