Cherry Hill Mortgage Investment Corp quarterly report, Q1 FY2021

Открыть документ

Cherry Hill Mortgage Investment Corp. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Cherry Hill is an externally managed residential mortgage REIT investing primarily in agency mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Dollar amounts below are in millions unless otherwise noted.

Financial performance and position

  • Profitability: GAAP net income was $21.2 million, or $1.07 per diluted common share, compared with a net loss of $48.8 million, or $3.03 per share, in Q1 2020. Net income applicable to common stockholders was $18.3 million.
  • Core earnings: The company’s non-GAAP core earnings attributable to common stockholders were $3.5 million, or $0.21 per diluted share, versus $7.8 million, or $0.47, a year earlier. Management attributed the decline primarily to a smaller RMBS portfolio.
  • Income and spreads: Net interest income was $5.9 million, down from $8.0 million. Net servicing income was $10.5 million, down from $13.7 million. The reported period-end RMBS net interest spread was 1.57%, versus 1.77% at year-end 2020; a separate period-end average net interest rate spread measure, including swap benefits, was 2.52% versus 2.46%.
  • Fair-value and other items: MSRs generated a $22.5 million unrealized gain, while derivatives recorded an $8.1 million unrealized loss and $4.7 million realized loss. RMBS had a $2.1 million realized gain. A rise of 81 basis points in the 10-year Treasury rate contributed to a $19.3 million RMBS unrealized loss in other comprehensive income; comprehensive income attributable to common stockholders was a loss of $0.6 million.
  • Cash flow: Operating activities provided $12.9 million and investing activities provided $182.2 million; financing activities used $220.6 million. Cash, cash equivalents and restricted cash totaled $104.7 million at quarter-end, including $61.9 million of unrestricted cash.
  • Assets and capital: Total assets were $1.410 billion, down from $1.593 billion. RMBS were $1.014 billion, down from $1.228 billion; servicing-related assets were $217.2 million, up from $174.4 million. Total stockholders’ equity was $307.6 million, versus $312.6 million at year-end.
  • Debt: Repurchase agreements were $934.0 million, down from $1.150 billion. Notes payable were $116.9 million, compared with $111.4 million. Total debt was approximately $1.051 billion. Repo borrowings had a 0.17% weighted-average rate and a 28-day weighted-average remaining maturity; the facilities are uncommitted and collateralized.
  • Dividends: The company declared a $0.27-per-share common dividend and quarterly preferred dividends of $0.5125 per Series A share and $0.5156 per Series B share.

Material changes versus comparable periods

  • The return to GAAP profitability from Q1 2020’s loss largely reflects the year-over-year swing in MSR valuations: a $22.5 million gain in Q1 2021 versus a $93.9 million loss in Q1 2020. Derivative valuation also reversed, from a $52.2 million gain to an $8.1 million loss.
  • Interest income fell $14.2 million year over year, which management attributed primarily to RMBS sales during 2020 to rebuild unrestricted cash. Reported interest expense fell from $12.3 million to $0.1 million; management cited lower repo borrowings and financing rates.
  • The RMBS portfolio contracted, while the MSR portfolio’s carrying value increased. At March 31, 2021, RMBS consisted solely of Agency securities; year-end 2020 also included private-label RMBS.
  • Unrealized RMBS losses in other comprehensive income reduced accumulated other comprehensive income from $35.6 million to $16.2 million during the quarter.

Outlook, risks and contingencies

  • Management said cash on hand and operating cash flow should meet anticipated liquidity needs over the next 12 months, including portfolio financing, potential margin calls and operating expenses. It maintained elevated unrestricted cash because of continuing economic uncertainty and said it expected to invest more as conditions became clearer. No earnings or distribution guidance was provided.
  • COVID-19-related forbearance and foreclosure restrictions remained relevant. At quarter-end, 4.5% of borrowers underlying Aurora’s MSRs were in active forbearance; 7.9% of those borrowers were still making scheduled payments. Management believed the company could meet servicing obligations in 2021.
  • Key exposures include interest-rate and spread changes, mortgage prepayments and extensions, MSR valuation and liquidity, repo rollover and collateral calls, counterparty and servicing-provider performance, borrower credit, and REIT qualification. MSR valuation is Level 3 and depends on significant assumptions, including prepayment speeds and discount rates.
  • The MSR Revolver had $53.0 million outstanding and was scheduled to renew or mature on July 27, 2021; the Fannie Mae MSR facility had $64.0 million outstanding. Repo borrowings had short maturities and are uncommitted. The company’s management agreement expires October 22, 2021 and renews automatically absent timely notice; no 2021 non-renewal notice had been given.
  • Management reported no material legal or regulatory claims, no off-balance-sheet arrangements and no new risk factors in this filing. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

  • How much of reported GAAP income depends on volatile, non-cash MSR and derivative fair-value movements, compared with recurring core earnings and cash generation.
  • The sustainability of common and preferred dividends relative to taxable income, core earnings, liquidity needs and financing obligations.
  • Repo renewal access, collateral haircuts and margin-call capacity, along with the refinancing or renewal status of the MSR Revolver due in July 2021.
  • The assumptions and sensitivity underlying the $217.2 million Level 3 MSR valuation, including prepayment, delinquency and servicing-cost expectations.
  • Developments in borrower forbearance, servicing advances and the company’s ability to maintain servicing operations as pandemic-related protections change.