PennyMac Mortgage Investment Trust (PMT) 2012 Q4 法說會逐字稿

Welcome to the PennyMac Mortgage Investment Trust fourth-quarter earnings discussion. The slides that accompany this discussion are available from PennyMac Mortgage Investment Trust's website at www.pennymac-reit.com.

Before we begin, please take a few moments to read the disclaimer on slide two of the fourth-quarter earnings report.

Thank you. Now I'd like to turn the discussion over to Stan Kurland, PMT's Chairman and Chief Executive Officer. Stan?

Thank you, Chris. PMT ended 2012 with record net income for the fourth quarter resulting from strong correspondent loan purchases in addition to the continued growth of PMT's distressed whole loan investments. Both of the Company's business segments, Correspondent Lending and Investment Activities, delivered strong pretax earnings in the fourth quarter, demonstrating the earnings power of PMT's business model.

Today, I'd like to talk to you about PMT's fourth-quarter and full-year 2012 results, and the revisions to our management and fee agreements with PMT's manager, PNMAC Capital Management or PCM, and its fulfillment and servicing provider PennyMac Loan Services, PLS, which were announced this morning. Lastly, I'll discuss key mortgage market drivers and their impact on PMT.

Then I will turn it over to David Spector, PMT's President and Chief Operating Officer, to take you through our mortgage investment activities. And finally, Anne McCallion, PMT's Chief Financial Officer, will discuss the quarter's financial results in greater detail.

Now let's turn to page 3 and review PMT's fourth-quarter highlights.

PMT delivered its most profitable quarterly results since the Company's IPO in the summer of 2009. Net income totaled $49 million, a 22% increase from the third quarter, which equates to $0.83 per diluted share. Net income reached $125 million for the quarter, driven by solid results from both the Investment Activities and Correspondent Lending segments. Correspondent Lending purchases totaled just over $10 billion in the fourth quarter, a 59% increase from the third quarter and a more than ten-fold increase from the fourth quarter of 2011.

Our investments portfolio of distressed mortgage loans continued to grow, adding an additional $290 million in UPB of nonperforming whole loans during the quarter. Investments in distressed whole loans totaled $2.1 billion in UPB at year-end.

Investments in mortgage servicing rights increased 95% on a quarter-over-quarter basis, driven by strong growth in Correspondent Lending volumes, of which 65% were conventional loans. The ability to organically grow the mortgage servicing rights portfolio is essential to achieving sustainable earnings momentum through the cycle. MSRs originated in this historically low interest rate environment are particularly valuable to us given their relatively low prepayment risk, which enhances their potential return.

This quarter's record performance underscores the strength of PMT's business strategy and its ability to deliver solid investment returns through the management expertise of PCM and the operational execution of PLS.

Turning to slide four, we look at PMT's full-year results. 2012 was an excellent year for PMT. Net income grew 115% to $138 million and EPS increased 30% year over year to $3.14 per diluted share, compared to $2.41 per share in 2011.

We raised over $600 million in new equity capital during the year, which was successfully deployed into accretive investments. Those investments primarily consisted of distressed mortgage loans, which are generally purchased at a significant discount to the outstanding principal balance of the loans, and mortgage servicing rights retained on newly originated mortgage loans.

Correspondent purchases totaled $21.5 billion in 2012, a 16-fold increase from 2011 volumes, placing PMT among the top 10 lenders in the country. These impressive results reflect the quality of the Correspondent Lending team and their ability to execute on their differentiated business model.

Distressed whole loan acquisitions totaled $1 billion in UPB for all of 2012, which is on par with the amount of distressed whole loans purchased in 2011. Distressed loans purchases in 2012 were 81% nonperforming loans and the majority of the remaining 19% comprising reperforming loans.

Looking at PMT's business model holistically, the REIT structure provides a tax efficient means of raising capital for investment in high return mortgage-related assets and distributing its earnings. This unique strategy delivers value by targeting operationally intensive assets.

In leveraging the relationship with its manager, PCM, and its fulfillment and servicing provider, PLS, PMT is able to access the requisite intellectual capital and operational capabilities to realize its investment returns. In 2012, PMT delivered a 15% return on average equity.

Slide five provides a top-level overview of our strategy for creating shareholder value.

PMT utilizes its capital and modest amounts of leverage to grow its portfolio of residential mortgage-related investments. PCM and PLS, through management and fee agreements, provides the investment management capabilities and operational infrastructure necessary to extract the value of these investments. This is evidenced by the earning trend over the last three years, with earnings and diluted EPS more than doubling since 2010.

