PennyMac Mortgage Investment Trust Q1 2025 Earnings Call Transcript

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April 22, 2025

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to PennyMac Mortgage Investment Trust First Quarter twenty twenty five Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust's website at pnt.pennymac.com. Before we begin, let me remind you that this call may contain forward looking statements that are subject to certain risks identified on Slide two of the earnings presentation that could cause the company's actual results to differ materially as well as non GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer and Dan Pirotti, PennyMac Mortgage Investment Trust Chief Financial Officer.

Speaker 1

Thank you, operator. For the first quarter, PMT produced a net loss to common shareholders of $1,000,000 or diluted earnings per share of negative $01 Strong levels of income excluding market driven value changes were offset by net fair value declines due to interest rate volatility and credit spread widening. PMT declared a first quarter common dividend of $0.40 per share. Book value per share at March 31 was $15.43 down modestly from December 31. Current third party estimates for industry originations averaged $2,000,000,000,000 in 2025, reflecting projections for growth in overall volumes with moderate contributions from both refinance and purchase.

Speaker 1

Interest rates have been extremely volatile in recent periods, creating a challenging environment for most mortgage REITs. However, our diversified investment portfolio, efficient cost structure and strong risk management practices enable us to effectively manage through these challenging market conditions. These risk management practices include our well established interest rate hedging program and the establishment of unique non mark to market financing arrangements for the vast majority of our credit risk transfer investments, which enable us to effectively manage through volatile markets. Turning to Slide five. Our synergistic relationship with PFSI provides PMT with unique and proven competitive advantages.

Speaker 1

First, PMT leverages PFSI's best in class operating platform, including its deep and experienced management team, scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high quality pipeline of loans for investment. Second, our structure allows PMT to efficiently deploy capital into long term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations and retain the related investments, positions PMT to capitalize on the evolving landscape for secondary market execution should the GSEs reduce their footprint. This provides us with access to unique investment opportunities that we believe will generate attractive risk adjusted returns over time. Slide six highlights our ability to organically create investments from our own private label securitization activity and importantly, the significant opportunity presented by the broader loan pipeline.

Speaker 1

The increased volume of non owner occupied and jumbo loans underscores the potential for future investment, and this growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long term return objectives. In recent periods, PMT has been among the largest issuers of private label securitizations, demonstrating our expertise and leadership in this space. In the first quarter, we successfully completed three securitizations of investor loans totaling $1,000,000,000 in unpaid principal balance, retaining $94,000,000 in new investments with returns on equity expected to be in the mid teens. We believe that our position as the producer of the underlying loans is a competitive advantage, providing us with the ability to review and diligence the loans for securitization and subsequent investment. Additionally, our position as the servicer of the underlying loans uniquely positions us to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender credit risk transfer.

Speaker 1

Looking ahead, we expect to continue closing approximately one securitization of non owner occupied loans per month, and we anticipate closing approximately one jumbo loan securitization per quarter beginning in the second quarter. This consistent cadence of securitizations underscores our commitment to leveraging our origination capabilities and actively participating

Speaker 2

in

Speaker 1

the private label securitization market. Turning to Slide five, approximately two thirds of PMT shareholders' equity is currently invested in the seasoned portfolio of MSR and the unique GSE lender risk share transactions we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future as low expected prepayments have extended the expected lives of these assets. While credit spreads have widened the current economic environment, delinquencies remain low. This can be attributed to the overall credit strength of the consumer combined with the substantial accumulation of home equity in recent years due to continued home price appreciation.

Speaker 1

Mortgages underlying PMT's large investment in lender originated risk share have a low weighted average current loan to value ratio below 50%. As a result, we continue to expect that realized losses will be limited. MSR investments account for approximately half of PMT's deployed equity. The majority of the underlying mortgages of these MSRs remain far out of the money, and we expect the MSR asset to continue producing stable cash flows over an extended period of time. MSR values also continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short term interest rates.

Speaker 1

Similarly, these characteristics are expected to support the performance of these assets over the long term. In closing, our risk management capabilities and diversified investment strategies, which include a seasoned MSR and CRT portfolio, combined with a growing securitization platform, position us very well to continue delivering attractive risk adjusted returns to our shareholders in 2025 and beyond. And we remain confident in our ability to successfully navigate a volatile and evolving market. Now I'll turn it over to Dan, who will review the drivers of PMT's first quarter financial performance and PMT's run rate return potential.

