Cherry Hill Mortgage Investment (US:CHMI)2024-03-06 16:00PART I Business CHMI is an externally managed residential real estate finance REIT investing in RMBS and Servicing Related Assets for stockholder returns - The company's primary business is acquiring, investing in, and managing residential mortgage assets, specifically Servicing Related Assets and RMBS, with the goal of generating yields and returns for stockholders10 - CHMI is externally managed by Cherry Hill Mortgage Management, LLC, which is responsible for investment strategies and day-to-day operations. The company itself has no employees, except for three leased employees at its subsidiary, Aurora13 - The company operates in a manner to maintain its qualification as a REIT, which requires distributing at least 90% of its REIT taxable income to stockholders annually10480 - CHMI's business is organized into three segments: (i) investments in RMBS; (ii) investments in Servicing Related Assets; and (iii) 'All Other'10 - The company utilizes leverage, primarily through repurchase agreements, to finance its RMBS portfolio. As of December 31, 2023, it had repurchase agreements with 35 counterparties44 Risk Factors The company faces market, operational, and structural risks including interest rate volatility, prepayment speeds, third-party dependency, and REIT compliance - Business risks include dependency on third-party mortgage servicers, sensitivity of Servicing Related Asset values to interest rate changes, and the impact of prepayment rates on asset performance285155 - The company uses leverage, which magnifies both gains and losses. A sudden drop in financed asset values could lead to margin calls and force liquidation of assets at unfavorable prices61492 - Risks related to the external management structure include dependence on the Manager and its key personnel, potential conflicts of interest with the Manager and its affiliates (like Freedom Mortgage), and a management fee that is payable regardless of portfolio performance699497 - Failure to maintain REIT qualification would subject the company to corporate income tax, substantially reducing cash available for distributions. This involves complex tests regarding income sources, asset diversification, and distribution levels143167 - The company's Series B Preferred Stock dividend rate will transition from a fixed rate to a floating rate based on a successor to LIBOR (anticipated to be CME Term SOFR) from April 15, 2024, which introduces uncertainty and potential volatility162 Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - As of the report date, there were no unresolved comments from the SEC staff204 Cybersecurity The company maintains a NIST-based cybersecurity program, overseen by the CFO, with no material threats reported to date - The company's information security program is designed to protect sensitive data and is informed by the NIST Cybersecurity Framework and regulations like the Gramm-Leach-Bliley Act205 - The Chief Financial Officer (CFO) has day-to-day oversight of the cybersecurity program and is responsible for ensuring the board of directors is updated on the company's risk profile205207 - To date, no risks from cybersecurity threats have materially affected or are reasonably likely to materially affect the company207 Properties The company operates from office space provided by its Manager in Farmingdale, New Jersey, and New York, New York - The company operates from two locations provided by its Manager: 1451 Route 34, Suite 303, Farmingdale, New Jersey 07727 and 1270 Avenue of the Americas, Suite 920, New York, New York 10020207 Legal Proceedings As of December 31, 2023, the company is not aware of any material legal or regulatory claims or proceedings - The company is not aware of any material legal or regulatory claims as of December 31, 2023207 Mine Safety Disclosures This section is not applicable to the company - Not applicable207 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CHMI common stock trades on NYSE, with reduced quarterly dividends in 2023 and underperforming key indices over five years - The company's common stock has been listed on the NYSE under the symbol 'CHMI' since October 4, 2013209 Dividends Declared per Common Share | Period | Declaration Date | Record Date | Payment Date | Amount per Share | | :--- | :--- | :--- | :--- | :--- | | 2023 | | | | | | Q4 | 12/8/2023 | 12/29/2023 | 1/31/2024 | $0.15 | | Q3 | 9/14/2023 | 9/29/2023 | 10/31/2023 | $0.15 | | Q2 | 6/15/2023 | 6/30/2023 | 7/31/2023 | $0.15 | | Q1 | 3/16/2023 | 3/31/2023 | 4/25/2023 | $0.27 | | 2022 | | | | | | Q4 | 12/16/2022 | 12/30/2022 | 1/31/2023 | $0.27 | | Q3 | 9/15/2022 | 9/30/2022 | 10/25/2022 | $0.27 | | Q2 | 6/17/2022 | 6/30/2022 | 7/26/2022 | $0.27 | | Q1 | 3/11/2022 | 3/31/2022 | 4/26/2022 | $0.27 | Cumulative Total Stockholder Return Performance (assumes $100 invested on Dec 31, 2018) | Index | Dec 31, 2019 | Dec 31, 2020 | Dec 31, 2021 | Dec 30, 2022 | Dec 29, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | CHMI | $93.27 | $67.61 | $68.70 | $57.29 | $46.48 | | Russell 2000 | $125.52 | $150.58 | $172.90 | $137.56 | $160.85 | | S&P U.S. BMI Mortgage REITs | $119.61 | $94.68 | $108.65 | $80.83 | $93.30 | | S&P 500 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | - In June 2023, stockholders approved the 2023 Equity Incentive Plan, which replaced the expired 2013 Plan, for granting equity-based compensation such as stock awards and LTIP-OP Units214 Management's Discussion and Analysis of Financial Condition and Results of Operations The company reported a $35.5 million net loss in 2023 driven by higher interest expense and unrealized losses, with EAD decreasing to $0.70 per share Comparison of Operations (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income (Expense) | $(1,657) | $12,079 | | Net Servicing Income | $42,179 | $41,593 | | Total Income (Loss) | $(21,202) | $40,193 | | Total Expenses | $13,730 | $12,934 | | Net Income (Loss) | $(35,455) | $22,189 | | Net Income (Loss) Applicable to Common Stockholders | $(44,647) | $11,886 | - Interest expense increased by $34.0 million year-over-year to $51.6 million, primarily due to a rise in financing rates on all assets, particularly RMBS financing costs237 - The company recorded an unrealized loss of $25.9 million on its Servicing Related Assets in 2023, compared to a gain of $23.0 million in 2022, mainly due to changes in valuation inputs and assumptions286 Earnings Available for Distribution (EAD) Reconciliation (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income (Loss) | $(35,455) | $22,189 | | Adjustments (Net) | $64,268 | $10,147 | | Total EAD | $28,813 | $32,336 | | EAD Attributable to Common Stockholders | $18,423 | $21,827 | | EAD per Diluted Share | $0.70 | $1.10 | - As of December 31, 2023, the company had approximately $903.5 million in outstanding repurchase agreement borrowings and $170.5 million outstanding under its MSR financing facilities270298 Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate volatility, affecting asset values and net interest income, mitigated by derivatives - The company's primary market risk is interest rate risk, which impacts its assets, liabilities, and net interest income. It uses derivatives like interest rate swaps and U.S. treasury futures to hedge this exposure335 MSR Fair Value Sensitivity as of Dec 31, 2023 | Scenario | Change in Fair Value (%) | | :--- | :--- | | Discount Rate Shift -20% | +10% | | Discount Rate Shift +20% | -8% | | Prepayment Rate Shift -20% | +5% | | Prepayment Rate Shift +20% | -5% | RMBS Portfolio Fair Value Sensitivity as of Dec 31, 2023 | Interest Rate Shift | Change in Fair Value ($ thousands) | Change in Fair Value (%) | | :--- | :--- | :--- | | -0.75% | +$3,806 | +0.51% | | +0.75% | -$6,658 | -0.89% | - The company faces funding risk as it relies on short-term repurchase agreements to finance its RMBS portfolio. Weakness in financial markets could make lenders unwilling or unable to provide financing313 Consolidated Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, including balance sheets, income statements, and detailed notes on accounting policies and portfolios Consolidated Balance Sheets As of December 31, 2023, total assets were $1.39 billion, liabilities $1.13 billion, and equity $258.4 million, with key RMBS and Servicing Related Assets Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total RMBS, at fair value | $1,012,130 | $931,431 | | Total Investments in Servicing Related Assets, at fair value | $253,629 | $279,739 | | Total Assets | $1,392,992 | $1,408,825 | | Repurchase agreements | $903,489 | $825,962 | | Notes payable | $169,314 | $183,888 | | Total Liabilities | $1,134,617 | $1,143,309 | | Total Stockholders' Equity | $258,375 | $265,516 | Consolidated Statements of Income (Loss) For 2023, the company reported a $35.5 million net loss, a reversal from 2022, driven by net interest expense and unrealized losses, resulting in ($1.70) diluted EPS Key Income Statement Data (in thousands, except per share data) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income (Expense) | $(1,657) | $12,079 | $9,188 | | Net Servicing Income | $42,179 | $41,593 | $40,533 | | Net Income (Loss) | $(35,455) | $22,189 | $12,530 | | Net Income (Loss) Applicable to Common Stockholders | $(44,647) | $11,886 | $2,430 | | Diluted EPS | $(1.70) | $0.60 | $0.14 | Notes to Consolidated Financial Statements The notes detail segment reporting, RMBS and MSR portfolios, equity structure, related party transactions, derivatives, and REIT tax status - The company's business is conducted through three segments: investments in RMBS, investments in Servicing Related Assets, and 'All Other'. In 2023, the RMBS segment had a net loss of $33.0 million, while the Servicing Related Assets segment had a net income of $8.4 million129131 - As of December 31, 2023, the RMBS portfolio had a carrying value of $1.01 billion with a weighted average yield of 4.77%. The MSR portfolio had a carrying value of $253.6 million on an unpaid principal balance of $20.0 billion108112 - The company utilizes an at-the-market (ATM) program for its common stock, raising approximately $31.5 million in gross proceeds during 2023. It also has share repurchase programs for both common and preferred stock, though no shares were repurchased in 2023149369400 - For tax year 2023, 95% of the common stock dividend was classified as ordinary income and 5% as return of capital. 100% of preferred stock dividends were classified as ordinary income527542 Controls and Procedures Management, including CEO and CFO, concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The company's CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period528 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework528 - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023528545 Other Information There is no other information to report in this section - None531 PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's upcoming 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement517 Executive Compensation Information for this item is incorporated by reference from the company's upcoming 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement548 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's upcoming 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement515 Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's upcoming 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement515 Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's upcoming 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement515 PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, with schedules omitted if not applicable - This section lists all documents filed as part of the report, including financial statements and exhibits549 Form 10-K Summary This section indicates that no Form 10-K summary is provided in the report - None552