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What to Expect From PennyMac Mortgage's (PMT) Q2 Earnings?

Zacks Equity Research

PennyMac Mortgage Investment Trust PMT is slated to report second-quarter 2019 results on Aug 1, after the closing bell. The company’s results will likely reflect year-over-year growth in its net income per share and net investment income.

In the last reported quarter, this mortgage real estate investment trust (REIT), which invests primarily in residential mortgage loans and mortgage-related assets, posted net income per share of 68 cents, surpassing the Zacks Consensus Estimate of 42 cents. The company also witnessed year-over-year growth in net investment income.

Over the preceding four quarters, the company met the Zacks Consensus Estimate on all occasions. It delivered an average positive surprise of 45.8% during this period. The graph below depicts this surprise history:

PennyMac Mortgage Investment Trust Price and EPS Surprise

PennyMac Mortgage Investment Trust Price and EPS Surprise

PennyMac Mortgage Investment Trust price-eps-surprise | PennyMac Mortgage Investment Trust Quote

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

PennyMac Mortgage’s assets includes distressed whole loans, credit risk transfers (CRT), retained interests from private-label securitizations, mortgage servicing rights (MSR), excess servicing spread (ESS) as well as Agency and non-Agency mortgage-backed securities (MBS).

Over the past years, the company made strategic efforts to transition its lending segment by selling the legacy distressed mortgage portfolio, and focusing on CRTs and MSRs. This offers diversification benefits, and enables the company to capture new and steady returns from ESS/MSR investments. In fact, the company expects $400-$600 million of CRT & MSR equity deployment in 2019.

Accordingly, during the quarter, PennyMac Mortgage raised fresh capital through a secondary public offering of 8,000,000 common shares for total estimated gross proceeds of nearly $169 million (or around $195 million if the option to purchase additional common shares is fully exercised). This capital was used to purchase new CRT and MSR investments. These new investments are anticipated to drive PennyMac Mortgage’s overall return.

Additionally, mortgage REITS witnessed expansion of pipelines, while origination activity began to pick up during the second quarter.  Specifically, the 30-year mortgage rates declined from 4.08% at the beginning of the second quarter to 3.73% at the end of the quarter, according to figures released by Freddie Mac. This marked the lowest level of the 30-year rate since late 2016. Following suit, the 15-year fixed rates and 5-year fixed rate declined to 3.16% and 3.39%, respectively.

Lower rates boosted issuance and originations during the quarter, with the issuance of Agency MBS surging 43% sequentially. Also, non-Agency MBS, backed by seasoned collateral, accounted for 54.3% of new issuance during the June-end quarter. This buoyed aggregate issuance by Fan-nie Mae, Freddie Mac and Ginnie Mae that hit $330.65 billion.

Amid this, we anticipate the company to have witnessed strong origination volumes and mortgage loan origination fees. This will likely drive growth in net investment income. In fact, the Zacks Consensus Estimate for second-quarter net investment income is pegged at $98.8 million, calling for a 19% improvement from the year-earlier quarter’s reported tally.

Although significant decline in interest rates buoyed originations, it resulted in yield-curve steepening and higher interest rate volatility. Further, prepayment activity increased on account of lower interest rates. This is expected to have dented MSR and ESS valuations as well as spreads on Agency MBSs in the quarter under review.

This implies that PennyMac Mortgage’s pool of MSRs will have witnessed headwinds in the form of asset writedowns during the second quarter. Additionally, due to the widening of agency and credit spreads, we anticipate the company to register a decline in its second-quarter book value.

Moreover, credit spread widening during the quarter is expected to have affected CRT valuations.

Additionally, prior to the second-quarter earnings release, there was lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of net income per share for the April-June quarter remained unchanged at 48 cents, over the past 30 days. Nonetheless, it indicates year-over-year growth of 2.1%.

Earnings Whispers

Our proven model does not conclusively show that PennyMac Mortgageis likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earning ESP: PennyMac Mortgage’sEarnings ESP is 0.00%.

Zacks Rank: The company currently flaunts a Zacks Rank of 1, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

CyrusOne Inc. CONE, scheduled to release earnings on Jul 31, has an Earnings ESP of +1.37% and carries a Zacks Rank #3, at present.

Equity Commonwealth EQC, slated to report quarterly figures on Jul 31, has an Earnings ESP of +3.23% and sports a Zacks Rank of 1, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Healthcare Realty Trust Incorporated HR, set to release June-end quarter results on Jul 30, has an Earnings ESP of +0.72% and currently holds a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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