Q4 2023 PennyMac Mortgage Investment Trust Earnings Call
Operator: 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 two of the earnings presentation that may 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 material. Now, I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust Chief Financial Officer. Thank you, Operator.
Presentation slides that will be referred to in the call are available on opinion Mac mortgage investment Trust's website.
P M T dot dot com before we begin let me remind you that this call will this call may contain forward looking statements that are subject to certain risks identified on slide two of the earnings presentation that may 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 material.
Now I'd like to introduce David Spector, Pennymac mortgage investment Trust's, Chairman and Chief Executive Officer, and Dan Karate Pennymac mortgage investment Trust's Chief Financial Officer.
Thank you operator, good afternoon, and thank you to everyone for participating in our fourth quarter earnings call.
David Spector: Good afternoon, and thank you to everyone for participating in our fourth quarter earnings call. PMT produced very strong results in the fourth quarter, with sizable contributions from the credit-sensitive strategies and its correspondent production business. These results were partially offset by fair value declines in the interest rate sensitive strategy. Net income to common shareholders was $42 million, or diluted earnings per share of 44 cents.
PMT produced very strong results in the fourth quarter with sizable contributions from the credit sensitive strategies and its correspondent production business.
These results were partially offset by fair value declines in the interest rate sensitive strategies.
Net income to common shareholders was $42 million or diluted earnings per share of 44 cents.
David Spector: PMT's annualized return on common equity was 12%, and book value per share increased to $16.13 at December 31st, up from $16.01 at the end of the prior quarter. This strong financial performance marked the culmination of an outstanding year for PMT, demonstrating its resilience in a year of tremendous interest rate volatility and highlighting our management team's unwavering commitment to managing interest rate risk. PMT was profitable every quarter in 2023 with annual income contributions from all three of its investments. Net income attributable to common shareholders for the year was $158 million, or diluted earnings per share of $1.63. Return on common equity was 11%, and book value per share grew 2%, net of $1.60 in common share dividends.
Pmt's annualized return on common equity was 12% and book value per share increased to $16.13 at December 31st.
<unk> from $16.01 at the end of the prior quarter.
This strong financial performance marked the culmination of an outstanding year for PMT.
Demonstrating its resilience in a year of tremendous interest rate volatility and highlighting our management team's unwavering commitment to managing interest rate risk.
PMT was profitable every quarter in 2023 with annual income contributions from all three of its investment strategies there.
Net income attributable to common shareholders for the year was $158 million or diluted earnings per share of $1.63.
Return on common equity was 11% and book value per share grew 2% net of $1 60, and common share dividends.
In 2023, we invested nearly $500 million continue MSR and opportunistic investments, which we believe will perform well over the long term.
David Spector: In 2023, we invested nearly $500 million into new MSR and opportunistic investing, which we believe will perform well over the long term. As we head into 2024, we will remain disciplined in the deployment of capital and continue to look for opportunistic investments across the residential mortgage landscape. The strength of PMT's balance sheet has always been a key differentiator among mortgage REITs, and I'm very proud of the work our management team has accomplished in 2023.
As we head into 2024, we will remain disciplined in the deployment of capital and continue to look for opportunistic investments across the residential mortgage landscape.
The strength of Pmt's balance sheet has always been a key differentiator among mortgage Reits and I'm very proud of the work our management team has accomplished in 2023.
David Spector: Not only did we return approximately $170 million to shareholders through common share cash dividends and share repurchases, but we further strengthened the balance sheet with new long-term debt issuances of $659 million and redemptions of $450 million in debt with upcoming maturity. As you can see on slide five of our fourth quarter presentation, the origination market is expected to have dropped in 2023 as mortgage rates have declined from their recent high, and anticipated future rate cuts have increased third-party estimates for industry originations in 2024 to approximately $2 trillion. Much of this anticipated growth is based on expectations for interest rate reductions later in the year. And we expect the first quarter of 2024 to remain seasonally low before moving into the spring and summer home buying season.
Not only did we returned approximately $170 million to shareholders through common share cash dividends and share repurchases, but we further strengthened the balance sheet with new long term debt issuances of $659 million and redemptions of $450 million in debt with upcoming maturities.
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As you can see on slide five of our fourth quarter presentation. The origination market is expected to trough in 2023 as mortgage rates have declined from their recent highs and anticipated future rate cuts have increased third party estimates for industry originations in 2024 to approximately.
Two trillion dollars.
Much of this anticipated growth is based on expectations for interest rate reductions later on in the year and we expect the first quarter of 2024 to remained seasonally low before moving into the spring and summer home buying season.
Given the current environment I remain very enthusiastic about the potential performance from Pmt's investment portfolio.
David Spector: Given the current environment, I remain very enthusiastic about the potential performance of PMT's investment portfolio. More than two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSRs and the unique GSC lender risk share transactions we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future as low expected prepayments extend the expected asset life. Additionally, delinquencies remain low due to the overall strength of the consumer, as well as a substantial accumulation of home equity in recent years due to continued home price appreciation.
More than two thirds of PMT shareholders' equity is currently invested in a season portfolio of Msr's and the unique GSE lender risk share transactions, we invested in from 2015 to 2020.
As the majority of mortgages underlying these assets were originated during periods of very low interest rates. We continue to believe these investments will perform well over the foreseeable future as low expected prepayments extend the expected asset life.
