8-K: Cherry Hill Mortgage Investment Corporation Completes Internalization, Terminates Management Agreement

Cherry Hill Mortgage Investment Corporation has transitioned to an internally managed structure, terminating its agreement with its external manager and hiring its existing executive team.

Summary

• Cherry Hill Mortgage Investment Corporation has completed its transition to an internally managed company, effective November 14, 2024.
• The company terminated its management agreement with Cherry Hill Mortgage Management, LLC, its external manager, on the same date.
• No termination fee was paid to the external manager.
• The company's senior management team, including Jeffrey B. Lown II, Michael A. Hutchby, and Julian B. Evans, have been hired as employees of the company.
• Mr. Lown will receive an initial annual base salary of $1,235,000, Mr. Hutchby will receive $600,000, and Mr. Evans will receive $550,000 until December 31, 2025.
• Mr. Evans is also eligible for a $275,000 bonus in the first quarter of 2025.
• Starting in January 2026, the executives will be eligible for non-equity incentive plans and discretionary cash bonuses.
• The Board of Directors concluded its review of strategic alternatives and decided to continue with the company's existing residential mortgage investment strategy as an internally managed entity.

Sentiment

Score: 7

Explanation: The document is generally positive due to the successful internalization and cost-saving potential, but there are risks associated with the transition.

Positives

• The transition to internal management is expected to reduce expenses and enhance the company's earnings profile.
• The company has retained its existing senior management team.
• No termination fee was paid to the external manager, saving the company money.
• The board has concluded its strategic review, providing clarity on the company's direction.

Negatives

• The company faces risks associated with the transition to internal management, including potential disruptions and higher than anticipated expenses.
• The payment of future non-equity incentive plan compensation and discretionary cash bonuses is not guaranteed.

Risks

• The company may not successfully retain its senior management team and other personnel.
• General and administrative expenses could be higher than anticipated after the internalization.
• The company's operations, financing relationships, and internal procedures could be disrupted.
• Management's attention could be diverted by the internalization process.
• There is no guarantee that the company will realize the intended benefits of the internalization.

Future Outlook

The company expects to reduce expenses and enhance its earnings profile as an internally managed REIT, but there are risks associated with the transition.

Management Comments

• We are very pleased to have completed the internalization process and begin our evolution as a fully integrated mortgage REIT, said Jay Lown, President and CEO of Cherry Hill Mortgage Investment Corporation.
• As an internally managed REIT moving forward, we expect to reduce expenses and enhance our earnings profile, thereby better aligning management and the investment community.

Industry Context

The move to internal management is a strategic shift that aims to reduce costs and align management interests with shareholders, a trend seen in some REITs seeking greater control and efficiency.

Comparison to Industry Standards

• Internalizing management is a strategy employed by some REITs to reduce costs and improve alignment with shareholders, similar to moves by companies like AG Mortgage Investment Trust and MFA Financial.
• The executive compensation packages are in line with industry standards for REITs of similar size and complexity, with base salaries and bonus potential.
• The termination of the external management agreement without a fee is a positive outcome, as some REITs have faced significant costs when ending such arrangements, such as those seen in the termination of external management at Resource Capital Corp.

Management Changes

Stakeholder Impact

• Shareholders may benefit from reduced expenses and enhanced earnings potential.
• Employees will transition to being directly employed by the company.
• The external manager will no longer receive management fees.

Next Steps

• The company will continue to execute its residential mortgage investment strategy as an internally managed company.
• The senior management team will begin their employment with the company.
• The company will implement its new compensation structure for the executive team.
• The company will file a Current Report on Form 8-K with the SEC by November 20, 2024.

Key Dates

Keywords

Internalization, Management Agreement, Mortgage REIT, Executive Compensation, Strategic Alternatives, Residential Mortgage Assets, Internal Management, Termination