UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q



(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to ________
Commission file number 001-36099



CHERRY HILL MORTGAGE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)



N/A
(Former name, former address and former fiscal year, if changed since last report)

Maryland
 
46-1315605
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

1451 Route 34, Suite 303
   
Farmingdale, New Jersey
 
07727
(Address of Principal Executive Offices)
 
(Zip Code)

(877) 870 – 7005
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
CHMI
New York Stock Exchange
8.20% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share
CHMI-PRA
New York Stock Exchange
8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable
Preferred Stock, $0.01 par value per share
CHMI-PRB
New York Stock Exchange



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
       
Non-accelerated filer
Smaller reporting company
       
Emerging growth company
   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐   No  ☒

As of May 11, 2020, there were 17,054,634 outstanding shares of common stock, $0.01 par value per share, of Cherry Hill Mortgage Investment Corporation.



CHERRY HILL MORTGAGE INVESTMENT CORPORATION

TABLE OF CONTENTS

   
Page
   
3
     
PART I.
5
     
Item 1.
5
     
 
5
     
 
6
     
 
7
     
 
8
     
  9
     
  10
     
Item 2.
42
     
Item 3.
63
     
Item 4.
67
   
PART II.
68
   
Item 1.
68
   
Item 1A.
68
     
Item 2.
69
     
Item 3.
69
     
Item 4.
69
     
Item 5.
70
     
Item 6.
70

FORWARD-LOOKING INFORMATION

Cherry Hill Mortgage Investment Corporation (together with its consolidated subsidiaries, the “Company,” “we,” “our” or “us”) makes forward-looking statements in this Quarterly Report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” “potential” or the negative of these terms or other comparable terminology, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

the Company’s investment objectives and business strategy;
the Company’s ability to raise capital through the sale of its equity and debt securities and to invest the net proceeds of any such offering in the target assets, if any, identified at the time of the offering;
the Company’s ability to obtain future financing arrangements and refinance existing financing arrangements as they mature;
the Company’s expected leverage;
the Company’s expected investments and the timing thereof;
the Company’s ability to acquire servicing-related assets and mortgage and real estate-related securities;
estimates and statements relating to, and the Company’s ability to make, future distributions to holders of the Company’s securities;
the Company’s ability to compete in the marketplace;
market, industry and economic trends;
recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Treasury and the Board of Governors of the Federal Reserve System, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“Ginnie Mae”) and the U.S. Securities and Exchange Commission (“SEC”);
mortgage loan modification programs and future legislative actions;
the Company’s ability to maintain its qualification as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), and limitations on the Company’s business due to compliance with requirements for maintaining its qualification as a REIT under the Code;
the Company’s ability to maintain its exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
projected capital and operating expenditures;
availability of qualified personnel; and
projected prepayment and/or default rates.

The Company’s beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to it or are within its control. If any such change occurs, the Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in, or implied by, the Company’s forward-looking statements. These risks, along with, among others, the following factors, could cause actual results to vary from the Company’s forward-looking statements:

the factors discussed under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019;
general volatility of the capital markets;
changes in the Company’s investment objectives and business strategy;

availability, terms and deployment of capital;
availability of suitable investment opportunities;
the Company’s dependence on its external manager, Cherry Hill Mortgage Management, LLC (the “Manager”), and the Company’s ability to find a suitable replacement if the Company or the Manager were to terminate the management agreement the Company has entered into with the Manager;
changes in the Company’s assets, interest rates or the general economy;
increased rates of default and/or decreased recovery rates on the Company’s investments, including as a result of the effects of more severe weather and changes in traditional weather patterns;
the ultimate geographic spread, severity and duration of pandemics such as the recent outbreak of novel coronavirus, actions that may be taken by governmental authorities to contain or address the impact of such pandemics, and the potential negative impacts of such pandemics on the global economy and our financial condition and results of operations;
changes in interest rates, interest rate spreads, the yield curve, prepayment rates or recapture rates;
limitations on the Company’s business due to compliance with requirements for maintaining its qualification as a REIT under the Code and its exclusion from regulation as an investment company under the Investment Company Act;
the degree and nature of the Company’s competition, including competition for the residential mortgage assets in which the Company invests; and
other risks associated with acquiring, investing in and managing residential mortgage assets.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this Quarterly Report on Form 10-Q. The Company is not obligated, and does not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION

Item 1.
Consolidated Financial Statements

Cherry Hill Mortgage Investment Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands — except share and par value data)

   
(unaudited)
       
   
March 31, 2020
   
December 31, 2019
 
Assets
           
RMBS, available-for-sale (including pledged assets of $1,555,384 and $2,419,539, respectively)
 
$
1,598,999
   
$
2,508,360
 
Investments in Servicing Related Assets at fair value (including pledged assets of $222,642 and $291,111, respectively)
   
222,642
     
291,111
 
Cash and cash equivalents
   
102,201
     
24,671
 
Restricted cash
   
33,817
     
67,037
 
Derivative assets
   
36,902
     
18,289
 
Receivables from unsettled trades
   
83,823
     
-
 
Receivables and other assets
   
58,452
     
47,084
 
Total Assets
 
$
2,136,836
   
$
2,956,552
 
Liabilities and Stockholders’ Equity
               
Liabilities
               
Repurchase agreements
 
$
1,565,232
   
$
2,337,638
 
Derivative liabilities
   
23,526
     
12,337
 
Notes payable
   
171,776
     
166,989
 
Dividends payable
   
8,717
     
8,768
 
Due to affiliates
   
1,525
     
3,589
 
Accrued expenses and other liabilities
   
17,424
     
15,588
 
Total Liabilities
 
$
1,788,200
   
$
2,544,909
 
Stockholders’ Equity
               
Series A Preferred stock, $0.01 par value per share, 100,000,000 shares authorized and 2,781,635 shares issued and outstanding as of March 31, 2020 and 100,000,000 shares authorized and 2,781,635 shares issued and outstanding as of December 31, 2019, liquidation preference of $69,541 as of March 31, 2020 and liquidation preference of $69,541 as of December 31, 2019
 
$
67,213
   
$
67,213
 
Series B Preferred stock, $0.01 par value per share, 100,000,000 shares authorized and 2,000,000 shares issued and outstanding as of March 31, 2020 and 100,000,000 shares authorized and 2,000,000 shares issued and outstanding as of December 31, 2019, liquidation preference of $50,000 as of March 31, 2020 and liquidation preference of $50,000 as of December 31, 2019
   
48,068
     
48,068
 
Common stock, $0.01 par value per share, 500,000,000 shares authorized and 16,527,624 shares issued and outstanding as of March 31, 2020 and 500,000,000 shares authorized and 16,660,655 shares issued and outstanding as of December 31, 2019
   
170
     
170
 
Additional paid-in capital
   
302,847
     
302,723
 
Accumulated Deficit
   
(100,364
)
   
(47,367
)
Treasury stock at cost, 378,481 shares at $13.98 as of March 31, 2020 and 235,950 shares at $14.59 as of December 31, 2019
   
(5,291
)
   
(3,543
)
Accumulated other comprehensive income
   
33,783
     
41,414
 
Total Cherry Hill Mortgage Investment Corporation Stockholders’ Equity
 
$
346,426
   
$
408,678
 
Non-controlling interests in Operating Partnership
   
2,210
     
2,965
 
Total Stockholders’ Equity
 
$
348,636
   
$
411,643
 
Total Liabilities and Stockholders’ Equity
 
$
2,136,836
   
$
2,956,552
 

See accompanying notes to consolidated financial statements.

