CHMI & IVR Q3 2023 Updates By Scott Kennedy

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Article section by Scott Kennedy.

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Disclosures

Related to the stocks in this article:

CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, MFA-C, RITM-C, EFC-B, PMT-C, PMT-B, CIM-B, AGNCP, CIM-D, RITM, SLRC, MFA, GPMT, RC.

Scott Kennedy is long: RITM, RC, SLRC, GPMT, ARCC, TSLX, FSK, MFA, RITM-D, MITT-B, MITT-C, GAINL, RCB, ECCC, ECCW.

The rest of this post is from Scott Kennedy.

Summary

• This 20th earnings assessment article reviews CHMI’s and IVR’s BV and core earnings performance during Q3 2023.

• This article also discusses how CHMI’s and IVR’s quarterly change in BV and core earnings “matched up” to expectations. Earnings remain a key driver to stock performance.

• CHMI’s BV was a notable outperformance while its core earnings was a minor-modest outperformance. IVR’s BV was a minor underperformance while its core earnings was a modest outperformance.

• No change in CHMI’s and IVR’s percentage recommendation ranges or risk rating. CHMI is currently deemed undervalued (BUY). IVR is currently deemed appropriately valued (HOLD).

• CHMI reported a good "bounce back" quarter (least severe BV decrease in the agency sub-sector) and flat core earnings/EAD.  IVR "panicked" in October and notably reduced the company's investment portfolio.

Introduction:

Hi subscribers. For new members, my name is Scott Kennedy and currently I fully cover 20 mortgage real estate investment trust (mREIT) and 15 business development company (“BDC”) common stocks within this Investing Group regarding research/data, subscriber questions, weekly projected book values/net asset values (BV/NAV), and common stock recommendation ranges. Colorado (“CO”) Wealth Management handles the mREIT preferred stocks and he and his team handles all other applicable REIT sectors outside the mREIT sector. CO also provides some mREIT common stock and BDC articles from time-to-time which are more of an “overview/introduction” discussion; typically based either on my or our combined research/data. This also includes some macroeconomic trends and data. My name is always attached to all Investing Group articles I personally wrote so there is no confusion for subscribers.

This REIT Forum article is part of a series of articles over a span of 6-7 weeks which will analyze my previously projected BV/NAV and core earnings (or core earnings equivalent)/net investment income (“NII”) figures and compare these metrics to each mREIT’s and BDC’s actual reported results, respectively. For readers who are familiar with my public mREIT and/or BDC articles, these types of articles are beneficial to readers who desire to pursue a more active investing strategy and/or want more “real time” thoughts/analysis.

I hope my services/contributions ultimately help enhance a subscriber’s total investment returns or minimize their total investment losses within the mREIT and BDC sectors. At the very least, I hope subscribers will gain more insight into the mREIT and BDC sectors by reading my/our exclusive REIT Forum articles.

1) CHMI’s BV and Core Earnings Q3 2023 Performance (Projected Versus Actual Results):

On 11/2/2023, Cherry Hill Mortgage Investment Corp. (CHMI) reported the company’s earnings results for the third quarter of 2023. Table 1 below provides CHMI’s BV and earnings summary.

Table 1 – CHMI Q3 2023 BV and Earnings Summary

Source: Taken Directly from the REIT Forum’s © Analytical Spreadsheets/Data

Hi subscribers. I was able to review CHMI’s Q3 2023 earnings results in more depth. CHMI reported a BV as of 9/30/2023 of $4.99 per common share (3.9% decrease) versus my prior projection of $4.60 per common share (11.3% decrease). I consider this a notable (greater than a 5.0%) outperformance and was OUTSIDE my $4.25 - $4.95 per common share range.

I would just point out the extreme volatility, especially for the agency mREIT model, during the third quarter of 2023. BVs notably decreased during September 2023 (some peers in excess of 12%). In my personal opinion, any quarterly BV variance at or within 4% this particular quarter should really be considered an accurate estimate (larger “cone” per se). In addition, as a reminder, the current subscriber spreadsheets are based on CURRENT BVs. For example, currently each company’s BV estimate as of 11/10/2023. In this chat note, I am comparing 9/30/2023 BV projections versus actual results. Something to mention for newer subscribers. While I correctly projected CHMI would report one of the least severe quarterly BV decrease out of the agency mREIT peers, management even outperformed my expectations so a very good quarter for CHMI on quarterly BV fluctuations (a rarer occurrence over the past several years). As such, let us discuss CHMI’s BV outperformance versus my expectations.

First, CHMI continued to “ease off” regarding increasing the company’s on-balance sheet agency mortgage-backed securities (“MBS”) sub-portfolio during the third quarter of 2023. As of 6/30/2023, CHMI’s on-balance sheet agency MBS sub-portfolio had a fair market value (“FMV”) of $1.05 billion which decreased to $1.02 billion as of 9/30/2023. When calculated, this was a quarterly decrease of ($37) million or (4%). In comparison, I projected CHMI’s on-balance sheet agency MBS sub-portfolio would fluctuate (2.5%) – 2.5% (mean change of 0%) during the third quarter of 2023. Simply put, unlike some sub-sector peers, CHMI did not add to the company’s fixed-rate agency MBS sub-portfolio only to see said purchases decline in value by quarter-end. CHMI reported an agency MBS net valuation loss of ($25) million during the third quarter of 2023. In comparison, I projected an agency MBS net valuation loss of ($28) million (technically, ($27.5) million). This $3 million variance directly led to a BV outperformance of $0.09 per common share when compared to my expectations.

Second, CHMI’s derivative instruments modestly – notably outperformed my expectations during the third quarter of 2023. This was mainly due to the fact CHMI continued with the company’s net (short) “to-be-announced” (“TBA”) MBS position (only sub-sector peer to continue to implement this strategy during the quarter) while also notably increasing its net (short) U.S. Treasury futures 10-year position. While CHMI also increased the company’s net long U.S. Treasury futures 2- and 5-year position, losses within these hedges were contained due to the steepening of the yield curve during the third quarter of 2023. Simply put, “the stars aligned”, strategy-wise, for CHMI during the quarter. When combined, CHMI reported a quarterly derivatives net valuation gain of $39 million during the third quarter of 2023. In comparison, I projected a derivatives net valuation gain of $33 million (technically, $32.5 million). This $6 million variance (rounded) directly led to a BV outperformance of $0.23 per common share when compared to my expectations.