PennyMac Mortgage Investment Trust (PMT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 PennyMac Mortgage Investment Trust earnings conference call.

At this time, all participants are in listen-only mode.

(Operator Instructions).

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

Stan Kurland, Chairman and CEO.

Please proceed, sir.

Thank you, Ann.

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 fourth-quarter highlights.

For the fourth quarter, PMT reported net income of $7.3 million or $0.43 per diluted share on net investment income of $13.6 million.

Cash flow generated from mortgage investments totaled $49 million, with $29 million coming from PMT's whole loan mortgage investments and $20 million generated from our MBS portfolio.

We did see a significant increase in expenses for the fourth quarter, predominantly from increases to servicing expenses and professional services.

As the Company's portfolio of loans increases and as the volume of liquidation events rises, loan servicing fees should increase as well.

Professional services increased substantially from the third quarter as we completed our largest loan acquisition to date, operationalized our new credit facilities and established our aftermarket equity program.

Significant costs associated with due diligence fees for acquisitions completed during the quarter and legal fees for the debt facilities and equity program were recognized in the fourth quarter.

However, the benefit from these activities will be realized over future quarters as we manage the loans and utilize our credit and equity facilities to purchase additional assets.

We will discuss these expenses in further detail later in the presentation.

The Board of Trustees approved the fourth-quarter dividend of $0.42 per share, which was paid on January 28.

This dividend represents a 9.3% annualized yield based on the stock price at the end of the year.

During the quarter, we invested $148 million in distressed mortgage assets, with $146 million of that invested in residential whole loans.

We did purchase $2 million of mortgage-backed securities during the quarter.

We have also entered into a transaction to invest $69 million in nonperforming whole loans, which is scheduled to close in the middle of February.

The fourth quarter was an active quarter for us as we increased our available capital for investing through the addition of two credit facilities intended for the acquisition of distressed mortgage assets, including nonperforming loans, or NPLs, and real estate acquired in the settlement of loans, or REO, and established a warehouse facility for newly originated prime loans purchased through PMT's conduit.

We will discuss these credit facilities in further details later on in the presentation.

Let's now turn to slide 3 and take a look at PMT's full-year highlights.

PMT's mortgage assets have increased from $201 million at the end of the first quarter to $514 million at the end of the fourth quarter.

During the year, PMT fully deployed its capital and continues to invest in mortgage assets through cash generated from the portfolio and various forms of debt financing.

In 2010, PMT purchased $828 million of unpaid principal balance in mortgage whole loans through 11 separate transactions.

During that time, PNMAC Capital Management, PMT's investment manager, analyzed over $23 billion of residential whole loans.

For the full year 2010, PMT earned net income of $24.5 million or $1.44 per diluted share on net investment income of $44 million.

PMT's Board of Trustees also declared dividends totaling $1.19 per share.

We have also increased our capital available for investment by $300 million by putting in place two credit facilities totaling $225 million, as well as adding a $75 million warehouse line to fund our conduit purchases.

While the costs associated with these facilities were incurred in the fourth quarter, we believe these programs will add substantial benefit to our returns in 2011.

We have been patient at putting our investors' capital to work.

However, we believe that our assets, along with our increased available capital through our credit facilities, strategically position PMT for 2011.

Let's now turn to slide 4 and look at our outlook for 2011.

This year, we are concentrating on four main initiatives for PMT -- distressed whole loan investments, select MBS investments, jumbo loan investments through our conduit, and the utilization of prudent leverage.

We see the opportunity to acquire distressed whole loans continuing into 2011.

As banks continue to work to improve their capital ratios, they will look to strategic sales of whole loans as one alternative to achieve this.

The large banks are overwhelmed with volumes of distressed and nonperforming whole loans.

By selling these loans, not only are banks improving their balance sheets, but they are putting those loans in the hands of a specialist who has the resources to resolve the borrowers' issues with greater speed and attention.

In addition to the continued sales of nonperforming loans, banks may begin selling reperforming mortgages.

Loans that have been modified and current for some time will start to become more viable for banks to sell as they look for additional capital to make new investments.

While we believe that these reperforming loan sales by banks won't reach the levels of nonperforming sales, we do believe that they will become an important component of the distressed investment opportunities available over the next year.