Cherry Hill Mortgage Investment Corporation and Subsidiaries
Consolidated Statements of Loss
(Unaudited)
(in thousands — except share and per share data)

   
Three Months Ended March 31,
 
   
2020
   
2019
 
Income
           
Interest income
 
$
20,249
   
$
16,969
 
Interest expense
   
12,291
     
10,744
 
Net interest income
   
7,958
     
6,225
 
Servicing fee income
   
19,519
     
17,188
 
Servicing costs
   
6,122
     
3,821
 
Net servicing income
   
13,397
     
13,367
 
Other income (loss)
               
Realized loss on RMBS, available-for-sale, net
   
(17,543
)
   
-
 
Realized loss on derivatives, net
   
(18,756
)
   
(7,476
)
Realized gain on acquired assets, net
   
46
     
-
 
Unrealized gain (loss) on derivatives, net
   
52,200
     
(8,272
)
Unrealized loss on investments in Servicing Related Assets
   
(93,853
)
   
(27,175
)
Total Loss
   
(56,551
)
   
(23,331
)
Expenses
               
General and administrative expense
   
2,756
     
963
 
Management fee to affiliate
   
1,965
     
1,809
 
Total Expenses
   
4,721
     
2,772
 
Loss Before Income Taxes
   
(61,272
)
   
(26,103
)
Benefit from corporate business taxes
   
(16,512
)
   
(4,965
)
Net Loss
   
(44,760
)
   
(21,138
)
Net loss allocated to noncontrolling interests in Operating Partnership
   
834
     
349
 
Dividends on preferred stock
   
2,459
     
1,841
 
Net Loss Applicable to Common Stockholders
 
$
(46,385
)
 
$
(22,630
)
Net Loss Per Share of Common Stock
               
Basic
 
$
(2.79
)
 
$
(1.36
)
Diluted
 
$
(2.79
)
 
$
(1.36
)
Weighted Average Number of Shares of Common Stock Outstanding
               
Basic
   
16,611,440
     
16,646,114
 
Diluted
   
16,624,229
     
16,654,370
 

See accompanying notes to consolidated financial statements.

Cherry Hill Mortgage Investment Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(in thousands)

   
Three Months Ended March 31,
 
   
2020
   
2019
 
Net loss
 
$
(44,760
)
 
$
(21,138
)
Other comprehensive income (loss):
               
Net unrealized gain (loss) on RMBS
   
(25,174
)
   
31,981
 
Reclassification of net realized loss on RMBS included in earnings
   
17,543
     
-
 
Other comprehensive income (loss)
   
(7,631
)
   
31,981
 
Comprehensive income (loss)
 
$
(52,391
)
 
$
10,843
 
Comprehensive income (loss) attributable to noncontrolling interests in Operating Partnership
   
(977
)
   
179
 
Dividends on preferred stock
   
2,459
     
1,841
 
Comprehensive income (loss) attributable to common stockholders
 
$
(53,873
)
 
$
8,823
 

See accompanying notes to consolidated financial statements.

Cherry Hill Mortgage Investment Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(in thousands — except share and per share data)

 
 
Common
Stock
Shares
   
Common
Stock
Amount
   
Preferred
Stock
Shares
   
Preferred
Stock
Amount
   
Additional
Paid-in
Capital
   
Treasury
Stock at
Cost
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Retained
Earnings
(Deficit)
   
Non-
Controlling
Interest in
Operating
Partnership
   
Total
Stockholders’
Equity
 
 
                                                           
Balance, December 31, 2018
   
16,652,170
   
$
167
     
2,718,206
   
$
65,639
   
$
298,614
   
$
-
   
$
(38,400
)
 
$
34,653
   
$
3,258
   
$
363,931
 
Issuance of common stock
   
6,000
     
-
     
-
     
-
     
132
     
-
     
-
     
-
     
-
     
132
 
Issuance of preferred stock
   
-
     
-
     
2,049,480
     
49,360
     
-
     
-
     
-
     
-
     
-
     
49,360
 
Conversion of OP units
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(103
)
   
(103
)
Net Loss before dividends on preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(20,789
)
   
(349
)
   
(21,138
)
Other Comprehensive Income
   
-
     
-
     
-
     
-
     
-
     
-
     
31,981
     
-
     
-
     
31,981
 
LTIP-OP Unit awards
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
266
     
266
 
Distribution paid on LTIP-OP Units
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(134
)
   
(134
)
Common dividends declared, $0.49 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(8,156
)
   
-
     
(8,156
)
Preferred Series A dividends declared, $0.5125 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,419
)
   
-
     
(1,419
)
Preferred Series B dividends declared, $0.3667 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(422
)
   
-
     
(422
)
Balance, March 31, 2019
   
16,658,170
   
$
167
     
4,767,686
   
$
114,999
   
$
298,746
   
$
-
   
$
(6,419
)
 
$
3,867
   
$
2,938
   
$
414,298
 
 
                                                                               
Balance, December 31, 2019
   
16,660,655
   
$
170
     
4,781,635
   
$
115,281
   
$
302,723
   
$
(3,543
)
 
$
41,414
   
$
(47,367
)
 
$
2,965
   
$
411,643
 
Issuance of common stock
   
9,500
     
-
     
-
     
-
     
124
     
-
     
-
     
-
     
-
     
124
 
Repurchase of common stock
   
(142,531
)
   
-
     
-
     
-
     
-
     
(1,748
)
   
-
     
-
     
-
     
(1,748
)
Issuance of preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Conversion of OP units
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(76
)
   
(76
)
Net Loss before dividends on preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(43,926
)
   
(834
)
   
(44,760
)
Other Comprehensive Income
   
-
     
-
     
-
     
-
     
-
     
-
     
(7,631
)
   
-
     
-
     
(7,631
)
LTIP-OP Unit awards
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
264
     
264
 
Distribution paid on LTIP-OP Units
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(109
)
   
(109
)
Common dividends declared, $0.40 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(6,612
)
   
-
     
(6,612
)
Preferred Series A dividends declared, $0.5125 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,428
)
   
-
     
(1,428
)
Preferred Series B dividends declared, $0.5156 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,031
)
   
-
     
(1,031
)
Balance, March 31, 2020
   
16,527,624
   
$
170
     
4,781,635
   
$
115,281
   
$
302,847
   
$
(5,291
)
 
$
33,783
   
$
(100,364
)
 
$
2,210
   
$
348,636
 

See accompanying notes to consolidated financial statements.

