PennyMac Mortgage Investment Trust Q1 FY2026 Earnings Call

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's First Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information 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. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. Starting on Slide 3. PMT's first quarter net income was $14 million or $0.16 per diluted common share, representing a 4% annualized return on common equity. These results were impacted by a lower contribution from our interest rate sensitive strategies primarily due to a decrease in servicing fees as a result of seasonality and a larger-than-expected MSR runoff related to higher note rate loans. These impacts were partially offset by improved results in our aggregation and securitization segment. PMT paid a quarterly dividend of $0.40 per share and book value per share on March 31 was $14.98, down 2% from the end of the prior quarter. Turning to Slide 5. I would like to note we have renamed what was previously the Correspondent Production segment to the aggregation and securitization segment. We believe this name more accurately captures the breadth of PMT's participation in the mortgage ecosystem, specifically our focus on aggregating high-quality loans for execution in the secondary market to drive organic asset creation. In total, during the first quarter, PMT purchased $4.3 billion in UPB of loans from PFSI. $2.8 billion in UPB was through its correspondent purchase agreement with PFSI, for which PMT pays fulfillment fees. The remaining $1.5 billion represented loan sales from PFSI to PMT outside of their loan purchase agreement where PMT's private label securitization platform provided optimal secondary market execution for PFSI. Slide 6 highlights the continued success of our organic investment creation engine. Similar to last quarter, we completed 8 private label securitizations totaling $2.8 billion in UPB. This activity resulted in the retention of $190 million of new subordinate bond investments in the credit-sensitive strategies and $12 million of new senior bond investments in the interest rate-sensitive strategies. We also generated $40 million of new MSR investments. Our momentum has continued after quarter end, with 2 additional securitizations completed and another 1 priced totaling $1.1 billion in UPB, and we remain on pace to complete approximately 30 securitizations in 2026, which we expect will build a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On Slide 7, we provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of subordinate bonds within our credit-sensitive strategies totaled $744 million. 66% of this portfolio is comprised of bonds from nonowner-occupied loan securitizations. 20% is comprised of bonds from general loan securitization with the remainder primarily from agency eligible owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO origination of 774, a weighted average LTV at origination of 72 and negligible delinquencies. Within our interest rate-sensitive strategies, as of quarter end, we held $94 million in fair value of senior and mezzanine bonds. These investments are diversified across our jumbo non-owner occupied and agency eligible owner-occupied loan securitizations. And similar to our credit-sensitive bonds, these investments are backed by high-quality collateral with weighted average original FICO scores in the 770 range and original loan-to-value ratios in the low 70s. This consistent credit quality across these organically created assets underscores our ability to produce attractive, high-yielding investments. On Slide 8, approximately 60% of PMT's shareholders' equity remains deployed to long-standing investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for nearly half of shareholders' equity, providing stable cash flows from the portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments represent 12% of shareholders' equity and consists of seasoned loans with a weighted average current LTV of 46%. Turning to Slide 9, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.31 per quarter for the next year. And focusing on the interest rate-sensitive strategies, increased amortization on higher coupon loans as well as reduced expectations for declines in short-term interest rates, which drive financing costs have lowered expected returns on MSRs in the near term. As is our long-standing practice, we continue to actively evaluate our overall equity allocation and investment opportunities to refine and optimize our returns on a go-forward basis. We are working diligently to reposition PMT to capture the opportunities more aligned to our long-term return hurdles. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market. By leveraging our unique ability to create credit-sensitive, high-quality assets, and drive our overall returns higher through disciplined capital allocation, I remain confident in our strategy to support our dividend and create long-term value for our shareholders. Now I'll turn it over to Dan to review the first quarter financial performance.