Additionally, delinquencies remained low due to the overall strength of the consumer as well as a substantial accumulation of home equity in recent years due to continued home price appreciation.
MSR investments account for more than half of Pmt's deployed equity.
David Spector: MSR investments account for more than half of PMT's deployed equity. However, rates declined during the quarter, and the majority of the underlying mortgages remained far out of the money.
The rates declined during the quarter. The majority of the underlying mortgages remain far out of the money and we expect the MSR asset to continue to produce stable cash flows over an extended period of time.
David Spector: And we expect the MSR asset to continue to produce stable cash flows over an extended period of time. MSR values also benefit from the current interest rate environment. As the placement fee income PMT receives on custodial deposits is closely tied to short-term rates, Similarly, the mortgages underlying PMT's large investment in lender risk share have low delinquencies and a low weighted average current loan-to-value ratio of 50%. These characteristics are expected to support the performance of these assets over the long term, and we continue to expect the realized losses over the life of these investments to be limited.
The MSR values also benefit from the current interest rate environment has the placement fee income PMT receives on custodial deposits is closely tied to short term rates.
Similarly, mortgages underlying pmt's large investment and lender risk share have low delinquencies and a low weighted average current loan to value ratio of 50%.
These characteristics are expected to support the performance of these assets over the long term and we continue to expect the realized losses over the life of these investments to be limited.
David Spector: We remain focused on actively managing PMT's portfolio of opportunistic investments, which we believe have the potential for strong, long-term risk-adjusted returns. In the fourth quarter, we invested $17 million in floating rate GSE CRT bonds. After the quarter ended, we sold $56 million of previously purchased floating rate GSE CRT bonds as credit spreads tightened, making capital available for PMT to deploy into additional opportunistic investments. Slide 8 outlines the runway potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects an average of $0.31 per share over the next four quarters. This is down modestly from the prior quarter due to the impact of interest rate changes on asset yields compared to financing rates for the interest rate sensitive strategy. The expected returns on these investments have the potential to improve if short-term rates decline, driving an increase in the overall run rate. I will now turn it over to Dan, who will review the drivers of PMT's fourth-quarter financial performance. Thank you, David.
We remain focused on actively managing pmt's portfolio of opportunistic investments, which we believe have the potential for strong long term risk adjusted returns.
In the fourth quarter, we invested $17 million into floating rate GSE CRT bonds.
After quarter end, we sold $56 million of previously purchased floating rig GSE CRT bonds as credit spreads have tightened making capital available for PMT to deploy into additional opportunistic investments.
Slide eight outlines the runway potential expected from Pmt's investment strategies over the next four quarters.
Pmt's current run rate reflects an average 31 per share over the next four quarters. This is down modestly from the prior quarter due to the impact of interest rate changes on asset yields compare to financing rates for the interest rate sensitive strategies.
The expected returns on these investments have the potential to improve if short term rates decline driving an increase in the overall run rate I will now turn it over to Dan who will review the drivers of Pmt's fourth quarter financial performance. Thank.
Thank you David turning to slide 12, PMT earned $42 million in net income to common shareholders in the fourth quarter or <unk> 44 per diluted common share.
Dan Perotti: Turning to slide 12, PMT earned $42 million in net income to common shareholders in the fourth quarter, or $0.44 per diluted common shareholder. Additionally, its credit-sensitive strategies contributed $61 million in pre-tax income. Pre-tax income from PMT's organically created CRT investments in the fourth quarter totaled $42 million. This amount included $29 million in market-driven fair value gains, reflecting the impact of tighter credit. The fair value of these investments was essentially unchanged from the prior quarter, as fair value gains were offset by runoff. As David mentioned, the outlook for our current investments in organically created CRT remains favorable, with a low underlying current weighted average loan to value ratio and a 60-day delinquency rate of 1.23% as of December. Income from opportunistic investments in CAS and stacker bonds issued by the GSEs totaled $12.8 million in the quarter.
Pmt's credit sensitive strategies contributed $61 million in pre tax income pretax income from Pmt's organically created CRT investments in the fourth quarter totaled $42 million.
This amount included $29 million and market driven fair value gains, reflecting the impact of tighter credit spreads.
The fair value of these investments was essentially unchanged from the prior quarter as fair value gains were offset by runoff.
As David mentioned the outlook for our current investments in organically created CRT remains favorable with a low underlying current weighted average loan to value ratio and a 60 day delinquency rate of one 3% as of December 31.
Income from opportunistic investments and CASM stacker bonds issued by the Gse's totaled $12 $8 million in the quarter.
Dan Perotti: The Interest Rate Sensitive Strategy contributed a pre-tax loss of $17 million. The fair value of PMT's MSR investment decreased by $145 million as the decline in mortgage rates increased future prepayment projections. Approximately 78%, or $112 million, of this MSR decline was offset by changes in the fair value of agency MBS, interest rate hedges, and related income taxes. Agency MBS fair value increased by $184 million, while interest rate hedges decreased by $94 million.
The interest rate sensitive strategies contributed a pretax loss of $17 million the fair value of Pmt's MSR investment decreased by $145 million as the decline in mortgage rates increased future prepayment projections approx.
Approximately 78% or $112 million of this MSR decline was offset by changes in the fair value of agency MBS interest rate hedges and related income tax effects.
