With PennyMac Q3 Results Out, Buy Their Preferred A Issue At 8.2%

About: PennyMac Mortgage Investment Trust (PMT), PMT.PA, Includes: PMT.PB
by: Dividend Master


The Pref-A issue was hurt by a book keeping change in an S&P index.

Many retail investors sold, not being aware of what caused the sell-off.

The company just put out incredibly good Q3 results.

PennyMac (NYSE:PMT) is a mortgage REIT with $1.2bln market cap. It has 2 preferred stock issues, an 8 1/8% series A (NYSE:PMT.PA) and an 8% series B (NYSE:PMT.PB) which are both fixed to float. PMT runs a very different strategy than typical levered carry trade mREIT by doing mortgage lending, distressed mortgage investing and building a servicing book (MSRs). This business has worked like a charm over last few years with BV very stable while all the larger better-known mREITs like Annaly (NYSE:NLY) and American Capital (NASDAQ:AGNC) have suffered massive BV losses as Fed hikes rates and their hedging strategies get shown to not really work.

Back a few months ago, there was an adjustment done to the S&P Preferred Index that caused the PMT series A to be removed from the index and replaced with a larger issue (the PMT series B which is a larger issue remained in the index). This is the sort of mundane change done regularly to indices but the result was a number of portfolio managers dumping the PMT series A from $25 ¾ area to below $25 very quickly.

This issue (as well as many mREIT preferreds) is heavily retail-owned, and the plunge in the price set off much panic that something had gone wrong at the company itself to cause the sell-off. I owned some of both the A and B shares, so I spent a lot of time looking into the story.

The first thing I noticed was that the 8 1/8% pfdA was trading below the 8% pfdB, which supported my contention that the company was fine, and this was simply portfolio managers indexed to this S&P index dumping an issue at any price to stay matching the index. I started adding to the issue selling some other pfds as well as simply selling the B issue at a higher price than the A issue.

But I noticed a few in my Twitter stream claiming the pfdA sell-off was NOT due to just the removal from an index and that PMT as a company was flawed/suspect. So, it's been with a lot of interest that I have awaited Q3 results from PMT which came out on Nov 1.

To put it mildly, PMT blew it out in Q3; huge beat on EPS and 2%+ increase in BV in a quarter where the big boys all dropped another 2%+ to new lifetime lows. It was their highest quarterly revenues and earnings since 2014 (stock was $22 back then vs $19+ today).

So, I will more confidently tell you today to BUY PennyMac pfdA (under $25 PAR) vs. selling most any other issue out there. The company is doing great, and the issue was damaged purely by a concentrated sell-off brought on by the S&P index change.

At the Nov. 1st close of 24.82, this issue had a yield of 8.18% (8.56% YTC). An interesting aspect of this issue is that it converts into a floating rate issue on 3/15/2024 and will reset to 3mo Libor + 583bps.

If you own mREIT pfds, this should be an easy swap to do. I would expect this issue to be back above $25 before year-end.

Disclosure: I am/we are long PMT PFD A AND PFD B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.