Thank you, David. Net income to common shareholders was $14 million or $0.16 per diluted common share in the first quarter or a 4% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $16 million to pretax income, generating an annualized return on equity of 17%. Gains from organically created CRT investments were $10 million, which included $7 million of realized gains and carry and $3 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $6 million, $2 million of which were market-driven value gains. Interest rate-sensitive strategies contributed pretax income of $8 million for an annualized ROE of 3%. Income excluding market-driven value changes for the segment was $11 million, down from $21 million in the prior quarter, impacted by increased prepayment speeds during the quarter, particularly on higher note rate MSRs, which drove higher runoff of our MSR assets, as well as lower servicing fees from seasonality and lower placement fees on custodial balances as a result of lower short-term interest rates. Regarding market-driven value changes, our hedging activities during the quarter yielded a small net decline as the $40 million MSR fair value increase was more than offset by $46 million of net declines in fair value of MBS and interest rate hedges, including the related tax expense. Additionally, during the quarter, we sold $477 million of agency fixed rate MBS to capitalize on intra-quarter spread tightening, resulting from the GSE MBS purchase announcement, and we redeployed the capital into retained investments from our private label securitizations. The aggregation and securitization segment reported pretax income of $16 million compared to a pretax loss of $1 million in the prior quarter. The prior quarter amount was primarily driven by spread widening on jumbo loans during the aggregation period and lower overall margins. In total, PMT reported $28 million of net income across strategies, excluding market-driven value changes, up from $21 million in the prior quarter, primarily due to an increased contribution from the aggregation and securitization segment. I want to address our dividend in the context of our current results and the updated run rate return potential. While projections for income, excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend of $0.40 per share, which is supported by our taxable income and which we expect to be sufficient to fully cover the dividend at its current level. Turning to Slide 13. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we redeemed $345 million of exchangeable senior notes originally due in March 2026 using capacity from existing financing lines. And finally, on Slide 14, we continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage and that ratio declined to 5.6x at quarter end from 6x at the prior quarter end within our expected range. PMT's total debt to equity increased to approximately 11:1 from 10:1 at December 31 as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio 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 expect the divergence between these 2 metrics to continue increasing as our securitization program grows. We'll now open it up for questions. Operator?

Operator provided instructions for participants to enter the queue to ask questions. And our first question comes from the line of Trevor Cranston with Citizens JMP.

Question related to your comments on Slide 9 about actively evaluating the asset allocation of the company and some new investment opportunities. Can you elaborate on what you guys are looking at in terms of kind of new investments if that includes things like non-QM or home equity. And also was curious if sales of maybe some lower returning assets are part of the valuation that's ongoing?

Well, I think it's all of the above. First of all, if you look at Slide 9 and the annualized return on equity, you can see which sectors are not achieving that minimum required return of roughly 13 to 14 percent. That shows the sector underdelivering is the net interest rate-sensitive strategies, particularly MSRs. As we look across our MSR portfolio, some parts clearly have real value and market demand, while other parts have value but less demand. We're strategically evaluating the MSR portfolio to potentially reduce the weighted average equity allocated to that strategy and shift more toward credit-sensitive strategies. Regarding credit-sensitive strategies, there are opportunities to do additional securitizations in non-owner-occupied loans, agency-eligible loans, and even jumbo loans. Given what we're seeing in non-QM originations — both in correspondent channels and at PFSI's broker division — the ability to aggregate loans for securitization is clear, and I wouldn't be surprised to see a non-QM securitization over the next year. There are other assets in the marketplace that can produce investments meeting our return targets, and as we've done before, we're evaluating where we can recycle capital out of lower-returning assets and into higher-returning ones.

And your next question comes from Bose George with KBW.

So first, just the change in the ROE expectation that you gave for the $0.31 down from $0.40, it looks like it's mainly on the Agency MBS, but can you just walk through the drivers of that change.

Really, the bigger driver of those is the MSRs, where the return fell a few percentage points and the weighted-average equity allocated there represents a larger proportion. Agency MBS also declined. That decline was related to changes in short-term rate expectations from last quarter to this quarter: there had been a sharper decline previously, which implied greater expected carry from agency MBS in the prior run-rate scenario. The larger impact, however, is tied to prepayment speeds and the short- to medium-term expectations we see on the MSRs.

