PennyMac Mortgage Investment Trust Q2 FY2024 earnings call

• Financial Results: Net income to common shareholders was $15 million ($0.17 diluted EPS). Annualized return on common equity was 4%, book value per share $15.89 at June 30.
• Origination Market: Third-party estimates for total originations averaged $1.7 trillion in 2024 and $2.1 trillion in 2025, driven by lower rates and increased refinance volumes.
• Financing Activities: Issued $217 million of exchangeable senior notes and $355 million of term notes secured by Fannie Mae MSRs. Redeemed $305 million of similar term notes after quarter end.
• Investment Strategies: More than two-thirds of equity invested in seasoned MSRs and GSE lender risk share transactions. MSR investments account for over half of deployed equity, with stable cash flows expected. GSE lender risk share investments have low delinquencies and LTV.
• Run Rate Potential: Current run rate is $0.33 per share, down from $0.35 due to lower expected asset yields in interest rate-sensitive strategies.

Credit-sensitive strategies: Contributed $16 million in pretax income, including $11 million from organically created CRT investments. CRT had a low current weighted average loan-to-value ratio below 50% and a 60-day delinquency rate of 1.11% as of June 30. Opportunistic investments in CAS and STACR bonds: Totaled $6 million in the quarter; sold $8 million in subordinate tranches of investor loan securitizations. Interest rate sensitive strategies: Contributed $17 million in pretax income. MSR fair value increased by $46 million due to higher mortgage rates, but offset by decreases in MBS fair value ($39 million) and interest rate hedges ($18 million). Income from taxable REIT subsidiary drove a $3 million tax expense. MSR fair value at quarter end was $3.9 million, unchanged from March 31. Delinquency rates for MSR portfolio were low, and servicing advances decreased. Correspondent Production segment: Pretax income down slightly from prior quarter due to lower margins offsetting higher volumes. Total correspondent loan acquisition volume was $23 billion in Q2, up 24% from prior quarter. Conventional loans acquired totaled $2.2 billion, up 26% from prior quarter. PMT expected to retain a higher percentage of conventional correspondent loan production in Q3.

• Run Rate: Current run rate is $0.33 per share, down from $0.35 primarily due to lower expected asset yields in interest rate-sensitive strategies.
• Future Expectations: Anticipated EPS to move back above $0.40 level in later next year as short rates decline and capital is deployed effectively.
• Capital Deployment: Expected to retain a higher percentage of conventional correspondent loan production in Q3, leveraging raised capital through convertible debt issuance.

• Interest Rate Volatility: Fair value changes in interest rate-sensitive strategies due to elevated volatility can impact financial performance.
• Origination Market Uncertainty: Projections for originations depend on rate movements, which are uncertain.
• Refinance Activity: Refinancing activity is sensitive to mortgage rate levels, which can fluctuate.

Q: Hi. Good afternoon, everyone. Thanks for taking my question. I fully agree with you on where credit spreads are and your decision to retain more correspond production. It makes a ton of sense. But ultimately, can you talk about what form that will take? Is this as simple as just keeping more whole loans on the balance sheet? Or will you be looking to term fund that via securitization eventually?

A: So for those loans that we're keeping through the quarter that PMT will be -- the additional loans that PMT will be retaining through the correspondent channel primarily, those will consist of the Fannie Mae and Freddie eligible loans that PMT has historically retained. And those generally speaking, we sell or securitize to the agencies, a few, we sell as whole loans to third parties. But generally, the investment that generated from that is in mortgage servicing, right? In addition to the game that we earned through the correspondent securitization. So don't have any plans currently to retain loans specifically on balance sheet other than potentially through securitization of some certain sets of loans that we may look to retain and then -- or that we may look to securitize and retain subordinate tranches on, which we've done in certain periods in the past and that looks to be a potential opportunity that could be arising again in the current environment.

Q: Thanks. I know you guys take a long-term approach to the dividend. But I guess, how are you thinking about the dividend and given kind of the run rate earnings that you laid out and that, that took a slight tick down in this quarter?

