Cherry Hill Mortgage Investment Corporation (CHMI) Q4 2024 Earnings Call March 07, 2025 02:46 AM ET Company Participants Garrett Edson - Investor Relations, ICRJay Lown - President and CEOJulian Evans - Chief Investment OfficerMichael Hutchby - Chief Financial OfficerRandy Binner - Managing DirectorMikhail Goberman - VP - Equity Research Conference Call Participants Jason Stewart - Director & Equity Research Analyst Operator Hello, everyone, and welcome to Cherry Hill Mortgage Investment Corporation Fourth ...

Legal Disclaimer Investor Presentation Fourth Quarter 2024 FORWARD-LOOKING STATEMENTS. Certain statements in this presentation may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, references to: potential or expected future cash flows; estimated or expected returns, sometimes referred to as initial IRR, updated IRR, expected IRR, or current-to-maturity IRR; potential discount rates; potential future investments; e ...

Cherry Hill Mortgage (CHMI) came out with quarterly earnings of $0.10 per share, in line with the Zacks Consensus Estimate. This compares to earnings of $0.17 per share a year ago. These figures are adjusted for non-recurring items.A quarter ago, it was expected that this residential real estate finance company would post earnings of $0.14 per share when it actually produced earnings of $0.08, delivering a surprise of -42.86%.Over the last four quarters, the company has not been able to surpass consensus EP ...

Company Overview - The company operates as a fully integrated, internally managed residential real estate finance company focused on acquiring, investing in, and managing residential mortgage assets in the U.S.[56] - The company’s overall strategy is adaptable to changing market environments, subject to compliance with REIT qualification requirements[66] - The company aims to maintain its REIT status by distributing at least 90% of its annual REIT taxable income, which is essential to avoid U.S. federal income tax[80] Financial Performance - Interest income for the year ended December 31, 2024, was $55,798,000, an increase from $49,985,000 in 2023, representing a growth of approximately 3.6%[280] - Net interest income improved to $29,000 in 2024 from a loss of $1,657,000 in 2023, indicating a significant turnaround[280] - Total income for 2024 was $34,575,000, compared to a loss of $21,202,000 in 2023, marking a substantial recovery[280] - Net income applicable to common stockholders was $2,079,000 in 2024, a recovery from a loss of $44,647,000 in 2023[280] - The company recognized a realized loss on RMBS of $6,595,000 in 2024, a significant improvement from a loss of $36,315,000 in 2023[280] - Unrealized loss on RMBS measured at fair value through earnings was $19,445,000 in 2024, compared to a gain of $9,755,000 in 2023, indicating volatility in asset valuations[280] - The provision for corporate business taxes increased to $4,102,000 in 2024 from $523,000 in 2023, reflecting higher tax obligations[280] - The company’s total expenses increased to $18,263,000 in 2024 from $13,730,000 in 2023, representing a rise of approximately 33.3%[280] Investment Strategy - The company’s strategy includes allocating a substantial portion of equity capital to the acquisition of Servicing Related Assets and RMBS, with a focus on leveraging investments[60] - The company may raise additional funds through equity or debt offerings as determined by its board of directors[73] - The company operates in a highly competitive market, competing with various financial institutions and mortgage REITs for investment opportunities[74] - The company’s strategy may be influenced by SEC guidance regarding investment company definitions, which could restrict its investment capabilities[88] Risks and Compliance - The company is subject to various risks including market volatility, interest rate fluctuations, and economic conditions that could adversely affect its ability to generate sufficient revenue for distributions[92] - The company relies on third-party servicers for servicing functions, exposing it to compliance risks with applicable laws[55] - The company is subject to numerous federal, state, and local laws and regulations regarding mortgage servicing rights (MSRs), which could lead to fines or penalties if compliance is not maintained[99] - The company’s organizational structure and reliance on leverage expose it to various operational and regulatory risks[54] - The company faces risks related to climate change, which could affect asset values and borrowers' ability to pay mortgages[151] - The increasing focus on ESG matters may lead to higher compliance costs and reduced access to capital, potentially impacting financial performance[152] Human Capital and Management - The company emphasizes human capital management by providing competitive wages, benefits, and professional development opportunities to attract and retain talent[76] - The transition to a self-managed company is expected to result in substantial cost savings and enhanced returns, but there are risks associated with realizing these benefits[157] - The company’s transition to self-management may incur additional costs related to hiring and retaining employees, which could impact financial results[159] Asset Management and Valuation - The company relies on analytical models for asset management, which may lead to incorrect valuations if the models are flawed or based on inaccurate data[116] - The value of Servicing Related Assets is highly sensitive to interest rate changes, with values typically increasing when rates rise and decreasing when they fall[106] - Changes in prepayment rates can adversely affect the performance of the company's assets, impacting cash flows and valuations[109] - The valuation of certain assets remains uncertain and may differ significantly from third-party valuations, particularly during market disruptions like the COVID-19 pandemic[120] Stockholder Considerations - The company must distribute at least 90% of its REIT taxable income to avoid corporate income tax, which could affect cash available for distribution to stockholders[188] - If the company fails to qualify as a REIT, it would be subject to federal income tax, significantly reducing cash available for stockholder distributions[186] - Future sales of common stock or convertible securities could lead to dilution of existing shares and negatively impact market value[178][179] - The company has not established a minimum distribution payment level, and future distributions may vary based on earnings and financial conditions[180] - Distributions may include a return of capital, which would reduce the tax basis of stockholders' investments[182] Operational Challenges - The company relies on third-party mortgage servicers for servicing mortgage loans, and any failure by these servicers could materially impact its financial performance[94] - The company is highly dependent on information technology, and any cybersecurity incidents could disrupt operations and negatively impact financial results[122] - Illiquidity of mortgage-related assets may hinder the ability to sell assets when needed, potentially leading to significant losses during financial stress[126] - Leverage is used to finance investments, which can magnify both gains and losses, impacting cash available for distribution to stockholders[127] - The company faces risks related to margin calls, which may require posting additional cash collateral and could jeopardize its REIT qualification[135] Market Conditions - Rising interest rates could decrease the volume of target assets, adversely affecting the ability to acquire assets that meet investment objectives and make distributions to stockholders[121] - Interest rate mismatches between assets and borrowings could adversely affect income during periods of changing interest rates[113] - An increase in delinquency rates on mortgage loans could significantly lower the net revenue from Servicing Related Assets, impacting cash flow projections[108]

