Earnings Call Transcript - PMT Q2 2025

Operator, Operator

Good afternoon, everyone, and welcome to PennyMac Mortgage Investment Trust Second Quarter 2025 Earnings Call. Additional earnings 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. Now I'd like 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.

David Spector, CEO

Thank you, operator. For the second quarter, PMT produced a net loss to common shareholders of $3 million or loss per share of $0.04, as solid levels of income, excluding market-driven value changes, were offset by fair value declines and a $14 million nonrecurring tax adjustment that Dan will discuss later on. PMT declared a second-quarter common dividend of $0.40 per share and book value per share at June 30 was $15, down modestly from March 31. Interest rates were extremely volatile this quarter, with the 10-year treasury yield traversing a range of more than 70 basis points, including intraday moves in 1 week in April alone. This created a challenging environment for our investment strategies. However, our diversified investment portfolio, efficient cost structure, and strong risk management practices enable us to effectively manage through these challenging market conditions. Turning to Slide 5, I want to touch on our synergistic partnership with PFSI and how that provides PMT with unique and proven competitive advantages. 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, our structure allows PMT to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. Third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations, provides PMT with the opportunity to invest in unique organically created investments at attractive risk-adjusted returns. As can be seen on Slide 6, the increasing volume of nonowner-occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment. This growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives. In the second quarter, we successfully completed three securitizations of Agency-eligible investor loans totaling $1.1 billion in UPB, retaining $71 million of new investments. We also completed our first jumbo loan securitization since 2013, with a total UPB of $339 million and retained investments of $82 million. The graphic on the right of the slide highlights our rapid ascent to become a leading issuer of private label securitizations. In recent periods, we've been a top 3 issuer of prime non-Agency MBS. In fact, since the fourth quarter of 2024, we have successfully completed nine securitizations totaling $3.2 billion in UPB with new retained investments of $300 million. Targeted returns on equity for these investments are expected to be in the low to mid-teens. Looking ahead, we expect to continue executing one securitization of Agency-eligible nonowner-occupied loans per month and one jumbo loan securitization per quarter. This consistent cadence of securitizations underscores our commitment to leveraging our organic investment creation abilities and remaining a leader in the private label securitization market. Turning to Slide 7, approximately two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk share transactions we invested in from 2015 to 2020. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 47% of our deployed equity, down from 56% at the high during the end of 2022. The majority of the mortgages underlying these MSRs remain far out of the money with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance. As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time. Furthermore, MSR values continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short-term interest rates. Similarly, PMT's unique credit risk transfer investments representing 16% of shareholders' equity are backed by seasoned loans with strong fundamentals that were originated during periods of low interest rates. Delinquencies have remained low on this portfolio as well. This can be attributed to the overall credit strength of the consumer, combined with the substantial accumulation of home equity in recent years due to continued home price appreciation, as evidenced by the low weighted average current loan-to-value ratio below 50%. We continue to expect that realized losses will be limited and that these core investments will perform well over the foreseeable future. As you can see on Slide 8, a significant portion of PMT's equity is allocated to investments that we have organically created through PennyMac's robust production volumes. This is a key differentiator for PMT. Because we are the producer and servicer of the loans, we have unparalleled insights into their quality and performance. Our position as the producer of the underlying loans is a competitive advantage, providing us with the ability to review and diligence the loans for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we are uniquely positioned to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender credit risk transfer. This deep understanding from origination through servicing allows us to directly influence the ultimate credit outcome, minimizing losses and maximizing returns for our shareholders. In closing, our risk management capabilities and diversified investment strategies, which include seasoned MSR and CRT portfolios, combined with a growing securitization platform built on our unique origination capabilities, positions us exceptionally well to deliver attractive risk-adjusted returns to our shareholders in 2025 and beyond. We remain confident in our ability to successfully navigate a volatile and evolving market by leveraging our competitive advantages. Now I'll turn it over to Dan, who will review the drivers of PMT's second-quarter financial performance and PMT's run rate return potential.

