10-Q: Cherry Hill Mortgage Narrows Q2 Loss, Boosts EAD
Quarterly Report
Cherry Hill Mortgage Investment Corporation reported a significantly reduced net loss for Q2 2025 and an increase in Earnings Available for Distribution for the first half of the year, driven by strong derivative gains and reduced expenses.
Summary
- Net loss applicable to common stockholders improved significantly to $0.935 million in Q2 2025, compared to a loss of $9.313 million in Q1 2025 and $1.864 million in Q2 2024.
- For the six months ended June 30, 2025, the company reported a net loss of $10.248 million, a decline from a $7.802 million net income in the same period of 2024.
- Earnings Available for Distribution (EAD) attributable to common stockholders was $3.247 million ($0.10 per diluted share) for Q2 2025, down from $5.376 million ($0.17 per diluted share) in Q1 2025.
- Six-month EAD increased to $8.623 million ($0.27 per diluted share) in 2025 from $6.291 million ($0.21 per diluted share) in 2024.
- Total assets remained stable at $1.491 billion as of June 30, 2025, compared to $1.491 billion at December 31, 2024.
- The RMBS portfolio increased to $1.152 billion from $1.122 billion, while Servicing Related Assets decreased to $224.6 million from $233.7 million.
- Net interest income improved to $2.641 million in Q2 2025 from $2.166 million in Q1 2025, and significantly from a net interest expense of $0.740 million for 6M 2024 to income of $4.807 million for 6M 2025.
- Realized gain on derivatives surged to $14.838 million in Q2 2025 from $4.634 million in Q1 2025.
- Unrealized loss on derivatives remained substantial at $19.147 million in Q2 2025, though an improvement from $22.741 million in Q1 2025.
- General and administrative expenses decreased to $1.947 million in Q2 2025 from $2.059 million in Q1 2025, and $4.006 million for 6M 2025 compared to $4.914 million for 6M 2024, partly due to internalization.
- Compensation and benefits increased significantly for the six-month period to $3.118 million (6M 2025) from $0.298 million (6M 2024) due to the company operating as an internally managed entity since November 2024.
Sentiment
Score: 6
Explanation: The company showed significant quarter-over-quarter improvement in net income (reduced loss) and an increase in EAD for the six-month period, indicating improved operational performance. However, substantial unrealized losses on derivatives and Servicing Related Assets, along with a year-over-year decline in GAAP net income, temper the overall positive outlook. The successful internalization and extension of financing facilities are positive operational developments.
Positives
- Net loss applicable to common stockholders significantly reduced to $0.935 million in Q2 2025 from $9.313 million in Q1 2025, indicating a positive quarter-over-quarter trend.
- Earnings Available for Distribution (EAD) attributable to common stockholders increased to $8.623 million ($0.27 per diluted share) for the six months ended June 30, 2025, compared to $6.291 million ($0.21 per diluted share) for the same period in 2024.
- Net interest income turned positive for the six-month period, reaching $4.807 million in 2025 from a net interest expense of $0.740 million in 2024.
- Realized gains on derivatives increased substantially to $14.838 million in Q2 2025, indicating effective hedging or trading strategies.
- General and administrative expenses decreased by $0.9 million for the six-month period ended June 30, 2025, primarily due to reduced professional fees related to the internalization.
- The weighted average asset yield on RMBS increased to 5.08% at June 30, 2025, from 4.91% at December 31, 2024.
- The weighted average cost of funds for RMBS decreased to 1.17% at June 30, 2025, from 1.30% at March 31, 2025, and 1.12% at December 31, 2024.
- The company successfully extended the revolving period for the Freddie Mac MSR Revolver for an additional 364 days in June 2025.
- Cash and cash equivalents increased to $58.042 million at June 30, 2025, from $46.313 million at December 31, 2024.
Negatives
- The company reported a net loss applicable to common stockholders of $10.248 million for the six months ended June 30, 2025, a significant deterioration from a net income of $7.802 million in the prior year period.
- Unrealized losses on derivatives remained substantial at $19.147 million in Q2 2025 and $41.888 million for the six-month period, indicating significant negative fair value changes in hedging instruments.
- Unrealized losses on investments in Servicing Related Assets increased to $9.056 million for the six-month period ended June 30, 2025, from $6.569 million in the prior year period.
- Servicing fee income decreased by $3.3 million for the six-month period ended June 30, 2025, due to changes in the size of the portfolio.
- Realized loss on RMBS increased to $6.045 million for the six-month period ended June 30, 2025, from $1.859 million in the prior year period, due to timing and volume of sales.
- Compensation and benefits expense increased significantly for the six-month period due to the company becoming internally managed.
- Net interest spread on the RMBS portfolio decreased to 2.61% at June 30, 2025, from 2.90% at December 31, 2024.
Risks
- Exposure to legal claims related to the termination of the management agreement with Cherry Hill Mortgage Management, LLC (CHMM) in November 2024 without a termination fee.
- Ability to raise capital through the sale of equity and debt securities and invest net proceeds.
- Ability to obtain future financing arrangements and refinance existing ones as they mature.
