Company Overview
Cherry Hill Mortgage Investment Corporation (NYSE: CHMI) is a publicly traded real estate investment trust (REIT) that focuses on acquiring, investing in, and managing residential mortgage assets in the United States. The company was incorporated in Maryland in 2012 and commenced operations in 2013 following the completion of its initial public offering and a concurrent private placement.
Cherry Hill's investment strategy centers around selectively constructing and actively managing a portfolio of Servicing Related Assets, which include mortgage servicing rights (MSRs), and residential mortgage-backed securities (RMBS), primarily those backed by 30-year, 20-year, and 15-year fixed-rate mortgages. The company aims to generate attractive current yields and risk-adjusted total returns for its stockholders, primarily through dividend distributions and secondarily through capital appreciation.
Business Strategy and Portfolio
Since its inception, Cherry Hill has navigated a dynamic and ever-evolving mortgage market, adapting its strategies to capitalize on changing industry dynamics. The company's portfolio is designed to provide exposure to the residential mortgage sector while mitigating risk through diversification and the use of hedging instruments. Under its charter, Cherry Hill is authorized to issue up to 500 million shares of common stock and 100 million shares of preferred stock. The company conducts substantially all of its operations and owns substantially all of its assets through its Operating Partnership, of which Cherry Hill is the sole general partner and owns 98% as of September 30, 2024.
Cherry Hill's common stock, 8.20% Series A Cumulative Redeemable Preferred Stock, and 8.25% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock are listed and traded on the New York Stock Exchange. The company has faced challenges related to changes in interest rates, prepayment speeds, and market volatility, which have impacted the performance of its investments.
Management and Ownership
In 2016, ownership of Cherry Hill's external manager, Cherry Hill Mortgage Management, LLC, was transferred to a blind trust for the benefit of Stanley Middleman. This arrangement continued until April 2024, when ownership was transferred back to Mr. Middleman. In July 2024, the company's board of directors, based on the recommendation of a special committee, authorized and approved internalizing management of the company and terminating the management agreement with Cherry Hill Mortgage Management, LLC.
Core Competencies
One of Cherry Hill's core competencies is its ability to acquire and manage MSRs, which represent the contractual right to service mortgage loans. Through its subsidiary, Aurora Financial Group, Inc., the company has obtained the necessary licenses to invest in MSRs on a nationwide basis and is an approved seller-servicer for both Fannie Mae and Freddie Mac. The MSR portfolio, which had an aggregate unpaid principal balance (UPB) of $17.3 billion as of the end of 2024, represents a significant portion of Cherry Hill's invested assets, accounting for approximately 46% of its equity capital.
In addition to its MSR investments, Cherry Hill maintains a portfolio of Agency RMBS, which are mortgage-backed securities for which the payments of principal and interest are guaranteed by a government agency, such as Ginnie Mae, Fannie Mae, or Freddie Mac. As of the end of 2024, the RMBS portfolio, including TBAs, had a market value of approximately $723 million, representing around 38% of the company's equity capital.
Risk Management
Cherry Hill's ability to actively manage its portfolio and leverage its expertise in the mortgage market has allowed it to navigate various economic and market conditions. The company utilizes a range of hedging strategies, including interest rate swaps, swaptions, TBAs, and U.S. Treasury futures, to mitigate interest rate and prepayment risk.
Financials
In the fourth quarter of 2024, Cherry Hill's GAAP net income applicable to common stockholders was $9.1 million, or $0.29 per share, while its earnings available for distribution (EAD), a non-GAAP financial measure, was $3.3 million, or $0.10 per diluted share. The company's common book value per share stood at $3.82 as of December 31, 2024.
It's worth noting that Cherry Hill's financial results in the fourth quarter, as well as throughout 2024, were impacted by expenses related to the special committee's review of strategic alternatives, which concluded in November 2024 with the internalization of the company's management. The internalization is expected to result in annual savings of $1.1 to $1.6 million, or $0.03 to $0.05 per common share, going forward.
For the most recent quarter, Cherry Hill reported revenue of -$7,077,000, net income of -$12,198,000, operating cash flow of $4,366,000, and free cash flow of $4,375,001. These figures reflect the challenging market conditions and the impact of the company's strategic initiatives.
Cherry Hill operates through two key product segments: Servicing Related Assets and RMBS. As of September 30, 2024, the Servicing Related Assets segment, primarily consisting of MSRs, had an aggregate UPB of approximately $17.64 billion. These MSRs have a weighted average coupon of 3.50%, a weighted average servicing fee of 0.25%, and a weighted average maturity of 24.70 months. During the nine-month period ended September 30, 2024, Cherry Hill recognized $14.04 million in unrealized losses on its investments in Servicing Related Assets.
The RMBS segment, as of September 30, 2024, had a total original face value of $1.33 billion, a book value of $1.19 billion, and a carrying value of $1.21 billion. The portfolio had a weighted average coupon of 4.81% and a weighted average yield of 4.93%. Cherry Hill reported $12.23 million in unrealized gains on its RMBS measured at fair value through earnings during the nine-month period ended September 30, 2024, along with $5.51 million in realized losses over the same period.
Liquidity
Cherry Hill maintains a strong liquidity position to support its operations and investment activities. The company's liquidity is primarily derived from cash on hand, cash flow from operations, and borrowing capacity under its financing arrangements. Cherry Hill's prudent approach to leverage and liquidity management helps ensure its ability to navigate market fluctuations and capitalize on investment opportunities.
Future Outlook
Looking ahead, Cherry Hill remains focused on navigating the evolving mortgage market landscape. The company is closely monitoring macroeconomic and geopolitical factors, such as the actions of the Federal Reserve and the policies of the current administration, which can have significant impacts on interest rates and the broader mortgage industry.
In response to the higher interest rate environment, Cherry Hill has been positioning its portfolio towards higher-coupon RMBS and increasing its TBA hedges. The company is also selectively investing in MSRs, which it believes can still present attractive risk-adjusted return profiles, while maintaining a strong liquidity position and prudent leverage.
Cherry Hill expects continued volatility and for rates to remain higher until there are clear signs of moderating inflation or economic weakness. The company plans to continue employing capital into agency RMBS and select MSRs, while maintaining strong liquidity and prudent leverage. Cherry Hill expects prepayment speeds to moderate on their RMBS portfolio in Q1 2025, given mortgage rates around 7%.
Conclusion
Overall, Cherry Hill Mortgage Investment Corporation has demonstrated its ability to adapt and thrive in a dynamic mortgage market. By leveraging its expertise in MSRs and RMBS, the company continues to seek opportunities to generate solid risk-adjusted returns for its shareholders, while navigating the evolving challenges and opportunities in the residential mortgage sector. The internalization of management and the company's strategic positioning in response to market conditions underscore Cherry Hill's commitment to optimizing its operations and enhancing shareholder value in the face of ongoing market uncertainties.