Agency MBS fair value increased by $184 million, while interest rate hedges decreased by $94 million.
Dan Perotti: The fair value declines on MSRs and interest rate hedges held in PMT's taxable REIT subsidiary drove a tax benefit in the fourth quarter. The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, down from $4.1 billion on September 30th as growth in the MSR portfolio from loan production was more than offset by fair value declines and runoff from production. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding increase to $191 million from $80 million at September 30th due to seasonal property taxes. However, no principal and interest advances are currently outstanding.
The fair value declines on MSR and interest rate hedges held in Pmt's taxable REIT subsidiary drove a tax benefit in the fourth quarter.
The fair value of Pmt's MSR asset at the end of the quarter was $3 9 billion down.
Down from $4 1 billion at September 30th as growth in the MSR portfolio from loan production was more than offset by fair value declines in runoff from prepayments.
Delinquency rates for borrowers underlying pmt's MSR portfolio remain low while servicing advances outstanding increased to $191 million from $80 million at September 30, due to seasonal property tax payments.
No principal and interest advances are currently outstanding.
Income from Pmt's correspondent production segment was up from last quarter, primarily due to higher margins total correspondent loan acquisition volume was $24 billion in the fourth quarter up 10% from the prior quarter.
Dan Perotti: Income from PMT's correspondent production segment was up from last quarter, primarily due to higher margins. Total correspondent loan acquisition volume was $24 billion in the fourth quarter, up 10% from the prior quarter. Conventional loans acquired for PMT's account totaled $2.5 billion, down 10% from the prior quarter due to seasonality. The Weighted Average Fulfillment Fee Rate was 20 basis points, unchanged from the prior. PMT reported $41 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $32 million last week. We'll now open it up for questions. Operator?
Conventional loans acquired for Pmt's account totaled $2 5 billion.
10% from the prior quarter due to seasonal impacts.
The weighted average fulfillment fee rate was 20 basis points unchanged from the prior quarter.
PMT reported $41 million of net income across its strategies, excluding market driven value changes and the related tax impacts up from $32 million last quarter.
We'll now open it up for questions operator.
Okay.
Operator: I would like to remind everyone that we will only take questions related to PennyMac Mortgage Investment Trust or PMT. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, simply press the star followed by the number 1 on your telephone keypad.
I would like to remind everyone. We will only take questions related to opinion back mortgage investment trusts or PMT. We also ask that you. Please keep your questions limited to one preliminary question and one follow up question as we'd like to ensure that we can answer as many questions as possible.
I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Operator: If you would like to withdraw your question, again, call 1. Please hold for your first question. Your first question is from the line of Boss George with KBW. Hey guys.
If you would like to withdraw your question again star one.
Please hold for your first question.
Yeah.
Your first question is from the line of bus charge with BW.
Hey, guys.
On slide eight where you gave the run rate potential Roe.
Boss George: On slide eight, where you give the run rate potential ROE, it declined, and it looked like it declined on the return on the MSR. Can you just talk about the returns expected this quarter versus last quarter? And then, you know, I thought like as the curve steepens, that should sort of benefit that number. And is that right? Hey, this is Dan.
It declined and it looked like a decline on the return on the MSR now can you just talk about the returns expected this quarter versus last quarter, and then I thought as the curve steepened veteran sort of benefited that number and is that is that right.
Okay.
Hey, Bose this is Dan.
The rest of the run rate did decline based on the interest rate strategies.
Dan Perotti: The run rate did decline, you know, based on interest rate strategies. Really, what we see there is that the curve, if we're thinking about the curve for the MSR, really did more de-invert, sorry, inverted more if you're looking at versus really short-term rates, which is where the financing, you know, where we're financing the MSR and especially at PMT, where, you know, the vast majority of the financing for the MSR is really secured. So, you know, we have short rates that are still stuck, and it looks like even through the first quarter of the year, probably at the same rates that they've been.
What we see there is the curve if we're if we're thinking about the curve for the MSR really more D. Invert, alright, alright inverted more if youre looking at versus really short really short term rates, which is where the financing where we're financing the MSR.
And especially at TMT, where the vast majority of the financing for the MSR is really is really secured.
No.
We have short rates that are still sticking and it looks like even through the first quarter here probably at.
At the same rate that they have been and Meanwhile, the longer term rates that drive the yield on the MSR came down pretty meaningfully in the fourth quarter and so that is sort of compression in the short term.
Dan Perotti: And meanwhile, the longer-term rates that drive the yield on the MSR came down pretty meaningfully in the fourth quarter. And so, that sort of compression in the short-term, um you know is what drove the the reduced expected return over uh you know over the in the run rate which is really over just the next four quarters um as uh you know if interest rate or short-term interest rates decline as we're you know as we in the market are expecting them to and we see this sort of through the forecast um you know we expect that overall uh you know that overall spread uh to increase that would you know the curve would be inverted um and that would uh you know create a sort of better spread in terms of the ROE driving a higher ROE for the MSRs and the interest rate sensitive strategies overall and that could lead to a you know a greater um expectation or return potential for the interest rate sensitive strategy so uh you know we do based on what's sort of forecasted in the market expect that to evolve over the coming year but just looking out at the you know at the sort of shortish term um currently we see some you know some compression in the in the interest rate sensitive strategies um as the you know while or as the short rate is still sticking up pretty high, Okay, great. Thanks a lot.
