PMT - Solid 10% Yield On PennyMac's Preferred Shares
Summary
- PMT-C offers investors an attractive yield over 10% with about 50% upside to call value. I don't expect a call, but it's nice to know the ceiling is so high.
- PMT-B is a better choice than PMT-A today. While PMT-A floats sooner, PMT-B is $.99 cheaper and will have a slightly higher spread when both shares float.
- We've been picking up shares of PMT-C to take advantage of the discounted valuation.
PennyMac Mortgage Trust ( PMT ) is one of the better-performing mortgage REITs on the year. They thoroughly beat the mortgage REIT indexes for the year:
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However, we're here to talk about the preferred shares.
PMT has three different preferred shares:
These shares offer investors a very attractive dividend yield and significant upside to call value.
PMT-A and PMT-B are fixed-to-floating shares that will begin floating on 3/15/2024 and 6/15/2024, respectively. PMT-C is a fixed-rate share.
Index Card
We prepare some cards for organizing key data about the shares. I'll share each of them below, then resume the article:
The REIT Forum
The REIT Forum
The REIT Forum
Our Position
We've been picking up shares of PMT-C. While PMT outperformed the mortgage REIT indexes, their preferred shares have suffered quite a bit.
Comparison
Some people won't like our pick with PMT-C. The yield today is higher than the yield on PMT-A or PMT-B, but when PMT-A and PMT-B begin floating they will have a materially higher yield (if short-term rates remain anywhere near 4%).
However, at $16.61, shares have dramatic upside to call value (about 50%). If interest rates decrease within the next several years, PMT-C could rally substantially higher. I'm not expecting shares to reach $25.00 unless rates fall significantly, but a 10% to 25% rally could happen without that. Pretty good when it's combined with the dividend yield.
Further, we've seen some weakness in PMT-C relative to other preferred shares (including other fixed-rate preferred shares). That reinforces my view that the market is simply overlooking PMT-C.
If rates remain above 4% indefinitely, then PMT-A or PMT-B is probably the better choice. That's OK. I can still console myself with the stripped yield being greater than 10%. If short-term rates fall, then PMT-C could be the better pick by a large margin. For many investors, it may make sense to split their purchase between PMT-B and PMT-C.
Looking at PMT-A vs PMT-B, I think PMT-B would be the better choice. The price is materially lower. Investors who buy PMT-B instead of PMT-A will save $.99 using recent prices.
When PMT-A and PMT-B are both floating, PMT-B has a slightly higher rate.
So what does PMT-A get? Well, PMT-A floats about 90 days earlier.
That's nice, but it's absolutely not worth $.99.
Recent Purchases
I've been picking up PMT-C during December.
These are my purchases:
The REIT Forum
Conclusion
Investors looking for a respectable yield combined with a significant upside to call value should look into PMT's preferred shares. For investors looking to add some fixed-rate exposure with substantial upside, PMT-C is a great fit. For fixed-to-floating shares, I would pick PMT-B over PMT-A based on the $.99 spread in the share prices.
For further details see:
Solid 10% Yield On PennyMac's Preferred Shares