PennyMac Mortgage Investment Trust (PMT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PennyMac Mortgage Investment Trust third earnings conference call.

At this time all lines are in a listen-only mode.

(Operator Instructions).

I would now like to turn the conference over to Mr.

Stan Kurland, Chairman and Chief Executive Officer.

Sir, please proceed.

Thank you, Tekhia.

Before we begin, please take a moment to review the forward-looking disclaimer statement on slide 1.

Now please turn to slide 2 and let's discuss the third-quarter highlights.

For the third quarter, PMT reported net income of $7.7 million or $0.45 per share, a net investment income of $12.6 million.

In addition, the Board of Trustees has approved a dividend of $0.42 per share which represents an annualized 9.7% dividend yield based on the closing stock price on Friday, October 29.

During the quarter, we invested $73 million in mortgage assets utilizing cash flow from existing investments and debt from repurchase agreements on PMT's MBS position.

The aggregate unpaid principal balance of our whole loan investments for the quarter totaled $147 million.

We also entered into a transaction to invest $222 million in non-performing whole loans which is scheduled to close in the middle of December.

To complete this transaction, we are utilizing debt including a new $100 million credit facility and cash.

We will discuss our expanding leverage capabilities and, specifically, this new line of credit later in the presentation.

PMT continues to grow its conduit operations.

To date, we have funded approximately $14 million in prime agency loans as we have tested our systems' infrastructure and procedures.

We are ready to begin increasing purchase volume of prime credit quality conventional conforming mortgage loans and we expect our business to pick up meaningfully over the next year.

Facilitating the launch of this business, our conduit subsidiary was recently approved as a Fannie Mae seller/servicer.

Our investment manager, PCM, is currently looking to expand the product offerings of our conduit and is developing jumbo loan programs and guidelines.

We are preparing to capitalize on that product segment when the market returns.

Let's now turn to slide 4 and take a closer look at PMT's investments.

Our manager and servicer were very active during the quarter -- working through resolution programs on our investment holdings and completing three whole loan purchase transactions.

PMT's whole loan portfolio increased over 21% from the previous quarter with almost all of that increase coming from the acquisition of non-performing whole loans.

We also increased our holdings or short duration bonds by over 34% with a number of opportunistic purchases made in late September.

We expect our MBS to continue to produce healthy cash flows while providing PMT the ability to leverage our portfolio through the pledging of bonds on repurchase agreements.

Cash flow from PMT's investments totaled $45 million with approximately $25 million coming from our residential whole loans.

These cash flows represent a return of our investments and the corresponding gains, many of which were recognized in earlier periods.

We will be discussing income recognition and cash flow timing later in the presentation.

As you can see from our operational activity, it was an active quarter.

Almost 18% of the ending Q2 whole loan portfolio experienced one type of transition event.

Foreclosures were the most active for the quarter comprising 52% of the total transition events.

Our alternatives to foreclosure, short sale and deeds in lieu, performed well comprising 35% of the total transitions.

PLS, our servicer, works diligently with borrowers to provide alternatives to foreclosure where possible as these alternatives generally represent a resolution in the best interest of all parties.

As we look forward to Q4 and into 2011, I think it makes sense to also review PMT's strategy.

Let's turn to slide 5 and see how our strategy evolves as we move forward.

Looking at our current strategy, you can see our primary focus is on distressed mortgage acquisitions and that remains our primary focus through the medium term.

We believe that the distressed market should be fairly active for at least the next 18 months and anticipate PMT to continue as a purchaser of distressed residential mortgage assets over that time.

While we continue to see opportunities in the distressed market, we understand that this opportunity will and must decline over time as we converge to a more normalized market.

PMT needs to prepare itself now in order to effectively transition itself as distressed opportunities diminish over time.

To that end, we have started a conventional conforming conduit.

We are developing a jumbo loan conduit program and we are in the initial stages of developing warehouse lending capabilities.

While these mortgage segments will develop over time, it is necessary to build the capabilities today to seize the opportunities of the future.