Is what drove the reduced expected return over.
Over the in the run rate, which is really over just the next four quarters.
As you know.
If interest rate or a short term interest rates decline as we're now as we and the market are expecting them to and we see this sort of through the forecast.
We expect that overall.
<unk> spread to increase the curve would be <unk>.
That would <unk>.
Create a sort of better spread in terms of the row driving higher ROE for the MSR and the interest rate sensitive strategies overall and that could lead to greater.
The expectation of return potential for the interest rate sensitive strategies. So.
We do based on what sort of forecasted in the market expect that to evolve over the coming year, but just looking out at the.
Sort of short ish term currently we see.
Some compression in the in the interest rate sensitive strategies.
While her as the short rate is still sticking up pretty high.
Okay, great. Thanks, a lot.
Okay.
Matthew Philip Howlett: Your next question is from the line of Matthew Howlett with B Riley. Hey, thanks for taking my question. First, just on the credit side, I mean, you bought some CRT in the fourth quarter, then you sold a lot of it in the season and stuff in January. What's your view on spreads today with CRT and any update on, you know, a securitization program on the horizon? Leans, or ELOX, and or a restart of the CRT.
Your next.
First is from the line of Matthew Howlett with B Riley.
Hey, Thanks for taking my question.
First just on the on the credit side I mean, you bought some CRT in the fourth quarter than you sold a lot of it sees and stuff.
Whats your view on spreads.
<unk> with CRT and any update on that.
Securitization program on the Horizon, maybe second liens or <unk> <unk>, a restart of the CRT and other gse's youre at with.
David Spector: I know the GSEs are out with some of their Guidelines today, but just an update on the credit side and where you think you can maybe grow it and what you think of spreads. Yeah, sure. Hey, Matt. It's David.
Some of there.
Guidelines today, but just an update on the credit side, and where you think you can maybe grow it and what you think of spreads now.
Yes, sure Hey, Matt.
David.
I think I think.
David Spector: I think that on the credit census strategies front, we had very strong returns in 2022, and that really speaks to the really great job Will and the team are doing in terms of actively managing that portfolio. We bought $17 million earlier in the quarter of cash and stacker bonds, and we sold $56 million after quarter end. Opportunistically, we tightened spreads.
I think that on the credit sensitive strategies.
We had very strong returns in 2023 and that really speaks to a really great job will and the team are doing in terms of actively managing that portfolio.
We bought $17 million earlier in the quarter CASM Stacker bonds, we sold 56 million after quarter end.
Opportunistically as spreads tightened.
David Spector: And look, we're going to continue to monitor the market. You know, the sale of the bonds was because the yields were well below our required returns, and, you know, just redeploying them even to pay down warehouse lines made sense and as a way to have dry powder to be able to invest in credit-sensitive assets as we see them. In terms of, you know, in terms of a securitization program, we're starting to see some asset securitizations of second liens, albeit the credit pieces of those securitizations don't meet our required returns at PMT, although we're monitoring them very, very closely. And I think that, you know, I think that's something that we're just going to continue to monitor. I don't see the GSEs coming back with a lender credit risk program until we see an increase in the overall size of the mortgage market, at least. Cattle producers right now need all the production they can get to support their own cows and stack their barns. And so it's something that, you know, we're continuing to stay in dialogue with them. But I don't, I don't understand that.
And look we're going to continue to monitor the market.
The sale of the bonds were because the yields were well below our required returns.
Yes, just redeploying them, even pay down warehouse lines made made sense as a way to have dry powder to be able to invest in.
Credit sensitive assets as we see them.
In terms of.
In terms of a securitization program.
Starting to see some asset securitization second liens, albeit the secure the the credit pieces of those securitization.
Don't meet our required returns at PMT, although we're monitoring them very very closely.
And I think that I think that's something that we're just going to continue to monitor I don't see the GSE is coming back with a lender credit risk program.
So we see an increase in the overall size of the mortgage market at a minimum.
Hey, right now need all the production, making get to support their own CASM stacker bonds and so it's something that we're continuing to stay in dialogue with them.
But I don't I don't see that I think look I think we have we're in a position where we have dry powder to invest when we see the opportunities and.
David Spector: I think, look, I think we have, we're in a position where we have dry powder to invest when we see the opportunities and, you know, continue to, you know, deliver the returns we need to maintain our dividends. You know, we had a great year in PMT overall, where, you know, we for the fourth quarter, we delivered 12% for the year, and we were at 11%, where earnings exceeded the dividend, and we exceeded the dividend, you know, in a nice way. We had minor book value growth per share, which in the REIT sector says a lot given the volatility that we saw and speaks to the, you know, the hedging that we do, as well as the, you know, the opportunities that we see in the marketplace. So I think, I think, by and large, it's going to be, you know, until we can raise capital. And I see that as an opportunity that's going to present itself, hopefully, in the later, later parts of the year, as we see rates decline.
We continue to.
Deliver the returns we need to.
To maintain our dividend.
We had a great year in PMT overall, where.
For the fourth quarter, we delivered 12% for the for the year, we were at 11% of our earnings exceeded the dividend and we exceeded the dividend.
In a nice way minor book value growth per share, which in the REIT sector says a lot.
Given the volatility that we saw and speaks to the hedging that we do as well.
