PennyMac Mortgage Investment Trust Q4 FY2025 Earnings Call

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's Fourth Quarter 2025 Earnings Call. Additional materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust's website at pmt.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 2 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. I'd like now to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. Starting on Slide 3, PMT generated strong financial results in the fourth quarter with net income to common shareholders of $42 million or a 13% annualized return on common equity. Diluted earnings per share was $0.48 in excess of PMT's $0.40 per share quarterly dividend, increasing book value per share to $15.25 at year-end from $15.16 on September 30. Dan will talk about PMT's fourth quarter financial results in more detail later on in the presentation. Turning to Slide 4, I'd like to highlight the significant progress we made in 2025, accelerating our organic investment creation activities resulting from private label securitizations. As you can see, over the course of the year, we successfully completed 19 securitizations, totaling $6.7 billion in UPB, a substantial increase from just 2 securitizations in 2024. Retained investments from these securitizations grew to $528 million, up nearly tenfold from just $54 million in 2024. This consistent cadence of securitization activity firmly established PMT as a top 3 issuer of prime non-Agency MBS in 2025. At the same time, we rotated capital to better optimize PMT's return profile. This included the purchase of $876 million of agency floating rate MBS, and the sale of $195 million of opportunistic GSE-issued CRT investments, where we had realized significant gains. We decided to sell these GSE-issued CRT investments as their forward-looking expected returns fell below our targeted return requirements, and to free up capital for PMT to invest in newly created assets with higher expected returns from our ongoing private label securitization activity. Turning to Slide 6, our synergistic relationship with PFSI remains a unique and proven competitive advantage. 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, PMT is able 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 provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is expected to have even more opportunities to organically grow its portfolio. Turning to Slide 7, approximately 60% of PMT's shareholders' equity is deployed to seasoned investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for 46% of shareholders' equity, providing stable cash flows as the loans underlying this investment have a weighted average coupon of 3.9%, far out of the money. Our GSE credit risk transfer investments represent 13% of shareholders' equity and consist of seasoned loans originated from 2015 to 2020. With a weighted average current LTV of 46%, we continue to expect realized lifetime losses on this portfolio to be limited. Slide 8 highlights our robust securitization activity in the fourth quarter and our ability to rapidly grow this business. We completed 8 securitizations totaling $2.8 billion in UPB and retained $184 million of new investments. Our fourth quarter activity included 3 non-owner-occupied deals, 3 jumbo deals, and 2 agency-eligible owner-occupied deals. Our momentum has continued after the quarter-end, with 3 additional securitizations completed totaling $1.1 billion in UPB. Looking ahead and at this pace, we currently expect to complete approximately 30 securitizations in 2026, with targeted returns on equity for these retained investments in the low to mid-teens. The pie charts on Slide 9 highlight our active management of the portfolio to maximize risk-adjusted returns. As strong managers of capital, we expect to optimize returns by recycling capital into assets that maximize risk-adjusted returns, transitioning from lower-yielding assets to high-quality investments with superior return profiles. We remain focused on optimizing our allocation towards investments with targeted ROEs in the 13% to 15% range. And as we strategically redeploy capital into these higher returning assets, we are successfully driving the long-term return potential of our overall portfolio higher. Turning to Slide 10, you can see the average quarterly run rate return potential expected from PMT's investment strategies over the next 4 quarters. PMT's current run rate reflects a quarterly average of $0.40 per share, down slightly from $0.42 per share in the prior quarter. As I noted earlier, we expect increased investments in accretive non-agency subordinate and senior bonds, primarily through organic securitization activity. Our expected returns from the interest rate-sensitive strategies remain unchanged from the prior quarter as lower return potential from MSRs due to higher prepayment expectations was offset by a decrease in projected hedge costs. In correspondent production, margins have declined, and our expectations for returns from the strategy are down from the prior quarter. Our legacy investments provide a stable foundation for continued strong performance, and we have succeeded in repositioning PMT as a leader in the private label securitization market, where we are organically creating new investments and driving our overall returns higher. As we look ahead, I am confident that this comprehensive and diversified investment platform will drive our ability to continue generating earnings that more than support our dividend and drive long-term value for our shareholders. Now I'll turn it over to Dan to review the fourth quarter financial performance.

