PennyMac Mortgage Investment Trust: C Series Preferred Offers 8.8% Yield

Core Viewpoint - PennyMac is strategically shifting its focus towards mortgage servicing while divesting from its loan holdings, aiming to stabilize its operations and profitability amidst challenging market conditions [3][6][12]. Financial Performance - In the first quarter, PennyMac reduced its mortgage-backed security position by $900 million, reallocating funds to reduce liabilities and increase short-term investments, while maintaining stable shareholder equity at $1.96 billion [3]. - The company reported a net interest income of negative $28 million, slightly worse than the negative $26 million from the same quarter last year, indicating that the cost of financing exceeds the interest income from its mortgage portfolio [7]. - Despite a decline in net income to $47 million, PennyMac generated sufficient profitability to cover preferred share dividends by more than four times [7]. Mortgage Servicing Operations - PennyMac services over $230 billion in unpaid principal mortgages, with 98% insured by Fannie Mae or Freddie Mac, and maintains a low delinquency rate [4][12]. - The company generated $163 million in servicing revenues in the first quarter, contributing to a net investment income of $74 million, which is $16 million lower than the previous year [7]. Preferred Shares - The Series C preferred shares offer an attractive entry cost with an 8.8% dividend yield, while the common shares yield 11.5% [6][15]. - The Series A and Series B preferred shares have floating requirements, but the company opted to keep the dividend rates fixed, which may lead to short-term volatility in pricing if holders push back [19]. Market Conditions - PennyMac faces headwinds from higher interest rates affecting its mortgage-backed securities, but a shift towards mortgage servicing is expected to stabilize net income [6][12]. - The company has hedged liquidity risks with multiple counterparties, including major banks, which mitigates some concerns related to macroeconomic conditions [13].