Q2 2023 PennyMac Mortgage Investment Trust Earnings Call - Q&A

Hey, Noah.

Alright.

Good afternoon, and welcome to opinion back mortgage investment trusts second quarter 2023 live earnings Q&A session.

Additional earnings materials are available on P. Pneumatic mortgage investment trusts website at PMT Dot <unk> Dot com.

Before we begin let me remind you that this Q&A session may contain forward looking statements that are subject to certain risks identified on slide two of the earnings presentation that could cause the company's actual results to differ materially.

I would like to remind everyone. We will only take questions related to opinion make mortgage investment trust. Our BMT. The replay of the live Q&A session for Pennymac financial services incorporated our P. F. S. I will be available shortly on P. F S adopting black dot com.

He also asks that you. Please keep your questions limited to one preliminary question and one follow up question as we'd like to ensure we can answer as many questions as possible.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again is star one.

Now I'd like to introduce David Spector, Pennymac mortgage investment Trust's, Chairman and Chief Executive Officer, and Dan Berardi, Pennymac mortgage investment Trust's Chief Financial Officer. Please go ahead.

Thank you operator, and welcome everybody to Pennymac mortgage investment Trust first slide earnings Q&A session.

As you all know historically, we've not done a live earnings call.

But we believe strongly in the continued evolution of our strong and accessible investor relations process.

Now is an appropriate time to introduce the element into our earnings process.

I believe these Q&A sessions will give stakeholders increased transparency into our business in a timely manner.

Although we do see a live call you can rest assured that we will maintain our ongoing commitment to investors and analysts via conferences non deal Roadshows phone calls and other industry events.

Now, we'd like to begin taking questions operator.

As a reminder, if you would like to ask a question simply press star followed by the number one on your telephone keypad. We will now take our first question from the line of Kevin Barker with Piper Jaffray.

I'd like to thanks.

Thanks for doing this call really appreciate it that's really helpful. Also what's your thinking a little bit on the corresponding production.

Clients significantly here I know you switched strategies last year.

And how you are splitting that between Pennymac financial and PMT could.

Could you just.

I'll talk about the reasoning for this significant drop and if you expect to.

Keep that production fairly low on a go forward basis.

Yes, so look I think that Youre right, Kevin there's a lot that went into the correspondent production story for the quarter.

The big one as you pointed out was the sale increased sale conventional loans from PBC to PFS.

And that was it was 38% of the total conventional production first quarter jumping all the way to 70% in the third quarter.

I think thats.

At least for this quarter I would expect similar levels.

And I would suspect it will stay that way for at least a few quarters after depending on.

The capital position of P&C, and if it raises more capital.

Look at the capital allocation decision for PMT.

We were very heavily weighted to MSR preliminary interest rate strategies, and we decided that we wanted to opportunistically deploy capital into credit investments that came up in the market to bring that more in line.

And sorry.

Think that.

We did a great job of getting on that.

Initiative and I think we've.

We've opportunistically added to the credit investment strategies on the.

The margin side look I think in PMC its an interesting story for this quarter.

I think mark I know margins would've been higher PMT, not seen a $45 million impact on profitability from unannounced GSE pricing changes in these pricing changes.

PMC.

And is this an unfortunate way and the fact that it had inventory that is debt on its balance sheet at the end of the first quarter, we sold less loans to PFS side versus in the in the second quarter. So I think we saw that and as we and in addition, we saw some other changes that.

The GSC is presented to us about any pipeline protection or inventory protection. So all that added up to the $45 million.

We've made changes to our pricing methodology to two to risk manage that.

But I think that that's the that's the margin story I think that as it pertains.

To the P&C correspondent business and look where we're in a really strong competitive position in correspondent I think it speaks to the synergistic relationship between <unk> and <unk> <unk>, who wants to continue to grow its servicing portfolio and has the capital to do so can step in.

And fill the void with PMT once once to get better balance between its credit sensitive strategies and interest rate sensitive strategies.

