Executive Summary / Key Takeaways

• Internalization Delivers Cost Savings but Not Scale: Cherry Hill's November 2024 transition to internal management will save $1.1-1.6 million annually, yet this modest reduction fails to address the fundamental disadvantage of managing a $1.2 billion portfolio against peers with $90+ billion in assets, resulting in persistently higher funding costs and lower operating leverage.

• The MSR/RMBS Barbell Creates Natural Hedges but Capital Allocation Dilemmas: CHMI's 41% equity allocation to mortgage servicing rights (MSRs) provides a valuable interest rate hedge—rising when RMBS values fall—but management's admission that they have "primarily, if not exclusively" reinvested cash flows into Agency RMBS for "better levered returns" reveals a strategic tension: the company is underweighting its most durable competitive advantage.

• Real Genius Partnership Demonstrates Strategic Flexibility but Immaterial Scale: The Q2 2025 investment in digital mortgage technology platform Real Genius shows management can execute on unique opportunities post-internalization, yet with expectations of profitability only "within the first 6 or 7 months," this $50 million maximum investment represents less than 4% of investable assets and cannot offset core portfolio pressures.

• Book Value Volatility Persists Despite Aggressive Hedging: CHMI's book value per share declined from $4.02 in Q3 2024 to $3.36 in Q3 2025—a 16.4% drop—while the company maintained leverage at 5.3x and deployed Treasury futures, swaps, and TBAs. This demonstrates that even sophisticated hedging cannot fully insulate a sub-scale mREIT from rate volatility and spread widening.

• Dividend Sustainability Hinges on EAD Realignment, Not Core Earnings: The Board's Q3 2025 dividend cut to $0.10 per share, aligning with $0.09 EAD, signals a pragmatic reset, but with TTM operating cash flow at -$4.69 million and a 21.4% dividend yield suggesting market skepticism, the payout remains vulnerable to further rate-driven earnings compression.

Setting the Scene: The Sub-Scale mREIT Dilemma

Cherry Hill Mortgage Investment Corporation, incorporated in Maryland in 2012 and commencing operations in 2013, operates at the intersection of two fundamentally different mortgage assets: Agency RMBS that generate interest income and MSRs that generate fee income. This hybrid model, while theoretically elegant, places CHMI in direct competition with specialized giants. The company manages approximately $1.2 billion in RMBS and MSR assets with $16.2 billion in unpaid principal balance (UPB), a fraction of AGNC Investment (AGNC)'s $90.8 billion RMBS portfolio or Annaly Capital (NLY)'s $122.1 billion diversified holdings.

The mREIT industry structure rewards scale above all else. Larger portfolios command lower repo funding costs, more favorable derivative terms, and greater access to MSR flow agreements. CHMI's size forces it into a tactical, rather than strategic, posture—constantly shifting between higher and lower coupon RMBS, adjusting TBA positions, and managing leverage quarter-to-quarter. This operational intensity consumed $1.9 million in professional fees during the internalization process in 2024, a cost that will not recur but highlights the management burden of running a complex mortgage portfolio without scale efficiencies.

The company's core strategy relies on generating "attractive current yields and risk-adjusted total returns" through active portfolio management. Yet the numbers reveal a deeper truth: CHMI's TTM return on equity of 4.59% trails AGNC's 7.94% and NLY's 10.94%, while its operating margin of 44.15%—though respectable—masks the reality that gross interest income must cover a 5.34x debt-to-equity ratio and persistent hedging costs. The internalization was supposed to align management and shareholders, but it cannot manufacture competitive scale.

Technology, Products, and Strategic Differentiation

CHMI's primary technological differentiation lies not in software but in its hedging architecture and MSR management capabilities. The company utilizes interest rate swaps, Treasury futures, and TBA short positions to hedge duration risk, with management noting in Q2 2025 that "SOFR swaps will primarily represent front-end, short and intermediate maturity hedges to the portfolio, while treasury futures and the MSR will represent longer maturity hedges." This multi-instrument approach reflects sophistication, but also complexity that smaller peers cannot afford to maintain.

The MSR portfolio, managed through subsidiary Aurora Financial Group, represents CHMI's most defensible moat. With a weighted average note rate in the "mid-threes," this $16.2 billion UPB portfolio experiences de minimis prepayment speeds—averaging 5.9% CPR in Q3 2025—even as rates decline. This stability provides ballast against RMBS price volatility. However, management's commentary reveals a critical vulnerability: "the asset class is generally priced 'fairly rich,' and while we have not shied away from MSRs, we have been more selective, favoring MBS on a levered basis for better returns." When your best asset is too expensive to buy, your competitive advantage becomes defensive, not offensive.

