Cherry Hill Mortgage Investment Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 30, 2013. Cherry Hill was a development-stage company and had not commenced investment operations by quarter-end; operations began after its October 9, 2013 IPO and concurrent private placement. The filing provides no clear prior-year comparable quarterly results.
Financial results and position
| Metric | Period / date | Reported amount |
|---|---|---|
| Revenue | Three and nine months ended September 30, 2013 | None reported; the company had not commenced operations |
| Net loss | Three months ended September 30, 2013 | $36,054 |
| Net loss | Nine months ended September 30, 2013 | $107,309 |
| Total expenses | Nine months ended September 30, 2013 | $107,309, primarily audit fees of $105,000 |
| Cash | September 30, 2013 | $14,826 |
| Total liabilities | September 30, 2013 | $146,135, including $105,000 accrued expenses and $41,135 due to the Manager |
| Stockholders’ deficit | September 30, 2013 | $(131,309) |
| Operating cash flow | Nine months ended September 30, 2013 | $(27,309) |
| Financing cash flow | Nine months ended September 30, 2013 | $41,135 |
Margins are not meaningful because the company reported no revenue. There was no debt at September 30, 2013. Subsequent short-term repo borrowings are described below.
Material developments after quarter-end
- On October 9, the company sold 6.5 million IPO shares and 1 million shares in a concurrent private placement at $20 per share. Combined net proceeds were approximately $148 million; 7.5 million common shares were outstanding as of November 7.
- The company acquired Excess MSRs from related party Freedom Mortgage for approximately $99 million, tied to loans with approximately $20.3 billion of unpaid principal balance. Agreements included commitments of approximately $60.6 million for an 85% participation interest in one pool and $38.4 million for a 50% participation interest in another.
- As of November 5, the company held approximately $299 million of Agency RMBS and $24 million of forward-settling TBA securities. It had approximately $261 million of repo borrowings with seven counterparties, secured by cash and Agency RMBS.
- The company intends to qualify as a REIT for its short taxable year ending December 31, 2013. It revoked its Subchapter S election effective October 2.
Strategy, outlook and risks
Management’s objective is to generate long-term risk-adjusted returns primarily through dividends. The planned portfolio emphasizes Excess MSRs, with Agency RMBS and potentially prime jumbo mortgage loans. Management expects initial Agency RMBS debt-to-equity leverage of approximately 8:1, potentially as high as 10:1 depending on market conditions; this is an expectation, not a reported quarter-end ratio. The company intends regular quarterly distributions, subject to board authorization, operating needs and debt service.
Key risks include interest-rate and spread changes, mortgage prepayments and the resulting effects on Excess MSR valuations and RMBS yields, leverage and margin calls, financing availability, counterparty performance, asset liquidity, and dependence on Freedom Mortgage for servicing and investment opportunities. Recapture agreements may mitigate prepayment exposure, but their benefit depends on counterparties achieving anticipated recapture rates. Management also cautions that REIT qualification and the Investment Company Act exclusion involve ongoing requirements.
The external Manager is controlled by Stanley Middleman, who also purchased the private-placement shares. The management agreement provides for a base fee of 1.5% per year of stockholders’ equity and may require a termination fee under specified circumstances. The Manager reported approximately $1.6 million in IPO-related costs incurred by it as of September 30; the filing says the company had no obligation to reimburse certain indirect expenses. Management reported disclosure controls were effective at quarter-end; no legal proceedings or defaults upon senior securities were reported.
Most important facts for investors to verify
- Whether post-IPO Excess MSR and Agency RMBS acquisitions, valuations and cash flows support the stated return and dividend objectives.
- Actual repo leverage, financing costs, collateral requirements and exposure to margin calls as the portfolio grows.
- Performance of Freedom Mortgage as Manager, servicer and related-party counterparty, including recapture results and the terms of related-party transactions.
- REIT qualification, dividend capacity and the effect of management fees and other operating expenses on distributable income.
- How prepayment, interest-rate, spread and liquidity changes affect portfolio fair values and earnings.