The opportunities that we see in the marketplace. So I think I think by and large it's going to be until we can raise capital and I see that as an opportunity that's going to present itself aquifer. Later later parts of the year as we see rates decline.
Dan Perotti: But, you know, we continue to actively manage the portfolio. The other piece that I mentioned, Matt, is that, you know, if you look at our portfolio, around 70 percent of the portfolio is invested in our core assets in terms of MSR and our existing lender credit risk share that we have outstanding. Given where interest rates have been and the note rates on those portfolios, the runoff of those is very slow. So our need to redeploy at this point is, you know, not huge.
We continue to actively manage the portfolio.
The other the other piece that.
Mention Matt is that if you look at our portfolio.
Around 70% of the portfolio.
In our core assets in terms of MSR as our existing yes.
Lender credit risk share that we have outstanding.
Given where interest rates have been in the note rates on those portfolios. The run off of those is a very slow so our need to redeploy.
At this point is.
David Spector: So, as David mentioned, we're looking for, you know, opportunities and investing opportunistically where we see opportunities. But in terms of the overall portfolio, the runoff is not that great at this point. Right, that's a good point. And then, on the subject of sort of allocation of capital, how long will this interplay with PMT selling a big chunk of their conventional production to PMSAT? How long do you expect to get to that in the first quarter?
Not huge though as David mentioned, we're looking for the.
The opportunities and investing Opportunistically, where we see.
When we see those opportunities, but in terms of the overall portfolio. The runoff is not that great at this point.
That's a good point.
And then.
On the subject of sort of allocation of capital how long will this interplay with PMT selling a big chunk of your conventional production to be up is that how long do you expect you guys to add in the first quarter.
David Spector: Obviously, there are huge synergies between the two companies. How long do you see that continuing? And what will need to change for PMT to start retaining that production? And, of course, David, you brought up the dividend. Just any owner's sense, you want to keep the, in terms of, you know, this interplay between buying back stock and just paying that dividend. Do you feel like you want to pay the dividend, or given the stock's discounted book, would you see allocating more capital to buybacks? Just curious about that. Thank you very much.
Obviously, there's huge synergies between the two companies.
Do you see that continuing and what needs to change for for PMT to start retaining that production.
David you brought up the dividend.
Just any sense you want to keep the in terms of this interplay.
Interplay between buying back stock and paying that dividend.
Do you feel like you want it you want to pay the dividend or given the stock is discounted book would you what would you see allocating more capital to buybacks just curious on that thank you very much.
Okay.
Dan Perotti: Okay, so on the correspondence side, look, I think that, you know, we, it speaks volumes about the synergistic relationship we have with PFSI that we have the ability to move loans over to PFSI in this period of time where we have alternative investments at a higher return and we're trying to pace how we deploy that capital and really with an eye towards credit sensitive strategies as opposed to the MSR port is very large and we want to get that more in balance. I think it's you know look it's going to for kids I don't see it changing in Q1 Q2 it's a capital allocation issue from the point of view of as you know should we raise capital we have more capital to deploy and we and we want to deploy in MSRs PMT will sell less loans to PFSI and I think it's it's nothing more complex than that but I think I think I think for now it speaks to the more the active management that we're taking in the portfolio in PMT and how we think about the split between credit sensitive strategies and interest rate sensitive strategies.
On the correspondent side look I think that.
It speaks volumes about the synergistic relationship we have with PFS side that we have the ability to move to move loans over to PFS Si in this period of time, where we have alternative investments at a higher return and we're trying to.
Pace, how we deploy that capital in really with an eye towards credit sensitive strategies as opposed to.
The MSR port is very large and we wanted to get that more in balance.
Look it's going to be for kidney I don't see it changing in Q1 Q2.
Capital allocation issue from the point of view should we raise capital we have more capital to deploy.
One we choose to deploy in Msr's P&C will sell less loans to <unk>.
And I think it's nothing more complex than that.
But I think I think for I think for now at least to the or the active management that we're taking in the portfolio in PMT and how we think about the split between credit sensitive strategies and interest rate sensitive strategies from Daniel talked about the dividend sure.
Dan Perotti: Dan you want to talk about the dividend? Sure you know with respect to the dividend and sort of the the trade-off that you that you mentioned that so where you know where we've seen the price to book in in recent periods where we've been you know moving closer to price to book you know we have not seen the the repurchase of shares as as attractive as you know we obviously have historically made share repurchases where we see that disconnect become meaningful but I think we you know in order for us to look at you know repurchasing more shares in a significant way we want to not that we would want to see but we wouldn't do that unless we saw uh you know the share price to book or the price to book ratio you know dropped from where it is today um you know we believe for for PMT and we've stated this before that having you know a stable dividend is sort of important and meaningful you know we do see a path consistent with what I was discussing earlier um and what we've discussed before for you know our run rate to move back toward uh the current dividend level at this point we don't think that it um you know that it warrants a change in the in the dividend um and so uh you know we expect to at least uh in the near term you know uh have our dividend remain uh level remain consistent if we you know if we do see um if we don't see a path back to you know uh for the run rate back to that 40 cents uh per share um you know then that would uh you know precipitate us you know reevaluating that but given what sort of the market expects and how that would impact the earnings potential of our portfolio um you know we do see that path as a likely potential in the future, Your next question is from the line of Kevin Barker with Piper Sadler.
