PennyMac Mortgage Investment Trust — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. PMT is an externally managed mortgage investment trust focused on residential mortgage loans and related assets, including distressed loans.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net investment income | $42.0 | $12.7 | $89.5 | $30.4 |
| Net income | $20.5 | $7.7 | $44.8 | $17.1 |
| Diluted earnings per share | $0.73 | $0.45 | $1.72 | $1.01 |
| Total expenses | $17.1 | $4.6 | $38.3 | $10.9 |
| Dividends declared per share | $0.50 | $0.35 | $0.92 | $0.35 |
- Q3 investment gains were $31.5 million, versus $8.2 million a year earlier. Management attributed the increase mainly to portfolio growth and loan valuation gains. Nine-month investment gains were $63.5 million, versus $19.1 million.
- Interest income was $9.8 million for Q3 and $24.0 million year to date. Q3 net income included substantial fair-value gains; results therefore reflect valuation estimates as well as cash interest and realized proceeds.
- At September 30, total assets were $1.155 billion, total liabilities $624.8 million, and shareholders’ equity $530.7 million. Cash was $12.0 million and short-term investments $30.7 million. Mortgage loans at fair value were $715.3 million, with another $152.9 million under a forward purchase agreement; REO was $69.9 million.
- Reported financing balances included $346.0 million of loan repurchase agreements, $62.8 million of securities repurchase agreements, $163.8 million under the forward purchase agreement, and $12.8 million financing REO.
- For the nine months, operating cash flow was negative $80.5 million and investing cash flow negative $278.0 million; financing provided $325.0 million. Cash declined $33.5 million to $12.0 million.
Material changes and business developments
- Total assets increased 96% from December 31, 2010, while investments grew 112%. PMT attributed expansion to acquisitions, additional borrowing, and the February/March share offering, which generated approximately $188.4 million net proceeds; net equity proceeds reported for the period were $188.8 million.
- Nine-month investment acquisitions totaled $944.8 million, including $625.1 million of distressed mortgage loans and $294.4 million of correspondent-lending loans. A substantial portion of distressed purchases came from or through Citigroup affiliates.
- About 78% of the fair value of the mortgage-loan portfolio was nonperforming at quarter-end. Approximately 72% of estimated loan fair value had current loan-to-value ratios above 100%; California represented about 27% of loan portfolio fair value.
- Q3 servicing fees rose to $4.5 million from $0.9 million, and interest expense to $5.2 million from $0.3 million, primarily reflecting the larger, increasingly debt-financed portfolio. Total Q3 expenses rose to $17.1 million from $4.6 million.
Outlook, risks, and unusual items
- Management said distressed-loan acquisition opportunities remain substantial but may be irregularly timed; portfolio growth depends on successful acquisitions and available capital. It described current liquidity as sufficient for short-term needs, without providing earnings guidance.
- Funding relies significantly on short-term secured borrowing. At quarter-end, about 76% of mortgage loans, MBS, and REO were financed. Repurchase facilities expose PMT to renewal, collateral-value, and margin-call risk; all borrowings were short term.
- A July 2011 forward purchase agreement with Citigroup Global Markets Realty covered distressed assets with an initial purchase price of $172.7 million, potentially rising to $174.4 million. Final settlement is subject to obtaining adequate capital; failure to settle may result in contractual net settlement. Subsequent to quarter-end, PMT also reported a pending approximately $35.1 million purchase subject to diligence, conditions, and capital availability.
- Fair values for mortgage loans, MBS, and related positions rely substantially on Level 3 inputs and management models. Management cited illiquid markets, uncertain housing prices, borrower performance, foreclosure timing, servicing/regulatory developments, and valuation assumptions as material risks.
- PMT’s REIT status requires qualifying distributions, generally at least 90% of taxable income. The filing also highlights potential adverse effects if regulatory interpretations of the Investment Company Act exemption for mortgage-related REITs change.
- On November 1, 2011, PMT amended a correspondent-loan repurchase facility, increasing its maximum purchase price from $75 million to $150 million and extending it to October 30, 2012. The board declared a $0.50-per-share dividend payable November 30, 2011.
- No legal proceedings were reported that management considered reasonably likely to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of earnings growth is repeatable cash income versus fair-value gains, and how sensitive are Level 3 valuations to housing, default, and discount-rate assumptions?
- Whether the heavily nonperforming loan portfolio can be resolved or liquidated on schedule, and whether reported collateral values translate into recoveries after costs.
- Whether short-term facilities can be renewed or replaced, and whether liquidity and covenant buffers can withstand margin calls or delayed asset sales.
- Whether PMT can fund and settle the forward purchase commitments without constraining liquidity or requiring additional equity.
- How affiliate relationships, servicing fees, management fees, and any contingent underwriting payments affect costs and shareholder returns.