PennyMac Mortgage Investment Trust Q2 Earnings Call Highlights

PennyMac Mortgage Investment Trust NYSE: PMT reported second-quarter net income of $20 million, or $0.23 per diluted common share, as lower contributions from credit-sensitive and aggregation-and-securitization strategies were partly offset by stronger results in interest-rate-sensitive investments.

The result represented a 6% annualized return on common equity, Chairman and Chief Executive Officer David Spector said. The company’s book value per share was $14.83 as of June 30, down 1% from the prior quarter. PMT paid a quarterly dividend of $0.40 per share.

Spector said earnings were affected by market-driven value declines in credit-sensitive investments and lower volumes in aggregation and securitization activities. The company is responding by shifting capital away from mortgage servicing rights, or MSRs, and toward retained subordinate bonds generated through its private-label securitization program.

Shift Toward Credit-Sensitive Investments

Beginning in June, PMT stopped acquiring agency-eligible conventional conforming loans through correspondent production, though it will continue to acquire all non-agency loan volume. Spector said the move is intended to reduce capital deployed in MSRs, which have faced return headwinds, while increasing investment in higher-yielding credit-sensitive assets created through private-label securitizations.

During the quarter, PMT acquired $2.6 billion in unpaid principal balance, or UPB, of loans through correspondent production, down 8% from the first quarter and 17% from the year-earlier period. It also acquired $2.2 billion in UPB of loans from PennyMac Financial Services Inc. production for private-label securitizations, up 44% sequentially and 123% year over year.

In total, the company acquired $4.8 billion in UPB of loans in the quarter. It completed six private-label securitizations totaling $2.2 billion in UPB, retaining $120 million of new subordinate bond investments and generating $31 million of new MSR investments.

After quarter-end, PMT completed two additional securitizations totaling $692 million in UPB. Spector said the company remains on track to complete about 30 securitizations in 2026 and expects to add more than $600 million of retained investments during the year. He said those investments are expected to produce returns on equity in the low- to mid-teens.

The company also agreed after quarter-end to sell $13 billion in UPB of low-coupon agency MSRs, with closing expected at the end of August. Spector said PMT is actively managing its MSR portfolio and will evaluate additional sales as it weighs securitization returns against market demand for low-note-rate servicing assets.

Portfolio and Segment Performance

At quarter-end, the fair value of retained bonds from PMT’s private-label securitization program totaled $936 million. The portfolio was composed of 63% non-owner-occupied loan securitizations, 21% jumbo loan securitizations and the remainder agency-eligible owner-occupied loan securitizations.

Spector said the assets had a weighted average FICO score at origination of 774, a weighted average loan-to-value ratio at origination of 72%, and negligible delinquencies.

Chief Financial Officer Dan Perotti said credit-sensitive strategies contributed $11 million in pretax income, representing an 11% annualized return on equity. Organically created credit-risk-transfer investments contributed $6 million, including $7 million in realized carry gains and $1 million in market-driven value declines. Subordinate mortgage-backed securities retained from private-label securitizations generated $5 million of gains, compared with $6 million in the prior quarter, primarily because of lower valuation-related gains.

Interest-rate-sensitive strategies contributed $9 million of pretax income, or a 3% annualized return on equity. Income excluding market-driven value changes in that segment rose to $20 million from $11 million in the first quarter, as lower prepayment speeds—particularly on higher-note-rate MSRs—slowed runoff of the MSR asset.

PMT purchased $486 million of agency floating-rate MBS during the quarter, bringing the fair value of its MBS portfolio to $4.1 billion, compared with $3.8 billion at March 31. Perotti said an $18 million increase in MSR fair value was offset by $18 million of net fair-value declines in MBS and interest-rate hedges, including related tax benefits.

The aggregation and securitization segment produced $11 million of pretax income, down from $16 million in the first quarter. Net gains on loans acquired for sale fell by approximately $8 million sequentially, primarily because of lower volumes.

Dividend, Rates and Capital Allocation

Across its strategies, PMT reported $32 million of net income excluding market-driven value changes, up from $28 million in the prior quarter. Management projected an average run-rate return of $0.33 per share per quarter over the next year, compared with its prior projection of $0.31.

Although that projection remains below the $0.40 quarterly dividend, Perotti said the company expects to maintain the dividend because taxable income is expected to be sufficient to fully cover it in coming periods.

In response to analyst questions, Perotti said higher long-term and mortgage rates generally support expected MSR returns by reducing prepayment speeds. Higher short-term rates, however, could raise financing costs on longer-dated fixed-rate assets and partially offset that benefit. He said PMT’s concentration in MSRs means the recent increase in long rates has generally benefited its run-rate outlook.

Spector said higher rates have slowed production activity over the past two months, though non-qualified mortgage lending, investor and second-home lending, and cash-out refinances continue to provide loan supply. Perotti added that lower market supply could support investor demand and securitization execution, provided sufficient loans continue to flow through PMT’s relationship with PFSI.

Core debt-to-equity, excluding non-recourse debt, increased to 6.2 times from 5.6 times in the prior quarter, driven by growth in loans held for sale. Total debt-to-equity rose to approximately 12 times from 11 times, reflecting growth in non-recourse debt tied to retained securitization investments. Perotti said repayment of that debt is limited to cash flows from the associated loans in each securitization.

About PennyMac Mortgage Investment Trust (NYSE:PMT)

PennyMac Mortgage Investment Trust NYSE: PMT is a publicly traded real estate investment trust (REIT) that primarily acquires and manages residential mortgage loans and mortgage-related assets. The company focuses on generating attractive risk-adjusted returns through investment in agency and non-agency residential mortgage pools, credit risk transfer securities, and residential mortgage whole loans. As a mortgage REIT, PennyMac Investment Trust seeks to capture both interest rate spread and potential price appreciation in its portfolio holdings.

Established with external management by PennyMac Financial Services, Inc, the trust leverages the sponsor's mortgage servicing, underwriting and capital markets expertise.

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