10-K: Cherry Hill Mortgage Investment Corporation Reports Fiscal Year 2024 Results

Cherry Hill Mortgage Investment Corporation's 10-K filing summarizes its financial performance for the year ended December 31, 2024, highlighting its transition to internal management and strategic focus on servicing related assets and RMBS.

Summary

• Cherry Hill Mortgage Investment Corporation is a residential real estate finance company that invests in and manages residential mortgage assets in the United States.
• The company transitioned to an internally managed structure on November 14, 2024, after terminating its management agreement with Cherry Hill Mortgage Management, LLC.
• The company's primary investment strategy involves allocating capital to servicing related assets and acquiring RMBS on a leveraged basis.
• For the year ended December 31, 2024, the company reported net income applicable to common stockholders of $2.1 million, or $0.07 per diluted share.
• The company's strategy includes acquiring MSRs, creating intercompany Excess MSRs, and using hedging instruments to mitigate risks.
• The company's RMBS strategy focuses on Agency RMBS, residential mortgage pass-through certificates, CMOs, and TBAs.
• The company finances its RMBS with repurchase agreements and may utilize other types of borrowings in the future.
• The company uses derivative financial instruments to mitigate interest rate risk and financing pricing risk.
• As of December 31, 2024, the company had repurchase agreements with 35 counterparties and approximately $1.1 billion of outstanding repurchase agreement borrowings.
• Aurora has two separate MSR financing facilities: a Freddie Mac MSR Revolver and a Fannie Mae MSR Revolving Facility.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While the company transitioned to internal management, which is generally viewed positively, the financial results show a decrease in EAD and net income applicable to common stockholders. The document also highlights various risks and uncertainties associated with the company's business.

Positives

• The company successfully transitioned to an internally managed structure, which is expected to result in cost savings and better alignment of interests.
• The company actively manages its portfolio and uses hedging instruments to mitigate risks.
• The company has access to multiple financing facilities for its MSRs and RMBS.
• The company's senior management team has extensive experience in the mortgage and real estate markets.
• The company is committed to environmental sustainability and reducing its corporate footprint.

Negatives

• The company's operating results are subject to fluctuations in interest rates, prepayment speeds, and other market conditions.
• The company relies on third-party servicers to service the mortgage loans underlying its servicing related assets.
• The company uses leverage, which magnifies both gains and losses.
• The company's hedging strategies may not be effective and could adversely affect earnings.
• The company operates in a highly competitive market.

