PennyMac Mortgage Investment Trust — Q3 2023 Form 10-Q
Business context and reporting period. PMT is a mortgage-focused specialty finance company investing in mortgage servicing rights (MSRs), mortgage-backed securities (MBS), credit risk transfer (CRT) assets and newly originated residential loans. It operates through credit-sensitive strategies, interest-rate-sensitive strategies, correspondent production and corporate segments. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. Figures below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net investment income | $163.4 million | $151.1 million | $344.2 million | $254.4 million |
| Expenses | $45.0 million | $60.7 million | $140.2 million | $185.8 million |
| Pretax income | $118.4 million | $90.4 million | $204.1 million | $68.6 million |
| Net income (loss) | $61.4 million | $11.9 million | $146.7 million | $(78.0) million |
| Net income (loss) attributable to common shareholders | $51.0 million | $1.5 million | $115.4 million | $(109.3) million |
| Diluted earnings (loss) per common share | $0.51 | $0.01 | $1.20 | $(1.19) |
- Income composition and margins: Net interest expense was $25.0 million in Q3 and $75.8 million for the nine months, versus $4.4 million and $4.3 million, respectively, in 2022. The filing does not present a single consolidated revenue or operating-margin measure. It reports that noncash items represented 92% of net investment income in Q3 and 76% for the nine months.
- Cash flow: For the nine months, operating activities provided $807.2 million, investing activities provided $60.5 million, and financing activities used $743.1 million. Cash increased $124.5 million to $236.4 million. Cash flow is affected by substantial loan-purchase and sale activity.
- Balance sheet and liquidity: At September 30, total assets were $13.22 billion, total liabilities $11.27 billion and shareholders’ equity $1.95 billion. Cash plus short-term investments was $386.5 million. Reported debt was approximately $10.78 billion; debt-to-equity was 5.5:1 including non-recourse debt and 4.9:1 excluding it. Repurchase facilities showed $5.52 billion of available capacity, including $5.05 billion uncommitted. Management reported compliance with debt covenants.
- Portfolio and per-share data: MSRs were valued at $4.11 billion, MBS at $4.67 billion and loans held for sale at $1.03 billion. Book value per common share was $16.01, versus $15.78 at year-end 2022. Common dividends were $0.40 per share in Q3 and $1.20 for the nine months.
Material changes versus comparable periods
- Q3 common-shareholder income rose to $51.0 million from $1.5 million; nine-month results improved from a $109.3 million common-shareholder loss to $115.4 million of income. Management attributed the improvement chiefly to lower MBS valuation losses, stronger CRT valuations and lower income-tax provision, partly offset by MSR performance.
- CRT investments benefited from tighter credit spreads: CRT-related net gains were $30.2 million in Q3 and $136.9 million for the nine months, compared with $4.4 million and losses of $73.6 million, respectively, in 2022.
- MBS valuation losses narrowed to $144.0 million in Q3 and $127.4 million for the nine months, from $251.5 million and $620.5 million in 2022. Q3 MSR fair-value gains were $160.9 million, while MSR hedging results were a loss of $50.7 million; for the nine months, MSR fair-value changes were a loss of $64.5 million and hedging results a loss of $81.6 million.
- Interest costs increased materially as floating-rate funding repriced: repurchase-agreement weighted-average rates were 5.97% for Q3 and 5.81% for the nine months, versus 3.09% and 2.02% in 2022. Correspondent loan purchases declined to $63.7 billion for the nine months from $67.4 billion; sales to nonaffiliates also fell substantially.
- Total assets declined about $698 million from December 31, 2022, mainly from lower loans held for sale, loans at fair value and CRT deposits, partly offset by higher MBS and MSR balances. PMT issued $53.5 million of 8.50% senior notes due 2028 in September.
Outlook, commentary, risks and unusual items
- Management said inflation and higher interest rates were weighing on mortgage production and expected the 2023 industry origination market to be $1.6–$1.8 trillion, compared with an estimated $2.3 trillion in 2022. It intended to continue selling some conventional loans to PLS in Q4 to optimize capital. The filing provides no earnings or dividend guidance.
- Management noted that higher rates increase floating-rate borrowing costs, reduce refinancing and prepayment activity, and may slow housing activity or home-price growth. Lower home prices or weaker economic conditions could increase delinquencies, defaults and losses on CRT and subordinate securities. It cited low loan-to-value characteristics of many underlying loans as a potential mitigating factor.
- Liquidity risks include short-term financing renewals, lender margin calls and dependence on collateral values and financing availability. Repurchase agreements are collateralized and can require additional cash or assets if collateral values fall. The filing states that repurchase agreements maturing before the report date were extended, renewed or replaced.
- Fair-value estimates are significant and include substantial Level 3 assets, particularly MSRs and CRT exposures; changes in interest rates, prepayments, credit spreads, servicing costs and home values can materially affect reported earnings. Q3 MSR and investment gains/losses are therefore not necessarily indicative of cash earnings.
- PMT is externally managed and relies on PFSI affiliates for servicing, fulfillment and management, creating related-party dependence. It must distribute at least 90% of REIT taxable income to maintain REIT status. Series A and B preferred shares will continue accruing at fixed rates after their stated LIBOR transition dates rather than switch to floating rates, according to the filing.
- The representation-and-warranty liability was $33.2 million. Management said no material legal proceedings were pending and reported no material changes to the previously disclosed risk factors. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of earnings and future results reflects realized cash flows versus noncash fair-value marks, especially for MSRs, MBS and CRT assets.
- Whether higher funding costs, refinancing patterns and interest-rate movements continue to pressure net interest income and MSR hedging effectiveness.
- The quality and delinquency trends of CRT reference pools and serviced loans, along with exposure to home-price declines and potential representation-and-warranty claims.
- The availability and terms of repo and other financing, uncommitted capacity, covenant headroom, margin-call exposure and upcoming debt maturities.
- The sustainability of common and preferred dividends relative to taxable income, cash generation, capital needs and REIT distribution requirements.
- Potential dilution and repayment or exchange outcomes from exchangeable senior notes; basic and diluted Q3 EPS differed partly because of the notes’ potential common shares.