PennyMac Mortgage Investment Trust — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. PMT is an externally managed specialty finance company investing primarily in residential mortgage assets. Its activities span correspondent loan production, credit-sensitive strategies, interest-rate-sensitive strategies and corporate operations.
Financial performance and condition
- Income: Net investment income was $64.5 million, up from $52.2 million in Q1 2016. Net income was $28.7 million versus $14.5 million; net income attributable to common shareholders was $28.2 million after $0.6 million of preferred dividends. Basic and diluted EPS were $0.42 and $0.40, respectively, compared with $0.20 for both measures a year earlier.
- Income components: Q1 2017 included $19.0 million net gain on mortgage loans acquired for sale, $16.7 million net gain on investments, $11.8 million net mortgage loan servicing fees and $10.9 million net interest income. Results from real estate acquired in settlement of loans were a $4.2 million loss.
- Noncash results: The filing reports $78.1 million of noncash items within net investment income, or 121% of net investment income. These include fair-value changes, MSRs received in loan sales and capitalized interest; reported income therefore substantially exceeded the amount represented by cash earnings alone.
- Interest margins: Net interest income fell to $10.9 million from $22.4 million. Net interest margin declined to 0.96% from 2.14%, and net interest spread to 0.79% from 1.90%. Management attributed the decline primarily to a smaller average distressed-loan portfolio and increased borrowings supporting non-interest-earning MSRs.
- Cash flow: Operating activities provided $395.4 million, compared with $39.6 million used in Q1 2016; investing activities provided $42.0 million, and financing activities used $351.8 million. Cash rose to $120.0 million from $34.5 million. Management noted that reported investment income may precede cash realization, particularly for distressed assets.
- Balance sheet and liquidity: Total assets were $6.00 billion, down from $6.36 billion at year-end; shareholders’ equity was $1.46 billion, up from $1.35 billion. Cash plus short-term investments totaled $139.9 million. Book value per share was $21.86, compared with $20.26. Management stated that liquidity was sufficient for current needs.
- Debt and leverage: Total liabilities were $4.54 billion. Repurchase-agreement borrowings were $3.50 billion; total secured borrowings were reported at $4.16 billion, excluding unamortized debt issuance costs. The leverage ratio was 3.02x, down from 3.58x. Repurchase agreements had $1.63 billion of available borrowing capacity, including $1.25 billion uncommitted; these facilities are collateralized and subject to margin calls and renewal risk.
- Distributions and capital: PMT declared $0.47 per common share, unchanged from Q1 2016. On March 9, it issued $115 million of 8.125% Series A preferred shares. The fixed dividend rate applies until March 2024; thereafter the rate floats at three-month LIBOR plus 5.831%.
Material changes versus Q1 2016 and year-end 2016
- Net income nearly doubled, primarily reflecting improved credit-sensitive segment results. Credit-sensitive pretax income rose to $19.4 million from $8.3 million, helped by CRT gains as credit spreads tightened and the CRT portfolio grew; gains on distressed loans were lower.
- Correspondent production purchases rose to $14.5 billion from $10.2 billion. Management cited growth in its correspondent seller network, partly offset by lower margins amid heightened competition in a smaller mortgage market.
- CRT Agreements generated $18.6 million of net investment gains, versus a $4.1 million loss. Net investment gains overall were $16.7 million, compared with a $3.9 million loss.
- Net servicing fees fell to $11.8 million from $15.6 million. Higher servicing fees were more than offset by adverse MSR-related effects, including hedge costs.
- Mortgage loans at fair value declined to $1.58 billion from $1.72 billion and REO to $224.8 million from $274.1 million. PMT acquired no distressed mortgage loans during the quarter and received $190.8 million from distressed-loan and REO liquidations, payoffs, paydowns and sales.
- PMT’s assets continued shifting from distressed loans toward correspondent-production-related investments, including MSRs and CRT Agreements. MBS holdings increased to $1.09 billion from $865.1 million.
Outlook, risks and unusual items
- Management gave no specific earnings or dividend forecast. It expects future investment activity to depend on cash from operations and liquidations, financing availability and potentially additional equity capital. Management said it expects to maintain liquidity sufficient for current needs, while noting that REIT distribution requirements limit retained earnings.
- Funding is substantially short-term and secured. The company is exposed to facility renewals, lender margin calls, collateral-value declines, borrowing-cost increases and limited financing availability for MSRs and ESS. Management said maturities falling between March 31 and the filing date had been renewed or extended.
- Material risks include interest-rate and prepayment changes, real-estate values, borrower defaults and recoveries, distressed-loan resolution and foreclosure delays, fair-value estimation uncertainty, correspondent seller repurchases and indemnification claims, and reliance on affiliated manager PCM and servicer PLS. A substantial portion of distressed loans and REO was acquired from or through Citigroup and JPMorgan Chase affiliates.
- Representation-and-warranty liability was $11.4 million, down from $15.4 million at year-end, including a $4.6 million reduction from revised loss estimates. Management cautioned that future repurchase activity and losses may increase as sold loans season. Litigation was not considered likely to have a material adverse effect; the filing reported no material change in previously disclosed risk factors.
- The negative effective tax rate reflected a $6.1 million tax benefit, largely associated with a loss at the taxable REIT subsidiary despite consolidated pretax income. Management expects the effective rate may be volatile.
- After quarter-end, PMT expanded certain Credit Suisse repurchase facilities and temporarily increased certain Barclays financing limits. The filing describes these as subsequent events, not quarter-end borrowings.
Key facts for investors to verify
- How much of reported earnings is recurring cash income versus fair-value gains, retained MSR value and other noncash items.
- Whether CRT gains and credit-spread conditions persist, and how much committed CRT funding and collateral liquidity may be required.
- Short-term facility renewal terms, uncommitted borrowing availability, margin-call exposure and compliance with financing covenants.
- MSR valuation, hedge effectiveness and servicing economics, given Q1 hedge costs and sensitivity to prepayments and discount rates.
- Performance, collateral values and resolution costs of the remaining distressed-loan and REO portfolio, including the concentration of credit and geographic risks.
- Correspondent-production margins, loan-sale volumes, repurchase claims and reliance on related-party services and financing.
- Preferred-share dividend obligations and the sustainability of the $0.47 common dividend relative to cash generation and REIT distribution requirements.