- Exposure to general volatility of capital markets and deterioration in domestic and global economic conditions.
- Regulatory and legal developments, including changes in tax laws.
- Inflationary trends leading to further interest rate increases or sustained higher rates, causing increased market volatility.
- Increased rates of default and/or decreased recovery rates on investments, including as a result of the effects of more severe weather and changes in traditional weather patterns.
- Changes in interest rates, interest rate spreads, the yield curve, prepayment rates, or recapture rates.
- Limitations on business due to compliance with requirements for maintaining REIT qualification and Investment Company Act exception.
- Competition for residential mortgage assets.
- Risks associated with acquiring, investing in, and managing residential mortgage assets.
- Credit risk on RMBS, Servicing Related Assets, and derivatives due to borrower or counterparty default.
- Market risk reflecting changes in asset values due to interest rates, spreads, or prepayment speeds.
- Impact of Federal Reserve policy changes on interest rates, funding costs, and economic activity.
- Prepayment risk and extension risk on MSRs and RMBS, affecting expected yields and hedge effectiveness.
- Counterparty risk in repurchase transactions and derivative agreements, including potential losses from lender defaults.
- Funding risk due to weakness in financial markets affecting lenders' willingness or ability to provide financing.
- Liquidity risk due to illiquidity of Servicing Related Assets and other portfolio assets.
- Dependence on mortgage sub-servicers for MSRs, with potential adverse effects if sub-servicers fail to perform.
Future Outlook
The company expects to invest more unrestricted cash in targeted assets if economic normalization continues. It also anticipates using capital resources to repurchase common stock if appropriate and if the stock trades at a significant discount to net asset value. The Federal Reserve's future actions to ease monetary policy (reducing federal funds rate, slowing balance sheet runoff) could lower interest rates, reduce funding costs, and spur economic activity, increasing net interest income. Conversely, tightening monetary policy could lead to higher interest rates, reduced economic activity, decreased interest rate spreads, and increased funding costs.
Management Comments
- We attempt to attain this objective by selectively constructing and actively managing a portfolio of Servicing Related Assets and residential mortgage-backed securities (RMBS) and, subject to market conditions, other cash flowing residential mortgage assets.
- We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.
- As of the date of this filing, we believe we have sufficient liquid assets to satisfy all of our short-term recourse liabilities and to satisfy covenants in our financing documents.
- With respect to the next twelve months, we expect that our cash on hand combined with the cash flow provided by our operations will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls and operating expenses.
- Federal Reserve Chair Jerome Powell recently indicated that the imposition of significant tariffs in the U.S. would likely cause inflation and unemployment to rise, threatening the Federal Reserve's dual mandate to pursue maximum employment and stable prices. He also stated that the Federal Reserve will await taking action until the data demonstrates the impact of any new tariffs on the U.S. economy.
Industry Context
The company's performance is highly sensitive to broader macroeconomic trends, particularly Federal Reserve monetary policy. The Fed has maintained its federal funds rate target at 4.25%-4.5% since December 2024, following three consecutive rate cuts. Inflation was reported at 2.4% in May 2025, close to the Fed's 2% target. The slowing of the Fed's balance sheet runoff, with reduced monthly redemption caps on U.S. Treasury Securities, indicates a cautious easing approach. These factors directly influence the mortgage market, affecting the company's asset yields, funding costs, and the valuation of its RMBS and MSR portfolios. The company's focus on Agency RMBS and MSRs positions it within a segment of the residential mortgage finance industry that is directly impacted by these interest rate and liquidity dynamics.
Management Changes
| Role | Previous Person | New Person | Effective Date | Reason |
|---|---|---|---|---|
| Interim Chief Financial Officer, Treasurer and Secretary | N/A | Apeksha Patel | 2025-05-27 | Appointment via Offer Letter |
Corporate Governance
| Change Type | Description | Effective Date | Impact Assessment |
|---|---|---|---|
| Management Structure Change | Completed an Internalization Event, terminating the external management agreement with Cherry Hill Mortgage Management, LLC (CHMM) without a termination fee. The company now operates as a fully integrated, internally managed company with its own dedicated executive management team. | 2024-11-14 | Expected to reduce general and administrative expenses in the long term, but increased compensation and benefits in the short term due to direct hiring of personnel. |
Related Party Transactions
- The Management Agreement with Cherry Hill Mortgage Management, LLC (CHMM) was terminated effective November 14, 2024, without payment of a termination fee. Prior to termination, management fees were paid to CHMM.
Stakeholder Impact
- Shareholders: Potential for improved returns through dividend distributions and capital appreciation, but current net losses and unrealized losses pose risks. The increase in EAD is positive for dividend capacity. Common stock ATM program may lead to dilution.
- Employees: Direct employment by the company following internalization provides stability and direct compensation.
- Creditors: Repurchase agreements and MSR financing facilities are in place, with sufficient liquid assets to satisfy short-term recourse liabilities and covenants.
Next Steps
- Continue to invest unrestricted cash in targeted assets if economic normalization continues.