Risks

• The company may not be able to generate sufficient revenue to make or sustain distributions to its stockholders.
• The company is dependent on mortgage servicers to service the mortgage loans relating to its servicing related assets.
• The company cannot predict the impact future actions by the Federal Reserve will have on its business.
• The value of the company's servicing related assets may vary substantially with changes in interest rates.
• If delinquencies on mortgage loans increase, the value of the company's servicing related assets may decline significantly.
• Prepayment rates can change, adversely affecting the performance of the company's assets.
• Interest rate mismatches between the company's assets and any borrowings used to fund purchases of its assets may reduce its income during periods of changing interest rates.
• The company relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage its portfolio, and these models are based on assumptions and actual results may differ significantly from the modeled expectations.
• Valuations of some of the company's assets will be inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed.
• An increase in interest rates may cause a decrease in the volume of certain of the company's target assets, which could adversely affect its ability to acquire target assets that satisfy its investment objectives and to make distributions to its stockholders.
• The company is highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could disrupt its business.
• The lack of liquidity of the company's assets may adversely affect its business, including its ability to sell its assets.
• The company uses leverage in executing its business strategy, which may adversely affect the return on its assets and may reduce cash available for distribution to its stockholders, as well as increase losses when economic conditions are unfavorable.
• Adverse market developments generally will cause the company's lenders to require it to pledge cash as additional collateral.
• The company's use of repurchase transactions gives its lenders greater rights in the event that it files for bankruptcy, which may make it difficult for it to recover its collateral in the event of a bankruptcy filing.
• If the company's lenders default on their obligations to resell the RMBS back to it at the end of the repurchase transaction term, the value of the RMBS has declined by the end of the repurchase transaction term or it defaults on its obligations under the repurchase transaction, it will lose money on these transactions.
• Hedging against interest rate changes and other risks may materially adversely affect the company's business, financial condition and results of operations and its ability to make distributions to its stockholders.
• The company may change its investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments.
• The company operates in a highly competitive market.
• The company operates in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
• The company's ability to make distributions to its stockholders depends on its operating results, its financial condition and other factors, and it may not be able to make regular cash distributions at a fixed rate or at all under certain circumstances.
• The company faces possible risks associated with the effects of climate change and severe weather.
• Increasing attention to ESG matters may impact the company's business.
• The company's risk management policies and procedures may not be effective.
• The development and use of AI technology could lead to legal or regulatory actions, harm the company's reputation, or have a significant negative impact on its business.
• The company may not be able to fully realize the expected benefits of its transition to a self-managed company or the ability to realize such benefits may take longer than anticipated.
• Potential legal matters related to the termination of the management agreement with CHMM could adversely affect the company's business, results of operations, and its financial condition.
• Maintenance of certain exceptions from (or otherwise not falling within) the definitions of investment company under the Investment Company Act imposes significant limitations on the company's operations.
• The ownership limits in the company's charter may discourage a takeover or business combination that may have benefited its stockholders.
• Certain provisions of Maryland law could inhibit a change in the company's control.
• The company's authorized but unissued common and preferred stock may prevent a change in its control.
• The company's rights and the rights of its stockholders to take action against its directors and officers are limited, which could limit your recourse in the event of actions not in your best interest.
• The company's charter contains provisions that make removal of its directors difficult, which could make it difficult for its stockholders to effect changes to its management.
• The market price and trading volume of the company's common stock may be volatile.
• Future sales of the company's common stock or securities convertible into or exercisable as exchangeable for its common stock could cause the market value of its common stock to decline and could result in dilution of your shares.
• Future offerings of debt securities, which would rank senior to the company's common stock upon its liquidation, and future offerings of equity securities, which would dilute the common stock holdings of its existing stockholders and may be senior to its common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of its common stock.
• The company has not established a minimum distribution payment level with respect to its common stock, and it cannot assure you of its ability to make distributions in the future.
• The company's failure to qualify as a REIT would subject it to U.S. federal, state and local income taxes, which could adversely affect the value of its common stock and would substantially reduce the cash available for distribution to its stockholders.
• Complying with REIT requirements may cause the company to forego or liquidate otherwise attractive investments.
• Failure to make required distributions would subject the company to tax, which would reduce the cash available for distribution to its stockholders.
• The company may satisfy the 90% distribution test with taxable distributions of its stock or debt securities.
• Despite qualification as a REIT, the company may face other tax liabilities that reduce its cash flows.
• The company may lose its REIT qualification or be subject to a penalty tax if the U.S. Internal Revenue Service, or IRS, successfully challenges its characterization of its investments in Excess MSRs.
• The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect the company's ability to qualify as a REIT.
• Uncertainty exists with respect to the treatment of the company's TBAs for purposes of the REIT asset and income tests.
• Complying with REIT requirements may limit the company's ability to hedge effectively.
• The company's ownership of and relationship with its TRSs (and any future TRSs that it may form) will be limited and a failure to comply with the limits would jeopardize its REIT status and may result in the application of a 100% excise tax.
• The company's ownership limitation may restrict change of control or business combination opportunities in which its stockholders might receive a premium for their common stock.
• Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
• The company may be subject to adverse legislative or regulatory tax changes that could reduce the market price of its common stock.
• The company's recognition of phantom income may reduce a stockholders after-tax return on an investment in its common stock.
• Liquidation of the company's assets may jeopardize its REIT qualification.
• The company's qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that it acquires, and the inaccuracy of any such opinions, advice or statements may adversely affect its REIT qualification and result in significant corporate-level tax.

Future Outlook

The company intends to continue to distribute all or substantially all of its REIT taxable income in each year and may distribute more than its REIT taxable income.

Management Comments

• The senior management team makes the determinations as to the percentage of assets that are invested in each of our targeted asset classes.
• Our senior management teams acquisition decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.

Industry Context

The company competes with other mortgage REITs, specialty finance companies, and other entities for investment opportunities in general. The company's performance is affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy in general.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• Comparable companies include AGNC Investment Corp., Annaly Capital Management, and Invesco Mortgage Capital Inc.
• These companies also invest in mortgage-backed securities and are subject to similar market risks.
• Industry benchmarks include the S&P U.S. BMI Mortgage REITs Index, which is used for performance comparison in the document.
• However, specific project comparisons or detailed global benchmarks are not provided.

Stakeholder Impact

• The company's performance and ability to make distributions will impact its shareholders.
• The company's transition to internal management will impact its employees.
• The company's relationships with its lenders and counterparties will impact its access to financing.
• The company's relationships with its servicers will impact the quality of its servicing related assets.

Next Steps

• The company intends to continue to distribute all or substantially all of its REIT taxable income in each year.
• The company will continue to manage its portfolio and use hedging instruments to mitigate risks.
• The company will continue to monitor market conditions and adjust its investment strategy as needed.

Key Dates