Business context and reporting period
PennyMac Mortgage Investment Trust (PMT) filed this annual report for the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. PMT is an externally managed mortgage REIT investing in residential mortgage loans and related assets. Its four segments are correspondent production, credit-sensitive strategies, interest-rate-sensitive strategies, and corporate activities. PennyMac Financial Services subsidiaries provide management, servicing, and mortgage fulfillment services.
Financial performance and condition
Unless noted otherwise, amounts are for the year ended December 31, 2018, with comparisons to 2017; dollar amounts are in millions.
| Metric | 2018 | 2017 |
|---|---|---|
| Net investment income | $351.1 | $317.9 |
| Income before tax | $158.0 | $124.5 |
| Net income | $152.8 | $117.7 |
| Net income attributable to common shareholders | $127.9 | $102.5 |
| Basic / diluted earnings per common share | $2.09 / $1.99 | $1.53 / $1.48 |
| Return on average common shareholders’ equity | 10.2% | 7.8% |
| Net interest income | $47.6 | $43.8 |
| Net interest margin / spread | 0.94% / 0.88% | 0.93% / 0.74% |
| Total assets | $7,813.4 | $5,604.9 |
| Total debt | $6,093.1 | $3,931.2 |
| Shareholders’ equity | $1,566.1 | $1,544.6 |
| Cash and short-term investments at year-end | $134.7 | $96.0 |
| Common dividend declared and paid per share | $1.88 | $1.88 |
Cash flows were $(573.8) from operating activities, $(1,424.3) from investing activities, and $1,980.2 from financing activities, producing a net cash decrease of $17.8. Operating cash use primarily reflected changes in mortgage-loan inventory. The balance sheet also included $74.9 million in short-term investments; these are separate from cash.
Material changes versus the prior comparable period
- Net income rose about 30%, primarily as interest-rate-sensitive strategies pretax income increased to $98.4 million from $22.7 million. Net servicing income benefited from a larger servicing portfolio and higher MSR fair values as interest rates generally rose.
- Correspondent-production net investment income fell to $105.6 million from $132.0 million as gain-on-sale margins tightened in a smaller mortgage market, despite purchases increasing to $68.0 billion from $65.9 billion.
- Credit-sensitive strategies pretax income declined to $87.3 million from $102.2 million, reflecting lower CRT gains and greater distressed-loan losses. Distressed mortgage assets were reduced by 78% to $203.4 million.
- Total assets increased 39%, including growth in Agency MBS to $2.6 billion, MSRs to $1.2 billion, and deposits securing CRT agreements to $1.1 billion. Mortgage loans at fair value declined to $408.3 million from $1.1 billion.
- Debt increased by approximately $2.2 billion; the reported leverage ratio rose to 3.89 times shareholders’ equity from 2.55 times.
Outlook, commentary, risks, and unusual items
- Management’s stated objective is attractive long-term risk-adjusted returns, primarily through dividends and secondarily through capital appreciation. The filing provides no numerical earnings or dividend guidance and gives no assurance that distributions will continue at current levels. The board determines future distributions; the REIT generally must distribute at least 90% of taxable income to maintain qualification.
- PMT reported $454.1 million of non-cash items within net investment income, equal to 129% of that income. Fair-value movements and recognition of MSRs and CRT commitments make reported earnings sensitive to estimates and market inputs; $1.8 billion, or 23% of total assets, used Level 3 fair-value inputs.
- Effective January 1, 2018, PMT prospectively changed its accounting for previously amortized MSR classes to fair value. The change produced a $14.4 million cumulative adjustment to opening equity and increased the MSR balance; it changes the timing and volatility of reported earnings.
- Management expected a $19.7 million interest-expense incentive under a repurchase agreement to cease in the second quarter of 2019, with a possible partial offset from improved pricing margins. This is an expectation, not a quantified forecast.
- Key exposures include short-term repurchase financing, margin calls, rising funding costs, interest-rate and prepayment changes, credit losses, and uncertain fair values. Repurchase facilities generally have short maturities; the filing states that facilities maturing between year-end and the filing date had been renewed, extended, or replaced.
- PMT depends on affiliated manager PCM and servicer PLS, creating service-provider and related-party risks. Other material risks include Agency and regulatory changes, repurchase or indemnification claims, REIT qualification, and the availability of financing. No material legal proceedings were reported at year-end.
- Subsequent to year-end, PMT entered into an agreement to sell 7 million common shares at $20.41 per share before expenses. The financial statements received an unqualified audit opinion; the auditor also reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether increased leverage and short-term financing can be maintained without material margin calls or refinancing pressure; review facility maturities, collateral, covenants, and available liquidity.
- How much of earnings and common dividends are supported by recurring cash receipts versus non-cash fair-value gains, particularly MSR and CRT valuations.
- Whether servicing growth and MSR fair values can offset tighter correspondent gain-on-sale margins and rising financing costs.
- The assumptions and sensitivity of Level 3 assets, including MSR prepayment speeds and CRT credit spreads, and the effect of the MSR accounting change on year-over-year comparability.
- The terms, use of proceeds, and dilution implications of the February 2019 common-share offering, and the sustainability of distributions to common and preferred shareholders.