But while shareholders have been banking these returns, Stanford L. Kurland, PennyMac’s C.E.O. and chairman, has reaped even greater riches from the REIT. He has done so through a couple of private companies: a mortgage servicing unit and an investment adviser that externally manages the REIT. These companies are units of PennyMac Financial Services, which not only earns lucrative fees from the REIT but also uses the REIT to generate business opportunities that it keeps for itself, financial statements show. Mr. Kurland owns 23 percent of the financial services company.

In other words, PennyMac Financial Services, of which Mr. Kurland is also C.E.O., is generating significant profits from a REIT on whose board he serves and to whose shareholders he owes a fiduciary duty.

“We recognize that conflict has the potential to arise in our businesses,” Mr. Kurland said in a statement. “However, each and every related-party transaction is reviewed by the related-party committee of each independent board and is subject to securities disclosure rules for related party transactions.”

First, a little history. Mr. Kurland enjoyed a long and prosperous career at Countrywide Financial, joining the company in 1979, just 10 years after Angelo R. Mozilo and David Loeb founded it. From 2004 through most of 2006, Mr. Kurland was president of Countrywide as it churned out some of the stinkiest loans ever created.

Mr. Kurland’s second act began in 2008, during the height of the financial crisis, when he founded the PennyMac REIT. He received financing from BlackRock, the money management giant, and Highbridge Capital. Since its public stock offering in 2009, PennyMac has raised $1.13 billion in equity.

While he was organizing the REIT, Mr. Kurland was also establishing a separate loan servicing company and investment adviser to provide it with management services. Rather than folding these companies into the REIT, he owned them with BlackRock and Highfields Capital, an investment firm in Boston.

Externally managed REITs, like PennyMac, are unusual today because they create the potential for conflicts if the same people run both entities. (Another such REIT, CommonWealth, was featured in this column two weeks ago.)

IT was unclear until recently how lucrative the relationship with the PennyMac REIT was for Mr. Kurland’s side companies. But an I.P.O. statement filed earlier this year by PennyMac Financial Services, the previously private company that contains the REIT’s investment adviser, lifts the curtain on the arrangement.

PennyMac REIT, the document says, paid Financial Services and its subsidiaries $96.7 million in fees last year, up from $8.5 million in 2010 and $23.4 million in 2011. That’s an 11-fold increase in just two years. In 2012 alone, the REIT accounted for more than one-third of Financial Services’ net revenue.

As for the potential conflicts, the PennyMac Financial Services offering statement notes that Mr. Kurland and others in the upper echelons of the company “may have conflicts in allocating their time and services between our operations” and those of the REIT.

In addition, the public filing states that the overlapping objectives of the REIT and the financial services company could present problems. PennyMac Financial Services might participate in some of the REIT’s investments, the document notes, without negotiating at arm’s length. This could result in potential conflicts, the filing adds, “between our interests in the investments” and those of the REIT.

An example: PennyMac Financial Services buys most of its mortgage loans from the REIT at its cost plus 0.03 percent. Then it sells them at a profit, with any luck. Last year, the financial services company generated $118 million on loans it had sold. To the degree that these gains were on loans that originated at the REIT, those were profits that the REIT could have received.

These possible conflicts were described differently for the REIT’s shareholders in a February investor presentation. There, the PennyMac REIT characterized its relationship with Financial Services as “synergistic.”

It’s hard to quantify what these potential conflicts might cost the REIT’s shareholders. But one way to look at the situation is to compare the overall returns at PennyMac Financial Services with those of the REIT.

Consider return on equity at both companies. In the first quarter of this year, that figure was roughly 78 percent at the financial services concern. At the REIT, it was 18 percent. For all of 2012, returns on equity were 67 percent at PennyMac Financial Services, versus 16 percent at the REIT.

On May 8, PennyMac Financial Services went public at $18 a share. Some 11 million shares were offered for sale, bringing the total shares outstanding to 74.2 million. After the offering, Mr. Kurland owned 23 percent, BlackRock owned 29 percent and Highfields 27 percent.

The stock closed on Friday at $20 a share, giving PennyMac Financial Services a market value of $1.48 billion. That values Mr. Kurland’s stake at $341 million.

By contrast, over at the REIT, Mr. Kurland owns approximately 335,000 shares, or about half of 1 percent of its stock outstanding.

Given this ownership imbalance, which company do you think will get more of Mr. Kurland’s attention?

His dueling jobs at the PennyMac entities also mean different paychecks for him. For his work at the REIT last year, Mr. Kurland was paid $1.87 million in stock. At PennyMac Financial Services, however, he received $2.634 million in total 2012 compensation.

So far, shareholders of the PennyMac REIT don’t seem perturbed by the potential conflicts in Mr. Kurland’s roles. And Mr. Kurland said that the companies have “disclosed potential areas of conflict to investors and put in place practices and structures that address them if they arise.” 

To eliminate any perception of conflict, Mr. Kurland could have rolled up the ancillary companies into the REIT itself. But that was not done.

As such, Mr. Kurland’s returns on his investment are far higher than those generated by the PennyMac REIT shareholders. According to financial statements, during 2009 and 2010, Mr. Kurland, BlackRock and Highfields contributed $97 million of capital into the company that became PennyMac Financial Services. Thanks to the new stock issue, that investment has grown to $1.2 billion, a more than 12-fold return.

For shareholders in the REIT, by contrast, their total return of 32 percent since the I.P.O. has been a good gain. But it’s certainly not the jackpot that Mr. Kurland has just hit.

Article source: http://www.nytimes.com/2013/05/19/business/at-pennymac-dueling-jobs-and-big-paydays.html?partner=rss&emc=rss