10-Q: Cherry Hill Mortgage Q3 2025: Net Income Rebounds

Cherry Hill Mortgage Investment Corporation reported a net income of $4.5 million for Q3 2025, a significant improvement from a $12.4 million loss in the prior year, driven by increased interest income and unrealized gains on RMBS.

Summary

• Net income applicable to common stockholders was $1.955 million for the three months ended September 30, 2025, a significant improvement from a net loss of $14.792 million for the same period in 2024.
• Basic earnings per share (EPS) turned positive to $0.05 for Q3 2025, compared to a loss of $0.49 per share in Q3 2024.
• Net interest income increased substantially to $3.300 million in Q3 2025, up from $0.109 million in Q3 2024.
• Net servicing income remained stable at $8.467 million in Q3 2025, compared to $8.475 million in Q3 2024.
• Unrealized gain on RMBS measured at fair value through earnings was $10.730 million in Q3 2025, contributing positively to income.
• Unrealized loss on investments in Servicing Related Assets decreased to $5.912 million in Q3 2025 from $7.467 million in Q3 2024.
• The Federal Reserve reduced its federal funds rate target by 25 basis points to a range of 3.75% to 4.00% since September 2025 and will cease reducing its balance sheet effective December 1, 2025.
• Total assets increased to $1.521 billion as of September 30, 2025, from $1.491 billion as of December 31, 2024.
• The RMBS portfolio increased to $1.191 billion at September 30, 2025, from $1.122 billion at December 31, 2024.
• The Servicing Related Assets portfolio decreased to $218.688 million at September 30, 2025, from $233.658 million at December 31, 2024, with an aggregate unpaid principal balance (UPB) of approximately $16.2 billion.
• Repurchase agreements increased to $1.107 billion at September 30, 2025, from $1.077 billion at December 31, 2024, with a weighted average rate decreasing to 4.31% from 4.75%.

Sentiment

Score: 7

Explanation: The company demonstrated a significant turnaround in net income and EPS compared to the prior year, driven by improved net interest income and unrealized gains on RMBS. The Federal Reserve's shift towards easing monetary policy is generally favorable. However, substantial realized and unrealized losses on derivatives and a decrease in the MSR portfolio's UPB, alongside increased compensation expenses post-internalization, temper the overall positive sentiment.

Positives

• Net income applicable to common stockholders significantly improved to $1.955 million in Q3 2025 from a loss of $14.792 million in Q3 2024.
• Basic EPS turned positive to $0.05 in Q3 2025 from $(0.49) in Q3 2024.
• Net interest income increased substantially to $3.300 million in Q3 2025 from $0.109 million in Q3 2024.
• Unrealized gain on RMBS measured at fair value through earnings increased by $7.2 million quarter-over-quarter (Q3 2025 vs Q2 2025) due to a drop in interest rates and spread tightening.
• Unrealized loss on investments in Servicing Related Assets decreased to $5.912 million in Q3 2025 from $7.467 million in Q3 2024.
• Interest expense decreased by $4.2 million for the nine-month period ended September 30, 2025, compared to the same period in 2024, due to a decrease in financing rates and notes payable.
• Servicing costs decreased by $2.5 million for the nine-month period ended September 30, 2025, compared to the same period in 2024, partly due to one-time loan level interest adjustments and deboarding fees incurred in the prior year.
• The Federal Reserve reduced its federal funds rate target by 25 basis points to 3.75%-4.00% and ceased balance sheet reduction, which could lower funding costs and spur economic activity.
• The average net yield spread on RMBS increased to 3.77% in Q3 2025 from 3.70% in Q1 2025.

Negatives

• Realized loss on derivatives was $10.496 million in Q3 2025, a significant decrease from a realized gain of $14.838 million in Q2 2025.
• Unrealized loss on derivatives for the nine-month period ended September 30, 2025, was $39.406 million, an increase of $27.4 million compared to the same period in 2024.
• Unrealized loss on investments in Servicing Related Assets increased by $3.2 million quarter-over-quarter (Q3 2025 vs Q2 2025) due to changes in valuation inputs/assumptions and paydown of underlying loans.
• Servicing fee income decreased by $4.2 million for the nine-month period ended September 30, 2025, compared to the same period in 2024, due to changes in the size of the portfolio.
• The MSR portfolio's unpaid principal balance (UPB) decreased from $17.3 billion at December 31, 2024, to $16.2 billion at September 30, 2025.
• Compensation and benefits expense significantly increased to $4.738 million for the nine-month period ended September 30, 2025, from $0.476 million in the same period of 2024, due to the internalization of management.
• General and administrative expense increased by $0.3 million quarter-over-quarter (Q3 2025 vs Q2 2025) due to an increase in professional fees.

