PennyMac Mortgage Investment Trust Q3 FY2024 earnings call

Key Points:

• PMT's third quarter net income to common shareholders was $31 million, EPS $0.36, ROCE 9%, book value per share $15.85.
• Effectively completed refinancing of $457 million of CRT and MSR term notes with lower effective cost and extended durations.
• Origination market outlook for 2025: total originations averaged $2.3 trillion, driven by expected mortgage rate decline.
• MSR investments: account for over half of deployed equity, produce stable cash flows; fair values down slightly but benefit from interest rate environment.
• CRT and lender originated risk share: low delinquencies, low LTV, expected limited realized losses.
• Correspondent production: retained increased percentage of conventional correspondent loan production in Q3, expect lower retention in Q4 to optimize capital allocation; contribution from liability releases to decline.
• Private label securitization opportunities: jumbo loans, investor loans, second homes; PMT well-positioned to execute due to relationships with investors; synergistic with PFSI.

PMT's net income to common shareholders was $31 million or diluted earnings per share of $0.36. Annualized return on common equity was 9% and book value per share at September 30 was $15.85. MSR investments account for more than half of PMT's deployed equity. The majority of underlying mortgages of these MSRs remain far out of the money. CRT and lender originated risk share investments have low delinquencies and a low weighted average current loan-to-value ratio of below 50%. Total correspondent loan acquisition volume was $26 billion in the third quarter, up 15% from the prior quarter, with conventional loans acquired for PMT's accounts totaling $5.9 billion, up 167% from the prior quarter due to retained production. The contribution from the release of representations and warranties liabilities is expected to decline to more normalized levels.

Guidance:

• Run rate potential: quarterly average of $0.37 per share, up from $0.33, could increase to $0.40 range if yield curve steepens further.
• Capital: Liquidity in place for repayment of $210 million exchangeable senior notes; strengthened capital position by refinancing MSR and CRT term notes at more attractive rates and longer duration.

Risks:

• Market-driven value changes affecting fair values of MSRs and other investments.
• Dependence on interest rate environment and prepayment risks impacting MSR values.
• Competition and market dynamics in private label securitization affecting ability to execute on opportunities.

Q: Hey, good afternoon. I just wanted to hone in on one of Dan's remarks there, specifically regarding the steepness of the yield curve and the earnings power of the entire PMT. Would you say that, that changes the calculus for the Board as far as dividend policy goes going forward? And how might that evolve over time?

A: I think our narrative has been pretty similar around our expected earnings power and how that plays into the dividend evaluation. So we've been in this inverted yield curve environment for a pretty significant amount of time to the extent that we see the yield curve invert over time that should allow for greater earnings power in the interest rate sensitive strategies as the yield on those longer -- those assets, which are all really key off of longer-term rates, and which we mark to market on a monthly basis or a quarterly basis. As those yields increase or become higher relative to the rates at which we're funding those assets, which are generally at spreads over short-term rates that drives the overall earnings power and could push us back up toward our run rate, back up towards the $0.40 level, as I mentioned in my remarks. That's really been the case over the last several quarters. And we're now starting to see that reinversion really takes shape and really see that path back to the $0.40 run rate. And so as a dividend or as the Board evaluates the dividend and as we look at the dividend, we've generally endeavored to keep that stable to the extent that we see that path back to $0.40, which now seems more apparent, given the changes in the environment that the Fed has begun lowering short-term rates. And then most recently, we've seen this increase in the longer end of the curve. And so really it's flattening out there. So I think we're finally starting to see what we've been talking about for the last few quarters come to fruition, which really in terms of the dividend and the run rate moving towards it sort of plays into the narrative that we've had and the stability that we've had for the dividend over time.

Q: Hey, guys. Good afternoon. Actually a couple of follow-ups. One, just on the steepening curve, the way that's happening now with the 10-year selling off. Does that -- are you kind of agnostic to how the curve steepens in terms of it impacting your returns?

