Q1 2024 PennyMac Mortgage Investment Trust Earnings Call

Okay.

Operator: Good afternoon, and welcome to the PennyMac Mortgage Investment Trust First Quarter Earnings Call. Additional earnings materials, including the presentation slides that will be referred to during 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 inter-earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust Chief Financial Officer.

Speaker Change: Good afternoon, and welcome to Pennymac mortgage investment Trust first quarter earnings call them.

Speaker Change: Additional earnings materials, including the presentation slides that can be bear fruit into the call are available on betting my mortgage investment Trust website at BMT that Danny Mark Dot Com.

Speaker Change: 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 could cause the company's actual results to differ materially.

Speaker Change: As well as non-GAAP measures that have been reconciled to their G. A a P equivalent in the earnings materials.

Speaker Change: 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.

David A. Spector: Thank you operator.

David A. Spector: Thank you, operator. P&T produced solid results in the first quarter with strong contributions from its credit-sensitive strategy and its correspondent production business. These results were partially offset by net fair value declines in the interest rate sensitive strategy. Net income to common shareholders was $37 million, or diluted earnings per share of 39%. PMT's annualized return on common equity was 10%, and book value per share was $16.11 at March 31, essentially unchanged from the end of the prior quarter.

David A. Spector: PMT produced solid results in the first quarter with strong contributions from the credit sensitive strategy and its correspondent production business.

David A. Spector: These results were partially offset by net fair value declines in the interest rate sensitive strategies.

David A. Spector: Net income to common shareholders was $37 million or.

David A. Spector: Diluted earnings per share of 39.

Pmt's annualized return on common equity was 10% and <unk>.

David A. Spector: Book value per share was $16 11 at March 31.

David A. Spector: Essentially unchanged from the end of the prior quarter.

David A. Spector: While many other mortgage REITs have been negatively impacted by increased levels of interest rate volatility in recent periods, P&T's book value per share has remained relatively stable due to its diversified portfolio and disciplined approach to hedging. Turning to the origination market, current third-party estimates for total originations in 2024 average $1.8 trillion, reflecting growth from an estimated $1.5 trillion in 2023. However, we believe these estimates to be optimistic and dependent upon multiple interest rate cuts from the Federal Reserve in the second half of the year.

David A. Spector: While many other mortgage Reits have been negatively impacted by increased levels of interest rate volatility in recent periods. PMT is book value per share has remained relatively comparatively stable.

David A. Spector: Due to its diversified portfolio and disciplined approach to hedging.

David A. Spector: Turning to the origination market current third party estimates for total originations in 2024 average one eight trillion dollars, reflecting growth from an estimated $1 five trillion in 2023.

David A. Spector: However, we believe these estimates to be optimistic and dependent upon multiple interest rate cuts in the federal reserve in the second half of the year.

David A. Spector: With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range. We expect these third party estimates will decline further from their current levels.

David A. Spector: With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range, we expect these third-party estimates will decline further from their current level. P&T's strong financial performance in recent periods highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise managing mortgage-related investments in a challenging environment. We remain focused on leveraging PMT's unique relationship with PFSI to actively manage its portfolio.

David A. Spector: PMT strong financial performance in recent periods highlights the strength of the fundamentals underlying its long term mortgage assets.

David A. Spector: And our expertise managing mortgage related investments in a challenging environment.

David A. Spector: We remain focused on leveraging pmt's unique relationship with PFS Si to actively manage pmt's portfolio.

David A. Spector: And in the first quarter, we took advantage of tighter credit, selling $111 million of previously purchased floating rate GSE CRT bonds. Importantly, we realized significant gains on these investments, with the sales driven by our belief that these investments no longer met our longer-term return requirements. Additionally, credit spread tightening drove our ability to issue more than $550 million in CRT term notes at attractive terms during and after the quarter ends, effectively refinancing similar notes with extended maturities and reduced spreads.

David A. Spector: And then the first quarter, we took advantage of tighter credit spreads totaling $111 million of previously purchased floating rate GSE CRT bonds.

