10-Q: Cherry Hill Mortgage Investment Corporation Reports Third Quarter 2024 Results

Cherry Hill Mortgage Investment Corporation's Q3 2024 results show a net loss applicable to common stockholders of $14.79 million, impacted by unrealized losses on derivatives and servicing related assets.

Summary

• Cherry Hill Mortgage Investment Corporation reported a net loss applicable to common stockholders of $14.79 million for the third quarter of 2024, or a loss of $0.49 per share.
• This compares to a net income of $13.12 million, or $0.49 per share, for the same period last year.
• The company's net interest income was $0.11 million, a decrease from $0.17 million in the previous quarter.
• Net servicing income was $8.48 million, down from $8.89 million in the prior quarter.
• The company experienced a realized loss on RMBS of $3.65 million and an unrealized loss on investments in servicing related assets of $7.47 million.
• Unrealized losses on derivatives were $21.31 million, significantly impacting the overall results.
• The company's total assets were $1.55 billion, and total liabilities were $1.31 billion as of September 30, 2024.
• The company's investments in RMBS were valued at $1.21 billion and investments in servicing related assets were valued at $226.78 million.
• The company's weighted average yield on RMBS was 4.93%.

Sentiment

Score: 3

Explanation: The document indicates a negative sentiment due to the significant net loss, unrealized losses on derivatives, and a decrease in servicing income. While there are some positive aspects, such as the weighted average yield on RMBS, the overall tone is negative due to the financial results.

Positives

• The company's weighted average yield on RMBS was 4.93%.

Negatives

• The company reported a net loss applicable to common stockholders of $14.79 million, or $0.49 per share, for Q3 2024.
• The company experienced a realized loss on RMBS of $3.65 million.
• Unrealized losses on derivatives were $21.31 million.
• Net servicing income decreased to $8.48 million from $8.89 million in the prior quarter.

Risks

• The company is subject to interest rate risk, which can impact the value of its assets and its borrowing costs.
• Prepayment speeds on mortgage loans can affect the yield on the company's assets.
• The company is exposed to credit risk from borrowers underlying the mortgage loans in its portfolio.
• The company's assets are subject to market fluctuations and may be difficult to sell if needed.
• The company is subject to counterparty risk with its repurchase agreement counterparties and derivative counterparties.
• The company is subject to funding risk, which could impact its ability to obtain financing on favorable terms.

Future Outlook

The company expects that its cash on hand combined with the cash flow provided by its operations will be sufficient to satisfy its anticipated liquidity needs with respect to its current investment portfolio, including related financings, potential margin calls and operating expenses. The company may also use capital resources to repurchase additional shares of common stock under its stock repurchase program when it believes such repurchases are appropriate and/or the stock is trading at a significant discount to net asset value.

Management Comments

• The company's management believes that it has sufficient liquid assets to satisfy all of its short-term recourse liabilities and to satisfy covenants in its financing documents.
• The company's management believes that it will fully realize its deferred tax assets.

Industry Context

The company operates in the residential mortgage REIT sector, which is sensitive to interest rate changes and economic conditions. The company's performance is influenced by factors such as prepayment speeds, credit risk, and the availability of financing. The company's decision to internalize management is a significant strategic shift that could impact its future operations and cost structure.

Comparison to Industry Standards

• The company's net loss of $14.79 million is worse than the previous quarter's net income of $784,000, indicating a significant downturn in performance.
• The company's weighted average yield on RMBS of 4.93% is within the range of other mortgage REITs, but the net interest spread of 3.22% is lower than some peers.
• The company's reliance on repurchase agreements for financing is typical for the industry, but the company's exposure to counterparty risk is a concern.
• The company's decision to internalize management is a strategic move that is not common among all mortgage REITs, and its success will depend on the company's ability to manage its operations effectively.
• The company's MSR portfolio is concentrated in a few states, which exposes it to geographic risk.

Related Party Transactions

• The company has a Management Agreement with Cherry Hill Mortgage Management, LLC, which is a related party.
• The company reimburses the Manager for certain expenses and a portion of the compensation paid to specified officers.
• Aurora leases three employees from Freedom Mortgage and reimburses Freedom Mortgage on a monthly basis.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and the decrease in the company's stock price.
• Employees may be impacted by the company's decision to internalize management.
• Customers may be impacted by changes in the company's servicing operations.
• Creditors may be impacted by the company's financial performance and its ability to repay its debts.

Next Steps

• The company will continue to monitor its investment portfolio and manage its risks.
• The company will take all actions necessary to cause the Company to effect the Internalization.
• The company will continue to evaluate its capital allocation strategy.

Key Dates

Keywords

Mortgage REIT, RMBS, MSR, Interest Rate Risk, Prepayment Risk, Derivatives, Servicing Rights, Real Estate Finance, Agency RMBS, Leverage