And your next question comes from Jason Weaver with Jones Trading.

In your prepared remarks, you mentioned the sale of roughly $0.5 billion of MBS on tightening to redeploy towards retained securitization, which looks like a material rotation in the interest rate-sensitive book. All else equal, is this a sort of glide path we should think about for the remainder of 2026? Or was this more of a tactical rotation?

I think that was really more opportunistic or tactical. We wouldn't necessarily expect to continue to wind down that portfolio, especially, although we will adjust as we're looking at rotating out of certain portions of the portfolio. But given the returns that we expect from the Agency MBS portfolio and what we have here overall, we wouldn't expect to drawdown necessarily further on the MBS portfolio, but it's something that we'll continuously evaluate based on where spreads are in the market.

Got it. And I think you redeemed about $350 million of exchangeable senior notes from the existing financing book. What is the unsecured corporate debt stack look for the next 24 months, if you can just guess. And are you targeting any sort of opportunistic refinancing or extension given current spreads?

So we issued about $150 million of additional convertible debt towards the end of Q4 last year. We additionally in 2025 issued a few unsecured baby bonds. That was effectively a pre-refinancing of the convertible debt that was retired in Q1 of this year. So we don't have a need to necessarily raise additional unsecured debt. It is something that we will continue to look at and see if there are opportunities. but no immediate plans necessarily, but it's something that we will be opportunistic with to the extent that we see opportunities.

Operator provided instructions for participants to enter the queue to ask questions. Your next question comes from the line of Doug Harter with BTIG.

As you think about the opportunity in the non-agency securitization, do you view it as more opportunity-limited today or more capital-constrained, and as you think about the ability to continue to scale that business?

I think it's more a capital issue than an opportunity issue. The great story about PMT is the synergistic relationship with PFSI: the ability to source the underlying assets, underwrite and process loans on the front end, and actively select loans for our investments. Whether it's investor or non-owner securitizations where we create subordinate bonds, general loan securitizations, or even agency-eligible loans where we securitize not just for execution but to create investments for PMT, that capability is important. Because of that, the constraint is really capital. That's why we're focused on opportunistically exiting lower-returning assets and likely reinvesting that capital into our credit-sensitive strategies. From the very beginning, the investment thesis for PMT was to be a credit-sensitive strategy vehicle, and that continues to be the guiding force. I think we've done a great job being the preeminent securitizer of these non-agency loans and creating the investments behind them. Their performance has been remarkable. When CRT was discontinued, we figured out how to create a similar investment without that CRT opportunity, and that's how we arrived where we are today. You will continue to see us grow the equity allocation to credit-sensitive strategies over time. I've been pleasantly surprised by how much of our correspondent base is getting into non-QM lending. They recognize the need to expand their product mix, and being the leading correspondent aggregator with more than 700 clients gives us an advantage in delivering meaningful volumes of non-QM correspondent loans. I expect that to grow significantly. As with all non-agency products, you have to be mindful of market disruptions and widening spreads, so initially we're being diligent in selling and forward selling non-QM to lock in margins until we decide to do a securitization. The synergistic relationship with PFSI is valuable here too, because on the broker side we're seeing strong receptivity to non-QM among our broker partners. When we decide to securitize and deploy capital, we'll be able to do so. A portion of the non-QM market is becoming more accepted in the broker and correspondent communities, and it is more aligned with their credit profiles and risk management frameworks than when the concept emerged about ten years ago and was viewed as somewhat below prime. I've been pleasantly surprised by that evolution.

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

Well, I'd like to thank everyone for joining us on our call today. If you have any questions, please don't hesitate to reach out to me or our IR team, Dan and I look forward to speaking to all of you in the near future. Thank you.

This concludes today's call. You may now disconnect.