Cherry Hill Mortgage Investment Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

   
Three Months Ended March 31,
 
   
2020
   
2019
 
Cash Flows From Operating Activities
           
Net loss
 
$
(44,760
)
 
$
(21,138
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
         
Realized loss on RMBS, available-for-sale, net
   
17,543
     
-
 
Unrealized loss on investments in Servicing Related Assets
   
93,853
     
27,175
 
Realized gain on acquired assets, net
   
(46
)
   
-
 
Realized loss on derivatives, net
   
18,756
     
7,476
 
Unrealized (gain) loss on derivatives, net
   
(52,200
)
   
8,272
 
Realized gain on TBA dollar rolls, net
   
(847
)
   
(406
)
Amortization of premiums on RMBS, available-for-sale
   
4,144
     
1,889
 
Amortization of deferred financing costs
   
83
     
199
 
LTIP-OP Unit awards
   
264
     
266
 
Changes in:
               
Receivables and other assets, net
   
(11,323
)
   
(3,907
)
Due to affiliates
   
(2,064
)
   
(236
)
Accrued interest on derivatives, net
   
(1,510
)
   
(1,754
)
Dividends payable
   
(51
)
   
(2,040
)
Accrued expenses and other liabilities, net
   
1,836
     
(2,390
)
Net cash provided by operating activities
 
$
23,678
   
$
13,406
 
Cash Flows From Investing Activities
               
Purchase of RMBS
   
(352,779
)
   
(220,328
)
Principal paydown of RMBS
   
84,221
     
34,571
 
Proceeds from sale of RMBS
   
1,064,779
     
-
 
Acquisition of MSRs
   
(25,383
)
   
(36,296
)
Purchase of derivatives
   
(413
)
   
(83
)
Proceeds from settlement of derivatives
   
29,956
     
1,735
 
Net cash provided by (used in) investing activities
 
$
800,381
   
$
(220,401
)
Cash Flows From Financing Activities
               
Borrowings under repurchase agreements
   
2,849,697
     
1,967,107
 
Repayments of repurchase agreements
   
(3,622,103
)
   
(1,780,354
)
Proceeds from derivative financing
   
(1,167
)
   
(9,038
)
Proceeds from bank loans
   
18,204
     
10,782
 
Principal paydown of bank loans
   
(13,500
)
   
(7,850
)
Dividends paid
   
(9,071
)
   
(9,997
)
LTIP-OP Units distributions paid
   
(109
)
   
(134
)
Conversion of OP units
   
(76
)
   
(103
)
Issuance of common stock, net of offering costs
   
124
     
132
 
Issuance of preferred stock, net of offering costs
   
-
     
49,360
 
Repurchase of common stock
   
(1,748
)
   
-
 
Net cash provided by (used in) financing activities
 
$
(779,749
)
 
$
219,905
 
Net Increase in Cash, Cash Equivalents and Restricted Cash
 
$
44,310
   
$
12,910
 
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
   
91,708
     
40,019
 
Cash, Cash Equivalents and Restricted Cash, End of Period
 
$
136,018
   
$
52,929
 
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the period for interest expense
 
$
12,208
   
$
10,543
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
               
Dividends declared but not paid
 
$
8,717
   
$
9,807
 
Sale of RMBS, settled after period end
   
(83,823
)
   
-
 

See accompanying notes to consolidated financial statements.

Cherry Hill Mortgage Investment Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2020

(Unaudited)

Note 1 — Organization and Operations

Cherry Hill Mortgage Investment Corporation (together with its consolidated subsidiaries, the “Company”) was organized in the state of Maryland on October 31, 2012 to invest in residential mortgage assets in the United States. Under the Company’s charter, the Company is authorized to issue up to 500,000,000 shares of common stock and 100,000,000 shares of preferred stock, each with a par value of $0.01 per share.

The accompanying interim consolidated financial statements include the accounts of the Company’s subsidiaries, Cherry Hill Operating Partnership, LP (the “Operating Partnership”), CHMI Sub-REIT, Inc. (the “Sub-REIT”), Cherry Hill QRS I, LLC, Cherry Hill QRS II, LLC, Cherry Hill QRS III, LLC (“QRS III”), Cherry Hill QRS IV, LLC (“QRS IV”), Cherry Hill QRS V, LLC (“QRS V”), CHMI Solutions, Inc. (“CHMI Solutions”) and Aurora Financial Group, Inc. (“Aurora”).

The Company is party to a management agreement (the “Management Agreement”) with Cherry Hill Mortgage Management, LLC (the “Manager”), a Delaware limited liability company established by Mr. Stanley Middleman. The Manager is a party to a Services Agreement with Freedom Mortgage Corporation (“Freedom Mortgage”), which is owned and controlled by Mr. Middleman. The Manager is owned by a “blind trust” for the benefit of Mr. Middleman. For a further discussion of the Management Agreement, see Note 7.

The Company has elected to be taxed as a real estate investment trust (“REIT”), as defined under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ended December 31, 2013. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income that will not be qualifying income for REIT purposes.

Effective January 1, 2020, the Operating Partnership contributed substantially all of its assets to the Sub-REIT in exchange for all of the common stock of the Sub-REIT. As a result of this contribution, the Sub-REIT is a wholly-owned subsidiary of the Operating Partnership and trading and other operations formerly conducted by the Operating Partnership through its subsidiaries are now conducted by the Sub-REIT through those same subsidiaries. The Sub-REIT has elected to be taxed as a REIT under the Code commencing with the taxable year ending December 31, 2020.

Note 2 — Basis of Presentation and Significant Accounting Policies

Basis of Accounting

The accompanying interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The interim consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company consolidates those entities in which it has an investment of 50% or more and has control over significant operating, financial and investing decisions of the entity. The interim consolidated financial statements reflect all necessary and recurring adjustments for fair presentation of the results for the interim periods presented herein.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make a number of significant estimates and assumptions. These include estimates of: the fair value of mortgage servicing rights (“MSRs” or “Servicing Related Assets”); residential mortgage-backed securities (“RMBS” or “securities”) and derivatives; credit losses, including the period of time during which the Company anticipates an increase in the fair values of RMBS sufficient to recover unrealized losses on those RMBS; and other estimates that affect the reported amounts of certain assets, revenues, liabilities and expenses as of the date of, and for the periods covered by, the interim consolidated financial statements. It is likely that changes in these estimates will occur in the near term. The Company’s estimates are inherently subjective. Actual results could differ from the Company’s estimates, and the differences may be material.

Risks and Uncertainties

In the normal course of business, the Company encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on the Company’s investments in RMBS, Servicing Related Assets and derivatives that results from a borrower’s or derivative counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments in RMBS, Servicing Related Assets and derivatives due to changes in interest rates, spreads or other market factors, including prepayment speeds on the Company’s RMBS and Servicing Related Assets. The Company is subject to the risks involved with real estate and real estate-related debt instruments. These include, among others, the risks normally associated with changes in the general economic climate, changes in the mortgage market, changes in tax laws, interest rate levels, and the availability of financing.

The Company also is subject to certain risks relating to its status as a REIT for U.S. federal income tax purposes. If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to U.S. federal income tax on its REIT income, which could be material. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost.

As the novel coronavirus (COVID-19) pandemic and its effects on the economy escalated in the United States in early March 2020, the financial markets started to melt down. The widening of nominal spreads resulted in a sudden and severe decline in the mark-to-market values assigned by repurchase agreement counterparties to the Company’s Agency RMBS assets. The crisis in the Agency RMBS market was closely followed by a substantial widening of spreads on credit assets and a reduction in available liquidity to finance credit assets, including, the credit risk transfer securities issued by Fannie Mae and Freddie Mac held as part of the CMOs in the Company’s portfolio.

While the Company met all of the margin calls received, it caused a severe drain on the Company’s liquidity. In order to rebuild the Company’s liquidity and to reduce the leverage employed by the Company, the Company undertook sales of Agency RMBS in its portfolio reducing the amount of its assets from $2,347.1 million at December 31, 2019 to $1,557.2 million at March 31, 2020.

The shelter in place restrictions imposed by the federal and state governments have resulted in historic increases in the level of unemployment and the imposition of forbearance restrictions on lenders and servicers such as the Company’s mortgage company subsidiary, Aurora. The Company is not yet able to estimate the likely number of borrowers on loans serviced by Aurora that will take advantage of the forbearance programs. However, based on information currently available to the Company, the Company believes that it will be able to satisfy these obligations in the near term.

The reduction in the amount of income-producing assets, coupled with the higher expenses of servicing its MSRs and greater retention of uninvested cash to address the greater volatility in the market, will result in diminished earning capacity for the Company for at least the next two quarters.