And then from a from a customer standpoint, they continue to see themselves as selling.

The loan to the same counterparty and so theyre not theyre not subjected to any of the any of the noise. After the fact that arises award the long ago. So I'd say I'd expect it to be.

I expect the third quarter to be similar to the second quarter as I said.

But I don't see and.

And I think.

That's going to be the case.

One other thing that I'd add to that because we did buy a small bulk package of msr's during the quarter and really the differentiation there is that PMT.

In terms of the servicing would prefer stable cash flows through.

Through the life.

With really little refinance.

Variability in refinance potential refinance expectation.

And.

That is the character of the servicing portfolio that we bought for for PMT, obviously through correspondingly our purchasing loans that are at prevailing rates.

So.

That's why we are selling.

The bulk of that through or increase.

An increasing portion through the <unk>.

Generally.

As stated that their their objective is to bring onboard at those higher rates.

First of all package at lower rates in in PMT, which is not generally available through correspond to that.

Okay, and then switching gears just on capital.

Leverage is running a little bit higher I guess, the last few quarters.

So it came down this quarter, which is good to see.

You know relative to what we saw in.

Pre pandemic.

Yet you're you're buying back stock, which is supporting book value as well.

Talk about how you way your leverage relative to buybacks and how youre thinking about it just broadly given the framework of different assets that are on the balance sheet today versus what it's been in the past.

Okay.

So.

In terms of the Leverages you as you mentioned came down pretty significantly quarter over quarter a portion.

A meaningful driver of that was the reduction in the inventory that we were holding on balance sheet for PMT for the correspondent business.

Our leverage has increased since.

The pre the pre Covid era, some of that is around our shifts toward the interest rate sensitive strategies. So as we have.

Moved more toward that interest rate sensitive strategies, which is primarily a peering between D. The MSR.

And Hey agency mortgage backed securities.

The growing size of the.

MSR has.

Necessitated an increased investment into the agency mortgage backed securities those agency mortgage backed securities generally come at.

Hi.

They're all leverage ratio and so that is what is sort of driven up.

The overall leverage ratio over time to the extent that we see that allocation declining.

We'd expect the leverage ratio.

And the a reallocation toward credit sensitive strategies, we would expect that over time to result.

And a decline in be.

And the overall leverage ratio on the balance sheet with respect to the share repurchases. As you noted that would also serve to increase the leverage ratio.

Yeah.

<unk>.

I think our stance towards the.

Share repurchases at this point is really more focused around when we see a significant deviation.

The share price to book value.

See you know real potential for accretion there, we obviously saw some of that in the first quarter.

I think there is less opportunity for that today, but it is something.

As he mentioned that we sort of way when we're looking at the leverage profile versus.

The leverage profile versus the potential for return of accretion on the.

On the share repurchases.

<unk>.

<unk> balance out those those considerations.

Okay.

Thank you for taking my questions.

Kevin the one thing I'd add to that also as we had really good.

I would say success in terming out the leverage in the second quarter. So we.

We closed the CMT terminal deal.

That doesn't contain margin call provisions.

We extended I know, we're extending the CMT term notes that were due in may of 2023.

We issued a five year.

The term loan secured by Fannie MSR so.

I would say that it's the type of leverage as the type of debt that we have that also I look at and I think given given the fact that were terming out the debt as well.

Something that we made really theyre willing to team made really good progress on.

In the second quarter.

Yeah. Thank you David Thank you Dan.

Thanks, Kevin.

Your next question comes from the line of Bose George with <unk>.

Hey, guys. Good afternoon once again.

Actually I wanted to just ask about the run rate potential Roe.

Being lower this quarter versus last quarter, and then it looks like a big part of that was the MSR expectation coming down so just curious what drove that.

Sure so looking quarter over quarter really in the run rates really looking at our near term expectations for returns.

Really a lot of that is driven by.

Our expectation for <unk>.

Short rates over the next several quarters. So if you go back to the beginning of.

