PennyMac Mortgage Investment Trust CEO At Barclays Capital Global Financial Services Conference (Transcript)

PennyMac Mortgage Investment Trust (PMT)

Barclays Capital Global Financial Services Conference

September 10, 2012 12:00 AM ET

Executives

David Spector - President & CEO.

Andy Chang - Chief Business Development Officer

Analyst

Presentation

Unidentified Analyst

Speakers from PennyMac we have President and CEO, David Spector along with Andy Chang prior to joining PennyMac in addition to that stop at Morgan Stanley, David like many of the executives at PennyMac spent a fair amount of time at countrywide. And well PennyMac now is a mortgage it's part of a broader integrated originator servicer and investment mortgages with a very interesting, young future. So with that I will hand it over to David for his comments.

David Spector

Thank you Mark. Before we begin please take a moment to look over the disclaimer regarding forward-looking statements, now let me begin with a brief market overview. As I am sure you're all aware of the severe dislocations occurred in U.S. mortgage and housing markets is now approaching the five-year mark but we're beginning to see indications of market improvements. This is particularly evident in some of the areas hardest hit by the downturn, home prices are improving on the national basis while home purchase activity in several areas has been robust with investor demand for REO properties remaining strong, these data points suggest to us that prices are beginning to stabilize. Our experience with second-quarter REO and for closure sale liquidation suggest that demand increased in and the prices received for those properties were generally higher than sales of comparable properties in the previous quarter.

Ultimately price stability is necessary for consumers or investors to feel confident that home values aren’t going to decline after they buy a home. Clearly their downsized risks from a weak job market and slowing economic activity however we're hopeful the housing market will continue to stabilize and we remain cautiously optimistic about the prospects for home prices as we move into the latter half of 2012.

Low mortgage rates and programs such as HARP 2.0 and the FHAs negative equity refinance program have boasted refinance volumes and helped homeowner’s lock-in historically low rates on their mortgages. Additionally low rate coupled with attractive home prices and higher cost to rent makes purchasing a home more attractive. These factors appear to be having a positive impact on consumer attitudes towards homeownership which seems to be improving. While there are signs of improvement in the housing markets, we are also continuing to see a steady flow of distrust home loans being offered for sale. The attorneys general foreclosure settlement with the large banks and the desire to free up capital will drive additional sale of distress home loans going forward.

The sales will likely consist of non-performing and re-performing loans both of which have the potential to provide attractive returns to companies with the requisite servicing expertise to drive timely and effective resolutions. The correspondent landscape is going through a transformation as most of the big banks who have been the market leaders in the channel for many years are exiting or materially reducing their volumes. This market change is primarily due to the pending implementation of the Basel III capital requirements, operational complexities and Rep & Warrant issues.

Many of those banks have shifted their focus to their retail channels, additionally the Federal Housing Finance Agency, FHFA is working to drive parity and guarantee fees across mortgage lenders in order to narrow the competitive advantage enjoyed by the largest lenders and to reduce concentration risk. Thus far the FHFA has been successful in narrowing this gap and may choose scenario further by the end of the year.

This will help small and midsize lenders to compete more effectively with the large banks and drive more the total origination market to these lenders. These factors have created significant opportunity for non-bank financial intermediaries such as PMT to fill the resulting void and we think there is still considerable amount of growth potential for non-bank financial intermediaries in this channel. The current low mortgage rate environment coupled with the challenges that banks are facing with their mortgage related exposure have helped to increase the attractiveness of investments in mortgage servicing rights, Newly originated MSRs have relatively low prepayment risks given the historically low interest rate environment which enhances their return profile. Also regularity complexities and Basel III capital considerations will likely drive many large bank services to sell legacy MSRs.

We anticipate that opportunities to acquire bulk servicing rights will remain for the foreseeable future. Against this backdrop to turn to slide four, PMT is a unique enterprise that is focused on investing in the U.S. residential mortgage market; it engages opportunistic investments while capitalizing on emerging opportunities of the market converges towards normalization. PMT is an externally managed REIT leveraging the capabilities of PNMAC Capital Management, PCM and its affiliate PennyMac Loan Services, PLS.

PCM currently manages 1.7 billion of equity and provides investment management, knowledge and expertise to invest in distressed mortgage loans and engages in counter-activity for purchases of newly originated prime mortgages from correspondence sellers. PLS provides the operational infrastructure and capabilities for both loan fulfillment and mortgage servicing together PCM and PLS enable PMT to purchase opportunistic investments in residential mortgages and provide synergies that we believe maximize shareholder returns.

Now let’s turn to slide five and review PMT second quarter and also some of the highlights in the third quarter thus far. Our second quarter’s results demonstrated significant earnings power of PMT with both of the company’s business segments. Correspondent lending and investment activities delivered double-digit pretax earnings growth from the first quarter. Net income was 29.6 million in the second quarter a 55% from the first-quarter on revenue of 64.4 million. Diluted earnings per share reached an all-time high of $0.79, a 22% increase from the first quarter. Return on average equity was 17%, we believe this is particularly notable considering the raising of over 200 million in new equity in the quarter corner roughly a third of our market capitalization at that time demonstrating our ability to quickly and effectively deploy capital in accretive opportunities.

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