We expect our conventional conforming conduit to grow in volume in the fourth quarter of 2010 and into 2011.

At the same time, PCM, our investment manager, will be building out loan programs and guidelines for jumbo loans which will allow PMT to begin purchasing prime jumbo whole loans as that market develops.

We intend to prudently build volumes for this product, which is much like we are doing on our conventional conforming conduit.

As both of these business lines expand their customer base, volume should increase appropriately.

As we expand our conduit customer base, some of those business partners will look to PMT for financing.

By providing warehouse lines to these business partners, we will be able to increase our partners' ability to fund mortgages which will in turn provide more products for our conduit to purchase.

This strategy is a longer-term strategy but PCM is currently evaluating the systems and capabilities today to accomplish this in the future.

PMT's partnership with PCM and PLS afforded the operational expertise to be able to develop best-in-class systems and capabilities, both PCM and PLS have the experience and capabilities required to execute these strategies.

With the executive management averaging over 20-plus years of mortgage banking experience, this positions PMT very well for the future.

Now let's turn to slide 6 to see how the liability side of the balance sheet evolves in the short term.

As you can see from the slide, there are a number of strategic initiatives we are working on at PMT to solidify the capital base of the Company.

To date, we have utilized repurchase agreements on our MBS to add leverage to our investments utilizing $116 million in the third quarter.

In the fourth quarter, we plan to add two NPL credit facilities totaling $200 million and a $75 million warehouse facility.

As I stated earlier, we have closed a $100 million NPL credit facility and we are in discussions on another $100 million facility.

Both of these facilities are with large financial institutions that will be utilized to complete our latest loan purchase which is scheduled to close in the middle of December.

As we progress into the first half of 2011, we plan to add an additional $75 million warehouse facility.

This amount could increase or decrease depending on the amount of volume we are able to generate.

We are also expecting to close our first securitization of non-performing whole loans for PMT in early 2011 and expect that to generate approximately $55 million in proceeds.

We anticipate an additional $30 million of cash to be generated from pledging the subordinated tranche of this security.

While there is no guarantee that any or all of these initiatives will occur, there is the potential to prudently increase our liabilities by over $400 million by the middle of 2011.

We also expect to raise capital through equity offerings to the extent that we believe those offerings will be accretive to shareholders.

Our equity shelf registration statement allows for raises through both secondary offerings as well as after-market offerings and Management intends to use both methods over time depending on the needs of PMT and the best interest of PMT shareholders.

I am now pleased to introduce Steve Bailey, PLS' Chief Servicing Officer, to discuss the current foreclosure issue that had been seen in the news.

Steve is one of the most experienced leaders in the mortgage servicing industry and a leading mortgage banking executive.

He brings over 25 years of servicing experience with him.

Steve?

Thank you, Stan.

Over the first three quarters of 2010, there has been a record level of foreclosures in the US.

Starting in the third quarter, we saw a number of large lenders halt foreclosures over technical issues.

Irregularities resulting from how foreclosures were authorized and potential mortgage assignment issues have caused AGs of all 50 states to launch an investigation into how foreclosures are handled.

At PLS we have reviewed our judicial foreclosure and affidavit process and believe the affidavits produced under the current procedures to be accurate.

While we believe the process to be sound, our business plans call for growth from the servicing portfolio, therefore additional checks and balances have been deployed to strengthen the oversight surrounding our practices in anticipation of this growth.

We'd also like to reiterate that PMT's business model is first and foremost to keep homeowners out of foreclosure whenever possible.

We proceed with foreclosure only when we've exhausted all possibilities of alternatives to foreclosure.

In fact, we continually offer borrowers alternative to foreclosure, such as modifications, short sales and deeds in lieu throughout the foreclosure process.

Alternatives to the foreclosure generally produce higher economic returns to both the Company and the borrower.

At PLS we are established to provide the type of hands-on servicing needed for this type of issue.

We believe we have proceeded appropriately that we'll remain vigilant as the market continues to evolve.

PLS has a specialized platform dedicated to maximizing returns to investors has required more intimate customer interaction and executive management knowledge in the operations.

