PennyMac Mortgage Investment Trust (PMT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 PennyMac Mortgage Investment Trust earnings conference call.

At this time, all participants are in listen-only mode and will remain muted for the duration of the conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

Stan Kurland, Chairman and CEO.

Please proceed.

Thank you, Dominique.

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

Let's now turn to slide 2 and take a look at some of the quarter's highlights.

For the first quarter, PMT reported net income of $7.6 million or $0.35 per diluted share on a net investment income of $17.3 million.

While we experienced a slight increase in earnings over the fourth quarter of 2010, earnings per share were lower due to the additional shares issued in conjunction with PMT's equity offering in February.

Cash flow generated from our whole loan, REO, and MBS investments totaled $55 million.

At the end of the quarter, PMT had available capacity in our NPL credit facility of over $130 million.

This along with a portion of our $64 million in cash and short-term investments provides existing capital to PMT for additional distressed whole loan acquisitions.

We saw a seasonal slowdown in the first two months of the quarter as January and February's resolution activity was negatively impacted by the decline in housing sales during that time.

This decline was partially due to the severe weather conditions across the United States over that period.

The weighted average age of our REO inventory increased from 7.8 months at the end of the fourth quarter to 9.2 months at the end of the first quarter.

In March we experienced higher REO sales compared to the previous two months, which continued throughout April.

In February, the Company raised $188 million in net proceeds through an equity offering, selling $10.9 million in new common shares.

This increased PMT's weighted average shares outstanding from 16.8 million in the fourth quarter of 2010 to 21.9 million in the first quarter of 2011.

These proceeds were deployed along with other expanded credit facilities to purchase $243 million in distressed mortgage assets.

The Board of Trustees also approved a dividend of $0.42 per share consistent with our previous quarter.

We anticipate that the new equity and subsequent investments will be accretive throughout the year.

This dividend represents a 9.1% annualized yield based on the stock price on March 31, 2011.

Let's now turn to slide 3 and review PMT's long-term growth plans.

PMT is a hybrid mortgage REIT.

Our current focus is on distressed mortgage acquisitions, and this will remain our predominant activity over the next 12 to 18 months.

Because of this focus, the Company's current performance is sensitive to changes in home prices and resolution timelines.

We also have sensitivity to interest rates as we utilize financing to expand our capacity.

PMT's investment manager has established itself as one of the leading investors in distressed mortgage loans, acquiring more than $2.6 billion in residential whole loan balances since the start of 2010 on behalf of its managed entities.

While we are continuously seeing opportunities in the distressed market, we are also preparing for a return to a more normalized mortgage market over the next several years.

To this end, PCM has developed the systems, resources, and relationships essential to position PMT's conduit to capitalize on the opportunities in new mortgage originations as the market evolves.

Let's now turn to slide 4 to take a deeper look at our conduit business.

To date, our conduit activity has remained deliberate and measured.

For the first quarter of 2011, we purchased over $19 million in loans, bringing our total conduit purchases to date to almost $50 million.

We believe that there is currently a significant opportunity for PMT to increase its purchase volume of prime loans.

Already in April, PMT's conduit purchased $12.4 million in loans and had an ending pipeline of over $20 million.

Within the conduit, we see a substantial opportunity to participate in the jumbo loan origination and securitization market.

In 2010, the jumbo origination market was dominated by the large banks, as you can see by the chart on the right side of the slide.

The top five lenders originated over 82% of all jumbo loans, with total originations for the year reaching $66 billion.

We anticipate that the market for jumbo loans will expand as GSE loan size limits are reduced beginning with the reduction of the high-cost loan limits in October of this year.

As part of this expansion, we see a growing opportunity for a mortgage conduit.

We believe that PMT can differentiate itself as a conduit by understanding and addressing many of the obstacles that have faced the jumbo market.

Having spent much of 2010 steadily building the capabilities of our conduit, we are well positioned with our systems and resources and continue to effectively build correspondent relationships.

In the future, PMT's plans to coinvest in securitizations of the purchased loans and PLS, PMT's affiliated servicer, will service and provide fulfillment activities on the underlying loans.

This aligns management and investors' interest in the purchase, securitization and servicing of loans.

All of this, we believe, positions PMT well to deliver attractive returns to our conduit.

We intend to grow this business steadily and diligently over the next couple of years.

I will now turn it over to David Spector, PMT's President and Chief Operating Officer, to go further into the operational details of the first quarter.