Speaker 3

Thank you, David. PMT reported a net loss to common shareholders of $1,000,000 in the first quarter or negative $01 per diluted common share. The Credit Sensitive Strategies contributed $1,000,000 to pretax income. Losses from organically created CRT investments were $5,000,000 Investments in non agency subordinate MBS generated gains of $4,000,000 and investments in CAS and STACR bonds generated gains of $2,000,000 Other credit sensitive strategies contributed losses of $200,000 The interest rate sensitive strategies contributed a pre tax loss of $5,000,000 Fair value declines on MSR investments were $56,000,000 as the decrease in mortgage rates drove an increase in future prepayment projections. These fair value declines were partially offset by the combined impact of changes in the fair value of MBS, interest rate hedges and related income tax benefits.

Speaker 3

MBS fair value increased by $65,000,000 due to the decline in market interest rates. Interest rate hedges decreased by $40,000,000 Declines on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $16,000,000 tax benefit. The fair value of PMT's MSR asset at the end of the quarter was $3,800,000,000 down slightly from December 31 as fair value declines and runoff were partially offset by newly originated MSR investments. Delinquency rates for borrowers underlying PMT's MSR portfolio remained low, while servicing advances outstanding decreased to $84,000,000 from $105,000,000 at December 31. No principal and interest advances are currently outstanding.

Speaker 3

Total correspondent loan acquisition volume was $23,000,000,000 in the first quarter, down 18% from the prior quarter and consistent with the overall decline in the size of the origination market. Correspondent loans acquired for PMT's account totaled $3,000,000,000 down 20% from the prior quarter. PMT retained 21% of total conventional correspondent production in the first quarter, up from 19% in the fourth quarter. We expect this percentage to remain between 15% to 25% in the second quarter of twenty twenty five as we continue pursuing investment opportunities in the private label securitization market. PMT also acquired $637,000,000 in UPB of loans acquired or originated by PFSI for inclusion in private label securitizations, up from $437,000,000 in the prior quarter.

Speaker 3

Income from PMT's Correspondent Production segment was $10,000,000 down from the prior quarter, which included gains on non owner occupied loans due to credit spread tightening. The weighted average fulfillment fee rate was 19 basis points, up from 18 basis points in the prior quarter. Under the renewed mortgage banking services agreement with PFSI, effective 07/01/2025, correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100 of non government correspondent production from PFSI. In total, PMT reported $41,000,000 of net income across its strategies, excluding market driven value changes and the related tax impacts, down from $51,000,000 in the prior quarter, driven primarily by decreased income from correspondent production and seasonally low placement fees on custodial balances and deposits.

Speaker 3

Slide eight of our earnings presentation outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of $0.35 per share, down from $0.37 per share in the prior quarter. The return potential for credit sensitive strategies increased due to higher expected yields as credit spreads have widened. The return potential for interest rate sensitive strategies declined due to compression between longer dated asset yields and short term financing rates since the beginning of the year. If the yield curve steepens further, we expect PMT's overall run rate would increase driven by higher overall yields in the interest rate sensitive strategy.

Speaker 3

Turning to capital. In February, we issued $173,000,000 in unsecured senior notes due in 02/1930, and we also retired $45,000,000 of CRT term notes where the remaining assets were financed via repurchase agreements due to the size of the position. Through 2025, we will continue to seek opportunities to raise additional debt capital as we approach the maturity of our exchangeable note in 2026 as well as to provide additional funding for the potential expansion of our securitization efforts. We'll now open it up for questions. Operator?

Operator

I would like to remind everyone, we will only take questions related to PennyMac Mortgage Investment Trust or PMT. We also ask that you please keep your questions limited to one preliminary question and one follow-up question as we'd like to ensure we can answer as many questions as possible. Your first question comes from the line of Boss George with KBW. Please go ahead.

Speaker 4

Hey, Good afternoon. Just given the movement in rates since quarter end, can you just talk about any changes in your book value and also changes in the expected ROE since quarter end?

Speaker 3

So overall, we there's been significant interest rate volatility since the end of the quarter as well as credits additional credit spread widening since the end of the first quarter. And we've had impacts on from both of those during the quarter thus far. Overall, we're very pleased with the inflation that we've had from our hedging program on the with respect to the interest rate volatility. But the combination of some of the higher hedge costs, some of the interest rate volatility and the spread widening has decreased our book value by about 2% to 3% since the end of the quarter. But that remains fairly contained, and obviously, there's a significant amount of the quarter left to run.

Speaker 3

With respect to the ongoing ROE other than those fair value impacts, you know, during the or in in the with respect to q two, the ongoing ROE, our our run rate return potential reflects really where we've landed since the through the quarter to date and what our expectations are going forward with respect to that.