The Real Genius partnership introduces a genuine technology angle. This digital mortgage platform offers a direct-to-consumer experience that could theoretically generate proprietary MSR flow for CHMI. Management expects profitability within 6-7 months and dividends within the first year. Yet the $50 million maximum investment cap represents just 4% of CHMI's $1.28 billion enterprise value. Even if successful, Real Genius cannot materially alter the company's dependence on third-party MSR acquisitions or its scale disadvantage in RMBS markets.

Financial Performance & Segment Dynamics

The RMBS Segment: Tactical Positioning Amid Rate Volatility

CHMI's RMBS portfolio, inclusive of TBAs, stood at $782 million in Q3 2025, up from $723 million in Q4 2024, yet this growth masks underlying pressure. The net interest spread compressed from 3.55% in Q1 2025 to 2.61% in Q2 before rebounding to 2.87% in Q3. Why this volatility? The Q1 spread benefited from "improved dollar roll income and REPO expenses," but the Q2 decline reflected "a large swap position that matured in Q1 and lower dollar roll income." This pattern reveals CHMI's vulnerability to derivative roll-offs and funding cost fluctuations that larger peers hedge more efficiently.

The portfolio composition shifts tell a story of reactive positioning. In Q4 2024, management "reduced its RMBS positioning due to increasing interest rates and volatility, while continuing to shift into higher coupon mortgages." By Q2 2025, they "modestly shifted its RMBS positioning towards higher coupon mortgages," only to reverse course in Q3, shifting "towards lower-to-middle coupon stack mortgages versus higher coupon mortgages." These quarterly pivots, while rational, demonstrate a lack of strategic scale. AGNC and NLY can maintain consistent portfolio strategies across rate cycles; CHMI must constantly adjust, incurring transaction costs and realized losses—$0.5 million in RMBS losses in the nine months ended September 2025.

The hedging performance underscores the challenge. Realized derivative gains decreased $26.6 million in Q3 versus Q2, driven by a $21 million decrease in TBA gains and a $5.6 million decrease in Treasury futures gains. While this reflects lower volatility, it also shows that hedging profits—often a material component of mREIT earnings—are unreliable. CHMI's comprehensive income swung from a $70,000 gain in Q2 to $7.4 million in Q3, yet book value per share only rose $0.02, suggesting that core earnings power remains constrained.

The MSR Segment: Stable but Richly Priced

The MSR portfolio's $219 million market value represents 41% of equity capital, generating $8.5 million in net servicing income in Q3. The 5.9% CPR speed is exemplary, but the trend is concerning: UPB declined from $17.3 billion in Q4 2024 to $16.2 billion in Q3 2025, reflecting natural paydown without replacement. Management's observation that "the asset class is generally priced 'fairly rich'" explains why CHMI hasn't reinvested here, but it also means the company's best hedge is shrinking.

Servicing costs increased $0.3 million in Q3 due to "reimbursement of deboarding fees," while the nine-month costs declined $2.5 million due to portfolio size reduction. This cost structure is manageable, but the lack of scale means CHMI cannot spread fixed servicing infrastructure across a larger asset base. Larger peers like NLY and TWO (TWO) have integrated servicing platforms that lower per-loan costs; CHMI's $2,297 per quarter in servicing costs per billion in UPB is likely higher than scaled competitors.

The unrealized loss on MSRs increased $3.2 million in Q3 to $5.9 million, attributed to "changes in valuation inputs/assumptions and paydown of underlying loans." As rates fall, MSR values decline—this is the intended hedge. But with the Fed cutting rates in September 2025 and mortgage rates hovering around 6%, the hedge is working while the core RMBS portfolio faces prepayment risk. This barbell works in theory, but the capital required to maintain both sides limits growth.

Outlook, Management Guidance, and Execution Risk

Management's guidance reveals a company caught between strategic vision and tactical reality. In Q4 2024, they positioned for "higher for longer," expecting fewer Fed cuts. By Q2 2025, "all eyes are on the Fed" for September cuts. In Q3, they celebrated the "reduction in overall macro volatility" and shifted to lower-coupon RMBS. This rapid pivoting reflects not indecision but necessity—CHMI's small size requires constant adaptation to maintain spreads.

The leverage outlook illustrates the constraint. CIO Julian Evans stated in Q2 that he "would expect leverage to kind of creep up as we gain greater clarity on the Fed's intentions," yet leverage remained at 5.3x in Q3. This is prudent but also reflects limited access to incremental repo financing at attractive terms. AGNC and NLY operate at 6.5-7.2x debt-to-equity, using scale to secure better terms. CHMI's 5.3x ratio is both a risk management choice and a market-imposed limitation.