David?

Thank you, Stan.

PMT's loan portfolio grew over 60% from the previous quarter due to the multiple acquisitions made in conjunction with our equity offering.

The three acquisitions were comprised of largely nonperforming loans with a weighted average age of over 46 months.

The loans are geographically dispersed with the heaviest concentrations in California, Florida, and New York.

For the first quarter of 2011, we did not purchase any mortgage backed securities.

Activities from our whole loan investments were dominated by short sales, REO sales, and foreclosures.

We did see approximately $8 million in proceeds from loan payoffs during the quarter and were able to modify $5 million in UPB of loans.

We will get further into our whole loan activity a little later in the presentation.

As Stan stated earlier, our conduit purchased $19.6 million in prime loans.

For the quarter, the conduit generated gain on sale of $62,000 which included $40,000 in mortgage servicing rights we received as proceeds.

Obviously we expect these numbers to increase as our volume of loans purchase increases.

Let's now turn to slide 7 to take a closer look at the first-quarter returns on our investments.

For the first quarter, our mortgage whole loans achieved an annualized return of 16.4% while our investments in mortgage backed securities achieved an annualized return of 6.5%.

Although we were able to more fully utilize our credit facilities throughout the quarter, the seasonally slow beginning of the quarter impacted our liquidations, thus affecting returns.

The return on our mortgage backed securities was down from the previous quarter as valuations largely associated with bond prices reduced overall returns.

Cash flows for our MBS were strong as all of our MBSs are comprised of front pay bonds.

Let's now turn to slide 8 and take a look at our whole loan activity in more detail.

PMT's mortgage assets grew from $518 million at the end of 2010 to $726 million at the end of the first quarter of 2011.

This represents growth of over 40% predominately from the acquisition of residential whole loans made in conjunction with our equity offering.

The total unpaid principal balance on our whole loans is now over $1.1 billion with 83% of the portfolio considered nonperforming, meaning later than 90 days delinquent.

Over the past year, we have been liquidating an average slightly above 3% of the NPL unpaid principle balance per month.

In January and February, our liquidations were 0.5% below our yearly average for the reasons Stan had discussed earlier.

However, March proved to be a stronger month for loan resolutions with strong REO sales and short sale completions.

Let's now take a look at the pipeline of activities at the end of the quarter on slide 9.

79% of PMT's nonperforming loans have an active resolution path, with 35% of the portfolio in the active stages of modification, short sale, or deed in lieu.

38% of the portfolio is currently on a path to foreclosure.

While we understand that for some loans foreclosure is inevitable, we continue working diligently with borrowers to try to provide an alternative to foreclosure where possible.

One of our resolution paths is modifications which is a significant part of our activities.

PLS participates in the US Department of Housing and Urban Development's Home Affordable Mortgage program also known as HAMP.

Those loans that do qualify for HAMP modifications, 19% of the nonperforming loans at the end of the first quarter, are diligently monitored through their three-month trial period.

PLS's HAMP trial to permit modification conversion rate is well above the industry average due to its strong underwriting practices and the requirement of income verification prior to entering the trial.

In fact, 98% of our borrowers who enter the HAMP trial modification program are converted to permanent status after the three-month trial period.

As we head into the second quarter, we will continue to work with the 21% of borrowers who are in pre-foreclosure and solicitation.

These loans include delinquent loans that have not yet reached the foreclosure stage as well as loans in the process for foreclosure referral.

Through active solicitation, we will continue to pursue modification, deeds in lieu of foreclosure, and short sale resolutions on these loans.

We will continue to guide those borrowers currently on a path through the process.

We believe that with the increasing activity in March and the favorable progression of the portfolio pipeline, we are well-positioned as we head into the second quarter.

Let's now take a look in the investment market activity on slide 10.

Year-to-date, PCM has reviewed approximately $3 billion in whole loans or $1 billion per month during the quarter.

We expect this pace to continue throughout the year as we look to opportunistically acquire more distressful loan pools.

As Stan mentioned earlier, PCM is viewed as one of the leading investors in distressed residential mortgages.

This is not only due to its ability to complete and close large whole loan transactions, but also its conduct in transacting with the seller of whole loans.

The relationships for the counterparties have proven beneficial in acquiring and sourcing investments and we expect that to remain integral to investing in distressed mortgage assets in the future.

