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Piper Jaffray initiates coverage of PennyMac with 'overweight' rating

Piper Jaffray analyst Kevin Barker initiated coverage of PennyMac Mortgage Investment Trust with an "overweight" rating and a price target of $23.

Barker said the company has a strong track record of generating returns on equity that are better than its peers, as seen in its 70% growth in tangible book value and dividends over the past five years compared with hybrid mortgage real estate investment trusts' returns of 49% and 19% of agency MREIT peers. He also said PennyMac tried to increase its returns over the past four years with its transition to investing in mortgage servicing rights and credit risk transfers from primarily investing in non-performing loans, which were initially attractive to invest in immediately following the financial crisis but returns declined as the years went by.

The analyst noted the company has withstood volatility associated with interest rates better than most of its peers, which enables it to sustain its dividends while returns are below the company's target.

Barker also noted potential tailwinds coming from potential reforms on Fannie Mae, Freddie Mac and the Federal Housing Finance Agency to allow the private sector to have a bigger role in the mortgage market. The analyst said if FHFA Director Mark Calabria will succeed in these reforms, about $5 trillion of credit exposure will open up to the private sector and this represents ample opportunity to generate attractive returns. PennyMac, according to Barker, will be one of those who will benefit the most as it is one of the largest seller and servicers for Fannie Mae and for the largest front-end credit risk transfer investors.