A: So yes, we're fairly agnostic to have the curve steepens. It's really when we're looking at the interest rate sensitive strategies, the relationship between the longer end of the curve and the shorter end of the curve. So whether interest rates come down or longer-term rates go up, and when I say shorter-term rates, I mean, really financing rates, that drives that spread overall and the interest rate sensitive strategies to be larger and drive that income potential or return potential for the strategy. So, either way or both is helpful. And we're fairly agnostic to exactly which way or both it happens.

Q: Thanks. David, one of the areas you didn't touch on as possible securitization would be second liens, we're obviously PennyMac is originating those as well. Can you just talk if the execution there has come close to hurdle rates or would still have a ways to go to be attractive?

A: We do --it does have a ways to go. As you can tell from as I'm talking today to you, everyone on the phone, at the top of the waterfall in investor loans in second half, those meet our return targets. Secondly is jumbo loans, which is getting very close, I think the second liens, we're still seeing a tremendous bid on a whole loan basis going to other market participants who have a lower cost of capital. And so it's one that we'll continue to look at, and we monitor, as you can tell, all of these markets. But suffice it to say, if there was a market disruption or we saw the ability to invest in there. There's nothing to prevent us from doing that securitization.

Q: Hi, David. Hi, Dan. Thanks for taking my question. Just a follow-up on the last question. Would you expect PMT eventually to retain more you get back to that50-plus percent retention of conventional correspondent production? Or do you have so many opportunities. It sounds like你 just have this incredible subset. Does it make sense to just sell – looking to selling to PFSI and free up capital for the securitization effort and other things?

A: Yes. Exactly, Matt. I think that's really the idea behind the reduction in terms of the allocation of conventional correspondent that we mentioned from 42% in the past quarter to the 15% to 25%. So as we see these opportunities in the securitization market and are aggregating for those opportunities, it's ensuring that we're not crowding out by adding on more additional MSR through the conventional correspondent retention. And so I think it's exactly as you described it opening up a little bit of capital room to aggregate and retain the interest on those securitizations, and that's really leading to that reduction on the correspondent side. As David mentioned, if we deliver returns as we expect and are able to raise additional capital that could be a catalyst to increase that increase that proportion of the conventional loans that are retained again, and invest in additional MSR alongside the credit or a greater concentration in the credit-sensitive assets, but that's sort of as we move forward, and we see the opportunities moving forward.

Q: Hey thanks. Just one thing, did you say what the source of cash or liquidity is to retire the debt that's coming due next month? And is the expectation to carry lower leverage for a period of time? Or how are you thinking about that?

A: So, the source of funds for repaying the debt, debt to do next month is drawing on our secured lines and so we've positioned the liquidity really more or less ready to be able to retire that debt. And sorry, what was the second part of your question, Eric, I didn't hear that clearly. Well, it sounds like the leverage is going to be unchanged. Does the draw that you made to retire that is that reflective at on the balance sheet at the end of the third quarter? Yes, it's not reflected at $930 million. So, yes, it's about -- during the month this month. But yes, you're right, it's overall leverage is pretty -- would be pretty similar to 9/30, we're basically swapping secured debt for that convertible issuance.

Q: Hey, thanks for the follow-up. Just wanted to see if you could provide some color on the types of buyers in the whole loan market for both for the jumbos and the second liens?

A: Look, we're seeing a wide range of buyers. I think that it's -- we're able to sell these loans to insurance companies where some of the private equity shops are setting up their own conduits and doing their own aggregation, securitization. And similarly, on the PFSI side when we sell second – second lien, we see similar buyers. And so it's a wide range of buyers. The thing that impresses me is the depth of the market. And that's why, quite frankly, I'm fairly confident, very confident in our own ability to securitize because I think there's a very deep bid for these loans, deeper than I've seen in quite some time. And so I just think that there's a need for structured assets and structured investments. And so the ability, quite frankly, to organically create the opportunities, one that's really unique in the marketplace. And so it's just -- it's not banks, and I will tell you that. It's -- but it's all the usual cast of characters that we've seen in the past.