Seeking Alpha
Long only, REITs, macro
Profile| Send Message|
( followers)  

PennyMac Mortgage Investment Trust (PMT) is a great-looking investment with relatively low trade volume compared to other REITs like American Capital Agency Corp. (AGNC) or Annaly Capital Management, Inc. (NLY).

Who is PennyMac?

PennyMac is externally managed by PNMAC Capital Management, LLC. PMT is a specialty finance company, who through its subsidiaries, primarily invests in residential mortgage loans and mortgage-related assets.

Why is PennyMac worth my time?

The following graph shows the total returns from 2012 of PMT, AGNC, and NLY, including reinvested dividends. Despite having a lower yield, PMT had a far greater total return to stockholders in 2012.


(Click to enlarge)

Even though PMT has a higher price-to-book value, it is currently a better investment. Using the Tuesday, February 26, 2013 closing prices:

Price

Book Value (PS)

P/BV

Debt/Equity

PMT

24.78

20.1

1.23

105.01

NLY

15.13

15.85

0.95

678.23

AGNC

32.81

31.66

1.04

811.77

Financial 1.52 169.51
Residential REIT 1.91 244.16
Diversified REIT 2.33 68.03

Compared to the financial sector and the mREIT industry, PMT is trading at a discount. It is important to note that a low price-to-book value can also mean something is wrong with the underlying company. Even though NLY and AGNC may look like they are a cheap buy as well, I think there is another story. As you can see the debt-to-equity ratio of NLY and AGNC is far higher than that of PMT and the sector in general. High debt-to-equity can lead to volatility in earnings, seen in AGNC and NLY both.

Q1 EPS

Q2 EPS

Q3 EPS

Q4 EPS

2012

EPS

Trailing

P/E

E Q1 EPS

E 2013 EPS

PMT

0.65

0.79

0.81

0.83

3.08

7.99

0.84

3.4

NLY

0.44

0.46

0.3

0.31

1.51

8.86

0.33

1.33

AGNC

2.68

-0.88

0.25

2.37

4.42

7.31

1.1

4.22

Last quarter, PMT delivered its most profitable quarterly results since the company's IPO in the summer of 2009. According to First call Evaluations report, PMT has a five-year estimate annual EPS growth rate of 75.5% compared to the industry's 7.4%. PMT still has the potential to grow its earnings and book value as they state in its recent earnings conference call [transcript].


(Click to enlarge)


(Click to enlarge)

Over the last year PennyMac has had terrific growth and will continue to grow throughout 2013. This can mean growth for its dividend. Since its IPO in 2009, PMT has increased its dividend four times, without lowering it once. There was a first quarter dividend of $.57, which makes the Yield a nice 9.30%. Comparatively, NLY has reduced its dividend 7 times and AGNC has dropped its dividend only 1 time in the same span.

When Should I Start A Position?


(Click to enlarge)

Currently YTD, PennyMac is down about 3%. This makes it a great opportunity to establish a position at a good price. Most of the decline in price has been due to macroeconomic conditions. With the lead-up to the nearing sequestration and questions over the QE by the Fed, the REIT industry has been on shaky ground, giving good entry points into previously expensive REITs.

Conclusion:

I think it is the perfect time to pick up some shares of PMT. Especially after Bernanke appeared before the Senate Banking Committee and defended the Fed's QE for the foreseeable future.

What you can take away from this is that interest rates will remain low throughout 2013 and into 2014. A major risk to mREITs is a rapid rise in interest rates, which leads to a decline in the value of MBSs held in their portfolios, and net interest rate spreads could also be affected.

Currently PMT has 2 analysts with a strong buy, 3 with a buy, and 1 with a hold opinion. All-in-all, this is a perfect opportunity to pull the trigger and pick up some PMT.

Source: PennyMac Will Reward Your Portfolio With Great Returns