PMT has been able to adapt to a constantly changing post-housing crisis residential mortgage market landscape by adjusting its strategies to align with the opportunities available in the market. As a result, PMT's shareholders have enjoyed a 91% total return over the last three years, which is nearly double that of the S&P 500's total return of 46% for the same period.

We are pleased to announce revisions to the agreements that govern the investment management, loan servicing, and mortgage banking and warehouse services for PMT. On slide six, we highlight some of the key revisions to the agreements.

Please note that this is not intended to be a comprehensive overview and investors are encouraged to read today's 8-K filing in its entirety to ascertain the extent of the revisions. To obtain a copy of the 8-K, please visit PMT's investor relations website.

Among other things, the agreements extend all services for at least four years, ensure that PLS performs Correspondent Lending fulfillment services exclusively for PMT, and amends PCM's and PLS's compensation for these services. The revised agreements secure a long-term partnership among PMT, PCM, and PLS. They also address aspects of PMT's business activities which have evolved over time and better align the incentives of PCM and PLS with PMT's financial performance.

The agreements were reviewed by an independent, external adviser retained by a committee of PMT's Board comprised entirely of independent trustees.

Looking forward there are several evolving macro-level factors that we believe will have a significant impact on the residential mortgage market over the next several years. On slide 7 we examine a few of those factors and their impact on PMT's business model.

Looking forward into 2013, most forecasts are calling for a smaller mortgage origination market driven by a decline in refinance activity resulting from marginally higher mortgage rates, which will be partially offset by higher home purchase activity. We expect the impact on PMT to be mitigated by the Correspondent Lending group's continued execution on their successful strategy of deepening customer relationships, best-in-class customer service, and improving efficiency.

Moreover, we plan to grow the correspondent seller network at a measured pace to ensure that we maintain a high-quality nature of our correspondent seller relationships. We also continue to build out the correspondent product menu, which will focus on expanding jumbo volumes in 2013. As the market normalizes, we see significant opportunities in the non-agency securitization market and our targeted expansion of jumbo purchase volume will be an important piece of that strategy.

We expect housing prices to continue stabilizing in 2013, and in certain areas of the country we expect to see modest growth. As a result, we see that the capital flowing into residential mortgage opportunities will continue at a robust pace, which is likely to be reflected in the prices of residential mortgage investments.

We believe the correspondent channel will see several entrants in 2013. These new competitors will be looking to grow volume and capitalize on opportunities available in originated mortgage servicing rights. The ability to grow MSR portfolios organically is critical, and as a result, we anticipate some normalization in margins in 2013 resulting from increased competition.

However, it is unclear how the large money center banks will participate in the mortgage origination market going forward. It also remains to be seen what impact Basel III, Dodd-Frank, and other measures such as GSE guarantee fee parity will have on the new normal. Other considerations are the impact that rising home values may have on refinance activity and/or whether the new HARP 3.0 comes to fruition this year, both of which could significantly impact the size of the mortgage origination market if they occur.

It is important to consider the implications on the mortgage servicing rights that would result from the forecasted rise in mortgage rates. Rising rates would result in reduced prepayment activity which would theoretically extend the estimated life of MSRs, benefitting the return profile of the MSR asset and allowing for the recapture of impairment reserves.

With respect to the distressed whole loan investment opportunities, the flow of loans available for purchase has remained consistent throughout the fourth quarter. While the leveraged yield on these pools satisfies our return requirements, we have seen increasing demand for these assets and current pricing reflects a more optimistic outlook on housing.

Rising home values have been driven by strong demand for REO and foreclosure properties from private and institutional investors. We believe the market for both nonperforming and reperforming whole loans will be strong, with an increase in the flow of loans coming up for sale as new sellers emerge.

The opportunities in today's residential market are significant. Companies with patience, foresight, expertise, and ability to execute, such as PMT, will be poised for success as the residential market continues to evolve in 2013.

Now, David Spector, PMT's President and Chief Operating Officer, will discuss mortgage investment activities. David?

Thank you, Stan. PMT's mortgage investments delivered a solid fourth quarter. PMT continues to enjoy success in executing on its investment strategy, and sees significant opportunity to grow the correspondent business as the housing market continues to recover and the economy improves. Distressed whole loan investments remain a core opportunity and one that continues to evolve as the mortgage market moves closer to normalization.

Let's turn to slide nine and look at the operational results of the Correspondent Lending business in the fourth quarter.

Total correspondent loan acquisition volume reached $10 billion in the fourth quarter, up from $6.3 billion in the third quarter and $991 million in the year-ago period. Conventional and jumbo acquisition volumes reached $6.5 billion for the fourth quarter, a 75% quarter-over-quarter increase. Interest rate lock commitments reached $10.3 billion, of which conventional and jumbo locks totaled $7 billion.