Investments in RMBS

Classification – The Company classifies its investments in RMBS as securities available for sale. Although the Company generally intends to hold most of its securities until maturity, it may, from time to time, sell any of its securities as part of its overall management of its portfolio. Securities available for sale are carried at fair value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), except for credit related unrealized losses and unrealized losses on securities that the Company (i) intends to sell, (ii) will more likely than not be required to sell before recovering their cost basis, or (iii) does not expect to recover the entire amortized cost basis, even if the Company does not intend to sell the securities, or the Company believes it is more likely than not that it will be required to sell the securities before recovering their cost basis, which are recognized in earnings.

Fair value is determined under the guidance of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”).  Management’s judgment is used to arrive at the fair value of the Company’s RMBS investments, taking into account prices obtained from third-party pricing providers and other applicable market data. The third-party pricing providers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security. The Company’s application of ASC 820 guidance is discussed in further detail in Note 9.

Investment securities transactions are recorded on the trade date. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investment and is included in earnings. RMBS with a fair value of $83.8 million were sold in the three-month period ended March 31, 2020 and were settled after period-end. All RMBS purchased and sold in the three-month period ended March 31, 2019 were settled prior to period-end.

Revenue Recognition – Interest income from coupon payments is accrued based on the outstanding principal amount of the RMBS and their contractual terms. Premiums and discounts associated with the purchase of the RMBS are amortized and accreted, respectively, into interest income over the projected lives of the securities using the effective interest method. The Company’s policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus on prepayment speeds, and current market conditions. Adjustments are made for actual prepayment activity. Approximately $4.7 million and $7.7 million in interest income was receivable at March 31, 2020 and December 31, 2019, respectively. Interest income receivable has been classified within “Receivables and other assets” on the consolidated balance sheets. For further discussion of Receivables and other assets, see Note 13.

Impairment  - The Company evaluates its RMBS on a quarterly basis to assess whether a decline in the fair value below the amortized cost basis should be recognized in earnings or other comprehensive income. The presence of an impairment is based upon a fair value decline below a security’s amortized cost basis and a corresponding adverse change in expected cash flows due to credit related factors as well as non-credit factors, such as changes in interest rates and market spreads. A security is considered to be impaired if the Company (i) intends to sell the security, (ii) will more likely than not be required to sell the security before recovering its cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis, even if the Company does not intend to sell the security, or the Company believes it is more likely than not that it will be required to sell the security before recovering its cost basis. Under these scenarios, the full amount of impairment is recognized currently in earnings and the cost basis of the security is adjusted. However, if the Company does not intend to sell the impaired security and it is more likely than not that it will not be required to sell before recovery, the impairment is separated into (i) the estimated amount relating to credit loss, or the credit component, and (ii) the amount relating to all other factors, or the non-credit component. Credit related impairment is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, with the remainder of the loss recognized in accumulated other comprehensive income (loss). The allowance for credit loss as well as adjustment to earnings can be reversed for subsequent changes in the estimate of expected credit loss. Impairment has been classified within “Realized loss on RMBS, available-for-sale, net” on the interim consolidated statements of loss. For further discussion of impairment, see Note 4.

Investments in MSRs

Classification – The Company’s MSRs represent the contractual right to service mortgage loans. The Company has elected the fair value option to record its investments in MSRs in order to provide users of the interim consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs. Under this election, the Company records a valuation adjustment on its investments in MSRs on a quarterly basis to recognize the changes in fair value of its MSRs in net income as described below. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the MSRs and, therefore, may differ from their effective yields.

Although transactions in MSRs are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). Changes in the fair value of MSRs are reported on the interim consolidated statements of income (loss). Fluctuations in the fair value of MSRs are recorded on the interim consolidated statements of income (loss) as “Unrealized gain (loss) on investments in Servicing Related Assets.” Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the MSRs and, therefore, may differ from their effective yields. In determining the valuation of MSRs in accordance with ASC 820, management uses internally developed models that are primarily based on observable market-based inputs but which also include unobservable market data inputs. The Company’s application of ASC 820 guidance is discussed in further detail in Note 9. For reporting purposes, conventional conforming loans are aggregated into one category and government conforming loans are aggregated into a separate category.

Revenue Recognition – Mortgage servicing fee income represents revenue earned for servicing mortgage loans. The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred. Servicing fee income received and servicing expenses incurred are reported on the interim consolidated statements of loss.

As an owner and manager of MSRs, the Company may be obligated to fund advances of principal and interest payments due to third-party owners of the loans, but not yet received from the individual borrowers. These advances are reported as servicing advances within the “Receivables and other assets” line item on the consolidated balance sheets. Reimbursable servicing advances, other than principal and interest advances, also have been classified within “Receivables and other assets” on the consolidated balance sheets. Although advances on Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) MSRs made in accordance with the relevant guidelines are generally recoverable, the recoverability of similar advances made on Government National Mortgage Association (“Ginnie Mae”) MSRs may be limited under the rules and regulations of the U.S. Department of Housing and Urban Development, the Department of Veterans Affairs (the “VA”) and the Federal Housing Administration (“FHA”). The Company expects to recover advances on its Fannie Mae and Freddie Mac MSRs. In addition, unrecoverable losses on the loans underlying the Ginnie Mae MSRs have not been significant to date. As a result, the Company has determined that no reserves for unrecoverable advances for the related underlying loans are necessary at March 31, 2020 and December 31, 2019. For further discussion on the Company’s receivables and other assets, including the Company’s servicing advances, see Note 13.

As a result of the Company’s investments in MSRs, it is obligated from time to time to repurchase an underlying loan from the applicable agency for which it is being serviced due to an alleged breach of a representation or warranty. Loans acquired in this manner are recorded at the purchase price less any principal recoveries and are then offered for sale. Loans also may be acquired from pools backing Ginnie Mae securities in order to modify the loan. Those loans typically are re-pooled into other Ginnie Mae securities at fair value. Any loans acquired by the Company for either reason are accounted for as loans held for sale and are recorded in “Receivables and other assets” in the interim consolidated balance sheets.

Derivatives and Hedging Activities

Derivative transactions include swaps, swaptions, Treasury futures and “to-be-announced” securities (“TBAs”). Swaps and swaptions are entered into by the Company solely for interest rate risk management purposes. TBAs and Treasury futures are used to manage duration risk as well as basis risk and pricing risk on the Company’s financing facilities for MSRs. The decision as to whether or not a given transaction/position (or portion thereof) is economically hedged is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including restrictions imposed by the Code on REITs. In determining whether to economically hedge a risk, the Company may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken as economic hedges are entered into with a view towards minimizing the potential for economic losses that could be incurred by the Company. Generally, derivatives entered into are not intended to qualify as hedges under GAAP, unless specifically stated otherwise.

The Company’s bi-lateral derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. The Company reduces such risk by limiting its exposure to any one counterparty. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored. The Company’s interest rate swaps and Treasury futures are required to be cleared on an exchange, which further mitigates, but does not eliminate, credit risk. Management does not expect any material losses as a result of default by other parties to its derivative financial instruments.

Classification – All derivatives are recognized as either assets or liabilities on the consolidated balance sheets and measured at fair value. Due to the nature of these instruments, they may be in a receivable/asset position or a payable/liability position at the end of an accounting period. Derivative amounts payable to, and receivable from, the same party under a contract may be offset as long as the following conditions are met: (i) each of the two parties owes the other determinable amounts; (ii) the reporting party has the right to offset the amount owed with the amount owed by the other party; (iii) the reporting party intends to offset; and (iv) the right to offset is enforceable by law. The Company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements, and fair value may be reflected on a net counterparty basis when the Company believes a legal right of offset exists under an enforceable master netting agreement. For further discussion on offsetting assets and liabilities, see Note 8.