Thank you, David. Net income to common shareholders was $42 million or $0.48 per diluted common share in the fourth quarter, representing a 13% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $24 million to pretax income, generating an annualized return on equity of 27%. Gains from organically created CRT investments were $12 million, which included $8 million of realized gains and carry, and $4 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $11 million, including $9 million of market-driven value gains. The interest rate-sensitive strategies contributed pretax income of $28 million, generating an annualized ROE of 10%. The returns in this segment were impacted by increased prepayment speeds during the quarter, driving higher runoff of our MSR assets. Income excluding market-driven value changes for this segment was $21 million, down from $36 million in the prior quarter. However, our hedging activities during the quarter yielded net favorable results as the increase of $26 million in MSR fair value was partially offset by $7 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefit. Our MSR asset at year-end was valued at $3.6 billion, down slightly from the prior quarter, as gains from changes in fair value inputs and new MSRs from production were offset by the higher levels of runoff. Overall mortgage delinquency rates for PMT's primarily conventional MSR portfolio remain steady. Servicing advances increased to $97 million from $63 million in the prior quarter due to seasonal property tax payments. No principal and interest advances are outstanding. The Correspondent Production segment reported a pretax loss of $1 million. The negative result was due primarily to spread widening on jumbo loans during the aggregation period, as well as lower overall channel margins as competition increased during the quarter. The UPB of loans acquired from PFSI's Correspondent Production through our fulfillment agreement totaled $3.7 billion. Of this, $2.9 billion in UPB was conventional conforming correspondent volume and $800 million in UPB was non-agency-eligible correspondent volume. PMT purchased 17% of total conventional conforming Correspondent Production and 100% of non-agency eligible Correspondent Production for PFSI in the fourth quarter. In the first quarter of 2026, PMT expects to purchase 15% to 25% of conventional conforming Correspondent Production and 100% of correspondent non-agency eligible loan volume, consistent with levels reported in recent periods. PMT also acquired $1.8 billion in UPB of loans from PFSI's production outside of their fulfillment agreement for inclusion in private label securitizations. The weighted average fulfillment fee rate was unchanged from the prior quarter at 18 basis points. In total, PMT reported $21 million of net income across its strategies, excluding market-driven value changes, down from the prior quarter, primarily due to a decreased contribution from the Correspondent segment and increased runoff from MSRs as discussed earlier. Turning to Slide 15, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we raised $150 million of new unsecured financing through opportunistic reopenings of our exchangeable senior notes due in 2029. We currently expect to retire the $345 million in exchangeable senior notes due in 2026 using capacity from existing financing lines. Finally, on Slide 16, PMT's total debt-to-equity ratio increased to approximately 10:1 from 9:1 at September 30, as we continue to retain investments from securitizations. The increase in our total debt-to-equity reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We continue to believe that debt to equity, excluding nonrecourse debt, is the best metric for measuring our core leverage, and that ratio remained within our expected range at 6:1. We expect the divergence between these two metrics to continue increasing as our securitization program grows. We'll now open it up for questions.

I would like to remind everyone that we will only take questions related to PennyMac Mortgage Investment Trust or PMT. Your first question comes from Doug Harter from UBS.

Just hoping you could talk about the return expectations for the interest rate strategy. I would expect that prepayments probably stay elevated, kind of how do you offset the decline in that profitability to kind of get back to the target range?

Overall, regarding the MSRs, a limited portion is responsive to higher interest rates. It really involves both expected growth in recapture from PMT's recapture provider, PFSI, and the anticipated dilution from prepayments throughout the year due to their share of the portfolio. We are adding at a slower rate, and the overall portion of the portfolio is not expanding quickly. It's important to view the MSRs within the broader context of our entire interest rate sensitive strategy, which, as shown on Page 10 of the earnings presentation, maintains a 12.5% annualized ROE. There is a complementary relationship between the MSRs and the associated interest rate exposure they have in contrast to agency MBS, which have generally seen elevated returns on equity in recent quarters.

Your next question is from Bose George with KBW.

Can you talk about competition in the non-agency space on the production side?

Yes, it's pretty much what you'd expect. On the jumbo side, we are seeing strong activity from Rocket Mortgage in retail and EWM in the broker sector. We have been outperforming as a percentage of our originations, which reflects the dynamic way we manage our secondary marketing efforts. Currently, we do not notice much competition from banks. The third name worth mentioning is Redwood Trust, as they do engage in the jumbo market occasionally. However, primarily, those are the firms we consider our competition.

Great. That's helpful. And then in terms of the equity allocation to the non-agency securitization, where do you see that trending, say, by year-end?

Overall, if you look at the run rate, our weighted average allocation indicates the average for the next 12 months. We estimate it at 9% on average for the upcoming months. As we approach the end of the year, it is expected to be a few percentage points higher, likely reaching around 11% or 12% by year-end.