The growth of conventional correspondent loan volume was a key driver of growth in the MSR asset quarter over quarter, as PMT retains the MSR on conventional loans when they are sold to Fannie Mae and Freddie Mac.

Although margins on gains from mortgage loans acquired for sale benefitted from wider secondary spreads early in the fourth quarter, margins narrowed somewhat as the quarter progressed. However, for the quarter as a whole, margins were slightly higher from the prior quarter as a percentage of net gain on mortgage loans acquired for sale and locks.

While margins remained elevated from a historical perspective during the fourth quarter, we expect them to begin normalizing in 2013, but there are many variables involved in determining what the new normal will be. We think that there is room to continue growing loan acquisition volumes by deepening relationships within the current correspondent seller network and also by expanding the overall number of seller relationships. As this occurs, we will use the same thoughtful approach we've used in the past to ensure that quality and consistency is maintained.

As such, Correspondent Lending is targeting $4 billion per month in correspondent loan acquisitions by December 2013. While we remain optimistic regarding the prospects for the Correspondent Lending business, we also expect that acquisition volume growth rates will moderate in 2013 compared to 2012 levels.

The Jumbo product is a key focus which we believe will help drive incremental volume in the future, but it's likely that it will take a few quarters for volumes to become meaningful. Non-agency securitizations represent an attractive investment opportunity that are moving toward eventual re-emergence. Aiding this re-emergence are events like the recent finalization of the QM rules, which provide additional clarity around risk and are critical to the normalization of the mortgage and housing markets.

Let's now turn to slide 10 to take a closer look at distressed whole loan purchase activity.

Distressed whole loan purchase activity totaled $290 million in UPB in the fourth quarter, consisting mostly of nonperforming whole loans. We also purchased an additional $173 million in UPB of distressed whole loans which settled in January.

The flow of distressed whole loans available for purchase remained relatively consistent throughout the fourth quarter. As Stan mentioned in his comments, current pricing levels reflect a more optimistic outlook on the housing market, but there is also increased demand for these assets.

Our recent purchases show that there are pools in the market that meet our return criteria, but it's important to mention that we will remain patient. Currently, we are targeting leveraged returns in the range of 16% to 23% for distressed whole loans, and we believe that the availability of both nonperforming and reperforming loan pools will remain strong. The market for these assets is expected to remain active this year with additional participants emerging looking to sell legacy loans and free up capital.

Our perspective regarding this opportunity has improved over the last few months and it now appears that the flow of loan pools available for sale this year looks to be strong, and may continue for longer than we previously believed. Also, sellers of distressed loans have communicated to us the importance they place on assuring that the purchaser of the loans will conduct the subsequent loan resolution activities in a prudent and fair manner. We believe these criteria position PMT favorably in bidding for pools from sellers with this perspective.

The pools PMT purchased in the fourth quarter had a 45% fair value to UPB ratio on a weighted average basis, which was up slightly from the third quarter due to a higher percentage of performing loans in the fourth quarter's purchases.

While the impact of the stabilization of home prices has also impacted the prices on distressed loans available for sale, it has also had a positive impact on the valuation of distressed loans in PMT's portfolio.

Turning to slide 11, we look at the performance of PMT's distressed mortgage loans portfolio during the quarter. Realized and unrealized gains on mortgage loans totaled $38 million in the fourth quarter, an increase of 44% from the third quarter. Unrealized gains totaled $33.8 million in the quarter, driven by improvements in the performance of the loans in the portfolio, including improved delinquency roll rates, consistent modification activity, and continued steady progress towards resolution, which increased the fair value of the loans during the fourth quarter.

Also positively impacting valuations was the continued improvement in home price performance. The valuation models we use take into account both current and prospective home price performance.

The matrix in the bottom-right portion of slide 11 provides information on the national HPI forecast for both the third and fourth quarters. While both forecasts call for modest price declines in 2013, the depth of the decline has moderated from the third quarter and the recovery point has been projected to shorten from October 2013 to September 2013.

Another meaningful contributor to this quarter's gains on mortgage loans was total payoff activity which increased from the third quarter, resulting in a 19% quarter-over-quarter increase in payoff-related gains. The significant driver of the payoff-related gains was negative equity refinance activity, which is PMT's preferred liquidation path, as it provides the optimal outcome for both the borrower and shareholders.

On slide 12 we examine three opportunities that we believe have the potential to offer attractive returns as the residential mortgage market continues to evolve. The first is an opportunity in non-agency jumbo securitizations. We anticipate that the non-agency MBS market will begin to gain momentum in 2013, and we view participation in the reemergence of this asset class as a natural fit for PMT.

