PennyMac Mortgage Investment Trust — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report; selected fourth-quarter results are included below. PMT is an externally managed mortgage-focused REIT, with substantially all operations conducted through subsidiaries and services provided principally by PennyMac Financial Services, Inc. affiliates.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net investment income | $488.8 million | $351.1 million |
| Expenses | $298.2 million | $193.1 million |
| Income before tax | $190.6 million | $158.0 million |
| Net income | $226.4 million | $152.8 million |
| Net income attributable to common shareholders | $201.4 million | $127.9 million |
| Basic / diluted earnings per common share | $2.54 / $2.42 | $2.09 / $1.99 |
| Return on average common shareholders’ equity | 12.0% | 10.2% |
| Common dividends per share | $1.88 | $1.88 |
| Net interest income; net interest margin | $20.4 million; 0.26% | $47.6 million; 0.94% |
Fourth quarter: Net investment income was $155.0 million, net income was $58.6 million, basic and diluted EPS were $0.56 and $0.55, respectively, and the declared common dividend was $0.47 per share.
- Balance sheet at year-end: Assets were $11.77 billion, liabilities $9.32 billion, shareholders’ equity $2.45 billion, and cash $104.1 million. Short-term investments were $90.8 million.
- Debt and leverage: Borrowings totaled $9.17 billion, including $7.01 billion short-term and $2.16 billion long-term debt. The company-reported leverage ratio was 3.75 times equity, versus 3.89 times in 2018.
- Cash flow: Operating activities used $2.99 billion, investing activities used $704.7 million, and financing activities provided $3.73 billion. Cash increased $44.2 million to $104.1 million; operating cash use chiefly reflected growth in loans held for sale.
- Portfolio and production: Correspondent loan purchases totaled $114.5 billion, up from $68.0 billion. Year-end MSRs were $1.54 billion, MBS $2.84 billion, and CRT-related assets and commitments approximately $2.2 billion.
Material changes versus 2018
- Net income increased $73.6 million. Higher CRT-related results and stronger correspondent production contributed; a $35.7 million income tax benefit also lifted net income, compared with $5.2 million of tax expense in 2018.
- Credit-sensitive strategies pretax income rose to $182.2 million from $87.3 million, while correspondent production pretax income increased to $64.6 million from $16.5 million.
- Interest-rate-sensitive strategies pretax income fell sharply to $1.1 million from $98.4 million. Lower rates supported MBS valuation and hedging gains but drove lower MSR values and servicing results.
- Net loan servicing fees shifted to a loss of $58.9 million from income of $120.6 million, including $464.4 million of MSR valuation adjustments, partly offset by $80.6 million of hedging gains.
- Expenses rose 54%, primarily because loan fulfillment costs increased with production volume and management fees rose. Total assets grew 51%, supported by larger loans-held-for-sale, CRT deposit, MSR and MBS balances.
- Net interest margin narrowed to 0.26% from 0.94%; net interest income declined despite substantial growth in assets and financing.
Outlook, risks and unusual items
- The filing provides no quantified earnings or dividend guidance. Management’s stated objective is long-term risk-adjusted returns, primarily through dividends and secondarily through capital appreciation; future distributions remain at the board’s discretion.
- Management attributed higher production and gain-on-sale results to increased mortgage demand as rates declined. That same refinancing environment accelerated MSR runoff and reduced MSR and ESS values.
- Key exposures include interest-rate and prepayment volatility, credit performance and valuation of CRT investments, liquidity and margin calls under short-term secured financing, and reliance on Agency programs and access to mortgage markets. Nearly all assets are carried at or based on fair value; 35% of total assets involved Level 3 inputs.
- Funding and capital events included four underwritten common-share offerings totaling 33.5 million shares, plus 5.5 million shares sold through the ATM program. PMT issued $210 million of 5.50% exchangeable notes due 2024 and approximately $1.31 billion of secured CRT term notes during 2019. A $250 million 5.375% exchangeable note issue was due May 2020; the filing states financing arrangements maturing between year-end and filing were renewed, extended or replaced.
- Subsequent to year-end, PMT issued $350 million of secured CRT notes in February 2020. LIBOR transition was identified as a risk, with the benchmark then expected to be phased out by the end of 2021. The filing also discussed uncertainty around the scheduled 2021 expiration of the GSE “QM patch.”
- Related-party dependence is significant: PCM manages PMT and PLS provides servicing and fulfillment. Their agreements were due for renewal in September 2020, subject to automatic renewal. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions and identified valuation of MSRs and CRT assets and commitments as critical audit matters. No material legal proceedings were reported at year-end.
Investor facts to verify
- How much of reported earnings and common EPS depended on noncash fair-value changes, including CRT commitments and MSR marks, versus realized cash earnings?
- How did MSR valuation assumptions, prepayment activity and hedging performance change after year-end, and what was the effect on servicing cash flows?
- What are current borrowing availability, covenant headroom, required cash reserves and potential margin-call exposure, particularly for short-term and uncommitted facilities?
- What were the actual repayment, refinancing or replacement terms for the May 2020 notes and other near-term financing, and how is PMT addressing LIBOR-linked contracts?
- How should investors assess the impact of 2019 share issuance and exchangeable debt on per-share returns, dilution and the sustainability of the $1.88 annual common dividend?