Revenue Recognition – With respect to derivatives that have not been designated as hedges, any payments under, or fluctuations in the fair value of, such derivatives have been recognized currently in “Realized loss on derivatives, net” and “Unrealized gain (loss) on derivatives, net”  in the interim consolidated statements of loss.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid short-term investments with maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial institutions exceed insured limits. Restricted cash represents the Company’s cash held by counterparties (i) as collateral against the Company’s derivatives ($0 and approximately $5.7 million at March 31, 2020 and December 31, 2019, respectively) and (ii) as collateral for borrowings under its repurchase agreements (approximately $33.8 million and $61.3 million at March 31, 2020 and December 31, 2019, respectively).

The Company’s centrally cleared interest rate swaps require that the Company post an “initial margin” amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the interest rate swap’s maximum estimated single-day price movement. The Company also exchanges “variation margin” based upon daily changes in fair value, as measured by the exchange. As a result of amendments to rules governing certain central clearing activities, the exchange of variation margin is a settlement of the interest rate swap, as opposed to pledged collateral. Accordingly, beginning in the first quarter of 2018 and in subsequent periods, the Company has accounted for the receipt or payment of variation margin on interest rate swaps as a direct reduction or increase to the carrying value of the interest rate swap asset or liability. At March 31, 2020 and December 31, 2019, approximately $43.7 million and $1.1 million, respectively, of variation margin was reported as a decrease to the interest rate swap asset, at fair value.

Due to Affiliates

“Due to affiliates” on the consolidated balance sheets represents amounts due to the Manager pursuant to the Management Agreement. For further information on the Management Agreement, see Note 7.

Income Taxes

The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short taxable year ended December 31, 2013. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate income tax rates to the extent that it annually distributes less than 100% of its taxable income. The Company’s taxable REIT subsidiary (“TRS”), CHMI Solutions, as well as CHMI Solutions’ wholly-owned subsidiary, Aurora, are subject to U.S. federal income taxes on their taxable income. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. In 2017, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs to make elective stock dividends (i.e., dividends paid in a mixture of stock and cash), with at least 20% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. Pursuant to this revenue procedure, the Company may elect to make distributions of its taxable income in a mixture of stock and cash.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires the recording of deferred income taxes that reflect the net tax effect of temporary differences between the carrying amounts of the Company’s assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, including operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. The Company assesses its tax positions for all open tax years and determines if it has any material unrecognized liabilities in accordance with ASC 740. The Company records these liabilities to the extent it deems them more-likely-than-not to be incurred. The Company records interest and penalties related to income taxes within the provision for income taxes in the interim consolidated statements of income (loss). The Company has not incurred any interest or penalties.

Realized and Unrealized Gain (Loss) on Investments, Net

The following table presents gains and losses on the specified categories of investments for the periods indicated (dollars in thousands):

   
Three Months Ended March 31,
 
   
2020
   
2019
 
Realized gain (loss) on RMBS, net
           
Gain on RMBS
 
$
18,150
   
$
-
 
Loss on RMBS
   
(35,693
)
   
-
 
Net realized loss on RMBS
   
(17,543
)
   
-
 
Realized loss on derivatives, net
   
(18,756
)
   
(7,476
)
Unrealized gain (loss) on derivatives, net
   
52,200
     
(8,272
)
Unrealized loss on investments in Servicing Related Assets
   
(93,853
)
   
(27,175
)
Realized gain on acquired assets, net
   
46
     
-
 
Total
 
$
(77,906
)
 
$
(42,923
)

Repurchase Agreements and Interest Expense

The Company finances its investments in RMBS with short-term borrowings under master repurchase agreements. Borrowings under the repurchase agreements are generally short-term debt due within one year. These borrowings generally bear interest rates offered by the “lending” counterparty from time to time for the term of the proposed repurchase transaction (e.g. 30 days, 60 days etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. Borrowings under these agreements are treated as collateralized financing transactions and are carried at their contractual amounts, as specified in the respective agreements. Interest is recorded at the contractual amount on an accrual basis.

Dividends Payable

Because the Company is organized as a REIT under the Code, it is required by law to distribute annually at least 90% of its REIT taxable income, which it does in the form of quarterly dividend payments. The Company accrues the dividend payable on outstanding shares, excluding treasury shares, on the accounting date, which causes an offsetting reduction in retained earnings.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company’s purposes, comprehensive income represents net income (loss), as presented in the interim consolidated statements of income (loss), adjusted for unrealized gains or losses on RMBS, which are designated as available for sale.

Recent Accounting Pronouncements

Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which changes the impairment model for most financial assets and certain other instruments. The new model requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. Additionally, allowances for credit losses on Available-for-Sale debt securities will be recognized, rather than direct reductions in the amortized cost of the investments.

The Current Expected Credit Losses model replaces the idea of incurred losses with expected losses for all financial assets, with a few exceptions, not measured at fair value. Expected losses are estimated based on historical experience, current and future economic conditions and forecasting models. Key implementation efforts have included development of internal controls and retrospective analysis of credit related losses. Credit related impairments have not been material in the past, and no current or foreseeable economic factors were identified that would cause a significant impact, partly due to the indemnification language included in our subservicer agreements and the recoverability of servicing advances under agency guides for Fannie Mae and Freddie Mac. As a result, the Company has determined that the allowance would not be significant. This determination will be re-evaluated on a quarterly basis.

The Company elected not to measure an allowance for expected credit losses on accrued interest receivables as there is a policy in place to reserve or write off accrued interest receivables in a timely manner. Therefore, the Company elected the policy to write off accrued interest receivables by reversing interest income and/or recognizing credit loss expense. As of March 31, 2020, total balance of accrued interest receivables of $5.3 million was not included in the measurement of expected credit loss. For the three months ended March 31, 2020 and 2019, the Company did not recognize any write-off of accrued interest receivables.

The Company performed a review of its available for sale securities and determined that an allowance for credit losses is not necessary. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements of Fair Value Measurement, which amends the guidance on the disclosure requirements on fair value measurements in ASC 820. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. Disclosure of fair value measurements in Note 9 has been revised to include a description of the weighted averages of unobservable inputs used to value level 3 assets.

Financial Instruments - In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses and Leases, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). The ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Reference Rate Reform - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company is currently evaluating the effect this guidance will have on its consolidated financial statements.

Changes in Presentation

Certain prior period amounts have been reclassified to conform to current period presentation.

Note 3 — Segment Reporting

The Company conducts its business through the following segments: (i) investments in RMBS; (ii) investments in Servicing Related Assets; and (iii) “All Other,” which consists primarily of general and administrative expenses, including fees paid to the Company’s directors and management fees and reimbursements paid to the Manager pursuant to the Management Agreement (see Note 7). For segment reporting purposes, the Company does not allocate interest income on short-term investments or general and administrative expenses.