Speaker 1

I would add to that, though, that given the nature of our of our debt, especially in CRT where we don't have mark to market and not subject to margin call provisions, it's a time like this where it's really critical, when spread wide. We don't have assets that, you know, in the worst case, we'd have to sell. And so I think, you know, it's it's it's an important asset to look at the liability structure we have in place that, you know, the underlying fundamentals, for the loans, you know, remains the same. You know, in our CRT portfolio, we have a lot of borrowers, you know, a lot of equity, high credit quality, and I don't you know, that that they're so seasoned that at this point, you know, it would take something really serious for for them to be affected. And and so I think, and then the same thing holds true for the MSRs where we have so much low rate servicing with likewise equity in the underlying properties.

Speaker 1

The fundamentals stay the same. And so I think times like this, it's the fact that we hedge that's important, and it's the fact that we've termed out our debt without the mark to market for the assets that we can hedge, cannot hedge that's just as important.

Speaker 4

Yes. Okay, great. Thanks. I definitely appreciate the strength of the capital structure. Actually just one more on just on the mortgage banking.

Speaker 4

Just given the change in the or the update in the mortgage banking agreement between PennyMac and PFSI, is there an expectation that PMT could acquire a larger percentage of loans from PFSI in the back half of the year?

Speaker 3

PMT's acquisition amount really goes to where it's where we see it as most advantageous to deploy capital. So currently, we've been more focused on increasing our investments in the credit sensitive strategies and overall in terms of the interest rate sensitive strategies with the amount that's going through the correspondent channel and the MSR that's retained there, that has been roughly holding constant in terms of the interest rate sensitive strategies. And so, you know, in terms of what our outlook is currently, we wouldn't necessarily expect an an increase in the proportion of loans that PMT is, retaining or keeping in the back half of the year, since we're more focused on building up the credit sensitive strategies as opposed to creating more MSR that would go into the interest rate sensitive strategies.

Speaker 4

Okay, great. Makes sense. Thank you.

Speaker 1

Thanks, Bose.

Operator

Your next question comes from the line of Jason Riva with Jones Trading. Please go ahead.

Speaker 5

Hi, guys. Good afternoon. Good afternoon. Thanks for taking my question. So just to bridge on to the end of Bose's question there.

Speaker 5

Last quarter, we were obviously discussing moving more towards credit focused investments and less interest rate sensitive strategies. And it seems we've incrementally shifted somewhat of that way during the first quarter. Can you update on a little bit on your thinking given the current dislocation into 2Q right now about where you want to commit capital and what looks most attractive right now?

Speaker 1

Look. I don't know. I I I would say that, you know, I don't know if I I'm not seeing a dislocation in the mortgage market. What I would say to you is that we're we're generally pleased with the, you know, the capital allocation as we have it today. The it's important, as you point out, that PMT continues to grow its credit sensitive strategy position and being a being a serial issuer is very important.

Speaker 1

We're seeing the benefits of that and our securitizations and the spread tightening that's taking place with the senior bonds that get issued. You know, I wanna continue to explore doing a jumbo securitization every quarter. We're gonna do our first one this quarter. And so I think that, you know, if the origination market grows or normalizes, where the GSEs reduce their footprint through increasing loan level price adjustments, we could do more securitizations. Having said that, I'd like to see p PMT also continue to benefit from the correspondent activity.

Speaker 1

I don't I think that there's natural runoff that takes place in the interest rate sensitive strategies position. And so I don't wanna put I don't wanna put that position in a runoff mode. So there is some replenishment that I would like to see in that position. And, of course, this all, you know, comes down to two issues. It's the amount of capital we have to invest and the best execution for that capital.

Speaker 1

And that's probably the biggest kind of change in how we think about PMT versus two years ago and that, you know, we wanna we wanna focus on continuing to, you know, increase the returns in PMT and and really focus on it from a from an investment manager investment management point of view by looking at the best execution for all of the investments.

Speaker 5

Thank you. That's helpful. And then on Correspondence specifically, just given the decline in mortgage rates that was apparent during the second half of the first quarter, what kind of visibility do you have coming into 2Q about volumes just from those loans closing?

Speaker 1

I think to your point of correspondent, we I expect to see increased correspondent activity starting at the end of this month and running into May as the loans that were locked into our correspondent's pipelines fund. But I think, you know, look. The market the market is right now centered on a $2,000,000,000,000 origination market. Obviously, you know, with that's rate dependent. I do think we're in a more traditional mortgage banking environment where you have greater volatility, you're gonna have these short periods of refinance activity, followed by, you know, longer periods or perhaps short periods of higher rates.

Speaker 1

And so with this volatility, you know, the the total originations can move as well. But I I I think we're all, you know, still convicted that we're in a 2,000,000,000,000 market, but, you know, we're only in April as we speak.

Speaker 5

Agreed. Okay. Well, thank you for that color and helpful as always.

