PennyMac Mortgage Investment Trust — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing; it also reports fourth-quarter results. PMT is an externally managed mortgage REIT focused on residential mortgage assets, correspondent loan production, mortgage servicing rights (MSRs), and credit risk transfer (CRT) investments. Management and servicing are provided primarily by PennyMac affiliates.
Financial performance and position
| Metric | FY2017 / year-end | FY2016 / comparison |
|---|---|---|
| Net investment income | $317.9 million | $272.1 million |
| Net income | $117.7 million | $75.8 million |
| Net income attributable to common shareholders | $102.5 million, after $15.3 million of preferred dividends | $75.8 million |
| EPS | $1.53 basic; $1.48 diluted | $1.09 basic; $1.08 diluted |
| Return on average common equity | 7.8% | 5.4% |
| Net interest income / margin / spread | $43.8 million / 0.93% / 0.74% | $72.4 million / 1.51% / 1.26% |
| Operating cash flow | $223.1 million provided | $621.5 million used |
| Investing / financing cash flow | $681.7 million provided / $861.6 million used | $194.0 million provided / $404.0 million provided |
| Total assets / shareholders’ equity | $5.60 billion / $1.54 billion | $6.36 billion / $1.35 billion |
| Cash / short-term investments | $77.6 million / $18.4 million | $34.5 million / $122.1 million |
| Borrowings and leverage | $3.79 billion total liabilities; 2.55x leverage ratio | $5.01 billion total liabilities; 3.58x leverage ratio |
Common dividends declared were $1.88 per share, unchanged from 2016. The year-end common book value was $20.13 per share, versus $20.26 in 2016. The company reported net income of $40.8 million in fourth-quarter 2017; quarterly diluted EPS was $0.50.
Business and portfolio changes
- Correspondent loan purchases totaled $65.9 billion, broadly in line with $66.1 billion in 2016. PMT described itself as the second-largest U.S. correspondent aggregator. The servicing portfolio grew to $72.1 billion UPB from $56.3 billion.
- Correspondent production segment net investment income declined to $132.0 million from $168.5 million, mainly as gain-on-sale margins tightened amid a smaller mortgage market and increased competition.
- Credit-sensitive strategies net investment income rose to $133.4 million from $66.3 million. CRT investment gains were a principal driver, reflecting portfolio growth and tighter credit spreads.
- Net gain on investments increased to $96.4 million from $7.2 million; CRT gains were $123.7 million overall, partly offset by hedging and ESS losses.
- Net interest income declined to $43.8 million from $72.4 million, as distressed-loan balances fell and financing of non-interest-earning assets increased. Borrowing costs also rose, particularly on MSR and ESS financing.
- Total assets fell 12% to $5.60 billion, primarily as mortgage loans held for investment and sale, REO, and ESS declined. MSRs, CRT deposits, and MBS increased. PMT acquired no new distressed mortgage loans in 2017 and continued liquidating that portfolio.
Liquidity, financing, and capital
PMT reported $3.18 billion of repurchase-agreement borrowings, $307.4 million of asset-backed VIE financing, $247.2 million of exchangeable notes, and $144.1 million owed under a repurchase arrangement with PFSI. Repurchase facilities were generally short-term; the company reported a 4.0-month weighted-average maturity and $2.78 billion of available repurchase borrowing capacity at year-end. Borrowings are collateralized and subject to margin calls, covenants, and minimum cash and net-worth requirements. Management stated that liquidity was sufficient for current needs, while noting ongoing dependence on financing access and eligible collateral.
PMT issued 12.4 million preferred shares in 2017, raising $299.7 million net of issuance costs. Series A and B carry fixed annual dividend rates of 8.125% and 8.00%, respectively, until 2024, then float with LIBOR-based spreads. The company repurchased 5.65 million common shares for $91.2 million; $94.1 million remained under the $300 million authorization. The 5.375% exchangeable notes have $250 million principal and mature in 2020.
Outlook, risks, and unusual items
- Outlook: No formal earnings or production guidance is provided. Management expects elevated hurricane-related delinquency servicing expenses to continue into 2018, but did not expect significant adverse future earnings effects from the 2017 hurricanes.
- Hurricanes: Delinquencies increased in affected areas, including within CRT reference pools. Management reported that earlier fair-value reductions on CRT investments had reversed by year-end.
- Fair-value and earnings quality: More than half of reported FY2017 net investment income was noncash by the filing’s measure: noncash items totaled $355.2 million, or 112% of net investment income. Approximately 39% of total assets were measured using Level 3 fair-value inputs, which depend on significant unobservable assumptions.
- Tax Act: The 2017 tax law rate reduction generated a $13.0 million tax benefit from remeasuring deferred tax balances. Beginning January 1, 2018, PMT planned to account for all MSRs at fair value, with a reported expected $14.4 million increase in shareholders’ equity, net of deferred tax effects.
- Principal risks: Short-term secured funding, collateral haircuts and margin calls; interest-rate, prepayment, credit-spread and housing-price exposure; CRT credit losses; MSR/ESS valuation and runoff; repurchase and indemnification claims; reliance on PFSI affiliates for management, servicing, and loan fulfillment; and REIT and Investment Company Act compliance.
- Contingencies and controls: PMT reported no material legal proceedings at year-end. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Whether CRT gains and tighter credit spreads are repeatable, and how delinquencies and loss performance develop in the reference pools.
- How much reported earnings and distributable cash depend on noncash fair-value estimates, especially Level 3 valuations.
- Repurchase-facility renewals, collateral availability, margin-call exposure, covenant headroom, and the liquidity of pledged assets.
- The sustainability of common dividends relative to taxable income, cash generation, and preferred-dividend obligations.
- Progress in shrinking distressed loans and REO, and the effects on net interest income, servicing costs, and realized returns.
- Related-party service arrangements, fees, and counterparty dependence on PCM, PLS, and PFSI.