Daniel Perotti, CFO

Thank you, David. PMT reported a net loss to common shareholders of $3 million in the second quarter or negative $0.04 per diluted common share. The Credit Sensitive Strategies contributed $22 million to pretax income. Gains from organically created CRT investments were $17 million, including $9 million primarily consisting of realized gains and carry and $8 million of market-driven value changes from credit spread tightening. CAS and STACR bonds generated gains of $4 million and investments in PMT non-Agency subordinate MBS generated gains of $1 million. The Interest Rate Sensitive Strategies contributed a pretax loss of $5 million. Fair value increases on MSR investments were $23 million. These fair value increases were more than offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and related income tax benefits totaling $45 million. MBS fair value, which includes agency POs and securitized interest-only strips, increased by $12 million. Interest rate hedges decreased by $60 million. In the second quarter, PMT reported an income tax expense of $9 million, driven primarily by a $14 million nonrecurring repricing of deferred tax balances due to state apportionment changes driven by recent legislation. The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from March 31 as fair value increases and newly originated MSR investments were more than offset by runoff. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, and servicing advances outstanding decreased to $70 million from $84 million at March 31. No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $30 billion in the second quarter, up 30% from the prior quarter and consistent with the estimated increase in the size of the overall origination market. Correspondent loans acquired for PMT's account totaled $3 billion, up 11% from the prior quarter. PMT retained 17% total conventional Correspondent Production in the second quarter, down from 21% in the first quarter. Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans are initially acquired by PFSI. However, PMT will retain the right to purchase up to 100% of nongovernment Correspondent Production from PFSI. We expect this percentage to remain between 15% and 25% in the third quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market. PMT also acquired $1 billion in UPB of loans acquired or originated by PFSI for inclusion in private label securitizations, up from $637 million in the prior quarter. Income from PMT's Correspondent Production segment was $14 million, up from the prior quarter, primarily due to gains on nonowner-occupied and jumbo loans due to credit spread tightening. The weighted average fulfillment fee rate was 19 basis points, unchanged from the prior quarter. In total, PMT reported $36 million of net income across its strategies, excluding market-driven value changes and the related impacts, down from $41 million in the prior quarter, driven primarily by increased realization of cash flows due to higher realized and projected prepayment activity. Slide 14 of our earnings presentation outlines the 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 $0.38 per share, up from $0.35 per share in the prior quarter. Overall, we expect increased investment activity in accretive non-Agency subordinate and senior bonds, primarily through organic securitization activity. Additionally, correspondent and aggregation activities have positive momentum, driving improved execution and an overall increase to our Correspondent Production segment's return potential. If the yield curve steepens further, we expect PMT's overall run rate would increase further, driven by higher overall yields in the Interest Rate Sensitive Strategies. Turning to capital. In June, we issued $105 million in unsecured senior notes due in 2030, and we currently expect that the $345 million in exchangeable senior notes due in 2026 will be retired closer to maturity by utilizing capacity from existing financing lines. I want to take a minute to comment on PMT's overall leverage ratio, which has increased in recent quarters. The increase is primarily a reflection of growth in nonrecourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as a financing of the loans rather than retain interest in the securitizations. The source of repayment for this nonrecourse debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We believe that the best metric to measure the leverage of our balance sheet is debt to equity, excluding the nonrecourse debt related to securitizations, which we have shown on Page 15. This metric incorporates our exposure to the investments we are making in subordinate securities in a similar way to what we have seen in prior periods with our CRT investment, which has similar credit exposures to associated loan performance. We expect this divergence between total debt to equity and debt to equity, excluding nonrecourse debt, to increase in future periods as we continue our retention of investments from our securitization program. Excluding nonrecourse debt, our debt-to-equity ratio at June 30 was 5.6x, within the range of our expected and historical levels.

Operator, Operator

I would like to remind everyone we will only take questions related to PennyMac Mortgage Investment Trust, or PMT. We'll take the first question from Doug Harter, UBS.

Douglas Harter, Analyst

Hoping you could talk a little bit more about the non-Agency securitization opportunity. Can you just talk kind of how the returns progressed over the course of the quarter, given the volatility, and how you kind of are positioning the risk of those holdings going forward?

