PennyMac Mortgage Investment Trust (PMT) 2011 Q2 法說會逐字稿

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

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

(Operator Instructions).

And now, I would like to turn the conference over to Stan Kurland, Chairman and Chief Executive Officer.

Please proceed.

Thank you.

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 the highlights of our second quarter.

For the second quarter, PMT reported net income of $16.6 million or $0.59 per diluted share on net investment income of $30.2 million.

Net income increased by 118% from the previous quarter while net investment income increased by 75%.

Cash flow generated from our whole loan, REO, and MBS investments totaled $75 million.

Valuation gains on our investments were $14.7 million.

These results were largely driven by a record level of resolution activity in the whole loan portfolio.

As loans progressed closer towards a final resolution, their valuation increases.

Achieving milestones such as a deed in lieu, negotiated short sale, or foreclosure sale generally increases valuations.

We will discuss our portfolio activity in more detail later in the presentation.

A key component of our ability to continue to grow earnings and maximize PMT's return on equity is our ability to rapidly invest capital into high-yielding investment opportunities.

For instance, PMT's acquisitions in the first quarter completed in conjunction with our equity offering positively contributed to second-quarter earnings.

We also continued to reinvest cash flows generated from our investment portfolio throughout the second quarter.

The Board of Trustees has approved a dividend of $0.50 per share, an increase from $0.42 per share in the previous quarter.

This dividend represents an annualized yield of 12% based on the June 30 closing stock price.

Let's now review our markets for investment opportunities on slide 3.

During the second quarter, our manager, PCM, evaluated approximately $4.5 billion in whole loans, bringing the year-to-date total to over $7 billion.

The roughly $1.2 billion per month in the second quarter is in line with our expectations and we anticipate opportunities for distressed whole loan acquisitions to continue into next year.

The prices of non-agency MBS were somewhat volatile in the second quarter.

However, the market for short-duration front pay bonds in which PMT invests was less affected than longer-duration bonds.

We have remained on the sidelines in acquiring MBS for the past two quarters as we have seen more compelling investment opportunities in whole loans and correspondent lending.

Our correspondent lending activities continue to expand as we added 23 new correspondent sellers during the quarter bringing the total number of approved sellers to 55.

During the quarter, we made key personnel additions to the correspondent lending group and are well-positioned for further expansion.

Second quarter correspondent funding volume more than doubled from the first quarter, and July fundings almost equaled the total for the second quarter.

We expect this momentum to continue into the third quarter.

PennyMac has great potential to bridge the significant gap that exists in the origination market, which will likely grow with the expansion of the prime non-agency market as the agencies conforming loan limits are reduced.

The first reduction is scheduled to take place on October 1.

We are seeing the large incumbent bank lenders begin reducing their correspondent activity in anticipation of regulatory changes that require higher levels of capital associated with securitization and mortgage servicing rights.

The change in the appetite by the banks to participate as correspondent lenders produces an increase opportunity for PMT's correspondent lending activities.

We also continue to evaluate and consider creative ways to enter into accretive investment opportunities for PMT.

Early in the third quarter, we entered into a unique trade that allowed us to participate in a large NPL pool acquisition.

Slide 4 summarizes this new and unique opportunity.

On July 12, we entered an agreement to purchase loans acquired by Citi Global Markets from an unaffiliated third-party.

Citi purchased a pool of distressed mortgages totaling $348 million in unpaid principal balance and sold the pool to PMT under a forward purchase commitment.

Per the agreement, PennyMac Loan Services will service the loans for Citi and PMT will purchase these loans in the future for an agreed-upon price.

The outlay of capital for the acquisition occurs under a flexible buyout arrangement standing up to 12 months.

The loans from this forward trade will be reflected on PMT's balance sheet beginning in the third quarter.

As it's similar with typical NPL investments, PMT receives the economic benefits of ownership, net of the costs of carry.

While we do not expect the structure to be the predominant structure for PMT's acquisitions going forward, it provides PMT an alternative, economically attractive way to participate in loan acquisitions without a large initial capital outflow.

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

David?

Thank you, Stan.

On slide 6, you can see that PMT's mortgage assets grew from $721 million at the end of the first quarter to $788 million at the end of the second quarter.

At the end of 2010, our mortgage whole loan investments have grown over 80%.

At the same time, our MBS investments have declined 32% has we have not purchased any MBSs in the past two quarters.

During the second quarter, we completed three whole loan transactions acquiring over $200 million in unpaid principal balance or UPB of distressed mortgages.

Also, as Stan described earlier, we completed a forward trade soon after the quarter ended that were added an additional $348 million in UPB to our portfolio.