Financial Performance - GAAP net income applicable to common stockholders for Q4 2024 was $9.1 million, or $0.29 per share[6] - Earnings available for distribution (EAD) attributable to common stockholders for Q4 2024 were $3.3 million, or $0.10 per diluted share[5] - Total income for Q4 2024 was $18.7 million, compared to a loss of $7.1 million in the previous quarter[7] Dividends - Declared a regular common dividend of $0.15 per share, resulting in an annualized common dividend yield of 17.5%[6] Portfolio Information - Common book value per share was $3.82 as of December 31, 2024[6] - The unpaid principal balance for the MSR portfolio was $17.3 billion as of December 31, 2024[10] - The RMBS portfolio had a book value of approximately $1.1 billion with a weighted average coupon of 4.80%[11] - The company reported a net unrealized loss on the RMBS portfolio of approximately $10.8 million[8] Leverage and Risk Management - Aggregate portfolio leverage stood at 5.3x at the end of Q4 2024[6] - The company held interest rate swaps with a notional amount of $1.2 billion as of December 31, 2024[12] Strategic Focus - The company emphasizes its long-term growth opportunities and strategies to expand market opportunities[24] - The company aims to create its own Excess MSRs to enhance profitability[24] - The company is focused on generating sustainable and attractive risk-adjusted returns for stockholders[24]

Group 1 - The article focuses on high-yielding mortgage REITs, specifically those with yields of 12% or higher, which are attractive for investors in the mortgage REIT or BDC sector [1] - Colorado Wealth Management is highlighted as a REIT specialist with extensive experience in deep-dive REIT analysis, holding an MBA and having passed all 3 CFA exams [1] - Scott Kennedy is noted as a Certified Public Accountant and partner at a national accounting firm, contributing to the analysis of mortgage REITs [1] Group 2 - The article mentions that the contributors, Colorado Wealth Management Fund and Scott Kennedy, provide insights for The REIT Forum, with overlapping ratings and outlooks [3] - It is stated that the recommendations made in the article are not indefinite and are closely monitored, with Buy and Sell alerts issued exclusively to members [3] - There is an indirect conflict of interest mentioned regarding specific mREIT stocks, indicating a cautious approach to those investments [3]

