Introduction
PennyMac Mortgage Investment Trust (NYSE:PMT) recently issued the PennyMac Mortgage Investment Trust NT 8.5% 28 (NYSE:PMTU), giving investors three asset classes to pick from: common stock, preferred stock, and now a Note. As I have built a baby bond/note ladder, this article reviews the Note to see if it has a place in that investment strategy.
To help decide if the yield and yield-to-maturity are competitive, a comparison is done using two Eagle Point Credit Company (ECC) Notes that mature before or after PMTU. While ECC is a CLO investing CEF, both PMT and ECC are exposed to movements in interest rates so I thought there was logic for the comparison.
PennyMac Mortgage Investment Trust review
Understanding the Issuer is a critical part of the Note’s review. This is how Seeking Alpha describes this mREIT (condensed):
PennyMac Mortgage Investment Trust, a specialty finance company, primarily invests in mortgage-related assets in the United States. It operates through four segments: Credit Sensitive Strategies, Interest Rate Sensitive Strategies, Correspondent Production, and Corporate. The company’s Credit Sensitive Strategies segment invests in credit risk transfer agreements, CRT securities, distressed loans, real estate, and non-agency subordinated bonds. Its Interest Rate Sensitive Strategies segment engages in investing in mortgage servicing rights, excess servicing spreads, and agency and senior non-agency mortgage-backed securities (MBS), as well as related interest rate hedging activities. The company’s Correspondent Production segment is involved in purchasing, pooling, and reselling newly originated prime credit residential loans directly or in the form of MBS. PennyMac Mortgage Investment Trust was founded in 2009 and is headquartered in Westlake Village, California.
Source: seekingalpha.com PMT
This is how the mREIT describes itself:
PennyMac Mortgage Investment Trust is a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. As a real estate investment trust (REIT), our objective is to provide attractive risk-adjusted returns to our shareholders over the long term, primarily through dividends and secondarily through capital appreciation. Our investment focus is on mortgage-related assets that we create through our industry-leading correspondent production activities, including mortgage servicing rights (MSRs). In correspondent production, we acquire, pool and securitize or sell newly originated prime credit quality loans.
Source: pmt.pennymac.com/home
Their 3rd quarter report included this chart, which will be of no surprise.
Higher interest rates on mortgages are hurting the origination of new mortgages and even more so for refinancing existing ones due to a decade of record low rates on those new or previously refinanced mortgages. Also, the need for new mortgages at today's rates is depressed as homes-for-sale are down as homeowners do not want to give up their sub-4% mortgages. On the positive side, mortgage prepayments are down; such activity cuts into the lender's profit margin.
Approximately two-thirds of PMT’s shareholders’ equity supports seasoned investments in Mortgage Servicing Rights or MSRs. After declining steadily, PMT’s book value per share seems to be stabilizing and for the fifth straight quarter, PMT has turned a profit, both good signs.
PMT has shown a small decrease in shareholder's equity over the past nine months but with the Notes only being $50m, there is plenty of coverage.
Distribution history
As one might expect from a mREIT, changes in the dividend rate are more prevalent than companies exposed to other parts of the economy. That points out one advantage the Note, payouts are fixed.
For a recent Sell rating on PennyMac, read the article from On the Pulse.
PennyMac Mortgage Investment Trust NT 8.5% 28 review
As I usually do, I turned to my Quantumonline.com for an overview description of fixed income assets.
Competitive analysis
This will compare PMTU using the following two Notes:
- Eagle Point Credit Company Inc. 6.6875% NT 28 (ECCX)
- Eagle Point Credit Company Inc. NT CAL 29 (ECCV)
Seeking Alpha provides this overview of ECC:
Eagle Point Credit Company Inc. is a closed ended fund launched and managed by Eagle Point Credit Management LLC. The primary investment objective is to generate high current income, with a secondary objective to generate capital appreciation. The Fund seeks to achieve the investment objectives by investing primarily in equity and junior debt tranches of CLOs, that are collateralized by a portfolio consisting primarily of below investment grade U.S. senior secured loans with a large number of distinct underlying borrowers across various industry sectors.
Source: seekingalpha.com ECC
Here are the ECC Notes backgrounds.
Eagle Point Credit Called 50% of this issue back in early 2022.
Factor PMTU ECCX ECCV Issue date 9/18/23 4/17/18 1/12/22 Issue size $50m $60m $87m Coupon 8.5% 6.6875% 5.375% Rating BBB+ BBB+ BBB+ Call date 9/30/25 4/30/21 1/31/25 Maturity date 9/30/28 4/30/28 1/31/29 Price $25.09 $24.10 $22.36 Yield 8.46% 6.93% 6.06% YTC 8.28% NA 15.90% YTM 8.41% 7.67% 7.91%
Portfolio strategy
Just comparing these three Notes, I see the following as important in deciding which to own or not.
- With no Call protection, ECCX holders could experience that event. At its current price, I would rate that very unlikely. When partially Called before, ECCX was trading above Par.
- Unless an investor hopes for a sub-par Call, selling ECCX and buying ECCV should be considered for the Call protection if rates drop, though one does sacrifice over 80bps in yield.
- Based on its yield, the market seems to be rating PMTU below its BBB+ rating, otherwise, the yield would be near what ECCV provides investors. That said, the YTC values are reasonably close.
Conclusion
Since I already own both the PMT common and PennyMac Mortgage Investment Trust 6.75% RED PFD C (PMT.PR.C), I'm leaning toward adding to my ECCV position once I am permitted to execute that swap (Seeking Alpha analyst trading limitation). If not for that, I would be comfortable holding the new PMTU Note. Thus I have a Sell rating on ECCX and a Buy rating for both PMTU and ECCV.
Final thought
The PMT PFD C is a fixed-rate issue, currently yielding about 9%. PennyMac also has several fixed-to-floating preferreds where they decided to make them fixed permanently. This is not sitting well with investors and whether that was even legal was covered in several Seeking Alpha articles.
Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities. Alex leads the investing group known as the Hoya Capital Income Builder, which uses the investment knowledge of several Seeking Alpha analysts provide members with insightful articles covering mostly individual stocks or funds. Occasionally an article cover will cover an investing strategy or other topic that investors need to be aware of, such as law changes that might effect their long-term strategy.
For more information about this Investors Group, click on this link:
https://seekingalpha.com/instablog/1723581-hoya-capital/5350609-retired-investor-teams-up-income-builder
