Is Ameriprise Overvalued? Is PennyMac Cheap vs the REITs?

February 3, 2025 | Premium Service | Ameriprise Financial (AMP) and PennyMac Financial Services (PFSI) are two of the leaders in their respective industry segments and both delivered good results in Q4 2024, yet each has attributes that are making analysts and investors cautious about 2025. What do the earnings from these two high-flyers tell us about the economy and the investing environment? What are some of the common themes for these very different firms which depend so heavily on income from intangible assets? 

Ameriprise Financial

One of the clear headlines coming out of Q4 earnings from AMP is that guidance is softening, both in terms of the investment business and the balance sheet of the bank, where loan growth has been largely a function of mortgage lending.  Total assets under management were actually down 2% in 2024, in part due to competition from passive strategies and other market dynamics.  Yet GAAP net income was up strongly, as shown in the table below.

Of interest, AMP CEO James Cracchiolo thinks the advisor market is “a little pricey right now” and he does not see acquisitions in the future, preferring organic growth. “We expect more cash to be put to work and greater transactional activity as we move through 2025,” he told analysts.  But the more important question is whether AMP is a little pricey at almost 10x book value.

While the parent holding company of AMP has roughly $190 billion in total assets, the bank unit is relatively small at $23.6 billion. The larger group includes two broker dealers, several insurance companies and hundreds of other vehicles and special purpose entities. Total earning assets of the holding company were only $71 billion at Q3 2024, according to the Y-9, while intangible and other assets were $110 billion, representing derivatives, customer relationships and other ethereal assets. 

Source: FFIEC

AMP had over $350 billion in assets under management in proprietary mutual funds and annuities at Q3 2024. Total Assets Under Management, Administration, and Advisement increased 10% in 2024 to $1.5 trillion at year-end. While some Sell Side analysts have underweight ratings on the stock, the reason is primarily valuation. At 10x book value and a forward P/E of at least 10x earnings is well above the group, but AMP has delivered equity returns that are also well-above peer. 

The source of the earnings beat in Q4 2024 was corporate, however, while asset and wealth management was light at the end of last year. “While this was definitely a reported beat,” notes John Barnridge Piper Sandler, “that the driver was primarily Corporate and taxes suggests a low quality beat as underlying earnings power is less than investors were expecting for 4Q24 and prospectively out of its largest business - Advice & Wealth Management (AWM) = ~2/3 of '24 pre-tax EPS ex-corporate).”

To us, the real question with AMP is whether the crowd of equity managers that has caused this small asset gatherer to outperform the rest of the industry over the past five years is going to continue to push valuations higher. A sum of the parts analysis suggests that AMP is well-ahead of fundamental value vs retail asset managers, yet there are some institutional comps such as Apollo Global Management (APO) and Ares Management (ARES) that are even higher in terms of book value and/or earnings multiples.

Source: CapIQ

The fact that AMP has outperformed JPMorgan (JPM) over the past five years is interesting, but we see the slowing performance vs the industry leader over the past year as being more significant. AMP has been relatively stable in terms of market multiples, especially compared to ARES. That said, we’d be inclined to protect any LT gains in AMP with some sell stop orders on the theory that growing skepticism about future earnings growth may indeed be a sign that the best days in terms of appreciation are behind us.

An equity market retreat would be a catalyst for a more substantial decline in AMP and other members of our asset gatherers group. Indeed, we think it is notable that AMP has underperformed the other members of the group other than SCHW over the past year. Notice that Goldman Sachs (GS) currently leads the group.

Source: CapIQ (01/31/25)

PennyMac Financial

PFSI is one of the leaders in the mortgage industry and generally the first to report earnings and drop the Form 10 with the SEC. It is a long-proven axiom that the righteous report early in the 45-day period at the end of the quarter while the more devious hide in the back of the reporting period. PFSI is part of a binary paired with PennyMac Real Estate Trust (RMIT), which reserves as a balance sheet for conventional loans, MBS and MSRs. PFSI serves as the issuer and external manager of the REIT, but retains the Ginnie Mae exposures directly. 