Daniel Perotti, CFO

So overall, the non-Agency subordinate MBS, we obviously, during the quarter had a significant amount of both rate and spread volatility. The non-Agency subordinates are fixed-rate securities. Overall, during the quarter, with respect to credit investments, we did see generally credit spread tightening. You can see the reflection of that on the GSE credit risk transfer. We also saw a fair amount of interest rate volatility. That led to a slight decline in the fair value of the non-Agency subordinate MBS. Income, excluding market-driven value changes, was in line with our expectations of mid-teens returns. As we continue to add our additional subordinate investments as well as non-Agency senior MBS, we expect those to continue to be in the low to mid-teens returns over time. Those are very stable in terms of the returns with respect to reasonable shocks in credit performance as well. We believe that those are very stable and accretive investments for us over time.

Douglas Harter, Analyst

Great. As a follow-up, it seems that the retained interest on the jumbo was a significantly higher percentage compared to the nonowner-occupied. Can you discuss how far up the stack that goes? Was that opportunistic, or is that a trend you expect to see continue on the jumbo side?

Daniel Perotti, CFO

So with respect to that, we did retain a senior mezzanine tranche on the jumbo securitization. As we look on a deal-by-deal basis, we are making the decision based on the amount of capital we have to deploy. The jumbo securitization did occur after we had raised the additional unsecured debt. As we're looking to deploy additional capital, I think, at least over the next few periods, it's likely that we would be retaining a greater proportion of the interest, both in subordinate bonds and the senior mezzanine piece from many of these securitizations, but we do make the decision on a deal-by-deal basis based on the capital that we're looking to deploy.

David Spector, CEO

Look, I think, Doug, the important thing is that the team is dynamically managing the portfolio. So as you raise capital and have capital to deploy, deploying it into the subordinate tranches is a more long-term investment in nature, but there are other tranches you can invest in at an appropriate return. As we're doing more securitizations, if we need to recycle the capital, we can do so.

Operator, Operator

We'll take the next question from Jason Weaver, JonesTrading.

Jason Weaver, Analyst

First of all, David, I think we've talked about this before, but maybe just an update, if you have any insights under possible GSE privatization for the future of credit risk transfer.

David Spector, CEO

Yes. Look, I think that right now, we're not hearing much out of the folks in D.C. on anything GSE reform related. The GSEs have been active in their credit risk transfer program using the reinsurance vehicles. In terms of the return to lender CRT, like we were able to do from 2015 to 2020, I don't see that really on the horizon. This is what's so exciting about our non-Agency securitization program, is the fact that we can create very comparable investments, albeit not as rapidly or not as luminously, but we can create a similar type investment by doing these securitizations. That's what the team has done a really great job at, being able to issue the securitizations really every 3 weeks on a relative basis. I think that's something that's really exciting. We can take the product that executes better outside the GSEs and create comparable securitizations. Obviously, it allows us also to get expertise and real muscle memory if we need to do more. If we want to issue more or if there's other agency-eligible product that executes better outside the GSEs, that's where PMT is in a really advantageous state, having this credit investment thesis that it can continue to grow credit investments at mid-teen returns, which is something that we want to continue to focus on. We have very good exposure to MSRs and low-rate MSRs, where the range of outcomes is much more limited than current low-rate MSRs. If you combine those with the existing CRT that we have from 2015 to 2020, along with new credit investments, I think you're going to continue to see us climb to consistent mid-teen returns.

Jason Weaver, Analyst

Got you. Just to refresh, were there three securitizations you've completed this quarter? What kind of execution levels were you achieving on your AAAs and what advance rates were you seeing?

David Spector, CEO

I don't want to speak out of school. We're getting spreads are leaning into their tights. I mean we had a really volatile period at the beginning of the quarter, but things quickly snapped back. I don't want to speak out of school. We'll definitely get back to you with more detailed reporting on the embedded leverage. Suffice it to say, it beats Agency execution by a material amount. That was the goal of FHFA and the GSEs was to drive out some of the more nonowner-occupied and second homes into the private label markets. It's done a really nice job revitalizing the private label markets. It's a very active market and has had benefits not just for Agency-eligible production, but you can see in the jumbo loan securitization market, that's become a lot more active. Non-QM is running at about a $75 billion to $80 billion pace this year. It's really the most active, robust private label securitization market I've seen in our 18-plus years here at the company.

