After a brutal earnings season during which most mortgage REITs reported second-quarter declines in book value, PennyMac Mortgage Investment Trust (NYSE:PMT) swam against the tide. In addition to beating revenue estimates, the company reported an actual gain in book value from the previous quarter, of 1.6%. With that victory under its belt, the company is embarking on a secondary offering of 11.3 million shares, with an option for its underwriters of almost 1.7 million additional shares.
Diversification was key
How did PennyMac achieve such a triumph in the current climate? Much like Two Harbors (NYSE:TWO), which reported lower book value damage than most of its peers, PennyMac owes its success to a varied business stream -- particularly its correspondent lending business, which contributed revenues that increased by 42% from the first quarter.
Mortgage servicing income was robust in the second quarter, as well. Fees jumped from $6.6 million in the first quarter to $7.9 million, and PennyMac notes that mortgage servicing rights are positioned well for the rising interest rate environment because of a drop in prepayments.
One of PennyMac's specialties is the acquisition of pools of distressed loans. The company purchases these assets at a discount, then either liquidates them, or returns these mortgages to profitability through loan modifications. Troubled loans engender higher servicing fees, as well -- another feather in PennyMac's lucrative cap.
The jumbo-loan business is taking off
PennyMac, like Two Harbors, is moving into the jumbo market, including securitization activity. During Q2, the trust agreed to buy $393 million of prime jumbo loans, which it plans to blend with jumbos it purchases through its correspondence channel -- which it will securitize and sell sometime during the third quarter.
PennyMac considers jumbo securitization a profitable opportunity for the company, and it seems to be catching on with mREITs. Two Harbors participated in a prime jumbo securitization earlier this year and has plans to do so again very soon.
Even Annaly Capital Management (NYSE:NLY), which was a pristine agency-only player for so many years, has recently revealed an interest in securitization and jumbo loans -- though, at least for now, as separate activities. With its recent acquisition of CreXus, Annaly and CEO Wellington Denahan acknowledged plans to securitize some of its corporate debt, and the company noted that, sometime in the future, it will likely be originating jumbo loans through one of its affiliates, Shannon Funding.
Flexibility will protect yields
PennyMac proves that variety is the stuff of profits, and it looks like other mortgage REITs are finding the same to be true. As the unstable economic environment continues to rock the sector, it seems obvious that the mREITs that are willing to change and adjust will deliver the best value to their investors.
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