I will now turn it over to David Spector, PMT's President and Chief Operating Officer to discuss the current distressed opportunity.

David?

Thanks, Steve.

On slide 9, you can see the non-performing whole loan market continues to remain active with over $6 billion of whole loans shown to PCM in the third quarter.

This amount was predominately non-performing whole loans as few distressed or performing whole loans were offered during the quarter.

Pricing levels have remained stable over the past couple of months.

The foreclosure issues in the market place have not had a material effect on pricing.

In fact, pricing levels have remained within a narrow trading range over the course of the year.

As Stan indicated earlier, we believe the market for distressed whole loans, particularly non-performing whole loans, will remain active and strong over the next 18 months.

Let's turn to slide 10 to get a better understanding of why we believe that banks will continue to sell non-performing loans.

Then why are banks selling NPLs?

There are several reasons that have come together in the past few years with banks just starting to address their current capital structure.

NPLs carry a 100% risk weighting compared to 20% risk weighting for performing assets.

This means that banks are required to hold five times more capital for an NPL than in performing loans.

Regulators are monitoring banks' levels of NPLs in their assessment of risk.

In the current environment of sustained rates of loans moving into foreclosure and of cautious conservative management of these issues, banks look to sell NPLs to maintain their current level of non-performing loans.

A viable strategy for banks to manage their ratios is to sell their holdings of NPLs.

Banks are also operationally challenged in handling NPLs.

With legacy issues to deal with and extremely large portfolio sizes, many institutions do not have the resource capacity to be able to handle the amount of NPLs in an efficient manner.

Therefore, the NPLs sit on the banks' books longer and take more capital to resolve than they otherwise would.

It's important to banks that they are perceived to be getting through their NPL problems in order to focus on their core business and selling assets as an effective strategy to resolve this issue.

We've had dialogue with sellers for the past two-plus years and have deep relationships within those organizations.

We understand their needs and have a reputation for providing creative solutions while being able to close transactions in a timely and efficient manner.

Now let's turn to slide 11 to see why we view NPLs as a good distressed investment.

This is a single loan example of an NPL that would typically be in one of our pools.

As you can see on the far left of the slide, this loan was originally underwritten with a 22% down payment.

However, because home prices have declined since the loan was originated, the property is now only worth $188,000, or a 34% decline from where it was valued when the loan was originated.

We use quick-sale broker price opinions at PMT to project current value of non-performing loans.

The quick-sale value is simply an estimate of the value that could be attained by selling the property quickly in 30 days.

Our purchase price in this example is a 41% discount to the quick-sale value, or a 61% discount to the original value of the property.

This substantial discount provides PMT the ability to offer modifications, alternatives to foreclosures or to foreclose at appropriate returns to our investors.

Once the loan boards our servicing system, PLS and PCM work diligently with borrowers to provide resolutions to their specific situations.

If we turn to slide 12, you can see how PMT benefits from its relationship with PLS and PCM and more specifically the operational excellence that they provide to our borrowers.

PMT's partnership with PCM and PLS provides the operational capabilities across the mortgage spectrum to be able to successfully manage a residential whole loans.

As Stan mentioned previously, executive management across PCM and PLS individually average more than 20 years of mortgage banking experience.

This current distressed opportunity necessitates an operator to oversee the execution of the strategy from start to finish.

A company wishing to pursue acquiring distressed whole loans must be able to source value, assess credit risk, run proper due diligence, board the loans efficiently, service the loans, provide hands-on customer service, provide strategy for optimal loan pathing, and have expertise in the second secondary market to ultimately provide an exit.

All of these functions must work together and towards the shared goal in providing the most value to their investors and borrowers.

PMT's partnership with PCM and PLS provided us the expertise needed to successfully manage residential whole loans today and expand into the strategies outlined earlier by Stan.

I'll now turn it over to Anne McCallion, PMT's Chief Financial Officer to discuss the financials.

Anne?

Thank you, David.

I first want to discuss the recently closed non-performing loan credit facility that Stan mentioned earlier.