The target of our investment activity has been non-performing loans.

At present, that loans are over 98 days delinquent or in foreclosure, make up 74% of the unpaid principal balance in our whole loans pools.

Let's now take a closer look at the quarterly resolution activity and the distressed loan portfolio on slide 7.

In the second quarter, PMT liquidated a total of $81 million in UPB.

As depictive in the graph at the top of the slide, these liquidations were led by short sales and REO sales.

As of the end of the quarter, 86% of PMT's non-performing loans were on an active resolution path with 41% of portfolio in the active stages are for modification, short sale, or deed in lieu, or foreclosure.

38% of the portfolio is currently on a path to foreclosure sale, and 14% of the loans are in pre-foreclosure and solicitation.

Through active solicitation, we continue to pursue modification, deeds in lieu of foreclosure, and short sale resolution on all of our loans.

Take a closer look at our modifications.

PMT's pipeline of modifications continue to increase up to 26% of our NPLs at the end of the quarter, compared to 19% at the end of the first quarter.

In addition to returns and timely payment of principal and interest, we can achieve greater returns on certain modified loans.

For example, qualifying modifications that remain current for some period of time may be refinanced and sold under the FHA's negative equity refinance program.

This program is a highly effective loan resolution as it reduces the borrower's payment, provides the borrower with a permanent reduction in the size of their loan and provides a liquidation event for PMT's investment.

Let's now turn to slide 8 and 9 for an in-depth look at our PMT loan acquisitions that progressed at the beginning of 2010.

To add perspective on how whole and pool transitions to the resolution process, the following tables provide detail on static portfolios of loans acquired since the beginning of 2010.

The tables in these two slides take all of PMT's loan acquisitions completed in a specific quarter and track their progress each quarter since their acquisition.

For example, the chart on the top of slide 8 looks at the loans acquired in the first quarter of 2010 and shows the status of these loans at the end of each subsequent quarter.

As you can see, 59% of the loans PMT acquired in the first quarter of 2010 remain in the portfolio, meaning that 41% have been liquidated.

Of the remaining loans, approximately 26% are current up from 6% at acquisition.

This is the result of our servicer PLS who can diligently to collect payments as well as providing our borrowers with modifications when possible.

Both of the vintages shown on this slide are liquidating at an average speed of 18 months or quicker.

As PLS guides the loans along the resolution path, the percentage of loans of foreclosure reduces over time as loans are either modified or liquidated.

We see evidence of this as the foreclosure bucket shrinks and the REO in current buckets increase.

Slide 9 continues the analysis for our more recently acquired whole loan pools.

While loans are progressing well from these acquisitions, they are not as far along the resolution path which is what we would expect.

The percentage of loans of foreclosure status remains high which will continue to progress towards a resolution, as you can see from the acquisitions completed in the third-quarter of 2010 where almost 15% of the pool is current and 16% is in REO.

The ability to quickly work through our REO inventory will greatly influence the returns on these investments.

Now let's turn to slide 10 for a closer look at our REO inventory.

$13 million or 42% of the value of our REO properties at the end of the first quarter were liquidated in the second quarter.

At the end of the second quarter, only 32% of the REO inventory was over three months old.

As we continue to acquire new NPL pools and progress our current portfolio through the liquidation and resolution process, we would expect our REO inventory to increase.

However, we continue to closely monitor and manage the aging of our REO inventory and work to liquidate properties in a manner that generates the highest return of these investments.

Let's now turn to slide 12 to take a deeper look at our correspondent lending business.

Our correspondent lending group or CLG purchased $53 million in prime loans during the second quarter more than doubling the production in the first few months of the year.

Approximately two-thirds of those loans are $34 million or FHA or VA loans, whereas the remaining $18 million of the loans were conventional agency and jumbo.

One of our primary goals is increasing our activity in the jumbo and conventional markets.

For the month of July, CLG fundings were $49 million, and we see this momentum continuing into the third-quarter likely tripling our second-quarter volume.

Our target is for CLG to reach funding volumes of at least $200 million per month sometime in the fourth quarter.

To see how PMT benefits from this volume and the main drivers of our correspondent lending business, let's turn to slide 13.

This slide shows the revenues and expenses associated with our correspondent business and the drivers of each of these items.

For jumbo and conventional loans, PMT generates income for production volume as well as some accretion of a mortgage servicing right asset or MSR as these loans are sold with a servicing retained by PMT.

For government loans such as FHA or VA loans, PMT earns the net warehouse spread during the holding period, as well as a sourcing fee collected from PLS.