Summary financial data with respect to the Company’s segments is given below, together with a reconciliation to the same data for the Company as a whole (dollars in thousands):

   
Servicing
Related Assets
   
RMBS
   
All Other
   
Total
 
Income Statement
                       
Three Months Ended March 31, 2020
                       
Interest income
 
$
1,641
   
$
18,608
   
$
-
   
$
20,249
 
Interest expense
   
1,709
     
10,582
     
-
     
12,291
 
Net interest income (expense)
   
(68
)
   
8,026
     
-
     
7,958
 
Servicing fee income
   
19,519
     
-
     
-
     
19,519
 
Servicing costs
   
6,122
     
-
     
-
     
6,122
 
Net servicing income
   
13,397
     
-
     
-
     
13,397
 
Other income (expense)
   
(78,072
)
   
166
     
-
     
(77,906
)
Other operating expenses
   
600
     
-
     
4,121
     
4,721
 
Benefit from corporate business taxes
   
(16,512
)
   
-
     
-
     
(16,512
)
Net Income (Loss)
 
$
(48,831
)
 
$
8,192
   
$
(4,121
)
 
$
(44,760
)
                                 
Three Months Ended March 31, 2019
                               
Interest income
 
$
258
   
$
16,711
   
$
-
   
$
16,969
 
Interest expense
   
1,188
     
9,556
     
-
     
10,744
 
Net interest income (expense)
   
(930
)
   
7,155
     
-
     
6,225
 
Servicing fee income
   
17,188
     
-
     
-
     
17,188
 
Servicing costs
   
3,821
     
-
     
-
     
3,821
 
Net servicing income
   
13,367
     
-
     
-
     
13,367
 
Other expense
   
(24,967
)
   
(17,956
)
   
-
     
(42,923
)
Other operating expenses
   
492
     
-
     
2,280
     
2,772
 
Benefit from corporate business taxes
   
(4,965
)
   
-
     
-
     
(4,965
)
Net Loss
 
$
(8,057
)
 
$
(10,801
)
 
$
(2,280
)
 
$
(21,138
)

   
Servicing
Related Assets
   
RMBS
   
All Other
   
Total
 
Balance Sheet
                       
March 31, 2020
                       
Investments
 
$
222,642
   
$
1,598,999
   
$
-
   
$
1,821,641
 
Other assets
   
78,477
     
133,738
     
102,980
     
315,195
 
Total assets
   
301,119
     
1,732,737
     
102,980
     
2,136,836
 
Debt
   
171,776
     
1,565,232
     
-
     
1,737,008
 
Other liabilities
   
13,617
     
25,289
     
12,286
     
51,192
 
Total liabilities
   
185,393
     
1,590,521
     
12,286
     
1,788,200
 
Book value
 
$
115,726
   
$
142,216
   
$
90,694
   
$
348,636
 

Balance Sheet
                       
December 31, 2019
                       
Investments
 
$
291,111
   
$
2,508,360
   
$
-
   
$
2,799,471
 
Other assets
   
51,729
     
80,207
     
25,145
     
157,081
 
Total assets
   
342,840
     
2,588,567
     
25,145
     
2,956,552
 
Debt
   
166,989
     
2,337,638
     
-
     
2,504,627
 
Other liabilities
   
9,762
     
16,503
     
14,017
     
40,282
 
Total liabilities
   
176,751
     
2,354,141
     
14,017
     
2,544,909
 
Book value
 
$
166,089
   
$
234,426
   
$
11,128
   
$
411,643
 

Note 4 — Investments in RMBS

RMBS on which the payment of principal and interest is guaranteed by a U.S. government agency or a U.S. government sponsored enterprise are referred to as “Agency RMBS.” RMBS also includes collateralized mortgage obligations (“CMOs”) which are either loss share securities issued by Fannie Mae or Freddie Mac or non-Agency RMBS, sometimes called “private label MBS,” which are structured debt instruments representing interests in specified pools of mortgage loans subdivided into multiple classes, or tranches, of securities, with each tranche having different maturities or risk profiles and different ratings by one or more nationally recognized statistical rating organizations (“NRSRO”). All of the Company’s RMBS are classified as available for sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income (loss) except for credit related impairment and impairment on securities the Company (i) intends to sell, (ii) will more likely than not be required to sell before recovering their cost basis, or (iii) does not expect to recover the entire amortized cost basis, even if the Company does not intend to sell the securities, or the Company believes it is more likely than not that it will be required to sell the securities before recovering their cost basis (dollars in thousands):

Summary of RMBS Assets

As of March 31, 2020


             
Gross Unrealized
   
   
 
Weighted Average
 
Asset Type
 
Original
Face
Value
   
Book
Value
   
Gains
   
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
RMBS
                                                       
Fannie Mae
 
$
1,137,922
   
$
994,835
   
$
32,036
     
-
   
$
1,026,871
     
117
 
(B)
   
3.68
%
   
3.54
%
   
27
 
Freddie Mac
   
555,048
     
514,297
     
16,050
     
-
     
530,347
     
53
 
(B)
   
3.51
%
   
3.39
%
   
28
 
CMOs
   
45,400
     
40,835
     
-
   
$
(13,963
)
   
26,872
     
17
 
(B)
   
4.89
%
   
4.87
%
   
14
 
Private Label MBS
   
27,500
     
15,131
     
8
     
(230
)
   
14,909
     
7
 
(B)
   
4.10
%
   
4.11
%
   
29
 
Total/Weighted Average
 
$
1,765,870
   
$
1,565,098
   
$
48,094
   
$
(14,193
)
 
$
1,598,999
     
194
       
3.66
%
   
3.53
%
   
27
 

As of December 31, 2019


       
   
Gross Unrealized
   
   
 
Weighted Average
 
Asset Type
 
Original
Face
Value
   
Book
Value
   
Gains
   
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
RMBS
                                                       
Fannie Mae
 
$
1,878,229
   
$
1,596,288
   
$
23,636
   
$
(691
)
 
$
1,619,233
     
198
 
(B)
   
3.80
%
   
3.65
%
   
27
 
Freddie Mac
   
824,991
     
715,892
     
12,204
     
(245
)
   
727,851
     
88
 
(B)
   
3.72
%
   
3.59
%
   
28
 
CMOs
   
127,229
     
123,053
     
6,030
     
-
     
129,083
     
30
 
(B)
   
5.28
%
   
5.26
%
   
11
 
Private Label MBS
   
50,500
     
31,595
     
598
     
-
     
32,193
     
11
 
(B)
   
4.06
%
   
4.06
%
   
29
 
Total/Weighted Average
 
$
2,880,949
   
$
2,466,828
   
$
42,468
   
$
(936
)
 
$
2,508,360
     
327
       
3.85
%
   
3.72
%
   
26
 

(A)
See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.
(B)
The Company used an implied AAA rating for the Agency RMBS. CMOs issued by Fannie Mae or Freddie Mac consist of loss share securities, approximately 75% of which, by unpaid principal balance (“UPB”), are unrated or rated below investment grade at March 31, 2020 by at least one NRSRO. Private label securities are rated investment grade or better by at least one NRSRO as of March 31, 2020.
(C)
The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.
(D)
The weighted average maturity is based on the timing of expected principal reduction on the assets.