David A. Spector: Importantly, we realized significant gains on these investments with the sales driven by our belief that these investments no longer met our longer term return requirements.

Additionally, credit spread tightening drove our ability to issue more than $550 million in CRT term notes at attractive terms during and after the quarter end.

David A. Spector: Effectively refinancing similar notes with extended maturities and reduced spreads.

David A. Spector: More than two-thirds of PMT shareholders' equity is currently invested in a seasonal portfolio of MSRs and the unique GFC 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, we continue to believe these investments will perform well in 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 the substantial accumulation of home equity in recent years due to continued home price appreciation.

David A. Spector: More than two thirds of PMT shareholders' equity is currently invested in a season portfolio.

David A. Spector: Of Msr's in the unique GSE lender risk share transactions, we invested in from 2015 to 2020.

David A. Spector: 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 in the foreseeable future as low expected prepayments extend the expected asset lives.

David A. Spector: Additionally, delinquencies remained low due to the overall strength of the consumer as well as the substantial accumulation of home equity in recent years due to continued home price appreciation.

David A. Spector: MSR investments account for more than half of Pmt's deployed equity.

David A. Spector: MSR investments account for more than half of PMT's deployed equity. The majority of the underlying mortgages remain far out of the money, and we expect the MSR asset to continue producing 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 interest. 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%.

David A. Spector: The majority of the underlying mortgages remained far out of the money and we expect the MSR asset to continue producing stable cash flows over an extended period of time.

David A. Spector: MSR values also benefit from the current interest rate environment as the placement fee income PMT receives a custodial deposits is closely tied to short term interest rates.

David A. Spector: Similarly, mortgages underlying pmt's large investment and lender risk share of low delinquencies and a low weighted average current loan to value ratio of 50%.

David A. Spector: These characteristics are expected to support the performance of these assets over the long term, and we continue to expect that realized losses will be limited. Slide seven outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of 35 cents per share. This is up from the prior quarter, driven primarily by higher expected asset yield in the interest rate sensitive strategy. Now I'll turn it over to Dan, who will review the drivers of PMT's first quarter financial performance. Thank you, David.

David A. Spector: These characteristics are expected to support the performance of these assets over the long term and we continue to expect that realized losses will be limited.

David A. Spector: Slide seven outlines the run rate return potential expected from Pmt's investment strategies over the next four quarters.

David A. Spector: Pmt's current run rate reflects a quarterly average of 35 per share.

David A. Spector: This is up from the prior quarter, driven primarily by higher expected asset yields in the interest rate sensitive strategies.

Now I'll turn it over to Dan who will review the drivers of Pmt's first quarter financial performance. Thank.

Daniel Stanley Perotti: Thank you David.

Daniel Stanley Perotti: PMT earned $37 million in net income to common shareholders in the first quarter, or 39 cents per diluted common share. PMT's credit-sensitive strategies contributed $61 million in pre-tax earnings, including $48 million from its organically created CRT investment. This amount included $36 million in market-driven fair value. Reflecting the impact of tighter credit, the fair value of these investments was up slightly from the prior quarter, but fair value gains more than offset the decline from runoff.

Daniel Stanley Perotti: PMT earned $37 million and net income to common shareholders in the first quarter or <unk> 39 per diluted common share.

Daniel Stanley Perotti: Pmt's credit sensitive strategies contributed $61 million in pre tax income, including $48 million from Pmt's organically created CRT investments.

Daniel Stanley Perotti: This amount included $36 million and market driven fair value gains, reflecting the impact of tighter credit spreads.

Daniel Stanley Perotti: The fair value of these investments was up slightly from the prior quarter, that's fair value gains more than offset the decline from write offs.

Daniel Stanley Perotti: As David mentioned, the outlet for our current investments in organically created CRT remains favorable, with a low underlying current weighted average loan to value ratio of 50% and a 60 day delinquency rate of 1.11%, both as of March 31st.