As 2011 progresses, we believe that PMT is well positioned to take advantage of whole loan opportunities due to its capital and operating structures.

Our ability to raise capital through dedicated credit facilities expands our available capital to participate in this segment of the market.

Also, our management's extensive experience in completing structured transactions should produce additional investment capacity.

PMT is aiming to complete its first term financing of NPL loans in the first half of 2011.

For our investment in mortgage securities, we will continue to opportunistically purchase unique, cash-flowing, front-paid bonds.

With available debt financing, these assets are returning midteen returns with healthy cash flow.

On the conduit side, to date, we have mainly focused our attention on prime, conventional conforming loans.

We will continue to purchase conventional conforming mortgage loans through the conduit and will increase volume to the extent that the return criteria meets our investors' objective.

Strategically for 2011, our primary focus is developing the jumbo loan product segment.

We will continue to roll out PMT's jumbo loan offering as we establish and sign up correspondent partners and work with investors in evaluating the sale of securities backed by new loans.

With new legislation requiring the retention of a portion of the securitization, we feel that PMT is an ideal vehicle for this investment.

And lastly, we will continue to expand our use of prudent leverage by utilizing our in-place credit facilities and seeking appropriate additions for investments as conditions permit.

I would now like to turn it over to David Spector, PMT's President and Chief Investment Officer, to discuss the quarter's investment activity.

David?

Thank you, Stan.

Let's review the investment activity for the fourth quarter on slide 6.

We completed a transaction of $146 million in nonperforming whole loans in late December.

While this was the largest single transaction of whole loans for PMT to date, we did see reduced volume of mortgage loans offered for sale during the quarter.

This was largely expected and due to the fact that many of the large banks had reached their sales goals of mortgage loans and therefore stopped selling whole loans in early November.

We expect the volume of loans available for purchase to increase in the first quarter, and we have already seen the large money center banks come back into the market early in the year.

Additionally, we operationalized our two new credit facilities, as Stan mentioned earlier.

This largely entailed redepositing collateral loan files into the credit facility and obtaining broker price opinions, or BPOs, on the loans.

Because these loans were in our portfolio, many of them required updated BPOs, which, as Stan pointed out, increased the expense load for professional services in the fourth quarter.

In the future, we will achieve greater efficiency and use of these facilities by depositing newly acquired loans directly into these facilities and utilizing the BPOs ordered in connection with their purchase.

Also, subsequent to the quarter ended December 31, we entered into a pending investment for $69 million in nonperforming whole loans.

This investment is expected to close in the middle of February.

Investments in mortgage-backed securities during the fourth quarter were relatively small for PMT as we acquired roughly $2 million in front-paid loads.

We continue to opportunistically invest in MBS and will continue to do so throughout the year.

Our conduit business continues to progress with 53 client applications in process and 14 clients approved.

While we continue to purchase small amounts of conventional conforming loans, our key focus is on the jumbo mortgage market.

We believe that with the return of securitization, PMT and its manager are very well positioned to take advantage of the securitization of jumbo loans as the market evolves.

We also have in place the technical and personnel resources to be able to offer a full array of products to our clients.

Now let's turn to slide 7 and get some greater details on these investments.

PMT's whole loan portfolio grew over 50% from the previous quarter through one large transaction that was completed toward the end of the fourth quarter.

This transaction was completed utilizing the new credit facilities added in the fourth quarter and available cash flows from our existing portfolio.

With the addition of this transaction, our whole loan investments were leveraged at 0.6 times at the end of the fourth quarter compared to 0.1 times average leverage ratio over the fourth quarter.

Cash flows from PMT's investments totaled $49 million, with approximately $29 million coming from our residential whole loans.

This compares to $45 million in total cash flow generated from our mortgage investments in the third quarter.

As you can see from the fourth-quarter activity, our servicer, PLS, was very busy completing loan resolutions, modifications, and executing foreclosure and REO sales.

In fact, our foreclosure alternatives -- which includes payoffs, modifications, short sales, deeds in lieu, and note sales -- were 52% of the quarter's liquidation activity.

