KBRA Affirms Rating for PennyMac Mortgage Investment Trust

KBRA affirms the issuer rating of BB+ with a Stable Outlook for PennyMac Mortgage Investment Trust (NYSE: PMT or “the trust”), a real estate investment trust (REIT) that invests primarily in residential mortgage loans and mortgage related assets. Management of the company’s businesses, including its investment activities, is performed by PennyMac Financial Services, Inc. (NYSE: PFSI), based in Westlake Village, CA.

PMT’s rating remains anchored by its close association with PFSI and Private National Mortgage Acceptance Company, LLC (“PennyMac”), a leading and well managed residential mortgage loan origination and servicing company. During the past few years, quarterly GAAP net earnings have exhibited noticeable volatility and have generally trended lower, although rebounded in 2023. The earnings fluctuations have been influenced in part by the inherently cyclical nature of residential mortgage finance, as evidenced by the wide variation in loan production volumes (and gain on sale income) in 2022-2023 vs 2020-2021. Significant valuation (or MTM) adjustments for interest rate and credit sensitive assets (e.g., CRTs) in 2020 and 2022 have also contributed to earnings volatility. Earnings performance improvement was propelled by favorable MTM marks on the CRT and large RMBS portfolios. Loan servicing profitability remains solid and continues to serve as buffer to asset-driven P&L MTM volatility.

Financial leverage leveled in 2023, after rising in recent years, connected to increased MSR debt issuance and lower common shareholders’ equity. In 2023, the level of equity was essentially flat, owing to a combination of stronger bottom-line earnings, and lower shareholder distributions. Higher leverage and weaker earnings contributed to low interest and fixed charge coverage ratios during the past few years, although both metrics firmed in 2023, as result of improved GAAP earnings performance.

Financial flexibility diminished in 2022 (and remained largely unchanged as of YE 2023), due to higher leverage attached to the combined MSR asset, which can be a key element of corporate liquidity in form of incremental borrowing, in addition, to the cash flow from the loan servicing portfolio.

During 2H22, PMT began to curtail MSR asset creation by effectively selling a large portion of the acquired GSE loans with servicing released to affiliated PFSI. This was primarily undertaken to maintain the desired business mix between its three key business segments, due in part to limited credit sensitive investment opportunities and the need to balance the level of REIT-qualified income.

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