Summary of RMBS Assets by Maturity

As of March 31, 2020


       
   
Gross Unrealized
   
   
 
Weighted Average
 
Years to Maturity
 
Original
Face
Value
   
Book
Value
   
Gains
   
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
1-5 Years
 
$
1,500
   
$
836
     
-
   
$
(39
)
 
$
797
     
1
 
(B)
   
5.50
%
   
5.50
%
   
04
 
5-10 Years
   
24,000
     
20,696
     
-
     
(7,348
)
   
13,348
     
8
 
(B)
   
5.59
%
   
5.56
%
   
09
 
Over 10 Years
   
1,740,370
     
1,543,566
   
$
48,094
     
(6,806
)
   
1,584,854
     
185
 
(B)
   
3.63
%
   
3.50
%
   
27
 
Total/Weighted Average
 
$
1,765,870
   
$
1,565,098
   
$
48,094
   
$
(14,193
)
 
$
1,598,999
     
194
       
3.66
%
   
3.53
%
   
27
 

As of December 31, 2019


       
   
Gross Unrealized
   
   
 
Weighted Average
 
Years to Maturity
 
Original
Face
Value
   
Book
Value
   
Gains
   
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
1-5 Years
 
$
1,500
   
$
895
   
$
64
     
-
   
$
959
     
1
 
(B)
   
6.34
%
   
6.34
%
   
04
 
5-10 Years
   
64,579
     
61,935
     
4,153
     
-
     
66,088
     
13
 
(B)
   
5.85
%
   
5.81
%
   
09
 
Over 10 Years
   
2,814,870
     
2,403,998
     
38,251
   
$
(936
)
   
2,441,313
     
313
 
(B)
   
3.80
%
   
3.66
%
   
27
 
Total/Weighted Average
 
$
2,880,949
   
$
2,466,828
   
$
42,468
   
$
(936
)
 
$
2,508,360
     
327
       
3.85
%
   
3.72
%
   
26
 

(A)
See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.
(B)
The Company used an implied AAA rating for the Agency RMBS. CMOs issued by Fannie Mae or Freddie Mac consist of loss share securities, approximately 75% of which, by UPB, are unrated or rated below investment grade at March 31, 2020 by at least one NRSRO. Private label securities are rated investment grade or better by at least one NRSRO as of March 31, 2020.
(C)
The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.
(D)
The weighted average maturity is based on the timing of expected principal reduction on the assets.

At March 31, 2020 and December 31, 2019, the Company pledged Agency RMBS with a carrying value of approximately $1,555.4 million and $2,419.5 million, respectively, as collateral for borrowings under repurchase agreements. At March 31, 2020 and December 31, 2019, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, to be considered linked transactions and, therefore, classified as derivatives.

Based on management’s analysis of the Company’s securities, the performance of the underlying loans and changes in market factors, management determined that unrealized losses as of the balance sheet date on the Company’s securities were primarily the result of changes in market factors, rather than issuer-specific credit impairment. The Company performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding periods. Such market factors include changes in market interest rates and credit spreads and certain macroeconomic events, none of which will directly impact the Company’s ability to collect amounts contractually due. Management continually evaluates the credit status of each of the Company’s securities and the collateral supporting those securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security (if applicable), the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. Significant judgment is required in this analysis. In connection with the above, the Company weighs the fact that a substantial majority of its investments in RMBS are guaranteed by U.S. government agencies or U.S. government sponsored enterprises.

Credit related unrealized losses and unrealized losses on securities that the Company (i) intends to sell, (ii) will more likely than not be required to sell before recovering their cost basis, or (iii) does not expect to recover the entire amortized cost basis, even if the Company does not intend to sell the securities, or the Company believes it is more likely than not that it will be required to sell the securities before recovering their cost basis, are recognized in earnings. The Company did not record an allowance for credit losses on the balance sheet at March 31, 2020 and December 31, 2019, or any impairment charges in earnings during the three-month periods ended March 31, 2020 and March 31, 2019.

The following tables summarize the Company’s securities in an unrealized loss position as of the dates indicated (dollars in thousands):

RMBS Unrealized Loss Positions

As of March 31, 2020


                         
 
Weighted Average
 
Duration in
Loss Position
 
Original
Face
Value
   
Book
Value
   
Gross
Unrealized
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
Less than Twelve Months
 
$
69,900
   
$
54,317
   
$
(14,193
)
 
$
40,124
     
23
 
(B)
   
4.70
%
   
4.69
%
   
17
 
Total/Weighted Average
 
$
69,900
   
$
54,317
   
$
(14,193
)
 
$
40,124
     
23
       
4.70
%
   
4.69
%
   
17
 

As of December 31, 2019
 

                         
 
Weighted Average
 
Duration in
Loss Position
 
Original
Face
Value
   
Book
Value
   
Gross
Unrealized
Losses
   
Carrying
Value(A)
   
Number of
Securities
 
Rating
 
Coupon
   
Yield(C)
   
Maturity
(Years)(D)
 
Less than Twelve Months
 
$
55,588
   
$
55,429
   
$
(105
)
 
$
55,324
     
5
 
(B)
   
3.70
%
   
3.53
%
   
29
 
Twelve or More Months
   
169,346
     
131,540
     
(831
)
   
130,709
     
23
 
(B)
   
3.76
%
   
3.54
%
   
25
 
Total/Weighted Average
 
$
224,934
   
$
186,969
   
$
(936
)
 
$
186,033
     
28
       
3.74
%
   
3.54
%
   
26
 
 
(A)
See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.
(B)
The Company used an implied AAA rating for the Agency RMBS. CMOs issued by Fannie Mae or Freddie Mac consist of loss share securities, approximately 75% of which, by UPB, are unrated or rated below investment grade at March 31, 2020 by at least one NRSRO. The Company’s private label securities are rated investment grade or better by at least one NRSRO as of March 31, 2020.
(C)
The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.
(D)
The weighted average maturity is based on the timing of expected principal reduction on the assets.

Note 5 — Investments in Servicing Related Assets

Aurora’s MSR portfolio of Fannie Mae, Freddie Mac and Ginnie Mae MSRs have an aggregate UPB of approximately $30.0 billion as of March 31, 2020.

The following is a summary of the Company’s Servicing Related Assets as of the dates indicated (dollars in thousands):

Servicing Related Assets Summary

As of March 31, 2020

   
Unpaid
Principal
Balance
   
Cost Basis
     
Carrying
Value(A)
   
Weighted
Average
Coupon
   
Weighted
Average
Maturity
(Years)(B)
   
Changes in
Fair Value
Recorded in
Other Income
(Loss)
 
MSRs
                                     
Conventional
 
$
27,184,142
   
$
288,741
 
(C)
 
$
203,742
     
4.19
%
   
26.6
   
$
(84,999
)
Government
   
2,792,881
     
27,754
 
(C)
   
18,900
     
3.37
%
   
25.6
     
(8,854
)
MSR Total/Weighted Average
 
$
29,977,023
   
$
316,495
     
$
222,642
     
4.12
%
   
26.5
   
$
(93,853
)

As of December 31, 2019

   
Unpaid
Principal
Balance
   
Cost Basis
     
Carrying
Value(A)
   
Weighted
Average
Coupon
   
Weighted
Average
Maturity
(Years)(B)
   
Changes in
Fair Value
Recorded in
Other Income
(Loss)
 
MSRs
                                     
Conventional
 
$
26,142,780
   
$
357,667
 
(C)
 
$
263,357
     
4.27
%
   
26.8
   
$
(94,310
)
Government
   
2,925,346
     
40,216
 
(C)
   
27,754
     
3.37
%
   
25.8
     
(12,462
)
MSR Total/Weighted Average
 
$
29,068,126
   
$
397,883
     
$
291,111
     
4.18
%
   
26.7
   
$
(106,772
)

(A)
Carrying value approximates the fair value of the pools (see Note 9).
(B)
The weighted average maturity represents the weighted average expected timing of the receipt of cash flows of each investment.
(C)
MSR cost basis consists of the carrying value of the prior period, adjusted for any purchases, sales and principal paydowns of the underlying mortgage loans.