Alternatives to foreclosure shorten the resolution timeline, which should maximize the return to our investors.

Let's now turn to slide 8 to take a closer look at the fourth-quarter returns on our investments.

As you can see from the circled areas, our returns on our mortgage investments are in line with expectations.

For the fourth quarter, our mortgage whole loans achieved an annualized return of 16.5%, while our investments in mortgage-backed securities achieved an annualized return of 14.4%.

While these gross returns are in line with our expectations, we believe that our mortgage whole loan returns can improve.

As we utilize our new credit facilities and apply leverage to [the vaster class] over a full accounting period, we have the potential to initiate even greater returns.

We have already begun prudently leveraging our assets, and, as I mentioned earlier, our leverage ratio on our mortgage whole loans at the end of the fourth quarter was 0.6 times.

Our investments in mortgage-backed securities are aligned with our targets, and we would not expect to increase leverage much beyond this point.

We are continually in the market for cash-flowing, front-paid bonds that have debt financing available.

This type of asset with debt financing increases the returns to the midteens level and in line with our investment targets for this investment.

Let's now turn to slide 9.

On this slide, we want to provide you with some guidelines for how we view each of these investments and the illustrated returns for each asset class.

Our main investment today and into the foreseeable future is the distressed mortgage whole loan investments.

As you can see, our target investment return on an unlevered basis is 12% to 17%.

We estimate that we should be able to leverage this asset between 0.5 and 1 times.

Our MBS investment has a wider range of return depending on the type of investment and ranges from 3% to 5%.

At our leverage ratio of 4 times to 6 times, we believe this puts the illustrative returns between 14% and 20%.

We are strategically focused on the transition of the Company to a normalized mortgage market.

We believe this is several years away, but are working on developing the capabilities for this transaction.

Part of these capabilities is our focus on our conduit.

While there is little activity at this time, we wanted to provide you some guidelines for how we view this opportunity.

I would now like to turn over to Anne McCallion, PMT's Chief Financial Officer, to discuss the quarterly financials in greater detail.

Anne?

Thank you, David.

As Stan reported, PMT earned $7.3 million or $0.43 per diluted share for the quarter ended December 31, 2010.

Net investment income was $13.6 million, an increase of 8% from the third quarter.

Interest income, primarily from coupon payments on mortgage loans and MBS, and the discount accrual on our mortgage-backed securities was $4.3 million.

And gains and losses on investments, primarily gains on loans, added $8.3 million to income.

Total expenses amounted to $6.1 million for the fourth quarter of 2010, an increase of 34% from the third quarter.

The main expense increase occurred in professional services, which Stan touched on briefly and I will highlight on the next slide.

You will also see loan servicing fees increasing to $1.4 million for the quarter, which is a reflection of a larger portfolio of loans being serviced and the increased activity with loan resolutions.

As Dan mentioned earlier, the Board of Trustees declared a quarterly dividend of $0.42 per share, bringing the full-year dividend declarations to $1.19.

Now let's turn to slide 12 to go into greater detail on the professional services expenses.

Professional services increased from the third-quarter levels largely due to the completion of our largest whole loan portfolio acquisition to date, costs incurred around our new credit facilities, and the at-the-market equity program.

As you can see from the table on the right side of the slide, due diligence costs for our large loan portfolio acquisition totaled $328,000.

Our next line item reflects over $300,000 in costs incurred in the fourth quarter directly related to either the legal fees or due diligence fees associated with operationalizing the new credit facilities and putting in place the equity programs.

While these expenses impacted the fourth quarter, they will benefit future periods.

Let's now turn to slide 13 and take a look at cash flows associated with our mortgage assets.

Cash flows on mortgage investments for the fourth quarter were $49 million, with over $29 million coming from our whole loans.

Of this, almost $28 million 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.

Let's now turn to slide 14 and take a look at the balance sheet.

As you can see, PMT is continuing to build its assets, increasing almost 30% from the end of the third quarter.

Our liabilities were $269 million at the end of the fourth quarter, growing over 100% from the third quarter.

As we continue to utilize our credit facilities and possibly add additional facilities, we would expect this growth to continue into 2011.

I will 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 of 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.

Thank you for attending today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.