The jumbo mortgages collateralizing the securitization will be sourced through the Correspondent Lending group. Our strategy envisions the creation of a senior/subordinated structure where the senior tranche would be sold to third-party investors while the subordinated tranche would be retained by PMT. This arrangement would provide solid alignment of interests between investors in the senior tranche and PMT.

Reperforming whole loans, as I mentioned earlier, are a key opportunity for us. Reperforming loans are a relatively low yielding and capital intensive asset for banks and we expect an increase in the flow of these assets being put up for sale this year. Currently, we see these pools trading at price to UPB ratios of between 75% to 80% with targeting leveraged returns in the range discussed on slide 10.

Another important aspect of the reperforming activity is the ability to solicit refinancing under the FHA's negative equity refinance program. This program has been successful on the nonperforming loan portfolio, as it allows the borrower to achieve a positive equity position in their home in addition to receiving a new loan at today's low mortgage rates. PMT's shareholders receive optimal liquidation returns.

Bulk Legacy Agency MSR acquisitions are an opportunity that we remain very interested in. Several large bulk deals have traded over the last twelve months, and our view is that we are likely to see an additional $100 billion to $200 billion of UPB trade in 2013. The strong demand for these deals was reflected in the price of recent trades. However, we still see a bulk acquisition as an attractive opportunity that aligns very well with our core capabilities and we will continue to evaluate this opportunity going forward.

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

Thank you, David. Turning to slide 14, you can see the growth trend in PMT's mortgage assets, which have nearly doubled since last year and are up 14% from the previous quarter. Most of this quarter's growth was due to a 15% increase in our inventory of correspondent loans acquired for sale and a 9% increase in distressed whole loans.

Additionally, our investment in mortgage servicing rights continues to grow in line with the growth of our conventional and jumbo correspondent purchase activity. The capitalized MSR asset nearly doubled from the third quarter, reaching $127 million at year-end.

On the right, we have the historical trend of pretax earnings and net income. Net income rose 22% quarter over quarter reaching $49 million, which was driven by solid earnings growth in both of PMT's business segments, Investment Activities and Correspondent Lending. Pretax earnings totaled $65 million in the fourth quarter, 63% of which was attributable to the Correspondent Lending segment and 37% was from the Investment Activities.

On slide 15 we present the P&L for the Investment Activities segment. This segment's investments include distressed whole loan mortgages and mortgage servicing rights. Total pretax earnings for the segment rose 13% quarter over quarter, largely as a result of strong net gain on investment income from PMT's distressed whole loan investments.

As David discussed earlier, distressed mortgage loan valuations benefitted from improved performance during the quarter. This included fair value accretion on a growing pool of distressed whole loan investments which continued to progress along their path toward resolution, as well as better home price performance during the quarter.

Interest income declined 7% from the prior quarter as a result of lower capitalized interest on modifications and higher payoff activity in the portfolio which reduced interest income from performing loans. Other income fell $5.6 million, due to reductions in the value of selected high-balance REO properties in addition to property taxes and maintenance costs. Because our REO properties are recorded at the lower of cost or market, write downs in value are recognized while increases in value generally are not until the properties are sold.

Expenses in the segment rose 11% quarter over quarter as a result of a 22% increase in management fees resulting from higher average shareholder's equity balance in the quarter in addition to higher professional fees related to the completion of the revised fee agreements. Once again, the portfolio of distressed loan investments delivered a strong annualized total return of nearly 20%, up from 17% in the third quarter.

Now let's turn to slide 16 and discuss the earnings performance of the Correspondent Lending segment.

Pretax income in the Correspondent Lending segment increased 9% from the third quarter to $41 million, driven by a $16.6 million increase in gain on mortgage loans acquired for sale and a $2.8 million rise in interest income. This revenue growth was partially offset by a $14.5 million increase in loan fulfillment fees, which was commensurate with the quarter-over-quarter increase in conventional loan sales activity.

The Correspondent Lending segment's earnings are largely driven by the volume of locks on conventional and jumbo loans. In the fourth quarter, the volume of conventional and jumbo interest rate lock commitments totaled $6.5 billion.

The Correspondent Lending business delivered a 35% total return on assets in the fourth quarter, which was down from 42% percent in the prior quarter. Total return represents interest and net gain on correspondent loans and does not take into account any associated expenses.

Now let's turn to slide 17 and discuss net gain on mortgage loans acquired for sale.