A: Yes. So to your point, we do take a long-term approach to the dividend and look to -- obviously, over time, we want the dividends to reflect the earnings capacity of the company. But at the same time, as the market generates don't necessarily look to adjust it with every sort of gyration. We did see a little bit of a tick down in our run rates, as you mentioned, from $0.35 to $0.33 versus the dividend of $0.40. That was primarily driven by some additional reinversion of the yield curve over the past month or 2. As we look out, really what -- some of what that's reflective of is an expected decline in short-term rates and that would drive down our financing rates. And really, as we look out a little bit past the horizon of our forecast here into later next year, we do see the -- in our forecast the potential for the -- our EPS to move up back above the $0.40 level. And so given that we see that potential, we're not looking to adjust the dividend or we don't expect to adjust the dividend in the short term. I would really look to keep it stable as the market sort of readjust as expected, and we see short rates come down over the next few periods.

Q: Thanks. In the interest rate sensitive strategies segment, can you just speak to the investment opportunities you're seeing and which you view as the best risk-adjusted returns, whether it's on the MSR or the Agency and non-Agency side as you look forward? And how about those opportunities compare to the credit side?

A: Sure. In the current environment, and this goes along with some of the commentary and some of the actions -- activities that we've had in the portfolio recently. On the credit side, we've seen credit spreads tighten over the last several quarters. We had been opportunistically purchasing credit investments primarily STACR and CAS securities. We've generally been divesting of those and certain other credit investments in the recent quarters as spreads have tightened significantly and brought some of those investments below our return hurdles. Where we see the most attractive places to invest currently, as you mentioned, is in the interest rate sensitive strategies primarily in mortgage servicing rights. And so we have access through the correspondent channel to those mortgage servicing rights. So that's why we're shifting a portion or PMT retaining in Q3, a greater portion of those conventional correspondent loans given the capital that it raised through its conventional -- or through its convertible issuance. That's what we see as the most attractive and present opportunity. We also are looking at MSR portfolios that come to market on the secondary market or bulk MSR portfolios. We've participated in a few of those purchases or bought a few of those portfolios over the past few quarters. in recent periods, we've seen those portfolios really be pretty bid up to a significant degree to where the acquisition of MSRs through the correspondent channel appears more attractive at this point in time. But we still, from a collateral point of view and from a PMT positioning point of view, generally see the low coupon MSR portfolios as attractive pricing in the bulk market has not been what we're looking for most recently. As David mentioned, the other opportunities that we're looking at are really around the securitization of some of the production that comes through in the correspondent channel, potentially also in terms of loans that are originated from the direct channels at PFSI and potential generation of securitizations and retention of the subs, the subordinate bonds there. So that's another avenue that we view as attractive currently and especially to the extent that we can create a program that allows us to consistently invest in those types of assets.

Q: Yes, good afternoon. I wanted to try and quantify just the benefit from retaining more of the conventional production at PMT. So I was just looking at the difference between the gain on sale and the fulfillment fee, it's 0.35% versus 0.20%. So can we just look at sort of 15 basis points on the incremental loans that have been retained with PMT?

A: I think that the primary benefit is really around the capital deployment. So if we look at the gain on sale or the gain in PMT, a portion of that is driven by the -- a portion of that is driven by the gain of the loans that flow through to PFSI, a portion of it is also driven by what I've mentioned earlier in the call, the -- some of the rep and warrant relief, which is really related to loans that we sold historically not necessarily loans that are being sold and securitized in the current period. So really, the additional correspondent benefit on those loans is a smaller spread is a few basis points, the really the benefit overall a few basis points net over the fulfillment fee. Really, the primary benefit overall is in terms of the retention of additional investment and additional MSR that will grow that MSR asset a bit and drive additional earnings from a growing MSR portfolio or a larger MSR portfolio as opposed to the MSR portfolio, which really has been pretty static over the past few quarters.