With respect to the dividend and sort of the tradeoff that you that you mentioned that so where we've seen the price to book in recent periods, where we have been moving.
Those are at a price to book.
We have not seen the.
The repurchase of shares as as attractive as we obviously have historically made share repurchases, where we see that disconnect become meaningful.
But I think we.
In order for us to look at.
Repurchasing more shares in a significant way.
So we would want to see it but we wouldn't do that unless we saw.
The share price to book or the price to book ratio dropped from where it is today.
We believe for PMT and we've stated this before that having a stable dividend is sort of important and meaningful we do see it as consistent with what I was discussing earlier.
And what we've discussed before for our run rate to move back toward the current dividend level at this point, we don't think that it.
That it warrants a change in the dividend and so.
We expect to.
At least in the near term.
Have our dividend remained level remained consistent if we if we do see.
If we don't see a path back to.
For the run rate back to that 40.
Per share.
Then that would.
Precipitate reevaluating that but given what the market expects and how that would impact the earnings potential of our portfolio.
We do see that path as a likely potential in the future.
Yes.
Your next question is from the line of Kevin Barker with Piper Sandler.
Hello again.
Dan Perotti: Hello again, just wanted to follow up on, you know, you sold some CRT this quarter. Do you see any opportunities to make some structural changes that could potentially enhance the ROE of the business to bring it closer to the $0.40 dividend run rate, particularly since you have a couple of debt maturities coming due here in 2024? Could you potentially move some assets, pay down that debt, and maybe shift the balance sheet a bit? Just some additional color on what you're considering. Thanks.
Wanted to follow up on you sold some CRT this quarter.
Do you see any opportunities to make some structural changes that could potentially enhance the roe of the business.
To bring it closer to the 40% 40.
Dividend run rate.
Particularly with <unk>.
Do you have a couple of debt maturities coming due here in 2024.
Could you potentially move some assets pay down that debt.
Maybe shift the balance sheet a bit.
Just additional color there on what youre considering thanks.
Okay.
So with respect to the maturities in 2024.
Dan Perotti: So with respect to the maturities in 2024, you know, we do, we have a couple of secured maturities, specifically a CRT maturity that's upcoming, you know, that we expect to look to probably put some of the securities on, you know, on repo for a period of time, and then look to refinance, refinance that, you know, the market has improved a bit for the financing of our, you know And so we do, you know, we see that as an opportunity there. And that could, you know, somewhat improve the return profile, though that's only for a limited part of the portfolio. As we look out further into the maturities, we do have a maturity of the, which is convertible debt, later in 2024. You know, we partially addressed that last year with our baby bond issuance. You know, we have seen the baby bond market be active, you know, somewhat active in terms of issuance in the mortgage REIT space.
Yes, we do.
So we have a couple of secured maturities specifically at CRT and maturity.
That.
We expect to look to.
Probably put some of the.
Securities on.
On repo for a period of time, and then look to refinance refinance that.
The market has improved a bit for the financing of our and our credit risk transfer securities into the into the types of structures.
That we've had previously and so we do we see that as an opportunity there.
And that could.
Somewhat improve the.
The return profile, though thats for a limited part of the portfolio as we look out further into the maturities that you have a maturity of the.
Our our convertible debt later in 2024.
We've partially address that last year with our baby bond issuance.
We have seen the baby bond market be active.
Somewhat active in terms of issuance in the mortgage REIT space.
Dan Perotti: You know, that's a potential there or, you know, additional, you know, or another convertible debt issuance or, potentially, neither of those is attractive to your point with respect to the overall earnings of the portfolio, then you know, they could look to de-lever, and we do have the ability to do that without really significantly repositioning the portfolio. At this point in time, I don't think we're considering, you know, a significant shift in terms of the overall makeup of the portfolio. That's... We think what we have in both cases, like I said, on the credit-sensitive side, generates meaningful returns, even at tighter spreads. And we've repositioned or rotated out of assets where we didn't think that those returns were commensurate with the risk-adjusted returns were commensurate with where we want them to be invested. On the interest rate sensitive side, I think that's really, again, a matter of the shape of the yield curve at this point in time, which is really expected to normalize.
A potential there or additional.
Yes.
Another convertible debt issuance or potentially if neither of those are attractive to your point with respect to the overall.
<unk>.
The overall earnings of the portfolio, then could look to Delever and we do have the ability to do that.
Without really significantly repositioning the portfolio.
At this point in time I don't think we are considering.
Yes, a significant shift in terms of the overall makeup of the portfolio.
That.
We think what we have in both cases like I said on the on the credit sensitive side generates.
Generates meaningful returns even at the.
At the tighter spreads and we've repositioned.
Ah rotated out of the assets where we.
We didnt think that.
Those returns were commensurate with the risk adjusted returns were commensurate with where we wanted to be invested.
On the interest rate sensitive side, I think thats really again a matter of.
The shape of the yield curve at this point in time, which is really expect it to normalize.
Dan Perotti: And that, you know, that's where we expect to drive up the return profile in that case. So, you know, no significant shift in terms of the makeup of the portfolio, I wouldn't say we're contemplating currently. Could I realize you've made comments around the shape of the curve, but. Is there any way you can quantify the impact of Fed rate cuts?
That's where we expect to drive up.
