PennyMac Raises EPS Outlook to $0.38 and Plans Dividend Cut
Key Facts
PennyMac Mortgage Investment Trust said on October 29 that it expects to cut its regular dividend in the fourth quarter, after posting a net loss attributable to common shareholders of $36 million, or $0.41 per share, in the third quarter. Management did not specify the amount of the new dividend, so the cut remains a stated expectation rather than a final decision on a specific amount. The company had declared a third-quarter cash dividend of $0.40 per share. At the same time, its projected current earnings power rose to an average diluted quarterly EPS of $0.38 per share over the next four quarters. The divergence between the reported loss and improved projected earnings power comes as the company redirects capital and reviews its dividend level.
Adjusted net income attributable to common shareholders was $30 million, equivalent to adjusted EPS of $0.35 in the third quarter. Projected current earnings power rose to $0.38 per share from $0.33 per share in the previous quarter, an increase of 15%, the company said. These figures measure an expected average quarterly EPS over the next four quarters; they do not represent an annualized return or the total earnings for those quarters. Net investment income, meanwhile, fell to $36 million from $73 million in the second quarter and $99 million in the same period a year earlier. That item therefore declined 50% quarter over quarter and 63% year over year, despite management's improved estimate of future earnings power.
Book value per share fell to $14.03 at the end of the third quarter, down 5% from the previous quarter and 7% from a year earlier. Chief Executive Officer and Chairman David Spector said wider mortgage spreads and higher interest rates pressured the net fair value of the portfolio's assets, reducing book value by about 5%. Benchmark U.S. Treasury yields rose by about 50 to 80 basis points across intermediate and long maturities during the quarter. Mortgage spreads over Treasuries also widened by more than 20 basis points, weighing on the company's asset valuations. These moves form the backdrop to the quarterly loss and decline in book value as management reports growth in projected earnings power.
Management said it expects to cut the current dividend to support book value growth, while taking taxable income estimates into account. It added that it prefers to direct capital toward share repurchases, noting that the stock trades at a significant discount to book value. On October 29, the company increased its authorization for common share repurchases by $130 million, bringing total available capacity to more than $200 million. Management said: "We expect to reduce our current dividend in favor of share repurchases." The steps combine an expected dividend reduction, efforts to support book value and an increase in the amount available for share buybacks.
The company is shifting some capital from mortgage servicing rights into higher-yielding credit investments. Management said it had sold or contracted to sell servicing rights on loans with unpaid principal balances of $35 billion, and redirected the proceeds into private securitization investments. In its second-quarter results, it had said it began shifting capital allocation toward higher-yielding credit opportunities and estimated that returns on internally originated credit investments could fall in the low-to-mid double-digit range. During the third quarter, it completed eight securitizations and retained $167 million in initial and subordinate investments. In the second quarter, it closed six securitizations with an unpaid principal balance of $2.2 billion, generating $120 million in new investments in non-agency subordinate bonds.
After the end of the third quarter, the company entered into an agreement to sell mortgage servicing rights on loans with an unpaid principal balance of $12 billion, with the sale expected to close during the fourth quarter. It also priced its first securitization of non-qualified, conventional debt-service-coverage-ratio loans, with an original principal balance of $298 million and expected retained investments of $26 million. The transaction was expected to close in early November. In trading, the company's shares, listed under the ticker PMT, closed at $7.27 on October 28. The company also announced that Doug Jones, its president and chief business officer for the mortgage business, will retire on June 30, 2027, with his responsibilities to be transferred to other executives over the following months.