Cherry Hill Mortgage Navigates Volatility with Steady Dividends and Prudent Risk Management in Q1 2025

Cherry Hill Mortgage Investment Corporation (CHMI) delivered a mixed but strategically telling performance in its Q1 2025 earnings, balancing quarterly volatility with a focus on long-term stability. Despite a GAAP net loss, the company’s non-GAAP metrics, robust dividend policy, and disciplined risk management underscore its resilience in an uncertain interest rate environment.

Financial Performance: GAAP Losses vs. Earnings Available for Distribution

CHMI reported a GAAP net loss of $9.3 million ($0.29 per share), driven by unrealized losses on derivatives (-$22.74 million) and Servicing Related Assets (SRAs, -$6.325 million). These paper losses, however, contrasted with a stronger Earnings Available for Distribution (EAD) of $5.4 million ($0.17 per share), up from $3.29 million in Q4 2024. EAD excludes volatile items like unrealized gains/losses, focusing instead on recurring income streams like net servicing fees ($8.43 million) and net interest income ($2.17 million).

The company’s common book value per share held steady at $3.58 post-dividend, supported by $47.3 million in unrestricted cash and a consistent 5.2x leverage ratio. This stability suggests CHMI is navigating market turbulence without overextending.

Operational Strength: Diversified Assets and Hedging Discipline

CHMI’s asset mix remains a core strength. Its $17 billion unpaid principal balance in Mortgage Servicing Rights (MSRs), valued at $227.3 million, benefits from rising prepayment speeds in a high-rate environment. Meanwhile, its $1.1 billion RMBS portfolio, with a 28-year weighted average maturity and 4.88% coupon, provides steady income.

Critical to its risk management is the use of $804.3 million in interest rate swaps and $406.7 million in TBAs, which hedge against interest rate and duration risks. CEO Jay Lown emphasized the importance of these tools in “growing the portfolio responsibly” while maintaining a 5.2x leverage ratio, a conservative level by REIT standards.

Dividend Resilience: High Yield Amid Volatility

CHMI’s $0.15 quarterly dividend (annualized 20.1% yield based on its May 5 closing price) remains a standout feature. The dividend payout ratio—relative to EAD—is manageable, with EAD covering the dividend by a margin. This is critical for income investors, though the high yield inherently carries risks tied to interest rate sensitivity and valuation volatility.

Management Outlook: Transition to Internal Management and Strategic Focus

The earnings call highlighted CHMI’s shift to an internally managed REIT, a move designed to reduce costs and enhance operational control. Lown reiterated the company’s focus on “risk-adjusted returns” and liquidity preservation, with $47.3 million in cash serving as a buffer. The strategic emphasis on MSRs and hedging suggests management is prioritizing stability over aggressive growth—a prudent stance given Federal Reserve uncertainty.

Risks and Challenges

CHMI’s performance remains acutely tied to interest rate movements. The $22.74 million unrealized loss on derivatives underscores the risks of hedging in volatile markets. Additionally, a prolonged period of rising rates could pressure MSR values if prepayment speeds accelerate beyond expectations. Regulatory shifts, such as changes to mortgage servicing regulations, also pose tail risks.

Conclusion: A High-Yield Play with Managed Risk

Cherry Hill Mortgage Investment Corporation’s Q1 results reflect a company prioritizing capital preservation and dividend sustainability over short-term gains. With an EAD-driven dividend yield of 20.1% and a disciplined approach to leverage and hedging, CHMI offers compelling income potential for investors willing to accept interest rate risk.

Key data points reinforce this assessment:
- EAD growth: A 64% increase from $3.29 million to $5.4 million year-over-year.
- Liquidity: $47.3 million in unrestricted cash, mitigating refinancing risks.
- Dividend coverage: EAD comfortably covers the $0.15 dividend, even after accounting for unrealized losses.

While the GAAP loss highlights market volatility, CHMI’s focus on non-GAAP metrics and its strategic moves—such as internal management—position it as a resilient player in the mortgage REIT sector. For income-focused investors, CHMI’s blend of high yield and risk management makes it a watchlist candidate, provided they are prepared to navigate the inherent uncertainties of the housing and interest rate cycles.