Bose, what I think in doing non-agency securitizations, one of the things that we balance, of course, we like the returns on the investment, but there's an aggregation risk in terms of holding the loans until securitization. And so we're trying to manage that risk in keeping in mind, especially on jumbo securitization just kind of trying to dimension and monitoring what that risk is. So that's why we've grown our production and securitizations in a meaningful way. But I do think that, that's something that we're going to look to find exciting and alternative solutions to do more while not taking on the incremental risk of growing an aggregation pipeline to $2 billion, $3 billion.

Our next question comes from Jason Weaver with Jones Research.

Can you provide insights on the financing costs you have observed recently for investor jumbo and HC eligible deals? Additionally, are there any legacy deals you might consider calling and resecuritizing in the near term?

I think that regarding financing, it's a strong competitive market. We have benefited from this situation. In Q4, we introduced a facility that does not include a mark-to-market feature, which is important for managing risk. During COVID, we used a similar structure that eliminated mark-to-market risk. However, this new setup does not completely remove mark-to-market risk; significant events could still pose challenges. There’s a trade-off between cost and risk. That said, the market is quite competitive, and there is substantial capital available to finance these assets.

All right. And then so under some of these affordability-driven initiatives that the administration is floating, can you talk a bit about the origination capacity of the correspondent chattel, which is PFSI inclusive and it's bill to expand under what could be greater demand going forward?

I think there is a significant amount of capacity in the system to handle any programs introduced by the GSEs. If a streamlined refinance program is launched in the conventional space, it will likely create a surge in demand for refinances that may exceed capacity. However, this situation will resolve itself over time. One observation is that there is actually more excess capacity in the sector than I initially anticipated. This is mainly due to discussions about falling rates over the past year, which have allowed people to increase their capacity. If a substantial program is implemented and refinances rise from 20% to 50% of the market, that will alter the current situation. Nonetheless, I believe that our industry and our correspondents are well-prepared for a market around $2.4 trillion to $2.5 trillion. Anything beyond that would necessitate additional capacity.

Our next question comes from Eric Hagen with BTIG.

I think I just have one. I can't recall if PMT has ever sold any MSRs, but would you ever consider that as an option either opportunistically or for risk management purposes to delever the balance sheet?

We would consider it. I think that one of the things that I'm really pleased about in 2025, and this is the theme throughout the year, we've been much more agile and dynamic in terms of managing the portfolio. And so as we've been fortunate enough to raise capital to focus on being able to pay off the convert and do other things. As we find ourselves in a position where we can see higher returning assets versus MSRs, of course, we would look at it. And as evidenced by the MSR trade that we did out of PFSI, this management team knows how to sell and close and transfer servicing. And so that's something that we would clearly contemplate.

Our next question comes from Trevor Cranston with Citizens JMP.

Can you guys talk about what you've seen in terms of spread behavior in the non-agency market in January, given the significant amount of tightening that's happened within the agency space? And if that's flowed through to any meaningful change in securitization execution?

Overall, I believe that in the non-agency market, spreads have remained stable or tightened alongside agency spreads. We have observed strong demand for securitizations in January, which has supported our ongoing securitization efforts. In January, we completed one deal of each type we have been issuing: non-owner-occupied, jumbo, and agency-eligible owner-occupied, all of which saw robust demand. Therefore, we continue to find the market favorable for our securitization activities.

Got it. Okay. Looking at the prospective return slide, the returns on the CRT position appear quite competitive with what you are anticipating on the new subordinate retention. Do you expect to find more opportunities to sell within the CRT book, or do you think it has reached a point where it is likely to enter a more stable runoff mode?

We sold our CRT holdings, which were not tied to PMT collateral, that we acquired when spreads were wider. As spreads tightened significantly, the returns fell below our threshold, prompting us to sell our opportunistic position in third-party CRTs. We have kept all of our credit risk transfer related to our lender credit risk share directly from PMT's production and expect to continue doing so. Some of these have been on our books for quite a while, and we recently had a deal with a 10-year maturity mature late last year, with a few smaller deals maturing soon. Given the attractive return profile and the high quality of the underlying loans, which have seen significant home price appreciation, low mark-to-market LTVs, high FICOs, and low expected future credit losses, we plan to maintain this position moving forward.

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

Thank you all for joining us. We are very proud of the transformation PMT has undergone this year and look forward to all the opportunities ahead in 2026. If you have any additional questions, please reach out to our Investor Relations team, and thank you very much for the time and thoughtful questions.

The call has ended. You may now disconnect.