The return profile of that case.
No.
Yes, no no significant shift in terms of the makeup of the portfolio I wouldn't say, we're also clear that currently.
Could I realized you made comments around the shape of the curve.
So any way you can quantify the impact of fed rate cuts.
Relative to your earnings.
Dan Perotti: relative to your earnings. Now, obviously, it could shift quite a bit, but is there any way to simply look at it from a Fed rate cut perspective? Um, yeah, the way that you would generally look at it if we assume, you know, if you assume that the Fed's rate cuts are baked in, more or less, and that the longer term, in the current period, and that the longer term yields wouldn't move significantly to the extent that the Fed follows the path that sort of currently contemplated, you know, if there's six fixed rate cuts or something along those lines, staked You know, that's a point and a half that would come off of the, you know, our floating rate debt on MSRs, which is, you know, several hundred million dollars.
Obviously, it could shift quite a bit but is there any way it's simply look at it from a fed rate cut perspective.
Okay.
Yes.
The way that you would generally look at it if we assume if you assume that the.
The fed rate cuts are baked in more or less and that.
The longer term and in the current in the current period and that the longer term yield.
Yields wouldn't move significantly a to the extent that the fed follows the path that sort of currently contemplated.
Six.
Fixed rate cuts or something along those lines baked in.
Toward through the year.
That's a point and a half that would come off of that are.
Our floating rate debt on MSR switches.
<unk>.
Okay.
Several hundred million dollars.
Dan Perotti: So, you know, it adds a meaningful amount, you know, to the other assets, the interest rate sensitive assets, the returns, you know, our expected returns wouldn't change or the amount that they're earning, our costs on the debt would, you know, would decline meaningfully in terms of several million dollars, just from those interest rate cuts. I think that's the way to think about it. Thank you, Dan. All right.
So.
It adds a meaningful.
It adds a meaningful amount.
The other assets the interest rate sensitive assets. The returns are expected returns when chandra the amount that they're earning.
Our cost on the debt would.
With declined meaningfully in terms of.
Several million dollars.
Just from.
Those interest rates I think thats the way to think about it.
Okay. Thank you Dan.
Hello.
Yes.
Operator: As a reminder, to ask a question, press star 1 on your telephone keypad. Your next question is from the line, with Kevin Barker and Piper Sandler. I do apologize.
As a reminder to ask a question press star one on your telephone keypad.
Your next question is from the line.
Kevin Barker with Piper Sandler.
Operator: Do you have any next questions? from Eric Hagen with PPIG. Okay, thanks for taking my question. Hey, looking at slide 19, with around $240 million of liquidity buffer relative to the FHFA requirement, can you share how much you've seen that liquidity buffer fluctuate, especially when rates are volatile? And how close you got to that threshold during times when we have periods of higher volatility like we saw last fall?
I do apologize for my next question is.
Okay.
From Eric Hagen with PT.
<unk>.
Okay. Thanks for taking my question, Hey, looking at slide 19, with around 240 odd million of liquidity buffer relative to the FHFA requirement.
Can you share how much you have seen that liquidity buffer fluctuate, especially when rates are volatile and how close maybe you got to that threshold.
Periods of higher volatility like we saw last fall.
Yes, no our liquidity has been pretty stable or.
Eric Hagen: Yeah, no, our liquidity has been pretty stable. Part of what we look at in terms of our hedge profile is the impact that interest rate shifts can have on liquidity. We keep a reserve as part of our liquidity forecasting and our amounts of required liquidity in terms of managing the business that accounts for interest rate volatility and the impact that that could have on our liquidity available. But if you look at our liquidity that's been on the balance sheet in the last couple of quarters, I believe we've kept it at a pretty stable level there, which is 2x what the requirement is. So that really has not been an issue, even given the interest rate volatility that we've seen over the past couple of quarters. Okay.
Sure.
Part of what we look at in terms of our hedged profile is the impact that.
The interest rate shifts can have on liquidity and we keep a reserve as part of our our liquidity forecasting and our.
Amounts are required liquidity in terms of managing the business that.
That accounts for interest rate volatility and the impact that that could have on.
On our liquidity available, but if you look at our liquidity thats been on the on the balance sheet in the last couple of quarters I believe we kept it.
At a pretty stable level, there, which is to ask what the requirement is.
Or is that really has not has not been an issue even given the interest rate volatility that we've seen over the past couple of quarters.
Okay.
Right.
Okay, and then on slide 12, it looks like you have about $1 billion three of capital and the interest rate sensitive strategies can you split apart how much is in the MSR versus the MBS and hedges and.
Dan Perotti: And then on slide 12, you know, it looks like you have about $1.3 billion of capital in the interest rate sensitive strategies. Can you split apart how much is in the MSR versus the MBS and hedges? And maybe how much capital you see yourselves allocating to MBS and hedges going forward. Yeah, so, the vast majority of the capital in there is allocated to MSRs. It's the most capital-intensive asset. I think that we stated earlier in the presentation that 56% of the shareholders' equity, you know, is in the MSRs. And so that's, you know, over $1 billion of that $1.2 billion.
Maybe how much capital you see yourselves allocate into MBS and.
Just going forward.
Yes.
The.
The vast majority of the.
Of the capital and there is allocated to the MSR as it's the most it's the most capital intensive asset.
I think that we have.