Q: Hi David, thanks for taking my question. Look, on the subject of the balance sheet and the capital constraints, I know you want to put more money to work out there. If rates start coming down, in September, does that change your opinion and maybe trying to refinance the'24 maturity? I mean what's the appetite? I'm assuming the preferred markets probably aren't open quite yet, but you probably don't want to issue equity below book. So just thoughts on environment starts going down, the rates are heading downward.

A: So yes, to the extent that we see -- saw on the financing side to the extent that we see rates decline we could look at doing some additional issuance. But with respect to the 2024 maturity really the way that we have been looking at that and that we've sort of talked about in the past, that we fully reserve for that in our liquidity forecasting. And so as we were looking out, we had constrained investment because we wanted to make sure we had enough liquidity reserve to pay off the maturity that comes later in the year of our convertible debt. Given that we raised additional convertible debt in the second quarter, that really freed up some investment capacity for us. And that's really what's leading us to drive toward additional investment through an increased participation in the conventional correspondent loans that come through the correspondent channel and drive investment in MSR as well as additional correspondent activity and income. But to your point, to the extent that we see some opportunities -- some additional opportunities as interest rates decline to issue additional financing, then we would potentially look to take advantage of those opportunities as well, which could drive additional potential for investment. I think your perception of the preferred and our opportunities on the preferred and the common equity side are correct currently, where we don't see those as available opportunities in the current market.

Q: Yes, good afternoon. I wanted to try and quantify just the benefit from retaining more of the conventional production at PMT. So I was just looking at the difference between the gain on sale and the fulfillment fee, it's 0.35% versus 0.20%. So can we just look at sort of 15 basis points on the incremental loans that have been retained with PMT?

A: I think that the primary benefit is really around the capital deployment. So if we look at the gain on sale or the gain in PMT, a portion of that is driven by the -- a portion of that is driven by the gain of the loans that flow through to PFSI, a portion of it is also driven by what I've mentioned earlier in the call, the -- some of the rep and warrant relief, which is really related to loans that we sold historically not necessarily loans that are being sold and securitized in the current period. So really, the additional correspondent benefit on those loans is a smaller spread is a few basis points, the really the benefit overall a few basis points net over the fulfillment fee. Really, the primary benefit overall is in terms of the retention of additional investment and additional MSR that will grow that MSR asset a bit and drive additional earnings from a growing MSR portfolio or a larger MSR portfolio as opposed to the MSR portfolio, which really has been pretty static over the past few quarters.

Q: Hi. I know you just said you don't like predicting the future, but do you think there's potentially a better chance of reviving the lender CRT that you did in the past, given what could happen potentially with the election?

A: Well, I think that we've been in discussion with the GSEs about lender CRT. It's really doubtful for the foreseeable future. The GSEs are creating CRT. They're not even selling all the CRT. I think that a few things need to happen. One is you need a much bigger origination market. But more importantly, you need a change in thought in terms of what do you do with the CRT and the GSEs would have to be put in a position where they feel compelled to sell more of the bonds and they need the additional liquidity from PMT. And so I think that there's a few things that need to take place, but I don't, at this point, believe that it's really in the cards. But to your point, Michael, you could have a change of administration, you could have a change of leadership at FHFA. And so we try to remain very close to the people in FHFA. I've been spending time in D.C. once a quarter in meeting people, in and out of government. And so we're just trying to really make ourselves available to leaders and to be able to make ourselves available to give our point of view. But I think it's -- I think that it's not something that we're really planning on, which is what makes the opportunity to do private label securitization, so exciting for me.

Q: Second quarter is, I mean, does PMT have any interest in issuing equity below book value? I saw that $200 million distribution agreement recently filed.

A: Yes. So no, consistent with our previous -- how we've operated through our entire history. We're not looking to issue equity below book value. We did renew our equity shelf which we had not used since the last renewal of note as we've been below book value but we did renew that. And with that renewed at the money agreements with our underwriters, we would really only look to utilize that to the extent that we saw PMT's price move above book value to potentially end and had opportunities to be able to deploy the capital then we would potentially look to issue through that shelf, but we don't have any plans to issue equity below book value.