PennyMac Financial Services
PennyMac Financial Services is a mortgage platform that operates in nearly all sectors of the mortgage industry, including mortgage originations, mortgage servicing, and investment management through the REIT PennyMac Mortgage Investment Trust (NYSE: PMT). As of June 2020, PennyMac was the fourth-largest mortgage originator and the eighth-largest mortgage servicer in the United States.
The mortgage industry has had an interesting year. The initial onset of COVID-19 caused major disruptions, with tightened lending and margin calls. But it didn't take long after rate cuts were made by the Federal Reserve for business to heat back up. Mortgage rates are now at historic lows, motivating a number of prepared buyers to flood the market and resulting in record-high mortgage originations and loan refinancing.
PennyMac has been one of the largest benefactors of this surge in refinancing and new loan originations. The second quarter of 2020 saw a 124% increase in record production in direct lending channels when compared to the first quarter and a 448% increase year over year. Book value per share increased 15%, and pretax income reached $480 million, a 16% jump from the prior quarter.
The Blackstone Group is one of the largest investment firms in the world, with $565 billion of assets under management across real estate, private equity, credit and insurance, and hedge fund industries. The company's real estate portfolio consists of a core+ market, which includes long-term real estate holdings in the retail, residential, industrial, and office spaces. These are primarily in gateway cities and managed under Blackstone Real Estate Income Trust (BREIT), a public, nonlisted REIT. Debt investments, including loan origination and purchasing assets in the secondary market, are through Blackstone Mortgage Trust (NYSE: BXMT). The Blackstone Group's opportunistic portfolio targets value-add opportunities in global markets.
Blackstone's recent performance isn't exactly stellar, with a 11% decrease in distributable earnings and 7% decrease in total segment revenues year to date when compared to year-to-date performance in 2019, but there were a few positives. Free related earnings (FRE) are up 28% for the quarter year over year, and assets under management increased 3%.
The company has weathered tough times before, often coming out bigger and stronger. The challenges Blackstone is currently facing are undoubtedly related to COVID-19. I do believe third quarter earnings should provide slightly better results than second quarter 2020, as certain markets rebound and begin to recover from the initial impact of the pandemic, but earnings will probably be very inconsistent over the next few years as the world tries to navigate in a volatile economy.
Which is the better buy?
At first glance, PennyMac may look like the better buy. Recent activity has produced impressive results for the company. Its recent dividend increase and low debt-to-equity ratio of 2.3 times means it's in a very comfortable position right now.
But if we look at the bigger picture, there's still a lot of uncertainty and potential volatility in the mortgage market. Mortgage delinquency is still high, and the lack of additional governmental support for those who remain out of work may result in growing mortgage loan defaults. Investors with higher risk tolerances willing to bet big in hopes for big returns while the market is hot surely can benefit from buying shares of PennyMac, but I don't think the growth we're seeing today is sustainable in the long run.
For this reason, I personally think Blackstone is the better buy. Its portfolio allows for diversification across multiple sectors with global reach. If the debt markets take a dive, the company has other assets to help offset its losses.
Blackstone is well known for purchasing thousands of assets during the Great Recession. Depressed real estate values provide the company, which has $4.5 billion in liquidity, the opportunity to purchase new or value-add investments at low prices.
Blackstone clearly sees opportunity coming, having recently closed out a $8 billion capital raise for a debt investment fund, the largest real estate credit fund ever created. Additionally, share prices are down 15% from February highs, providing a 3.4% return for investors. Buyers should be ready to hold Blackstone for a few years and prepare for volatility with performance, earnings, and share values.