Q2, or the end of Q1 on the last time, we presented the run rate really much more of an expectation that short rates would move down in the relatively near term, which would bring down some of the funding cost on our interest rate sensitive strategies.

Which are generally has have debt that's tied to short rates to floating rate debt or two short term repo in the case of the agency MBS.

With the expectation that that will remain higher and then on the agency.

Yes.

With an inverted curve and with spreads at the levels that they are.

It's constrained our expectation over over the near term.

Based on where we are.

Roughly today or.

A few.

Last week.

Our expectation for what we see as the the returns.

Over the next the next few periods given the effectively the spread between our funding cost.

This is expected to be higher short term rates and the <unk>.

Yield on our long term.

Long term assets on the spreads that are commensurate there.

If we do see changes in that if we see a.

Really.

Greater steepening of the yield curve or becoming less inverted or spreads widen out somewhat that could.

That could meaningfully improve our expectations for the returns go forward on the on the interest rate sensitive strategies.

Okay. Thanks, and then actually the so the run rate.

EPS is obviously I think it was 30 cents of it but a bit below the dividend. So just curious if that's something.

If you look at it or is this is sort of whatever transitory and so if you kind of wait to see how things kind of shape going forward.

Yes, so look we.

Been pretty publicly saying that we've always tried to keep the dividend tied to GAAP earnings at the same time, we want to make it we try to keep it consistent and we try not to be reactive on a quarter by quarter basis.

So.

We feel that it's important for for those to understand where we see the run rate at the moment, we're going to we're going to in a way.

Eight and see where we are at the end of next quarter.

But I.

I think that having having a tied to GAAP earnings of course always having the cash to pay it.

And we wanted to we want to make it predictable to the extent, we can and so I think that the.

Yes.

For us it's just a it's just I think.

The way to go.

Q with other shareholders know that.

This is where we're at and we'll address it.

When we come back around next quarter.

And we'll decide what we want to do.

So okay makes sense great. Thanks.

Okay.

Your next question comes from the line of Matthew Howlett with B Riley Securities.

Oh, Hey, guys. Thanks for taking the question thanks for the call.

Hey, David just to follow on on the on the core EPS dividend question.

Historically, if you firstly there is a caveat the tassel EPS runs ahead of the courts.

Because that's still the case you could you disclose sort of where where taxable income is growing with TNT.

Yes, so the taxable income given that.

So we've seen this increase in the in our interest rate sensitive strategies and a lot of the MSR.

It.

<unk> is based in the Trs.

Taxable income in the REIT.

Although we had a bit of a timing mismatch that we disclosed last year, where that was ahead.

It was not as not necessarily running ahead of that.

GAAP income this quarter to date so.

Davis to David's point since a lot of the business is in the in the Trs generally we look at the GAAP EPS as sort of the.

And our expectations there over time as you know the.

Drive unless were.

Otherwise.

Otherwise.

Impelled.

To look at it differently via the view of the taxable income, but that's not necessarily.

Constraining factor.

In this case.

Currently.

Got you and then.

On the subject of gasoline income and earnings power going forward, you, obviously made a lot of credit investments.

In the quarter almost $100 million in the CRT in the jumbo origination what spreads are you seeing there I'm, assuming these tightened towards the quarter and then what's the outlook on organic.

<unk>.

CRT or even in jumbo securitization program that you've done or you've done home equity in the past maybe close second just curious on your organic outlook for credit production.

Yes look so.

Matt I think that.

We had really strong returns in the credit sensitive strategies and I think that speaks to.

The credit spread tightening that.

We saw it take take place I think that we have been.

Pretty active this year in opportunistically buying credit sensitive assets, we've deployed greater than $100 million.

Capital.

<unk> credit sensitive investments and look we've seen.

<unk> come in and and so that's worked out well for US we're always looking we're always looking and evaluating opportunities in the market.

And will you know when we're going to continue to do so I think on the CRT front look I think that.

The the return of front end lender risk is not in the in the short in the short term or medium term.