The MBS market has done increasing supply during the quarter just in Maiden Lane auctions, which is the AIG portfolio of MBSs which is now owned by the Fed.

Large parts of this portfolio have been auctioned weekly for the past couple of months along with the normal flow of MBS.

This caused some weakness in prices due to the overall supply which we saw impact valuations on our own MBS portfolio.

Our conduit business continues to grow as we now have 32 approved lenders.

As Stan stated earlier, we purchased 12.4 million loans in April and our current pipeline is over $20 million.

We expect the volume to continue to expand throughout the year.

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 $7.6 million or $0.35 per share for the quarter ended March 31, 2011.

While net income was up slightly from the fourth quarter, earnings per share declined as the weighted-average number of shares outstanding over the first quarter increased due to our equity offering in February.

Net investment income was $17.3 million, an increase of 28% from the fourth quarter.

Interest income primarily from coupon payments on mortgage loans and mortgage-backed securities and the discount accrual on our MBS was $6.2 million and gains and losses on investment, primarily gains on loans, added $9.9 million to income.

Real estate acquired in the settlement of loans or REO generated $1 million for the quarter through both gains from valuation increases as well as gain on the sales of REO.

During the quarter, we realized cash flows relating to our mortgage investments in whole loans, REO, and MBS of $55 million.

Of that amount, $23 million was from our mortgage loans, another $18 million from our MBS, and $14 million was from the sale of REO.

Expenses for the first quarter of 2011 totaled $9 million compared to $6.1 million in the fourth quarter of 2010.

This increase was largely attributable to increases in loan servicing fees of $780,000 and interest expense of $1.7 million, which together account for over 85% of the quarter's increase.

The Company's portfolio of loans serviced grew by $459 million in unpaid principle balance during the first quarter.

The increase in interest expense was expected as leverage was utilized for the entire quarter and we expect continued increase in this expense as we become fully leveraged and acquire additional portfolios.

As Stan mentioned earlier, the Board of Trustees declared a quarterly dividend of $0.42 per share, representing a 9.1% annualized yield based on the stock price on March 31, 2011.

Now let's turn to slide to 13 to go into greater detail on the quarterly results of our mortgage-backed securities.

Stan and David have focused on our loan portfolio during this call.

I would now like to highlight our MBS portfolio.

While the portfolio did produce over $1 million in interest income during the quarter, it also experienced a $442,000 loss from valuations.

The securities that PMT owns are the most senior in payment priority and all are currently cash flowing.

I would also like to point out that PMT's mortgage-backed securities have an average life of less than one year.

Let's now turn to slide 14 and take a look at our utilization of our credit facilities.

We continue to look at expanding and maximizing PMT's liquidity and to that end continuously explore the addition of credit facilities with several (inaudible).

While the leverage on our whole loan assets, our main investment focus, will not increase beyond 0.6 to 1 times equity, we believe it is prudent to have multiple facilities available to us.

For our current facilities, we still have available capacity as you can see from the slide.

This along with a portion of our $64 million in cash and short-term investment provides existing capital to PMT for additional distressed whole loan acquisitions.

We remain conservative in our leverage goals and will continue to manage the Company's liquidity needs and constraints prudently.

Turning to slide 15, let's take a look at the balance sheet.

As you can see, PMT is continuing to build its assets, increasing almost 43% from the fourth quarter.

Our liabilities were $323 million at the end of the first quarter, growing only 20% from December 31, 2010.

Our strong growth in assets is largely driven by the purchases of whole loans over the quarter in conjunction with the capital raised from the equity offering.

Our liabilities growth was largely due to the utilization of our credit facilities.

As we continue to maximize our current credit facilities and possibly add additional facilities, we expect this growth to continue.

I will now turn it back over to Stan.

Thanks, Anne.

As you can see, PMT is steadily growing and evolving.

We have developed a constant flow of investment acquisitions and positioned ourselves well for the future.

Since our IPO in August of 2009, we have grown our assets under management to over $840 million with over $1.1 billion of UPB of loans.

PMT is developing the building blocks for the mortgage platform of the future and is strategically positioned as a significant participant in the revitalizing mortgage market.

We will continue to work diligently to provide you, our investors, with quality risk-adjusted returns in the years to come.

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 submit them to our Investor Relations department by either e-mailing them to investor relations at PNMAC.com or you can call our IR department at area code 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, this concludes today's conference.

Thank you for your participation.

You may now disconnect and have a wonderful day.