Group 1 - The article rates Cherry Hill Mortgage Investment Corporation (CHMI) as a Hold for mortgage REIT investors, indicating that while there is upward momentum in the stock, it remains a highly speculative investment [1] - Short-term investors may find opportunities to trade based on the current trend, but caution is advised due to the speculative nature of the investment [1] Group 2 - The author, David A. Johnson, has over 30 years of investment experience and is the founder of Endurance Capital Management, which specializes in various investment vehicles including stocks, bonds, and REITs [1]

Company Overview - Cherry Hill Mortgage Investment Corporation (NYSE: CHMI) is a real estate investment trust (REIT) that focuses on investing in residential mortgages, categorized as an mREIT [1] Market Performance - A recent sell-off in shares has resulted in the company's dividend yield exceeding 20% [1] Investment Focus - The company is involved in income investing through various financial instruments, including common shares, preferred shares, and bonds [1]

C H E R R Y H I L L L MORTGAGE INVESTMENT CORPORATION Investor Presentation Third Quarter 2024 Legal Disclaimer FORWARD-LOOKING STATEMENTS. Certain statements in this presentation may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, references to: potential or expected future cash flows; estimated or expected returns, sometimes referred to as initial IRR, updated IRR, expected IRR, or current-to-maturity IRR; pote ...

Financial Data and Key Metrics Changes - For Q3 2024, the company reported a GAAP net loss applicable to common stockholders of $14.8 million or $0.49 per diluted share, while comprehensive income attributable to common stockholders was $1.3 million or $0.04 per diluted share [28] - Earnings available for distribution (EAD) were $2.5 million or $0.08 per share, impacted by approximately $0.045 per share of expenses related to a special committee [10][29] - Book value per common share decreased to $4.02 from $4.15 as of June 30, with approximately $0.06 of the change attributed to special committee and ATM issuance [12][29] - Financial leverage rose to 5.3 times, maintaining a solid liquidity profile with $50 million of unrestricted cash on the balance sheet [13] Business Line Data and Key Metrics Changes - The mortgage servicing rights (MSR) portfolio had an unpaid principal balance (UPB) of $17.6 billion and a market value of approximately $227 million, representing about 42% of equity capital [21] - The residential mortgage-backed securities (RMBS) portfolio accounted for approximately 42% of equity capital, with a total value of approximately $866 million, up from $674 million in the previous quarter [21][25] - Prepayment speeds for the MSR portfolio averaged approximately 5.5%, while the RMBS portfolio's weighted average three-month CPR increased to approximately 5.4% from 4.6% in the second quarter [22][25] Market Data and Key Metrics Changes - The U.S. 10-year Treasury yield ended the quarter at 3.78%, down 62 basis points quarter-over-quarter, as the market anticipated significant rate cuts [7] - The interest rate curve steepened, with lower coupon 30-year mortgages performing best during the quarter [19] Company Strategy and Development Direction - The company plans to continue pairing MSRs with agency RMBS and is focused on deploying capital into agency RMBS, which presents a strong risk-adjusted return profile [14] - The management is closely monitoring the macroeconomic environment and political developments, particularly the impact of a potential second Trump presidency on the economy and inflation [8] Management's Comments on Operating Environment and Future Outlook - Management expressed that while the macroeconomic environment remains volatile, they expect to gain confidence that volatility will moderate as they approach 2025 [8] - The company anticipates that the potential for at least one more rate cut in 2024 will influence their portfolio management strategies [20] Other Important Information - Operating expenses for the quarter were $5.1 million, which included $1.4 million of special committee-related expenses [31] - The company declared a dividend of $0.15 per common share for Q3 2024, paid on October 31 [31] Q&A Session Summary Question: Trade-off between agency MBS and MSR - Management indicated that while short-dated rates are expected to move lower, MBS still presents a better return profile than MSRs on a levered basis [35][36] Question: Leverage increase potential - Management noted that while leverage increased to 5.3, they are cautious about extending it further due to recent market volatility and margin calls [38][39] Question: Book value performance in Q4 - Management estimated a decline of about 4% to 5% in book value per share as of the previous Friday, before any fourth-quarter dividend accrual [40] Question: EAD outlook - Management agreed that as short-dated rates fall, the MSR portfolio should benefit, leading to a potential increase in EAD over time [45] Question: Future of internalization process - Management refrained from providing details on the timing of the internalization process, stating they are not prepared to discuss it [57]