I will tell you that we continue to talk to the G. S season, FHFA about it it's an interesting issue and the fact that I think that given the size of the mortgage market.

The gse's need as much collateral as they can to provide the critical mass that they need.

In issuing stacker in cats.

And then.

As you may or May not recall there was there was some difference of opinion on the value.

Of the front end credit risk.

Nature that we took on lender credit risk share versus.

They let loans season for nine months before the issuance Zachary has.

I think we put on a forward trade and there is a value there. So theres. Some theres just some differences in how we may perceive value.

Having said that we know one thing for sure when it comes to the GSC and FHFA and that there's always change.

So we'll continue to have the discussions and I think given given our correspondent.

Presence and market share dominance I think that we we believe the CRT comes back we would be able to pivot quickly to be able to capitalize on that.

Given given our.

Our share in correspondent.

As it pertains to other opportunities look I think that you know as.

They see the progress that we're making in PFS psi in our closed end seconds.

You can see a path to being so those being sold to PMT to securitize them and retain.

The subordinate bonds.

So I think that that's something we're keeping an eye on.

As I mentioned earlier that the.

Bank regs that came out.

Give me give me a kind of a kind.

Have a bullish view on what that can mean for securitization and I think with that that will mean greater opportunity in and buying jumbos and securitizing jumbos and look we've seen some of the banks that have been either seized or pull back.

We're pretty we're pretty strong in jumbo loan lending and so we're.

As we've always done we'll keep a close watch on that.

We're not going to go down in credit.

Yeah, we're not going to get into you know non QM.

Or are you now kind of kind of more of the cusp here part of the mortgage space, but there is I think I think that where we're looking for we'll continue to look for the credit investments.

To be able to kind of take advantage of the core skills with the management team has led by Wil and <unk>.

<unk> and our capital markets group.

I think that I think that we're we're in a really good place in terms of kind of getting more balanced between the credit sensitive strategies and the interest rate sensitive strategies.

I appreciate it I was going to ask what the new bank rules and it sounds like you guys are well positioned for that really appreciate it. Thanks David.

Thanks, Matt.

Okay.

Your next question comes from the line of Doug Harter with Credit Suisse.

Oh, Thanks, just touching on that last comment about balance.

Yeah.

As you look forward what is the right balance you know you know as you think about it and now at what point might you kind of.

We're retaining more of the MSR.

Creation.

Hum.

So you kind of think about finding that balance.

Yes look I think it always like.

From my perspective, it always starts out with return, Okay, where is the where's the highest return and thats always going to be the driving factor.

And how we manage PMT.

I think that return.

There's a day one returns there's a range of outcomes return.

You think about it.

I think that you know.

I know that when we were approaching 60%.

On the interest rate sensitive strategies. It felt really felt really kind of kind of at a level, where we need to get it more inbounds, we brought that down into the low <unk>.

This quarter I think that it's something that as it stands now I think the returns that we're getting on credit risk.

On the credit sensitive strategies meet our hurdle rate.

And the re and I think that.

As exhibited by the fact, we bought a small MSR portfolio. If we see MSR is that meet our return targets.

We're absolutely going to invest in those.

I think on the correspondent business. It's it's it's tough its tough to get and I think I think we're seeing conventional roadways in them.

And kind of the new issue <unk> and kind of the mid mid mid single digits.

Maybe a smidge higher.

But.

I think you put leverage on that and I think that.

It does it comes inside of the credit sensitive our returns.

So I think it's something that it's it's it's not a hard and fast rule.

Know that we were we were much lower than 50% just a few years back but we're.

Taken out on a quarter by quarter basis to try to get it more in line.

I think you know.

Overall.

Generally speaking, yes, we'd like we'd like them to be between credit sensitive and interest rate sensitive over time more even certainly in the past credit sensitive has been a greater proportion of Pmt's investment book.

But.

As David said.

We are also mindful of the relative returns and if we see an opportunity in interest rate sensitive, it's not going to preclude us from from <unk>.

