PennyMac Mortgage Investment Trust — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2021, with comparisons to Q1 2020 and balance-sheet comparisons to December 31, 2020. PMT is a mortgage-focused REIT with credit-sensitive investments, interest-rate-sensitive investments, correspondent loan production, and corporate activities. It is externally managed by PNMAC Capital Management and relies on PennyMac Loan Services for servicing and production support.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net investment income (loss) | $201.4 million | $(506.5) million in Q1 2020 |
| Pretax income (loss) | $91.0 million | $(584.4) million in Q1 2020 |
| Net income (loss) | $71.6 million | $(594.7) million in Q1 2020 |
| Net income (loss) attributable to common shareholders | $65.4 million; $0.67 per diluted share | $(600.9) million; $(5.99) per diluted share |
| Common dividend declared per share | $0.47 | $0.25 in Q1 2020 |
| Total assets | $12.52 billion | $11.49 billion at December 31, 2020 |
| Shareholders’ equity | $2.36 billion | $2.30 billion at December 31, 2020 |
| Cash and short-term investments | $201.2 million | $185.0 million at December 31, 2020 |
| Total debt, as presented in MD&A | $9.67 billion | $8.67 billion at December 31, 2020 |
| Leverage ratio | 4.10x | 3.78x at December 31, 2020 |
Net interest expense was $38.7 million, compared with $8.9 million in Q1 2020. Net interest margin was negative 1.75% versus negative 0.37%; net interest spread was negative 1.80% versus negative 0.57%. Total expenses rose 42% to $110.4 million, principally reflecting higher loan fulfillment, origination, and servicing costs.
Cash from operating activities was $(1.87) billion, versus $1.71 billion provided in Q1 2020, mainly reflecting growth and timing of correspondent loan inventory. Investing activities provided $930.9 million, while financing activities provided $973.5 million. Cash increased $35.1 million to $92.8 million. Operating cash flow should be interpreted in light of the high-volume loan purchase-and-sale business.
Material changes versus Q1 2020 and year-end
- Results swung to profit, primarily as CRT-related fair-value losses recorded during the onset of COVID-19 in Q1 2020 partially reversed. Q1 2021 net gains on investments were $83.2 million, versus losses of $815.1 million.
- MSR fair value increased $278.3 million, compared with a $627.2 million decline in Q1 2020. However, MSR hedging results were a loss of $374.4 million, versus a gain of $767.2 million; net servicing fees consequently fell to $50.0 million from $244.6 million.
- Agency MBS recorded a $71.1 million valuation loss, versus a $116.0 million gain, reflecting rising rates in Q1 2021. MBS fair value declined to $1.92 billion from $2.21 billion at year-end as PMT restructured the portfolio to reduce prepayment and price risk.
- Correspondent loan purchase volume rose to $53.2 billion from $33.2 billion, and loan sales rose to $51.7 billion from $34.2 billion. Management said production growth was more than offset by lower gain-on-sale margins as industry capacity returned.
- MSRs grew to $2.44 billion from $1.76 billion, while loans acquired for sale rose to $4.65 billion from $3.55 billion. CRT-secured deposits declined to $2.66 billion from $2.80 billion; PMT reported it was no longer creating new CRT investments following the FHFA-directed wind-down of new front-end risk-sharing transactions.
- PMT issued $345 million of 5.50% exchangeable senior notes due 2026. Exchangeable notes had $555 million principal outstanding at quarter-end. Secured notes payable for CRT and MSR assets increased to $2.90 billion from $1.92 billion.
Outlook, risks, contingencies, and unusual items
- Outlook: PMT did not provide company-specific earnings guidance. Management cited an estimated $3.6 trillion U.S. mortgage origination market for 2021, compared with an estimated $4.0 trillion in 2020, and said gain-on-sale margins had moderated from 2020 levels.
- COVID-19 and credit exposure: Forbearance and borrower distress may increase servicing costs, required principal-and-interest advances, and losses under CRT arrangements. CRT agreements can trigger exposure based on delinquency even if a loan later re-performs. At March 31, funded CRT reference loans had $48.4 billion UPB; $2.21 billion was 90 or more days delinquent, including forbearance-related amounts shown in the filing.
- Rates, prepayments, and valuation: MSRs, MBS, loans, derivatives, and CRT positions are sensitive to interest rates, prepayment speeds, credit spreads, home prices, and servicing costs. Material assets and liabilities use Level 3 fair-value estimates, and changes can materially affect reported earnings without immediate cash realization. Management reported non-cash items equal to 241% of net investment income.
- Funding and liquidity: PMT relies on short-term repurchase and participation facilities, faces collateral margin calls, and must renew or replace maturing facilities. Reported available repo capacity was $3.66 billion, including $3.42 billion uncommitted. Management said matured repurchase agreements had been extended or renewed and believed it remained covenant-compliant. Regulatory capital and liquidity requirements also apply.
- Other items: The representation-and-warranty liability rose to $29.0 million from $21.9 million at year-end; PMT recorded an $8.5 million provision for current-period loan sales. The deferred-tax valuation allowance was reduced to zero from $110,000. Management reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether CRT recoveries and fair-value gains persist, and how CARES Act forbearance, delinquencies, and borrower re-performance affect ultimate credit losses.
- Whether MSR valuation gains and hedging losses remain volatile, including the effect of rate changes, prepayments, servicing costs, and hedge effectiveness.
- Availability, renewal terms, and collateral requirements of repo and other financing; the scale of uncommitted capacity; and compliance with lender and Agency covenants.
- Whether correspondent production growth can offset lower gain-on-sale margins and higher fulfillment, origination, and servicing expenses.
- Cash generation and dividend coverage, given negative operating cash flow, substantial non-cash earnings components, REIT distribution requirements, and higher leverage.
- Potential dilution and future diluted-EPS treatment of exchangeable notes, including the planned adoption of ASU 2020-06 beginning in Q1 2022.