Pacific Investment Management Co. has long dabbled in mortgages even while it’s best known as a bond shop.
The Newport Beach-based money manager, which has $1.8 trillion assets under management, now plans to start its first real estate investment trust, or REIT.
The PIMCO Mortgage Income Trust Inc. is a newly organized real estate finance company that intends to acquire, manage and finance real estate investments—mostly paper instead of actual properties.
The REIT will focus on trading residential mortgage backed securities, also known as RMBS, residential mortgage loans and similar paper.
Investors have traditionally valued mortgage REITs for their history of relatively high dividends.
“We seek to provide attractive risk-adjusted returns to stockholders over the long term, primarily through dividends and distributions and secondarily through capital appreciation,” said the offering’s prospectus filed on April 19.
The prospectus said PIMCO sees an opening in financing mortgages because banks have reduced such lending in the past decade.
Another potential reason is that under REIT guidelines, the company won’t have to pay federal income taxes if it distributes at least 90% of its taxable income to shareholders.
PIMCO might also consider its existing holdings that would be part of the REIT business as undervalued, said David Bahnsen, owner of the Bahnsen Group, a PIMCO neighbor that manages $1.5 billion in assets.
“The argument is you unlock a lot of value if you spin off a unit,” Bahnsen said. “It’s always about unlocking valuation.”
A PIMCO spokesman said the company cannot comment at this time, citing compliance rules.
Hello PMTG
In 2011, PIMCO filed to begin a broader REIT that also included commercial real estate, bonds and equities, but for unclear reasons that $600 million offering didn’t go public. That REIT’s co-chief investment officer was scheduled to be Dan Ivascyn, who three years later became chief investment officer for all of PIMCO.
One potential competitor is PennyMac Mortgage Investment Trust (NYSE: PMT), which has a $1.4 billion market cap. It’s reported an annualized return of 26.2% in the trailing three-year period, outperforming its REIT diversified benchmark by 14.8%, according to Morningstar.
PIMCO’s new REIT won’t be generating more than $1.07 billion in annual revenue because it filed as an “an emerging growth company,” which limits its size to a figure under that amount, but gives it advantages such as far fewer requirements than larger firms.
Exactly how much assets under management will be under the roof of PIMCO’s REIT wasn’t revealed in the initial prospectus.
It noted that PIMCO has more than $235 billion in Agency RMBS, which are guaranteed by quasi-federal agencies like Fannie Mae and Freddie Mac, and $75 billion in non-Agency RMBS, which are issued by the private sector such as banks.
PIMCO has also overseen the servicing on over 250,000 individual mortgages through relationships with third-party sub-servicers and has acquired more than $60 billion in residential loans since 2010.
The amount to be raised and the opening share price weren’t revealed in the REIT’s initial prospectus, which indicated the offering has been in the works for nearly 10 months.
The who’s who of Wall Street has lined up as joint book-running managers, including Credit Suisse, Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and J.P. Morgan.
The publicly traded REIT will pay PIMCO an annual fee equal to 1.25% of the stockholders’ equity, as well as an incentive fee.
The proposed ticker is “PMTG.”
Expansion Plans
PIMCO Chief Executive Manny Roman, who joined in 2016, has sought to expand into hedge funds, real estate and other alternative assets.
Mortgage REITs “provide a simple way to hold an equity investment in the mortgage market with the liquidity and transparency of publicly traded equities—advantages not available through direct investment in mortgage loans and mortgage-backed securities,” according to the National Association of Real Estate Investment Trusts.
As early as 2005, PIMCO, led at the time by legendary investor Bill Gross, foresaw the subprime mortgage crisis and the firm avoided the 2008 financial meltdown.
Gross developed a strategy called “shake hands with the government” to invest in areas where that the government would be forced to guarantee mortgages issued by quasi-federal agencies Fannie Mae and Freddie Mac.
In the past decade, banks have reduced their roles in residential mortgages, causing these government sponsored entities that issue Agency RMBS to significantly increase their market share.
“The U.S. Federal Reserve greatly expanded its balance sheet, reaching over $1.7 trillion in Agency RMBS holdings at the peak in June 2017. Since then, private securitization channels and bank lending activity have both remained historically low and the U.S. Federal Reserve is well underway in reducing its footprint in the Agency RMBS market,” the registration statement for the offering said.
“Against this backdrop, we believe that Agency MBS valuations have become more attractive relative to much of the post-financial crisis environment and there remains a large void for private capital to fill in residential credit markets. We believe that private and permanent capital can take advantage of the reduced government footprint in the mortgage market to generate attractive risk-adjusted returns,” it said.
As a result, the REIT plans to leverage government backed mortgages by as much as 12-to-1 ratio while accepting less risk with a 5-to-1 ratio on private sector mortgage securities.
The New, New Bosses
The prospectus named only one of PIMCO’s 255 portfolio managers joining the new firm.
Daniel H. Hyman, 39, who will become co-chief investment officer, has been a managing director and co-head of the Agency Mortgage Portfolio Management team at PIMCO.
“One area in which we see a potential opportunity is U.S. housing, where fundamentals remain sound,” Hyman wrote in a PIMCO blog post this month. “Demand is outpacing supply, and it remains cheaper to buy a home than to rent one.
“Furthermore, while recession risks have risen, we don’t see the same kind of imbalances in the real economy that we have seen in previous recessions: There is no over-borrowing, overconsumption or over-investment,” Hyman said.
“Also, while the pace of home price gains is slowing and the pace of housing-related activity are slowing, valuations in the U.S. housing market look reasonably attractive.”
Hyman began the Mortgage Opportunities and Bond Fund (PMZIX), which has $4.9 billion in assets. It has returned 9% annually since its 2012 inception until this past March. It’s ranked in the top 20% of its category of nontraditional bond in four of the past six years.
Hyman has also managed two other funds: PIMCO Mortgage-Backed Securities Fund (PTRIX), $145 million AUM; and the GNMA and government securities fund (PDMIX), which has $668 million in assets.
The former ranked in the top 20% of its category in three of the past five years while the latter has appeared in the top 30% in each of the past five years.
Other PIMCO executives joining the REIT:
• Chief Executive Casey Newell, 55, is a PIMCO executive vice president in the Private Strategies Group. Previously, Newell worked at Deutsche Bank as a managing director and head of institutional debt and equity sales for the Midwest.
• Co-Chief Investment Officer Jason R. Steiner, 43, who is a managing director and senior residential mortgage credit portfolio manager at PIMCO, is responsible for opportunistic residential real estate debt and equity products in public and private markets.
• President Jason Mandinach, 34, is an executive vice president responsible for registered and private alternative credit strategies at PIMCO.
• Chief Financial Officer John Lane, 55, is chief financial officer of PIMCO’s alternatives platform.