It is a unique $100 million revolving facility for financing non-performing loans and REOs.

This provides PMT with a new source of capital to fund investments and introduces prudent leverage on our NPL investments.

Our intent with this facility is to use it as an aggregation facility to fund NPLs pending sale, securitization, or other liquidation.

As loans are removed from this facility, for example into a securitization, we will be able to use the facility to finance the purchase of additional non-performing loans.

The facility will be fully utilized with the recently announced loan portfolio purchase transaction expected to close in December.

Let's now take a look at the income statement on slide 15.

As Stan reported, PMT earned $7.7 million, or $0.45 per share for the quarter ended September 30, 2010.

Net investment income was $12.6 million.

Interest income, primarily from coupon payments on mortgage loans and MBS and the discount accrual on our mortgage-backed securities, was $3.8 million and gains and losses on investments, primarily gains on loans, added $8.2 million to income.

Total expenses amounted to $4.6 million for the third quarter of 2010 increasing commensurate with the growth in activity in acquiring portfolio and servicing a larger portfolio.

Our primary expense is our management fee to PCM which amounted to $1.2 million.

You will also see loan servicing fees increasing to $885,000 for the quarter which is a reflection of a larger portfolio of loans serviced on behalf of PMT.

PMT's provision for income taxes declined in the third quarter to $361,000 from $1.9 million in the second quarter.

This largely reflects Management's use of an intercompany structure in the form of REMICs resulting in more of the Company's assets being at the REIT level and out of the taxable REIT subsidiary.

As we've previously said, our goal is to manage our business to take full advantage of the tax benefits afforded to us as a REIT, and we will continue to do so in the future.

As Stan mentioned earlier, the Board of Trustees declared a dividend of $0.42 per share, a 20% increase from the second quarter.

Now let's turn to slide 16 to go into greater detail on the gains on investments of $8.2 million.

I would like to spend some time discussing the composition of this line item.

Of the total $8.2 million in gain, $7.5 million was attributable to mortgage loans with roughly $4 million due to valuation changes and $3.5 million due to gains on disposition, both mainly arising from our portfolio of non-performing loans.

Because we account for our portfolio of mortgage loans held for investment at fair value, changes in fair value are included in the results of our operations each period.

Theoretically, if the entire portfolio was sold in its entirety on the first day of the new quarter, we would record no gain or loss on that sale.

All other factors held constant, non-performing loans increase in value as they move closer to resolution due to the shorter time to monetization and the increased certainty of resolution.

The exchanges in value are non-cash items we've recognized in our income statement.

However, when the loan is monetized significant cash flows are generally realized often with a relatively small impact on income for that period.

Let's take a look at slide 16 to see this quarter's cash flow to get a better understanding of this.

Cash flows on mortgage investments for the third quarter were $45 million with over $25 million coming from our whole loans.

Nearly all of this amount arises from disposition of our mortgage loans.

Because of our use of fair value accounting, a significant portion of the gain associated with these dispositions has been recorded in previous quarters as we held the loans and marked them to fair value.

This is an important point in the evaluation of our earnings.

The valuation change recorded during a quarter reflects more than just the results of the model.

For non-performing loans, it could also mean we are moving closer toward a resolution on the loan, which means we are closer to monetization.

Let's now turn to slide 17 and take a look at the balance sheet.

As you can see, PMT is continuing to build its assets increasing almost 23% from the second quarter.

Our liabilities currently stand at $127 million with most of that being repurchase agreements.

We expect our balance sheet to grow in the fourth quarter and into 2011 with the strategic initiatives that Stan mentioned earlier.

I'll now turn it back over to Stan.

Thanks, Anne.

We would like to thank all of our current and future shareholders for listening to this earnings presentation.

I would like to invite all those investors that have questions to please submit them to our Investor Relations Department by either e-mailing them to investorrelations@pnmac.com, or you can call our IR Department at 818-224-7442.

If we receive a substantial number of questions, we will work to post a question-and-answer document to our website.

We thank you again for your time.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.