We stated earlier in the presentation that 56% of the shareholders' equity.
<unk>.
<unk> is.
As in the Msr's and so thats.
Over.
Well over $1 billion of that $1 2 billion.
On the agency MBS, if we just look at them on their face even though it's a significant portfolio of the haircut on that is relatively.
Dan Perotti: The agency MBS, if we just look at them on their face, even though it's a significant portfolio, the haircut on that is relatively low, so it doesn't take nearly as much equity. And that's similar for the rest of the assets that are in this section. So it's really predominantly the MSRs. And even if we add significantly to the agency MBS portfolio on a standalone basis in terms of the equity allocated, although we would, we may have to sort of increase our reserves depending on, you know, the interest rate sensitivity and how much we would want to hold for margin calls on its face, we wouldn't increase the equity allocation that much to hold additional MBS there.
Is relatively low so it doesn't nearly as much.
As much equity.
And then.
Theres also.
That's similar for the rest of the B B.
The assets that are in this section. So it's really it's really predominantly the MSR and even if we add significantly to the agency MBS portfolio.
On a standalone basis in terms of the equity allocated although we would.
We may have to sort of increase our reserves depending on.
On the interest rate sensitivity and how much we would want to hold for margin calls on its face increased the equity allocation not much to hold.
Additional MBS there.
Yes.
Dan Perotti: Yep, that makes sense. Thank you guys. Your next question is from the line of Jason Weber with Jones Trading. Hi guys.
No that makes sense. Thank you guys.
Okay.
Okay.
Your next question is from the line of Jason Labor with Jones trading.
Okay.
Hi, guys. Thanks for taking my question.
Jason Weber: Thanks for taking my question. So as of today, can you give us some sort of current context on the level of spreads and overall incremental ROE potential on new CRTs, such as the stacker bonds that you are buying? Um, I mean, the where we've seen a sort of new stacker in CAS today, I mean, we, as was mentioned, you know, we just sold a bit of those. So I think it's fair to say it doesn't, you know, in terms of those assets didn't, It wasn't commensurate with the sort of return profile that we have in the mid teams for the CRT and sort of the, But the, you know, overall, including, you know, the margin call reserves that we would look to look to hold on the CRT that's out in the market, probably high single or low, low double digits is what we see, you know, in sort of current current market or recent recent trades, that fluctuates. And so opportunistically, you know, in the fourth quarter, we invested where we saw an attractive spread that met But, you know, that's sort of the latest color in terms of what we've seen.
So as of today can you give us some sort of context on the level of the spreads and overall incremental ROE potential on new CRT, such as the stacker bonds that you were buying.
I mean the.
Where we've seen.
The sort of new stacker and Kaz today.
I mean, we.
As was mentioned we did.
Sold a bit.
So I think it's fair to say it does that in.
In terms of those assets didn't.
It wasn't commensurate with the sort of return profile that we have in the in the mid teens for the CRT in sort of the.
Target that we've had there.
Okay.
But.
The overall, including the margin call reserves that we would look to look to hold.
On the on the CRP that's out in the market probably high single or low double digits is what we see in sort of current current market. Our recent recent trades that fluctuates and so opportunistically.
Opportunistically.
In the fourth quarter, we invested.
<unk>, where we saw attractive spreads that met our return hurdles.
But.
That's sort of the most recent color in terms of what we've seen.
Okay.
Dan Perotti: Thanks. And I apologize if this was addressed during the prepared remarks, but where would you ballpark the value change here today? Um, you know, we don't typically get in, you know, sort of give a mark for that.
Thanks.
And I apologize if this was addressed during the prepared remarks, but where would you ballpark book value change year to date.
Okay.
We don't we don't typically get in.
Sort of give a mark for that but overall if you look at historically, where we've been in terms of overall book value its been pretty stable over the past few quarters, that's been really the.
Dan Perotti: But overall, if you look at where we've been in terms of overall book value, it's been, you know, pretty stable over the past few quarters. That's really the, The benefit of having the hedging program that we've had is that we don't see this type of, even with the interest rates being pretty volatile, we don't see that our book value fluctuates in the same way that certain other portfolios do. So overall, just give the colleagues pretty, you know, pretty stable book value quarterly data. Alright, thank you for the call. We have no further questions at this time. I will now turn the call back over to Mr. Spector for his closing remarks. Thank you, operator, and thank you all for joining us this afternoon. I appreciate the questions and the time, and I encourage investors and analysts with any additional questions to contact our investor relations team by email or phone. And thank you all very much for staying up until the late hour on the East Coast. Have a good day!
The benefit of having the hedging program that we've had is that we don't see the type of.
Even with interest rates being pretty volatile, we don't see that our book value fluctuate in the same way.
That certain other portfolios do.
So overall.
Just give a color it's pretty pretty stable book value.
Sure.
Alright, thank you for the color.
We have no further questions at this time I will now turn the call back over to Mr. Spector for closing remarks.
Thank you operator, and thank you all for joining us this afternoon.
I appreciate the questions and the time and I encourage investors and analysts are too.
With any additional questions to contact our investor relations team by email or phone and.
Thank you all very much for staying up with the late hour on the East coast.
Have a good day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
David Spector: This concludes today's call. Thank you for joining us. You may now disconnect your line. This concludes today's call. Thank you for joining. You may now disconnect.
Yes.
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