Tuesday, February 02, 2010

PennyMac's big 4Q09 loss.

Okidata, PennyMac has reported results 4Q09, of a loss of $0.07 cents per share. This isn't that surprising given the companies high cost structure and relatively low percentage of invested assets (the company claims to have invested ~37% of IPO proceeds so far). At this pace I would expect them to be mostly invested by late 2010. The companies ultimate ability to generate FAD is hard to predict, since they plan on buying non-performing assets and the servicing intensive assets will cause incremental G&A expense. It's still unclear how much of an advantage there is in buying whole loans vs discounted RMBS.

I am impressed that PMT management has decided not to do the easy thing which would have been to acquire Agency RMBS with repo leverage, and start earning the incentive fee. Investing in Agency RMBS would also hold the company over until it could acquire desirable assets.

Stanford L. Kurland, Chairman and Chief Executive Officer of PMT, stated:

"At this early stage in PMT's development, it is not surprising that operating costs have exceeded investment income. Over the past several months, our manager has focused significant attention on its ability to adapt and react to changing dynamics in the mortgage marketplace, including a low volume of available performing mortgage transactions, which offer greater opportunity for value enhancement, and less attractive trading levels for the pools that have been marketed. As it waits for the market to further develop, our manager has placed particular emphasis on expanding the operational capabilities and the range of sources for attractive investment opportunities available to PMT. This expanded menu of capabilities and opportunities includes: a conduit platform that will allow PMT to purchase newly originated loans from small mortgage lenders and repackage those loans for securitization and sale; increased participation in structured transaction and securitization activities; opportunities to acquire mortgage assets that result from distressed condo development projects that may include real estate development loans, existing residential loans originated by the developer, and residential loans originated by PennyMac Loan Services on our behalf; and investments in mortgage servicing rights of liquidating and other entities. Ultimately, we remain firm in our commitment to investing wisely on behalf of PMT shareholders who recognize that PMT's unique approach to the distressed residential mortgage arena requires patient, long-term capital resources."

The companies strategy of purchasing non-performing residential loans is capital gains oriented vs being current cash payment oriented. Assembling a portfolio of non-cashflowing assets is problematic given that the management fee must be paid in cash. Buying non-performing whole loans also favors management indirectly by causing cash leakage (aka fee income) in favor of PennyMac Loan Servicing.

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