Taking advantage of that.

Okay.

And then I guess as you look at the macro landscape yeah, there there seem to be a fair amount of loan.

Well lower coupon.

Discount loans, there were probably some probably hiring critical already or is that from banks is that something that you are split seriously considered for PMT.

It would be I think thats, because I think about the servicing that we'd want to bring into PMC I think that's more.

Suited for PMT.

It's got a it's got to have a longer life.

More predictable.

The pace of cash flows.

Not as reliant on recapture.

As kind of occurrence note rates.

So it's a much more pure investment from from that angle.

We're not we're seeing we're seeing we're seeing some packages and we bought one of those and it's something that.

We keep our eye out for for PMT as the convert.

Conventional low rates servicing.

It's kind of been there and kind of in their wheelhouse and so I think that's I think you've kind of hit it on what we think is better suited for PMT.

And I guess, what about on the loan side jumbo loans or.

That would be true.

Sure you know that might come out of banks.

But I think I think buying season jumbo loans is not really.

An area, we've got PMT, we're going to look at.

We will keep this guys busy looking at things, but I just think that.

Right now there are there's still a pretty good bank bid for that.

Thank you.

We're seeing we're.

We're seeing private equity participation in that space as well.

I don't I don't I don't think that season jumbo loans that would be an area that.

So you'll see us overly active in.

Great. Thank you.

Your next question comes from the line of Eric Hagen with <unk>.

Hello again.

A couple of questions here for the CRT portfolio. So much of that risk has been delivered at this point like is there a way to re lever that collateral in between the debt rolling over coming due.

And then second question here I mean, how much more liquidity.

Our capital do you think you'd need to scale up the servicing portfolio from here.

You layer in the MBS in any rate hedges on top of that would you say that there is like a rule of thumb for every $1 billion of incremental servicing we're using.

X amount of capital or liquidity to support that growth.

Sure so with respect to the CRT.

We've generally speaking.

And I guess in a in a global sense. It has been de Levered right. So looking through to the to the homeowner where you've got see LTV is on a lot of it.

Ltvs on a lot of the underlying loans have gone down pretty substantially you've got 50% LTV and so forth with respect to the valley.

The value of the assets that we hold the credit.

Credit risk pieces that we hold.

We're sort of able to re lever those by issuing notes we did some in this past quarter.

There are very old deals. We have you know on repurchase agreements that are based on the value of the pieces that we hold so.

I don't think that those are necessarily bad.

You know tremendous we de Levered from an investment point of view, although you know the way we think about it is that the risk has been substantially.

Substantially decrease versus when we originally entered into the contracts.

With respect to.

With respect to investments in MSR.

Roughly speaking.

If you look at the leverage that we're able to apply at least on a marginal basis in terms of the MSR.

Really at about a call it a two to one two to one basis.

That probably takes into that roughly takes into account.

On the value of the MSR so to your point, if you're buying one.

With MSR.

Call you know.

Call it a depend.

It depends on the servicing strip depends on.

The exact type of the MSR, but.

For.

For round numbers call it.

A point and a half so.

Overall.

On a on a $1 billion.

Roughly.

Hum.

15 15.

<unk> $15 million of.

Capital.

Gross and then two thirds of that comes down to a call it a $5 million equity investment not wood.

Roughly also account for any margin call reserves or.

And the incremental amount of MBS that would be required to hedge that so I think that's the rough.

The rough estimate there.

Yeah. That's helpful. Thank you guys very much.

Sure.

We have no further questions at this time I will now turn it back to Mr sector for closing remarks.

Thank you operator, and I'd like to thank all of you for participating in our.

First of all Ive earnings call and it's been a it's been.

Good two calls here, we've had today for both companies and if you have any questions. We are here for you and I look forward to speaking with all of you.

In the near future. Thanks again, everybody.

Yeah.

This concludes today's conference call you may now disconnect.

Yeah.

So to speaking with all of you.

In the near future.