Operator, Operator

Next up is Bose George from KBW.

Bose George, Analyst

So on Slide 13, where you have the run rate ROE, it looks like the increase there is really mainly on the rate side. Can you just walk through the drivers of the increase over the last quarter?

Daniel Perotti, CFO

Sure. If you examine what impacts the bottom line, there is a slight increase in the net interest rate sensitivity. This is primarily driven by some additions in the non-Agency sector or an increase in equity allocated to the non-Agency senior in IO MBS. We expect these retained interests from the securitization side over the next year to contribute to this, which should help slightly enhance the net interest rate-sensitive strategies. Additionally, we have seen an increase in ROE from Correspondent Production, with improvements quarter-over-quarter based on our volume and margin outlook, which we anticipate will continue in the upcoming quarters. Moreover, the overall run rate is boosted by further investments in the non-Agency subordinate piece, which also provides returns that help elevate the overall forecast and enhance allocations.

Bose George, Analyst

As you retain more subpieces from the securitizations, the net interest income from that is flowing through the Rate Sensitive line.

Daniel Perotti, CFO

It's both. If we're retaining seniors or senior mezz pieces, it would flow through net Interest Rate Sensitive. For every securitization, we are retaining non-Agency subordinate MBS and that flows through the Credit Sensitive and both of those are having positive contributions to the run rate.

Operator, Operator

Our next question is from Crispin Love, Piper Sandler.

Crispin Love, Analyst

Can you just discuss your thoughts on the sustainability of the $0.40 dividend level here? The operating earnings run rate that you discussed improved quarter-over-quarter but is still slightly below the dividend. You mentioned how you could see that level improve further in the coming quarters. But I am curious about you and the Board's comfortability with the dividend today.

Daniel Perotti, CFO

Thank you, Crispin. We are confident in maintaining the $0.40 dividend level as we anticipate returns over the next four quarters will stabilize around $0.38, which has improved from $0.35. We believe there's potential for this to rise closer to $0.40. Our history demonstrates that we value the stability of the dividend, particularly given the current trajectory of our earnings relative to the expected dividend. At this moment, we feel secure at the $0.40 level. Moreover, as we assess our taxable income generated from our strategies, it is also trending towards supporting the $0.40 level. We expect this taxable income to remain stable. As we increase our investments outside of our taxable REIT subsidiary, particularly in non-Agency subordinate and senior MBS, we further enhance the taxable income that underpins the $0.40 dividend level.

Crispin Love, Analyst

Great. Are you able to provide an update on book value in July to date?

Daniel Perotti, CFO

Overall, book value in July to date is very stable with respect to where we ended the prior quarter.

Operator, Operator

We'll go next to Eric Hagen from BTIG.

Eric Hagen, Analyst

It feels like a lot of attention, a lot more of a concerted effort around finally making reforms to title insurance. We got the new pilots and the GSEs. When we combine that with really strong HPA, I mean, do you see that potentially driving these low coupon borrowers to mobilize or do a cash-out refinance at some point?

David Spector, CEO

I don't. I think that it's going to help on the purchase side, obviously. However, I'm seeing, on the PFSI side, an increasing amount of closed-end seconds coming out of low-interest rate homeowners. Anything we can do to drive down the cost is a good thing. It's going to be about $400 a loan. I'm not expecting to really accelerate the prepayment speeds on the low-interest rate loans.

Operator, Operator

And everyone, at this time, there are no further questions. I would like to turn the conference back to David Spector for closing remarks.

David Spector, CEO

Well, thank you, operator, and thank you, everyone, for joining us today and asking good thoughtful questions. We're here for any follow-up that you may have, so reach out to Isaac and the team. Thanks again for the time, and I look forward to speaking to all of you in the future.

Operator, Operator

And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. We do encourage investors with additional questions to contact our Investor Relations team by e-mail or phone. Thank you.