Pennymac Mortgage Investment Trust — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter filing. PMT is a mortgage-focused specialty finance company and REIT, externally managed by PNMAC Capital Management and serviced by PennyMac Loan Services, both PFSI subsidiaries.
Financial and operating performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net investment income | $429.0 million | $303.8 million |
| Pretax income | $244.4 million | $63.1 million |
| Net income (loss) | $199.7 million | $(73.3) million |
| Net income (loss) attributable to common shareholders | $157.8 million | $(115.1) million |
| Diluted earnings (loss) per common share | $1.63 | $(1.26) |
| Net interest expense | $96.1 million | $26.6 million |
| Operating cash flow | $1.340 billion | $1.784 billion |
| Investing cash flow | $(21.7) million | $(1.867) billion |
| Financing cash flow | $(1.149) billion | $135.9 million |
| Common dividends per share | $1.60 | $1.81 |
- At year-end, total assets were $13.114 billion, total liabilities $11.157 billion, shareholders’ equity $1.957 billion, and book value per common share $16.13, versus $15.78 in 2022.
- Total debt was $10.505 billion, including $9.905 billion of secured borrowings. Debt-to-equity was 5.4:1 including non-recourse debt and 4.7:1 excluding it. Cash was $281.1 million and short-term investments were $128.3 million. Reported available secured borrowing capacity was approximately $5.856 billion.
- Net interest expense increased as financing costs rose; average repurchase-agreement and secured CRT/MSR financing costs also increased materially. The filing does not present a single conventional operating-margin measure.
- Approximately 95% of net investment income consisted of non-cash items, including fair-value changes and assets recognized in loan-sale transactions; reported cash flows therefore should not be read as equivalent to earnings.
- Correspondent loan purchases were $87.5 billion, modestly below $88.1 billion in 2022 and well below $181.4 billion in 2021. Year-end MSRs were valued at $3.919 billion; MBS at $4.836 billion; and net CRT-related investments at $1.146 billion.
Material changes versus FY2022
- Net income attributable to common shareholders improved by $272.9 million, from a loss to a profit. Improved CRT and MBS valuations were important contributors: CRT results benefited from tighter credit spreads, while MBS recorded $75.0 million of valuation gains versus $576.8 million of losses in 2022.
- Net loan servicing fees fell to $288.6 million from $909.6 million. MSR valuation changes and hedging, net of cash-flow realization, were substantially less favorable than in 2022; reported MSR valuation adjustments were negative $296.8 million in 2023 versus positive $449.4 million in 2022.
- Net interest expense rose to $96.1 million from $26.6 million, as the cost of financing increased; higher placement-fee income on custodial funds partly offset this.
- Expenses declined 23% to $184.6 million, mainly reflecting lower loan fulfillment and origination costs associated with reduced production volumes.
- Year-end assets declined 6% to $13.114 billion, primarily due to lower loans held for sale, partly offset by higher MBS holdings. Debt decreased from $11.404 billion to $10.505 billion.
Outlook, risks, and notable items
- Management cited high interest rates and inflation as pressures on mortgage production and financing costs. The filing relays industry economists’ estimate that the mortgage market could grow from about $1.4 trillion in 2023 to $2.0 trillion in 2024, with rates expected to decline; this is industry commentary, not formal PMT earnings guidance. PMT said it intended to continue selling some conventional loans to PLS in 2024 to optimize capital allocation.
- Key risks include interest-rate, credit-spread and prepayment volatility; MSR and CRT fair-value uncertainty; leverage, refinancing and margin-call exposure; mortgage-market liquidity; borrower defaults and property-value declines; regulation and Agency dependence; and reliance on PFSI, PCM and PLS.
- Management reported that all debt financing arrangements maturing between year-end and the report date had been renewed, extended or replaced, and that PMT and PLS were in compliance with applicable Agency capital and liquidity requirements. Repurchase facilities remain short-term and can require collateral after market-value declines.
- Approximately 40% of total assets were measured using Level 3 fair-value inputs. MSRs and CRT valuations depend on significant estimates, including prepayment, discount-rate, servicing-cost, credit-loss and property-value assumptions.
- Series A and B preferred shares will continue accruing dividends at their existing fixed rates after the relevant 2024 dates rather than transition to floating rates, following the LIBOR fallback interpretation described in the filing. Some investors have challenged that interpretation; litigation is possible.
- PMT issued $53.5 million of 8.50% senior notes due 2028 in September 2023. The company reported no material legal proceedings as of year-end and no off-balance-sheet arrangements. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
- PMT has not set a minimum common dividend and provides no assurance that distributions will continue at current levels. REIT qualification generally requires distribution of at least 90% of taxable income.
Investor verification checklist
- Review the drivers and repeatability of 2023 earnings, particularly CRT/MBS valuation gains, MSR valuation and hedging results, and the tax provision.
- Assess liquidity against short-term maturities, collateral haircuts, margin calls, lender concentration and the reported additional borrowing capacity.
- Test MSR and CRT valuation assumptions and sensitivity to rates, prepayments, servicing costs, credit spreads and home prices.
- Track loan production volumes, margins, sales to PLS, and the related-party economics and concentration associated with PFSI affiliates.
- Monitor preferred-share LIBOR disputes, the 2024 exchangeable-note maturity, REIT distribution capacity, and whether common dividends remain supported by cash and taxable income.