PMT is seeking to obtain approval from Ginnie Mae a reseller servicer, so that we'll be able to participate directly these loans in a similar manner to the conventional and jumbo loans.

As you can see, production volume is our main driver for revenue in the correspondent lending business.

However, pricing margins, processing turn times, closing ratios and effective hedging are all critically important to ensure that we earn an appropriate return on equity on our loan production.

We are highly focused on prudently managing all of these aspects as we continue to strategically and methodically increase our correspondent lending volume and its contribution to PMT.

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

Anne?

Thank you, David.

As Stan stated earlier in the call, PMT earned $16.6 million or $0.59 per share for the quarter ended June 30, 2011.

Quarterly earnings per share increased 69% from the first-quarter results of $0.35 per diluted share.

Net investment income was $30.2 million, an increase of 75% from the first quarter.

Interest income, primarily from coupon payments on mortgage loans and mortgage-backed securities and the discount accrual on our MBS was $8 million, and gains and losses on investments, primarily gains on loans, added $22.1 million to income.

During the quarter, we've realized cash flows relating to our mortgage investments in whole loans, REO, and MBS of approximately $75 million [there].

Of that amount, $40 million was from our mortgage loans, another $20 million from MBS, and $15 million was from the sale of REO.

Expenses for the second quarter of 2011 totaled $12.2 million compared to $9 million in the first quarter of 2011.

This increase was largely attributable to increases in loan servicing fees of $1.1 million and interest expense of almost $700,000.

The Company's average portfolio of loans serviced grew by $349 million in unpaid principal balance during the second quarter.

The increase in interest expense is attributable to the increased borrowings on our credit facilities used to fund PMT's whole loan investments.

The interest rate on borrowing for the second quarter was 3.67%.

As PMT continues to increase its use of leverage, we expect interest expense to increase correspondingly.

As Stan mentioned earlier, the Board of Trustees declared a quarterly dividend of $0.50 per share, representing a 12% annualized yield based on the closing stock price on June 30, 2011.

For the second quarter, total return on PMT's financial instruments was nearly 16% annualized.

Our whole loan portfolio performed in line with expectations while valuations affected the returns of our MBS portfolio.

PMT's return on our distressed mortgage loans was over 19%, while MBS returns were essentially flat for the quarter.

Turning to slide 16, let's take a look at the balance sheet.

As you can see, PMT's assets grew 5% from the first quarter.

Our liabilities were $360.5 million at the end of the second quarter, up 11%.

Asset growth was largely driven by whole loan purchases in the quarter.

Our liabilities growth was due to the increased borrowings under our credit facilities.

Our ability to finance REO properties improved with our new credit facility with Credit Suisse which partially explains our liabilities growth outpacing our asset growth.

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

A relatively new and growing item on our balance sheet is mortgage servicing rights or MSRs.

As David mentioned earlier, this asset is the result of our correspondent business selling loans into the secondary market while PMT retains the servicing with PLS as the sub-servicer.

The value of this asset generally represents the net present value of future cash flows from servicing the loans and as a component of being on sale.

As estimates regarding the future realization of cash flows or the market conditions for MSRs change, the increase or decrease in the valuation of the MSR asset will flow through the income statement under changes in fair value of mortgage servicing rights.

While small today, we expect this item to increase as our correspondent volume increases.

The tax treatment of these MSRs is favorable in that a portion of the income recorded from the value of the MSRs is not immediately taxable.

This will result in a deferred tax liability on our balance sheet.

Let's now turn to slide 17 and take a look at how we view our financing strategies.

We continue to look at optimizing PMT's use of debt financing.

To that end, we continuously explore additional credit facilities with numerous counterparties.

However, our investment assets require different levels of leverage and our strategy requires different sizes for each.

Our distressed whole loan credit facilities continue to lead our overall financing liabilities and we expect that these will remain in place over the life of the distressed asset opportunity.

As you can see by the chart, we have steadily grown our financing of assets with over $333 million of financing as of the end of the second quarter.

PMT's warehouse line for our correspondent business increased to $17 million in the second quarter and will increase as volumes increase.

The warehouse facility for correspondent loans are afforded relatively higher levels of leverage as these loans have generally been sold forward into the MBS market.

We continue to explore term financing and structured transactions.

Presently, the existing credit facilities we have in place are more operationally and economically efficient.

We will continue to evaluate the possibility of securitization and if appropriate, we'll enter the market.

We believe our leverage targets are conservative and we intend to prudently manage our leverage as the Company continues to grow and expand.

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 of those investors who have questions to please submit them to our Investor Relations department via e-mail or call us directly.

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

We thank you again for your time.

We thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect and have a great day.