The tables below summarize the geographic distribution for the states representing 5% or greater of the aggregate UPB of the residential mortgage loans underlying the Servicing Related Assets as of the dates indicated:

Geographic Concentration of Servicing Related Assets

As of March 31, 2020

   
Percentage of Total Outstanding
Unpaid Principal Balance
 
California
   
12.9
%
Texas
   
6.3
%
Maryland
   
5.9
%
Virginia
   
5.4
%
New York
   
5.3
%
All other
   
64.2
%
Total
   
100.0
%

As of December 31, 2019
 
   
Percentage of Total Outstanding
Unpaid Principal Balance
 
California
   
13.4
%
Texas
   
6.2
%
Maryland
   
5.6
%
New York
   
5.1
%
Virginia
   
5.1
%
All other
   
64.6
%
Total
   
100.0
%
 
Geographic concentrations of investments expose the Company to the risk of economic downturns within the relevant states. Any such downturn in a state where the Company holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and, therefore, could have a meaningful, negative impact on the Company’s Servicing Related Assets.

Note 6 — Equity and Earnings per Common Share

Common and Preferred Stock

On October 9, 2013, the Company completed an initial public offering (the “IPO”) and a concurrent private placement of its common stock. The Company did not conduct any activity prior to the IPO and the concurrent private placement.

The Company’s 8.20% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series A Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series A Preferred Stock is not redeemable by the Company prior to August 17, 2022, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after August 17, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series A Preferred Stock upon certain changes in control, the holders of the Series A Preferred Stock have the right to convert some or all of their shares of Series A Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series A Preferred Stock is 2.62881 shares of common stock, subject to certain adjustments. The Company pays cumulative cash dividends at the rate of 8.2% per annum of the $25.00 per share liquidation preference (equivalent to $2.05 per annum per share) on the Series A Preferred Stock, in arrears, on or about the 15th day of January, April, July and October of each year.

On February 11, 2019, the Company completed an offering of 1,800,000 shares of the Company’s 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Stock, par value $0.01 per share (the “Series B Preferred Stock”). The underwriters subsequently exercised their option to purchase an additional 200,000 shares for total proceeds of approximately $48.4 million after underwriting discounts and commissions but before expenses of approximately $285,000. The net proceeds were invested in RMBS and MSRs.

The Series B Preferred Stock ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, and on parity with the Company’s Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series B Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series B Preferred Stock is not redeemable by the Company prior to April 15, 2024, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after April 15, 2024, the Company may, at its option, redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series B Preferred Stock upon certain changes in control, the holders of the Series B Preferred Stock have the right to convert some or all of their shares of Series B Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series B Preferred Stock is 2.68962 shares of common stock, subject to certain adjustments. Holders of Series B Preferred Stock will be entitled to receive cumulative cash dividends (i) from and including February 11, 2019 to, but excluding, April 15, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including April 15, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.631% per annum. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October, when and as authorized by the Company’s board of directors and declared by the Company.

A significant portion of the paydowns of the RMBS acquired with offering proceeds have been or will be deployed into the acquisition of MSRs. The Company may also sell certain of these RMBS and deploy the net proceeds from such sales to the extent necessary to fund the purchase price of MSRs.

Common Stock ATM Program

Under the Common Stock ATM Program, the Company may, but is not obligated to, sell shares of common stock from time to time through one or more selling agents. The Common Stock ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three-month periods ended March 31, 2020 and March 31, 2019, the Company did not issue any shares of common stock under the Common Stock ATM Program.

Preferred Stock ATM Program

Under the Preferred Series A ATM Program, the Company may, but is not obligated to, sell shares of Series A Preferred Stock from time to time through one or more selling agents. The Preferred Series A ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three-month period ended March 31, 2020, the Company did not issue any shares of Series A Preferred Stock under the Preferred Series A ATM Program. During the three-month period ended March 31, 2019, the Company issued and sold 49,480 shares of Series A Preferred Stock under the Preferred Series A ATM Program. The shares were sold at a weighted average price of $25.05 per share for gross proceeds of approximately $1.2 million before fees of approximately $20,000.

Share Repurchase Program

In September 2019, the Company instituted a share repurchase program that allows for the repurchase of up to an aggregate of $10,000,000 of the Company’s common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. Unless sooner terminated or extended, the share repurchase program expires on September 3, 2020. During the three-month period ended March 31, 2020, the Company repurchased 142,531 shares of its common stock at a weighted average purchase price of $12.96 per share and paid brokers commissions of approximately $4,300 on such repurchases. During the year ended December 31, 2019, the Company repurchased 235,950 shares of its common stock at a weighted average purchase price of $14.59 per share and paid brokers commissions of approximately $7,000 on such repurchases.

Equity Incentive Plan

During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards, including long term incentive plan units (“LTIP-OP Units”) of the Operating Partnership.

LTIP-OP Units are a special class of partnership interest in the Operating Partnership. LTIP-OP Units may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. Initially, LTIP-OP Units do not have full parity with the Operating Partnership’s common units of limited partnership interest (“OP Units”) with respect to liquidating distributions; however, LTIP-OP Units receive, whether vested or not, the same per-unit distributions as OP Units and are allocated their pro-rata share of the Operating Partnership’s net income or loss. Under the terms of the LTIP-OP Units, the Operating Partnership will revalue its assets upon the occurrence of certain specified events, and any increase in the Operating Partnership’s valuation from the time of grant of the LTIP-OP Units until such event will be allocated first to the holders of LTIP-OP Units to equalize the capital accounts of such holders with the capital accounts of the holders of OP Units. Upon equalization of the capital accounts of the holders of LTIP-OP Units with the other holders of OP Units, the LTIP-OP Units will achieve full parity with OP Units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP-OP Units may be converted into an equal number of OP Units at any time and, thereafter, enjoy all the rights of OP Units, including redemption rights. Each LTIP-OP Unit awarded is deemed equivalent to an award of one share of the Company’s common stock under the 2013 Plan and reduces the 2013 Plan’s share authorization for other awards on a one-for-one basis.

An LTIP-OP Unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Holders of LTIP-OP Units that have reached parity with OP Units have the right to redeem their LTIP-OP Units, subject to certain restrictions. The redemption is required to be satisfied in cash, or at the Company’s option, the Company may purchase the OP Units for common stock, calculated as follows: one share of the Company’s common stock, or cash equal to the fair value of a share of the Company’s common stock at the time of redemption, for each LTIP-OP Unit. When an LTIP-OP Unit holder redeems an OP Unit (as described above), non-controlling interest in the Operating Partnership is reduced and the Company’s equity is increased.

LTIP-OP Units vest ratably over the first three annual anniversaries of the grant date. The fair value of each LTIP-OP Unit was determined based on the closing price of the Company’s common stock on the applicable grant date in all other cases.

The following table sets forth the number of shares of the Company’s common stock and the values thereof (based on the closing prices on the respective dates of grant) granted under the 2013 Plan. Except as otherwise indicated, all shares are fully vested.

Equity Incentive Plan Information

   
   
   
   
   
   
Number of Securities
Remaining Available For
   
Weighted
Average
 
             
     
LTIP-OP Units
   
Shares of Common Stock
   
Future Issuance Under
   
Issuance
 
 
Issued
   
Forfeited
   
Converted
   
Issued
   
Forfeited
   
Equity Compensation Plans
    Price  
December 31, 2018
   
(223,900
)
   
916
     
12,917
     
(57,875
)
   
3,155
     
1,235,213
       
Number of securities issued or to be issued upon exercise
   
(66,375
)
   
-
             
-
     
-
     
(66,375
)
 
$
17.64
 
Number of securities issued or to be issued upon exercise
           
-
     
6,000
     
(6,000
)
   
-
     
-
   
$
17.23
 
March 31, 2019
   
(290,275
)
   
916