The dividend realignment to $0.10 per share, matching $0.09 EAD, shows Board pragmatism. However, management explicitly states that "EAD is not the sole factor" in dividend decisions, also considering "taxable income and certainty of forward investment return economics."

With TTM operating cash flow at -$4.69 million and free cash flow similarly negative, the dividend is being funded by asset sales or financing, not core earnings. The 21.4% dividend yield is not a sign of strength but of market skepticism about sustainability.

Risks and Asymmetries

Funding Risk: CHMI's $55.4 million in unrestricted cash covers just 10% of its $554 million in repo borrowings implied by 5.3x leverage on $104 million in equity. If repo lenders increase haircuts or withdraw lines during market stress, CHMI would be forced to sell assets into illiquid markets, crystallizing losses. Larger peers maintain $1+ billion liquidity buffers; CHMI's cushion is thin.

Prepayment Risk Asymmetry: Management expects agency prepayment speeds to increase as rates fall, noting that "at 5.5% mortgage rate, the refinanceable universe increases to approximately 30%." Yet CHMI's RMBS portfolio has shifted to lower-to-middle coupons, which would face faster prepayment speeds. The MSR hedge would offset some losses, but the net effect is likely negative—MSR values fall faster than RMBS prices rise in a rally, particularly for low-coupon RMBS.

Scale Risk: The most material risk is competitive irrelevance. As AGNC, NLY, and DX (DX) grow through acquisitions and capital raises, CHMI's $94.8 million market cap makes equity issuance dilutive. The ATM program, expanded to $150 million in August 2024, has been used sparingly—only $9 million raised in Q2 2025—suggesting management recognizes the dilution cost. Without scale, CHMI cannot match competitors' funding costs or hedging efficiency, creating a persistent ROE gap.

Real Genius Execution Risk: While the partnership shows strategic flexibility, management's expectation of profitability within 6-7 months seems aggressive for a mortgage technology platform. If Real Genius fails to generate dividends within the first year, CHMI will have tied up capital in a non-core venture while its main business faces margin pressure.

Valuation Context

Trading at $2.54 per share, CHMI trades at 0.76x book value of $3.36, a discount that reflects market skepticism. However, this metric is misleading—book value has declined 16.4% over the past year, and the price-to-book ratio has compressed from 0.85x in Q4 2024 as the discount has widened. The market is pricing in further book value erosion.

On earnings metrics, the picture is worse. The TTM P/E of 50.8x reflects depressed earnings, while the price-to-operating cash flow ratio of 5.7x is meaningless given negative cash generation. The enterprise value of $1.28 billion is 37.0x TTM revenue of $34.6 million, a multiple that would be attractive for a growth company but is alarming for a shrinking mREIT.

Relative valuation highlights the scale penalty. AGNC trades at 1.17x book with an 87.7% profit margin and 7.94% ROE. NLY trades at 1.15x book with 10.94% ROE. Even troubled TWO trades at 0.88x book. CHMI's 0.76x multiple is not a value opportunity but a structural discount for sub-scale operations. The 21.4% dividend yield, far above peers' 12-16% yields, signals market expectation of a cut, not an opportunity.

The only plausible bull case is that internalization plus Real Genius creates a nimble platform that can pivot faster than bureaucratic giants. Yet the financial metrics show no evidence of this translating to superior returns—CHMI's 4.59% ROE is less than half the peer average, and its -$4.69 million in operating cash flow indicates the business is consuming, not generating, capital.

Conclusion

Cherry Hill Mortgage Investment stands at an inflection point where strategic improvements meet structural constraints. The internalization eliminates external management fees and aligns incentives, while the Real Genius partnership demonstrates post-transaction flexibility. The MSR/RMBS barbell provides natural hedging that pure-play RMBS mREITs lack.

Yet these advantages cannot overcome the scale disadvantage. CHMI's $1.2 billion portfolio generates insufficient revenue to cover operating costs and financing expenses efficiently, resulting in negative operating cash flow and a 16.4% book value decline over the past year. The 5.3x leverage ratio, while prudent, reflects limited access to attractive financing, not conservative risk management. The dividend, realigned to EAD, remains vulnerable to further rate-driven compression.

For the thesis to play out positively, CHMI must demonstrate that internalization enables a step-change in expense efficiency and that Real Genius generates meaningful MSR flow. More critically, the company must find a path to scale—either through accretive acquisitions or consistent equity raises at narrowing discounts. Without scale, CHMI will remain a tactically managed, sub-scale mREIT trading at a persistent discount to better-capitalized peers, with book value volatility that overwhelms any strategic progress. The key variables to monitor are the pace of book value erosion, the trajectory of operating expenses post-internalization, and whether management can deploy the ATM program without excessive dilution.