PennyMac Mortgage Investment Trust — Q1 2019 Form 10-Q
Business context and period. PMT is an externally managed specialty finance company investing mainly in residential mortgage-related assets. Its activities span correspondent loan production, credit-sensitive strategies, interest-rate-sensitive strategies and corporate. This unaudited report covers the quarter ended March 31, 2019; comparative income and cash-flow figures are for Q1 2018, and balance-sheet comparisons are to December 31, 2018.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net investment income | $106.6 million | $75.7 million in Q1 2018 |
| Net income | $53.5 million | $28.2 million in Q1 2018 |
| Net income attributable to common shareholders | $47.3 million | $22.0 million in Q1 2018 |
| Diluted earnings per common share | $0.68 | $0.35 in Q1 2018 |
| Common dividend declared per share | $0.47 | $0.47 in Q1 2018 |
| Net interest income / margin | $8.3 million / 0.55% | $6.2 million / 0.61% in Q1 2018 |
| Cash from operating / investing / financing activities | $144.9 million / $175.5 million / $(311.7) million | $122.5 million / $(227.6) million / $129.6 million in Q1 2018 |
| Cash | $68.5 million | $59.8 million at December 31, 2018 |
| Total assets / shareholders’ equity | $7.56 billion / $1.73 billion | $7.81 billion / $1.57 billion at December 31, 2018 |
| Borrowings / leverage ratio | $5.67 billion / 3.29x | $6.09 billion / 3.89x at December 31, 2018 |
| Book value per common share | $20.72 | $20.61 at December 31, 2018 |
The filing does not present a conventional consolidated revenue line; net investment income is the principal reported operating measure. Interest expense was $54.7 million, compared with $34.8 million a year earlier. Expenses rose 50% to $56.8 million, primarily from higher loan fulfillment costs.
Material changes versus the prior comparable period
- Net investment income increased 41%; net income and diluted EPS also rose substantially. Credit-sensitive strategies generated $58.4 million of pretax income versus $3.6 million a year earlier, supported by CRT-related gains and tighter credit spreads.
- Interest-rate-sensitive strategies’ pretax income fell to $0.8 million from $37.8 million. Lower rates reduced MSR and excess-servicing-spread values; a $137.3 million MSR fair-value loss was partly offset by $41.1 million of hedging gains. Net mortgage servicing fees were negative $31.1 million, versus positive $56.2 million.
- Net investment gains were $95.1 million versus near zero in Q1 2018; Q1 2019 included $36.9 million of MBS gains, $31.0 million of CRT Agreement-related gains and $22.2 million on CRT purchase commitments.
- Mortgage loan sales totaled $16.4 billion, up from $14.4 billion. PMT received $131.9 million in MSRs through loan-sale transactions. The portfolio of distressed loans and REO continued to run off.
- PMT issued 7.0 million common shares in February, receiving $142.8 million net, and began a $200 million at-the-market offering program; $195.5 million remained available at quarter-end. It issued $295.7 million in secured term notes on March 29.
Outlook, risks and unusual items
- No specific earnings or full-year financial guidance is provided. Management expects to stop accruing incentives under a consumer-relief repurchase agreement in Q2 2019; those incentives reduced Q1 interest expense by $7.5 million, versus $2.4 million a year earlier. The agreement expires August 21, 2019, subject to earlier termination by the lender. Management said improved pricing margins may partly offset the lost incentives, but gave no assurance.
- Management expects investment growth over time to depend on access to additional equity, borrowing and other financing. Short-term facilities, margin calls, collateral values and counterparty funding availability are key liquidity exposures. Contractual obligations totaled $8.9 billion, including loan-purchase and CRT-security commitments; $7.36 billion was shown due within one year.
- Results are sensitive to interest rates, mortgage prepayments, credit performance, housing prices and credit spreads. Much of the portfolio is valued using Level 3 inputs; fair-value estimates can change materially and are subject to model and assumption uncertainty. Approximately 62% of net investment income was identified as non-cash items.
- CRT commitments and retained credit exposure can generate losses from borrower delinquency, default and foreclosure. Mortgage-sale representations and warranties may require repurchases or indemnification; the recorded liability was $7.7 million. The company also depends on affiliated manager and servicer PFSI/PLS, creating related-party and operational dependencies.
- PMT reported no material legal proceedings, no material change to the risk factors in its 2018 Form 10-K, and no material subsequent event. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings improvement is repeatable versus fair-value gains, CRT spread movements and other non-cash items.
- Whether lower interest rates and faster refinancing continue to pressure MSR and ESS values, and how effective hedges are against those movements.
- The availability, terms and renewal status of short-term financing, exposure to margin calls, and compliance with cash, net-worth and other lending covenants.
- Performance and loss trends in CRT reference pools, including the $29.3 billion of UPB under legacy recourse obligations and $23.7 billion of UPB subject to CRT-security purchase commitments.
- Future share issuance and dilution, dividend coverage and the effect of the $0.47 quarterly common dividend on capital and liquidity.
- Developments in representations-and-warranties claims, counterparty recoveries, and the company’s reliance on affiliated manager and servicer arrangements.