Cherry Hill Mortgage Investment ((CHMI)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Cherry Hill Mortgage Investment’s latest earnings call struck a cautious but steady tone as management balanced near-term market pain with evidence of underlying resilience. Executives acknowledged a notable hit to book value and headline losses driven by geopolitical shocks, yet underscored disciplined hedging, ample liquidity, and an early second-quarter rebound in book value as signs the franchise remains intact.
Risk Management and Hedging Maintained
Cherry Hill stressed that it moved swiftly in March to manage interest rate risk, ending the quarter with roughly $396 million in notional derivatives spanning swaps, TBAs, Treasury futures, and swap futures. Management said leverage held steady at about 5.5 times, and the hedge book remained intact, helping cushion the blow from a sharp bout of spread widening.
Strong Liquidity Position
The company closed the quarter with $47 million in unrestricted cash, which management framed as a key buffer in a choppy market. That liquidity gives Cherry Hill flexibility to support existing funding, withstand further volatility, and potentially deploy capital into higher-yielding opportunities if spreads remain attractive.
MSR Portfolio Size and Resilience
Cherry Hill’s mortgage servicing rights portfolio carried an unpaid principal balance of $15.6 billion and a market value of about $213 million at quarter end. MSR and related net assets made up roughly 41% of equity capital and about 21% of investable assets excluding cash, with net CPR around 4.5% and minimal recapture, signaling limited refinance pressure on this segment.
RMBS Portfolio Contribution and Net Interest Margin
Residential mortgage-backed securities accounted for about 42% of equity capital and nearly 79% of investable assets ex-cash, reinforcing their central role in earnings. The RMBS net interest spread improved to 2.9%, supported by a decline in financing costs to 3.78% from 3.99% and stronger dollar roll income, enhancing income generation despite market stress.
Operational Results: EAD and Dividends
Earnings available for distribution attributable to common shareholders came in at $5.3 million, or $0.14 per share, demonstrating ongoing cash-flow capacity despite GAAP losses. The board declared a common dividend of $0.10 per share for the quarter and paid preferred dividends of $0.5125 on Series A and $0.5978 on Series B, signaling a commitment to returning capital to investors.
Post-Quarter Book Value Improvement and Return Opportunities
Management highlighted an early recovery in equity metrics, noting that book value per share as of April 30 rose nearly 2% from March 31, excluding any second-quarter dividend. They also outlined illustrative levered return targets if markets stabilize, with RMBS expected to generate mid- to high-teens returns and MSR strategies projected in the 10% to 12% range.
Strategic Partnership Progress
The company reported that its strategic partnership with Real Genius, a digital mortgage technology firm, is tracking according to plan. Executives framed this relationship as a potential source of future upside, providing enhanced origination and technology capabilities that could complement Cherry Hill’s MSR and RMBS platforms over time.
Quarterly Book Value and NAV Declines
Despite the later rebound, the quarter itself delivered a meaningful hit to capital metrics as book value per common share fell to $3.23 from $3.44, a 6.1% decline. Including preferred stock, net asset value decreased by $7.9 million, or 3.3%, underscoring how quickly geopolitical shocks and spread volatility can dent mark-to-market valuations.
GAAP and Comprehensive Losses
On a reported basis, Cherry Hill posted a GAAP net loss applicable to common stockholders of $2.0 million, or $0.05 per diluted share, reflecting the impact of market-driven valuation moves. Comprehensive loss, which incorporates mark-to-market changes on available-for-sale RMBS, widened to $4.4 million, or $0.12 per diluted share, highlighting the broader hit across the portfolio.
Market Volatility and Spread Widening Impact
Management linked much of the quarter’s pressure to geopolitical turmoil that drove heightened volatility, wider mortgage spreads, a flatter yield curve, and tighter SOFR spreads. Mortgage spreads versus 7-year swaps finished the quarter around 165 basis points but tightened to roughly 150 in April, and executives cautioned they could swing between about 130 and 180 as uncertainty persists.
Negative Economic Return and Prepayment Trends
The company reported a negative economic return of 3.2% for the quarter, reflecting both dividend payouts and the decline in book value. On the positive side, RMBS prepayment speeds eased to about 8% CPR from 8.5%, mirroring reduced refinance incentives following the geopolitical shock and supporting the durability of interest income.
Hedge Accounting and Earnings Volatility
Cherry Hill reiterated that it does not elect hedge accounting for its interest rate derivatives under GAAP, meaning changes in fair value flow directly through net gains and losses on derivatives. This choice, while operationally simpler, can amplify reported earnings volatility in turbulent markets even when economic risk is mitigated by the hedge positions.
Earnings Sensitivity to Macro Events
Executives underscored that portfolio returns and book value remain sensitive to shifts in rates and credit spreads as geopolitical risk remains elevated. Until markets find firmer footing, investors should expect results to fluctuate more from quarter to quarter, with downside risk tied to further spread widening and rate shocks.
Forward-Looking Guidance and Market Outlook
Looking ahead, management expects near-term volatility to remain elevated until there is greater stability in the Middle East, but sees fundamental support from low prepayment dynamics and limited refinance incentives. They pointed to mortgage rates averaging around the low-6% range, a refinanceable universe of roughly 14% today, and highlighted the combination of disciplined leverage, meaningful hedging, and attractive prospective levered returns across both RMBS and MSR strategies.
Cherry Hill’s earnings call painted a picture of a REIT navigating a difficult macro backdrop with disciplined risk controls and a still-viable income engine. While the quarter’s losses and book value decline underscore the sector’s sensitivity to geopolitical shocks, improved spreads, ample liquidity, and early signs of book value recovery provide investors with a cautiously optimistic roadmap for potential upside when volatility eventually subsides.