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 measured tone as management walked investors through a volatile quarter. Executives underscored solid liquidity, disciplined leverage and active hedging, which softened the blow from sharp spread moves, yet they also acknowledged that mark‑to‑market losses and a 6.1% drop in book value reflected the difficult macro backdrop.
Risk Management and Hedging Strategy Remain Intact
Cherry Hill emphasized that it moved quickly in March to manage interest‑rate risk, running about $396 million of swaps, TBAs, Treasury and swap futures to hedge the portfolio. Management noted that leverage held steady at 5.5 times equity and that the hedge book functioned as intended, helping to cushion book value from even steeper declines.
Liquidity Provides Flexibility Amid Market Stress
The company closed the quarter with $47 million of unrestricted cash, which management framed as a key buffer against market shocks. This cash position also gives Cherry Hill optionality to pursue attractive opportunities if spreads stabilize or dislocations create compelling entry points in RMBS or MSR assets.
MSR Portfolio Size and Resilience
Cherry Hill’s mortgage servicing rights book stood at $15.6 billion of UPB, with a market value of roughly $213 million, underscoring its role as a core earnings engine. MSR and related assets represented about 41% of equity and 21% of investable assets, while a low net CPR of 4.5% and minimal recapture highlighted limited refinance incentives.
RMBS Portfolio Drives Improved Net Interest Margin
RMBS exposures accounted for approximately 42% of equity and 79% of investable assets excluding cash, underscoring their centrality to returns. The RMBS net interest spread improved to 2.9%, helped by lower repo costs as the average financing rate fell to 3.78% from 3.99% and better dollar‑roll income supported core earnings.
Operational Results: EAD and Dividend Coverage
Earnings available for distribution to common shareholders reached $5.3 million, or $0.14 per share, providing a benchmark for dividend capacity. The board paid a $0.10 common dividend, while preferred shareholders received $0.5125 on Series A and $0.5978 on Series B, signaling ongoing commitment to returning capital despite market noise.
Post‑Quarter Book Value Recovery and Return Potential
Management noted that book value per share as of April 30 rose nearly 2% from March 31, excluding any second‑quarter dividend accrual, suggesting some rebound as spreads retraced. They also outlined potential levered returns in a steadier environment, targeting mid‑ to high‑teens for RMBS and around 10% to 12% for MSR, assuming spreads remain constructive.
Strategic Partnership with Real Genius Advances
Cherry Hill highlighted continued progress in its partnership with Real Genius, a digital mortgage technology platform that could enhance sourcing and analytics. Management portrayed this relationship as a strategic lever that may support long‑term growth and operational efficiency rather than a near‑term earnings driver.
Book Value and NAV Under Pressure
Despite operational positives, book value per common share fell to $3.23 from $3.44, a 6.1% decline over the quarter as spread widening hit asset valuations. Total NAV, including preferred equity, dropped by $7.9 million or 3.3%, underscoring the sensitivity of the balance sheet to rapid market repricing.
GAAP and Comprehensive Losses Reflect Volatility
The company reported a GAAP net loss attributable to common shareholders of $2.0 million, or $0.05 per diluted share, as fair value changes weighed on results. Comprehensive loss, which includes mark‑to‑market movements on available‑for‑sale RMBS, totaled $4.4 million, or $0.12 per diluted share, highlighting the drag from quarter‑end valuations.
Geopolitical Shock Drives Spread Widening
Management pointed to geopolitical tensions, including conflict in the Middle East, as a key driver of market turbulence that widened mortgage spreads and flattened the yield curve. Spreads ended the quarter near 165 basis points versus seven‑year swaps before tightening to about 150 in April, with management warning they could swing between roughly 130 and 180 until clarity returns.
Negative Economic Return and Slower Prepayments
Economic return was negative 3.2% for the quarter, reflecting both the decline in book value and the quarterly dividend to shareholders. RMBS prepayment speeds dipped to 8% CPR from 8.5%, while MSR prepayments stayed around 4.5%, aligning with reduced refinancing incentives following rate moves during the geopolitical shock.
Hedge Accounting Choice Amplifies Earnings Volatility
Cherry Hill reiterated that it has not elected hedge accounting for GAAP purposes on its interest‑rate derivatives, meaning all fair value changes run through earnings. Management acknowledged that this accounting approach can amplify quarter‑to‑quarter net income volatility even when the underlying hedges are performing their economic function.
Portfolio Sensitivity to Macro Shocks
Executives stressed that returns and book value remain highly sensitive to rates and spreads given ongoing geopolitical risk and uncertain monetary policy. Until volatility subsides, the firm sees downside risk from further spread widening, even as its hedging, diversified mix of MSR and RMBS, and liquidity are designed to buffer some of that pressure.
Forward‑Looking Outlook and Guidance
Looking ahead, management expects near‑term volatility to remain elevated but highlighted supportive fundamentals such as low MSR recapture and modest CPRs. With only about 14% of mortgages currently refinanceable at roughly 6.4% rates and levered return targets in the teens for RMBS and low teens for MSR, Cherry Hill aims to navigate the spread range with prudent leverage, robust hedging and a focus on preserving book value.
Cherry Hill’s earnings call painted a picture of a company weathering a difficult quarter but not losing its footing, thanks to conservative leverage, hedging discipline and ample cash. While negative economic returns and book‑value erosion underscored the risks of spread‑driven businesses, early second‑quarter recovery and attractive prospective returns may appeal to investors willing to tolerate ongoing macro uncertainty.