Gains from the conventional and jumbo mortgage loans acquired for sale during the fourth quarter totaled $66.5 million, a 33% increase from the third quarter driven by a 28% increase in interest rate lock commitments from the prior quarter. The net gain on mortgage loans acquired for sale has several components. Largest among them is the value of MSRs originated during the fourth quarter, which totaled $68 million.

Market value adjustments of the pipeline, inventory, and hedges resulted in a $25.6 million gain that reflects the change in value of the mortgage loans in the pipeline during the period of time between lock and sale. These gains were offset by $25 million of cash losses from loan sales and hedging activities.

The rep and warrant provision provides for future potential losses from loans that are repurchased for breach of any representations or warranties that we may have made and are unable to recover such losses from our correspondent seller. The result of these activities was a net gain on mortgage loans acquired for sale of $66.5 million.

Margins, which we define as the quarter's net gain from mortgage loans acquired for sale divided by interest rate lock commitment volume, are influenced by many factors, including the level and volatility of interest rates, inventory turnover, servicing values, secondary spreads for MBS, pull-through rates, and the competitive environment.

Early in the fourth quarter, margins benefitted from wider secondary spreads as a result of the implementation of QE3 in mid-September. The policy action by the Federal Reserve drove mortgage rates lower and increased refinance demand. The impact of this moderated with margins narrowing through the remainder of the quarter. Overall, margins for the fourth quarter were slightly higher than for the third quarter.

It is important to note that margins in the fourth quarter remained wide compared to historical levels, and as we've said previously, we believe that margins will begin to normalize this year as new competitors enter the market and refinance activity begins to decline.

Now I'd like to turn to slide 18 and discuss the growth of our MSR portfolio.

On this slide we take a look at the growth in PMT's MSR portfolio and the components of net servicing fees. The total MSR portfolio reached $12 billion in UPB at December 31, 2012, a 100% increase from the end of the third quarter. Originated MSRs represent a very attractive investment opportunity for PMT. The ability to organically build our MSR portfolio in today's low rate environment is a significant competitive advantage.

The multiple on conventional servicing booked in the fourth quarter was 4.14 times compared to 4.16 times in the third quarter and the weighted average note rate of the underlying loans was 3.55% compared to 3.79% last quarter, reflecting the decline in the average 30-year fixed mortgage rate during the fourth quarter.

Net loan servicing fee revenue reached $605,000 in the fourth quarter compared to a $511,000 loss in the third quarter. Servicing fee revenue rose by $1.1 million from the third quarter, which was offset by higher amortization and impairment charges. The impairment charges resulted from higher prepayment expectations inherent in our estimates of the value of the MSRs due to the low mortgage rate environment that prevailed in the fourth quarter. The impairment charges may be recoverable when rates rise.

Positively impacting fourth-quarter servicing results were hedge gains of $2.1 million. The fourth quarter marked the first time that the value of the MSR asset was hedged. We believe that the current low rate environment warranted this activity and we may choose to do so opportunistically in future periods.

I'd now like to give the floor back to Stan for some final comments on the quarter.

Thank you, Anne. I'd like to finish today's presentation by briefly reviewing the key takeaways from the quarter.

PMT's fourth-quarter results demonstrate the strength of its business model and its ability to deliver attractive returns across a variety of investment opportunities. The stabilization in home values will have significant benefit for PMT's portfolio of distressed mortgage loans and for the origination market as well.

Industry forecasts are calling for continued improvement in home prices, which positively impacts the value of the loans in our distressed whole loan portfolio and increases the demand for home purchases as well. Correspondent lending is expecting to continue growing volume and is targeting $4 billion in loan purchases per month by the end of 2013. This will occur through increased penetration in certain key products, primarily jumbo mortgages, and also by growing the network of approved sellers and continuing to deliver best-in-class customer service and efficiency.

Distressed whole loan investments are also expected to increase and they remain a key investment strategy. We see new participants entering the market looking to sell legacy assets in order to clean up their balance sheets and free up capital. As a result, it is likely that this market remains strong for both nonperforming and reperforming whole loans though 2013 and perhaps longer.

Lastly, the re-emergence of the non-agency securitization market is an opportunity that is particularly meaningful for PMT. This includes revenue opportunities in structuring, sales, investments, and servicing of non-agency deals. We expect that market will see strong growth in 2013 and make significant strides towards normalization.

PMT, in conjunction with PCM and PLS, is in an excellent position to capitalize on these opportunities, and we remain optimistic regarding the U.S. residential mortgage market and our ability to grow as it evolves.

Thank you.

This concludes the PennyMac Mortgage Investment Trust fourth-quarter earnings conference call. For any questions, please visit our Investor Relations website at www.pennymac-reit.com or contact our Investor Relations department at 818-224-7028. Thank you.