Speaker 1

Thanks so much.

Operator

Your next question comes from the line of Doug Harter with UBS. Please go ahead.

Speaker 6

Thanks. Can you talk about your outlook for the dividend given that you lowered run rate earnings and kind of the ability and wanting the ability to kind of retain as much capital for future growth and, therefore, kind of how the dividend fits into the total return strategy?

Speaker 3

So consistent with our we've seen previously as the run rate has moved around a little bit, we do expect the dividend to remain stable. We do think there's a value in the in the dividend stability, but also but also be the we do the primary reason for the decline in the run rate quarter over quarter really has to do with the shape of the yield curve and its impact on the interest rate sensitive strategies as longer term yields decline, but overall short term financing rates not move further. The Fed is on pause. That really puts some pressure on the interest rate sensitive strategies and the net returns generated there. We do expect the yield curve to normalize over time and drive up the expected returns on that interest rate sensitive strategy.

Speaker 3

And so this decline in terms of the run rate is within the range that we've, you know, that we've seen previously and doesn't really change our view, currently in terms of the, you know, the dividend and maintaining it at the level that that we've had

Speaker 1

it at, at $0.40

Speaker 6

Great. And then just a follow-up. On the yield curve, it seems like so far in April, while volatile, the yield curve has steepened somewhat. And I guess if you looked at the forward curve, would imply kind of even steeper. Just want to make sure I understand kind of when you think about run rate, how what pieces of that either April or the forward curve are kind of baked into that run rate expectation?

Speaker 6

Or is that kind of currently what you're seeing?

Speaker 3

Well, it's a it's a, you know, it's a little bit of a moving target, but consistent. You know, we still think that we're we're in that range once we see either, you know, yields move up, you know, yields move up a bit further, or maintain their level at, you know, at at the somewhat higher at the somewhat higher rates, or short term rates decline a bit. Either of those would sort of lock in an increase in terms of our expectations with respect to the run rate return potential of the interest rate sensitive strategies.

Speaker 6

Okay. I appreciate that, Dan. Thank you.

Operator

Your next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.

Speaker 1

Hey, thanks. Good afternoon. Can you guys talk about the return expectations you're seeing on new loan securitizations and if there's been any material change there with the spread widening we've seen so far in April kind of versus where you were seeing expected returns in the first quarter? Look, I mean, obviously, with the credit spread widening, you know, I would say that the return targets on the sub bonds that we have in our position have have have increased as one would expect. And I would say right now, this the the return targets on sub bonds are, call it, mid mid teens, call it 1515% ish.

Speaker 1

And I think that that's something that, you know, that intrigues us about the or that's one of the reasons why we're doing the securitization activity that we're doing. And I think that for to get that returns being in the organic creation of the security is really important. We're not seeing a lot of secondary flows in the market right now. And so to meaningfully deploy the capital into these returns, having having the structure that we have and having the ability to have the loans to create the securitization is something that's really unique for PMT. Got it.

Speaker 1

Okay. Appreciate the comments. Thank you.

Operator

Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.

Speaker 2

Hey, thanks. A follow-up on

Speaker 1

the interest rate strategies.

Speaker 2

I mean, you typically manage an agency MBS portfolio alongside the MSR portfolio, sort of like a carrying or kind of a hedge, if you will. Mean, would you say that the jumbo and the investor property loans are somewhat of a substitute for the Agency MBS portfolio since the risk profile is kind of kind of similar? Or is that really not the way you guys are thinking about

Speaker 3

The so it depends on the portions of the capital structure that we, that we retain, and we identify, you know, we identify that and, you know, in terms of the expected, you know, the expected contribution from from each of those and the expected equity in the in the run rate return potential. So to date, in terms of our securitizations, we've retained on a few of the securitizations, some of the senior mezz portion, which really has, as you know, interest rate sensitivity that's similar to the TBA position with a little bit generally wider spread. And so those we do view as a substitute effectively for some of the agency MBS position. But primarily and we noted the investments that we've made in credit sensitive versus the interest rate sensitive in some of the earnings release. 60 in the last quarter, we retained $66,000,000 in credit sensitive or subordinate bonds, which we don't view as a substitute, which are really more first loss piece and credit sensitive, $29,000,000 of the somewhat more senior bonds that are more, effectively substitutes for TBA.

Speaker 3

So a portion of it is a a TBA substitute, but most of what we're investing in from the securitizations is really, you know, not comparable and more of a a credit investment similar to the CRT.

Operator

We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.

Speaker 1

Thank you, operator. I'd like to thank everyone for joining us today. Please don't hesitate to reach out to our Investor Relations team if you have any follow-up questions. And again, thank you all very much.

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