Cherry Hill Mortgage Investment Corporation (CHMI): Navigating Volatility with Resilience

Cherry Hill Mortgage Investment Corporation (CHMI) has demonstrated its ability to navigate the volatile market environment, leveraging its strategic positioning in mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs) to deliver resilient financial performance.

Financials

The company reported annual net income of -$34,794,000 and annual revenue of $100,918,000 in its latest fiscal year. Its annual operating cash flow and free cash flow both stood at $40,659,000. While the net income figure reflects the challenges faced during the year, the company's revenue, operating cash flow, and free cash flow metrics showcase its underlying operational strength.

In the first quarter of 2024, CHMI generated GAAP net income applicable to common stockholders of $9.7 million, or $0.32 per diluted share. The company also reported earnings available for distribution (EAD), a non-GAAP financial measure, of $4 million, or $0.13 per share. EAD is just one factor the company considers in setting its dividend policy, as it also takes into account the existing market environment, portfolio return potential, taxable income, and forward investment return economics.

CHMI's book value per common share finished the first quarter at $4.49, down modestly from $4.53 at the end of 2023. On a net asset value (NAV) basis, which includes preferred stock in the calculation, NAV was down approximately 0.5% relative to the end of 2023. The company's financial leverage at the end of the quarter rose slightly to 4.5x, as it maintained a prudent approach given the volatile market dynamics.

Portfolio Performance

The company's positioning in MSRs and higher-coupon RMBS played a pivotal role in offsetting the impact of the flattening yield curve during the quarter. CHMI's MSR portfolio had a UPB of $19.6 billion and a market value of approximately $250 million at the end of the first quarter, representing approximately 44% of its equity capital and 28% of its investable assets, excluding cash.

Meanwhile, the RMBS portfolio accounted for approximately 41% of the company's equity capital and 72% of its investable assets, excluding cash. Prepayment speeds for both the MSR and RMBS portfolios remained relatively steady compared to the prior quarter, reflecting the elevated mortgage rate environment.

Outlook

Looking ahead, CHMI expects investment markets to remain volatile in the near term, with upcoming Federal Reserve decisions being driven by persistent inflation. In this environment, the company will continue to proactively manage its portfolio while shifting its capital structure to add value for shareholders through improved performance and earnings.

Capital Structure Initiatives

One of CHMI's top priorities is creating a more stable equity profile, which it has begun to address by repurchasing a portion of its Series B preferred shares. As of May 3, the company has repurchased approximately $9.3 million of Series B preferred shares, and it expects to continue this initiative in the days and months ahead. The repurchase of Series B preferred shares benefits common shareholders by reducing the amount paid for preferred dividends and aligning the capital structure more closely with industry peers.

Geographic Diversification

Geographically, CHMI's MSR portfolio is diversified across several key states, with California, New York, Virginia, Maryland, and Texas representing the largest concentrations. This geographic diversification helps mitigate the risk of economic downturns in any particular region.

Revenue Breakdown

In terms of revenue breakdowns, CHMI's primary sources of income are interest income from its RMBS portfolio and net servicing income from its MSR portfolio. The company's interest income for the first quarter of 2024 was $12.7 million, compared to $12.8 million in the previous quarter. The slight decrease was due to marginal changes in the company's leverage and portfolio composition.

Servicing fee income for the first quarter of 2024 and the previous quarter both stood at $12.9 million, reflecting the stability of CHMI's MSR portfolio. Servicing costs, on the other hand, decreased from $3.2 million in the fourth quarter of 2023 to $2.6 million in the first quarter of 2024, primarily due to timing of interest payments on escrowed loans.

Liquidity

The company's liquidity position remains strong, with $48 million of unrestricted cash on the balance sheet at the end of the first quarter. This solid liquidity profile, combined with the company's prudent leverage and strategic portfolio positioning, positions CHMI well to navigate the ongoing market volatility.

Recent Developments

In addition to its financial performance, CHMI recently announced that its Board of Directors has established a special committee to explore strategic alternatives to maximize stockholder value. While the company does not intend to discuss any information or developments related to the special committee on this or any subsequent call, this move underscores the Board's commitment to continuously evaluate opportunities that could benefit shareholders.

Conclusion

Overall, CHMI's resilient performance, strategic positioning, and proactive capital management initiatives demonstrate the company's ability to navigate the challenging market environment. As the company continues to monitor the evolving macroeconomic landscape and make adjustments to its portfolio and capital structure, investors can expect CHMI to remain focused on delivering long-term value for its shareholders.