Risks

• Exposure to interest rate risk due to sensitivity of assets and financing obligations to fiscal and monetary policies, economic, and political considerations.
• Prepayment risk affecting expected yields on RMBS and MSR cash flows, potentially reducing ultimate cash flows or accelerating premium amortization.
• Extension risk where slower prepayments extend the life of lower-yielding RMBS, reducing hedging effectiveness.
• Interest rate cap risk on adjustable-rate RMBS, potentially causing them to behave like fixed-rate securities if interest rates rise above cap levels, leading to less cash income.
• Credit risk associated with borrowers under mortgage loans underlying MSRs and any CMOs, with unanticipated credit losses potentially impacting operating results.
• Counterparty risk from repurchase agreements (loss equal to haircut if lender defaults) and sub-servicers (adverse impact on MSR value if terminated).
• Funding risk due to potential weakness in financial markets affecting lenders' willingness or ability to provide financing or increasing financing costs.
• Liquidity risk from illiquid Servicing Related Assets and other portfolio assets, making them difficult to sell if needed.
• Inflation risk, as changes in interest rates generally correlate with inflation rates, potentially leading to lower returns on investments.
• Risk of failing to qualify as a REIT, which would subject the company to U.S. federal income tax.
• Exposure to legal claims related to the termination of the management agreement with CHMM in November 2024 without the payment of a termination fee.
• Potential impact of an ongoing federal government shutdown on mortgage borrowers or the mortgage industry.

Future Outlook

The company expects to invest more of its unrestricted cash in targeted assets if economic normalization continues and believes it has sufficient liquid assets to meet short-term liquidity needs for the next twelve months. Long-term liquidity requirements are expected to be met through cash on hand, additional borrowings, proceeds from repurchase agreements, equity offerings, and asset liquidation or refinancing. The company intends to maintain its REIT qualification and make regular quarterly distributions of substantially all REIT taxable income. The Federal Reserve's future monetary policy actions, including potential rate cuts or balance sheet adjustments, are uncertain but could impact funding costs, economic activity, net interest income, and prepayment speeds.

Management Comments

• "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."
• "While it is inherently more difficult to forecast beyond the next twelve months, we currently expect to meet our long-term liquidity requirements through our cash on hand and, if needed, additional borrowings, proceeds received from repurchase agreements and similar financings, proceeds from equity offerings and the liquidation or refinancing of our assets."
• "Federal Reserve Chairman Jerome Powell has said that future rate cuts are not a foregone conclusion and will depend on future economic data, including measures of inflation, and financial and international developments."

Industry Context

Operating as a mortgage REIT, the company's performance is highly sensitive to interest rate movements and Federal Reserve policy. The Federal Reserve's recent actions, including a rate cut and the cessation of balance sheet reduction, signal a shift towards easing monetary policy. This environment generally benefits mortgage REITs by potentially lowering funding costs and increasing net interest income, although it can also lead to accelerated prepayments on RMBS and impact MSR valuations. The broader market for residential mortgage assets is influenced by economic conditions, housing trends, and regulatory changes, with the company's focus on Agency RMBS implying lower credit risk but higher interest rate sensitivity.

Management Changes

Corporate Governance

Related Party Transactions

• Prior to November 14, 2024, the company was externally managed by Cherry Hill Mortgage Management, LLC (CHMM), to which it paid management fees. This agreement was terminated upon the Internalization Event.
• Non-controlling interests in the Operating Partnership are held by directors, officers, and employees of the Company and by certain individuals who provided services through the Manager prior to the Internalization.

Stakeholder Impact

• Shareholders: Positive impact from improved net income and positive EPS. Potential for continued dividends. Common Stock ATM program and preferred stock repurchase program can impact share count and value.
• Employees: Direct employment of senior management and other personnel due to internalization, leading to increased compensation and benefits expenses.
• Customers/Borrowers: Indirectly impacted by changes in interest rates and prepayment speeds, which affect mortgage market conditions.
• Creditors/Lenders: Repurchase agreements and MSR financing facilities are key. Changes in market value of assets can trigger margin calls.
• Management: Now directly employed by the company, leading to increased compensation and benefits expenses, but also greater alignment with company performance.

Next Steps

• Continue to acquire, invest in, and manage a diversified portfolio of Servicing Related Assets and residential mortgage-backed securities.
• Monitor Federal Reserve policy and economic data for future adjustments to monetary policy and their impact on the business.
• Make regular quarterly distributions of all or substantially all REIT taxable income to stockholders.
• Potentially issue and sell additional shares of common stock under the Common Stock ATM Program, with approximately $34.6 million remaining.
• Potentially utilize additional MSR financing, warehouse agreements, securitizations, and equity or debt issuances for future liquidity.
• Evaluate the potential impact of new FASB accounting standards (ASU 2023-09, ASU 2024-01, ASU 2024-03, ASU 2025-01) on financial statements.

Key Dates

Recommendation

The company shows a strong rebound in net income and EPS, and the Federal Reserve's shift to easing monetary policy is a tailwind for mortgage REITs. The internalization of management, while increasing compensation costs, eliminates external management fees and aligns incentives more directly. However, significant volatility in derivative performance and a shrinking MSR portfolio, coupled with the inherent interest rate and prepayment risks of the business model, suggest a 'Hold' recommendation. The positive developments are notable, but the underlying risks and the impact of the internalization on long-term cost structure and performance need further observation.

Keywords

Mortgage REIT, RMBS, Mortgage Servicing Rights, MSRs, Real Estate Investment Trust, 10-Q, Financial Results, Interest Rates, Prepayment Risk, Internalization, Cherry Hill Mortgage Investment Corporation, CHMI, Agency RMBS, Repurchase Agreements, Derivatives, Hedging, Financial Performance, Federal Reserve Policy