- Potentially use capital resources to repurchase common stock if appropriate and if the stock trades at a significant discount to net asset value.
- Monitor and adapt to future Federal Reserve actions regarding monetary policy and interest rates.
- Manage interest rate risk and financing pricing risk through hedging instruments.
- Continue to operate as a fully integrated, internally managed company.
Key Dates
| Date | Description |
|---|---|
| 2012-10-31 | Company incorporated in Maryland. |
| 2013-10-09 | Company commenced operations following initial public offering. |
| 2013-12-31 | Company elected to be taxed as a REIT, commencing with this short taxable year. |
| 2014-01-01 | CHMI Solutions elected to be taxed as a corporation for U.S. federal income tax purposes. |
| 2018-08-01 | Common Stock ATM Program instituted. |
| 2019-04-02 | Freddie Mac MSR Revolver maximum amount increased to $100.0 million. |
| 2019-09-01 | Common Stock Repurchase Program instituted. |
| 2020-08-01 | Freedom Mortgage acquired RoundPoint Mortgage Servicing Corporation. |
| 2020-12-31 | Sub-REIT elected to be taxed as a REIT. |
| 2021-10-01 | Aurora and QRS III entered into the Fannie Mae MSR Revolving Facility. |
| 2021-12-01 | IRS issued revenue procedure temporarily reducing minimum cash distribution for REITs to 10% for distributions declared on or after November 1, 2021, and on or before June 30, 2022. |
| 2022-08-17 | Series A Preferred Stock became optionally redeemable by the Company. |
| 2022-11-01 | Amendment to Common Stock ATM Program, increasing aggregate offering price. |
| 2023-01-01 | Company elected fair value option for all RMBS acquired after this date. |
| 2023-04-01 | Company's board of directors adopted the 2023 Equity Incentive Plan. |
| 2023-06-01 | 2023 Equity Incentive Plan approved at annual meeting of stockholders. |
| 2023-09-30 | RoundPoint ceased being a wholly owned subsidiary of Freedom Mortgage, acquired by Matrix Financial Services Corporation. |
| 2023-10-01 | Fannie Mae MSR Revolving Facility amendment extended revolving period for an additional 24 months. |
| 2023-12-01 | Preferred Stock Repurchase Program initiated. |
| 2023-12-15 | FASB ASU No. 2023-09 (Income Taxes) effective for fiscal years beginning after this date for public business entities. |
| 2024-01-29 | Preferred Series A ATM Program terminated. |
| 2024-03-01 | FASB ASU 2024-01 (Compensation-Stock Compensation) effective for fiscal years beginning after December 15, 2024, for public business entities. |
| 2024-04-15 | Series B Preferred Stock became optionally redeemable by the Company. |
| 2024-06-01 | Monthly redemption cap on U.S. Treasury Securities reduced from $60 billion to $25 billion. |
| 2024-08-01 | Amendment to Common Stock ATM Program, increasing aggregate offering price. |
| 2024-09-18 | Federal Reserve's first rate cut in four years. |
| 2024-11-01 | FASB ASU 2024-03 (Expense Disaggregation Disclosures) issued. |
| 2024-11-14 | Internalization Event completed; Management Agreement with CHMM terminated. |
| 2024-12-18 | Federal Reserve maintained federal funds rate target at 4.25% to 4.5%. |
| 2025-01-01 | FASB ASU 2025-01 (Expense Disaggregation Disclosures) issued, clarifying effective date. |
| 2025-04-01 | Monthly redemption cap on U.S. Treasury Securities reduced from $25 billion to $5 billion. |
| 2025-05-01 | Inflation rate at 2.4%. |
| 2025-05-27 | Offer Letter to Apeksha Patel, Interim Chief Financial Officer, Treasurer and Secretary. |
| 2025-05-30 | 60,041 RSU units vested and settled with common stock grants. |
| 2025-06-01 | Freddie Mac MSR Revolver amendment extended revolving period for an additional 364 days. |
| 2025-06-30 | End of current reporting period; granted 146,520 shares of restricted common stock to independent directors. |
| 2025-08-07 | Date of filing of this Quarterly Report on Form 10-Q. |
Recommendation
holdWhile the company demonstrated significant quarter-over-quarter improvement in net income (reduced loss) and an increase in Earnings Available for Distribution (EAD) for the six-month period, indicating operational resilience and potential for future dividends, the overall GAAP net loss for the half-year and substantial unrealized losses on derivatives and Servicing Related Assets present ongoing volatility. The successful internalization is a positive structural change, but its full financial benefits are still unfolding. Given the mixed financial signals and the inherent interest rate sensitivity of the business, a 'hold' recommendation is appropriate, suggesting investors monitor the company's ability to sustain operational improvements and manage market risks in the evolving interest rate environment.
Keywords
Mortgage REIT, RMBS, MSRs, Real Estate Investment Trust, Residential Mortgage-Backed Securities, Mortgage Servicing Rights, Financial Services, Fixed Income, Interest Rate Risk, Hedging, SEC Filing, 10-Q, Financial Reporting, Corporate Governance, Capital Markets
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