We wrote recently (“Residential Mortgage Finance 2025”) about how Rithm Capital (RITM) should finally create a clear comp for PennyMac and Mr. Cooper (COOP) by spinning off NewRez as an issuer and manager, leaving RITM as an externally managed, multi-asset REIT.  At present, RITM and the residential REIT, Two Harbors (TWO), own seller/servicers as taxable appendages, a less than ideal corporate structure from a credit and capital markets perspective. REITs basically allow issuers to access retail investors looking for income, but are poor vehicles for accumulating capital.

In 2024, PFSI was locked in a price war with United Wholesale Mortgage (UWM) at the top of mortgage producers, Rocket Mortgage (RKT) at number three and Freedom Mortgage at number four, according to Inside Mortgage Finance. A  number of other issuers showed double-digit gains in 2024, largely due to the surge in production in Q3 and into Q4, but the leaders in 2025 will be the firms willing to pay for the expensive purchase loans.

As we go into 2025, production is slowing and profitability is uncertain because a few issuers led by Freedom are willing to pay premium prices for loans and servicing. Are the valuations for MSRs unreasonable? That depends upon your view of loan volumes and LT interested rates. 

Source: Fannie Mae/Freddie Mac/Ginnie Mae/IVolatility

Notice in the chart above showing new production in government loans how PFSI, RKT and Freedom were leaning into Ginnie Mae in Q3 and Q4, while other issuers were far less aggressive.  Like most issuers, PFSI is not making a lot on loans and more than 80% are expensive purchase loans, thus the servicing side gets far more attention from analysts. The chart below shows servicing results for PFSI.

The table above shows servicing results from the Q4 2024 PFSI earnings presentation. First we see the servicing pre-tax of $168 million, followed by a non cash increase in the modeled value of the mortgage servicing rights (MSR) of $540 million and a loss on the hedge of $608 million. While PFSI is able to report a cash profit for GAAP purposes, PennyMac is down because of the “noisy” hedge results, to quote one noted analyst.  The total loss on the hedge for 2024 is bigger than net income. Note in Q3, when interest rates fell, PFSI took a loss on the MSR and a much smaller gain on the hedge. Freedom does not hedge the MSR at all. 

During the Q4 2024 conference call, PFSI CEO David Spector said “the [GSE cash] window becomes less of an issue in periods of time of higher interest rates because sellers don't want to retain servicing because they don't hedge that servicing. And so, when rates were zero, there was a much better economic thesis to holding on the servicing when rates -- mortgage rates are 7%, and that's not so much the case.” 

We suspect the folks at Freedom and other issuers might disagree with this observation on MSRs, but Spector may have been speaking generally about correspondents that sell loans and servicing to him. While larger firms like PFSI and others continue to retain and purchase MSRs, we push back on the idea that these assets are overvalued.

Indeed, in a world where mortgage rates fluctuate between 6-7%, MSRs and firms that create them are arguably undervalued. Capitalization rates for retail properties start in the 6 times range and move up from there. Commercial office cap rates are in the 7s and 8s. Government MSRs with a 3% average coupon are trading in the 4.5x range, according to SitusAMC.  Looking at comparable assets across the real estate segment, residential MSRs look cheap.

PFSI is up only half as much as JPM over the past year, but out performed the banks by 2x over the past five years. As and when the FOMC drops ST interest rates, the mortgage sector leaders are likely to outperform the banks and nonbank finance peers. If we eventually get a couple of quarter point rate cuts over the next 24 months, the hyper-efficient survivors in the world of residential mortgages will be positioned to deliver outsized equity returns.

As you can see in the chart below, COOP currently leads the mortgage issuers group, followed by PFSI, RITM and TWO. We believe that the unified business model of COOP and PFSI are more attractive that the two REITS, RITM and TWO. As we've noted earlier, the REIT structure is less attractive to investors than the C-Corp configuration of COOP and PFSI. We think that both would benefit from spinning out the issuer as an independent seller/servicer, which would externally manage the REIT. COOP is up 700% over the past five years, PFSI a mere 200% and both RITM and TWO are actually down. The first chart below shows the past year's performance, while the second chart shows the past five years.

Source: CapIQ (1/31/25)

Source: CapIQ (1/31/25)

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