Daniel Stanley Perotti: As David mentioned the outlook for our current investments is Inorganically created CRT remains favorable with a low underlying current weighted average loan to value ratio of 50% and our 60 day delinquency rate of $1, one 1% both as of March 31.

Daniel Stanley Perotti: Income from opportunistic investments in chasm stacker bonds issued by the <unk> totaled $8 $9 million in the quarter.

Daniel Stanley Perotti: Income from opportunistic investments in CAS and stacker bonds issued by the GSEs totaled $8.9 million in the. As mortgage credit spreads continued to tighten during the quarter, the go forward returns on some of the opportunistic investments that we had previously made fell below our thresholds, and so we sold $111 million of these CAS and STACR investments during the quarter. The interest rate sensitive strategies contributed a pre The fair value of PMT's MSR investment increased by $72 million as the increase in mortgage rates drove a decline in future prepayment projections and an increase in projections of future earnings on the custodial balance.

As mortgage credit spreads continued to tightened during the quarter. The go forward returns on some of the opportunistic investments that we had previously made fell below our thresholds and so we sold $111 million of these CASM stacker investments during the quarter.

Daniel Stanley Perotti: The interest rate sensitive strategies contributed a pretax loss of $27 million.

Daniel Stanley Perotti: The fair value of Pmt's MSR investment increased by $72 million as the increase in mortgage rates drove a decline in future prepayment projections and an increase in projections of future earnings on custodial balances.

Daniel Stanley Perotti: These fair value gains were more than offset by changes in the fair value of MBS interest rates hedges and the related tax effects during the quarter.

Daniel Stanley Perotti: These fair value gains were more than offset by changes in the fair value of MBS, interest rate hedges, and the related tax effects during the quarter. NBS fair value decreased by $44 million, and interest rate hedges decreased by $70 million.

Daniel Stanley Perotti: MBS fair value decreased by $44 million and interest rate hedges decreased by $70 million net fair value declines on assets held in Pmt's taxable REIT subsidiary drove a tax benefit of $15 million.

Daniel Stanley Perotti: Net fair value declines on assets held in PMT's taxable REIT subsidiary drove a tax benefit of $15 million. The fair value of PMT's MSR asset at the end of the quarter was $4 billion, up slightly from $3.9 billion at December 31st as growth in the MSR portfolio from fair value gains, loan production, and MSR acquisitions more than offset runoff from pre-tax. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding decreased to $110 million from $191 million at December 31st. Additionally, no principal and interest advances are currently outstanding.

Daniel Stanley Perotti: The fair value of Pmt's MSR asset at the end of the quarter was $4 billion.

Daniel Stanley Perotti: Up slightly from $3 9 billion at December 31 as growth in the MSR portfolio from fair value gains loan production, an MSR acquisitions more than offset runoff from prepayments.

Daniel Stanley Perotti: Delinquency rates for borrowers underlying pmt's MSR portfolio remained low while servicing advances outstanding decreased to $110 million from $191 million at December 31.

Daniel Stanley Perotti: No principal and interest advances are currently outstanding.

Daniel Stanley Perotti: Income from Pmt's correspondent production segment was up slightly from last quarter as higher margins offset the impact of lower volumes.

Daniel Stanley Perotti: Income from PMT's correspondent production segment was up slightly from last quarter as higher margins offset the impact of lower volume. Total correspondent loan acquisition volume was $18 billion in the first quarter, down 23% from the prior quarter driven by our focus on profitability over volume. Conventional loans acquired for PMT's account totaled $1.8 billion, down 29% from the prior quarter. The Weighted Average Fulfillment Fee Rate was 23 basis points, up from 20 basis points in the prior quarter.

Total correspondent loan acquisition volume was $18 billion in the first quarter down 23% from the prior quarter driven by our focus on profitability over volume.

Daniel Stanley Perotti: Conventional loans acquired for Pmt's account totaled $1 8 billion.

Daniel Stanley Perotti: Down 29% from the prior quarter.

Daniel Stanley Perotti: The weighted average fulfillment fee rate was 23 basis points up from 20 basis points in the prior quarter.

Daniel Stanley Perotti: PMT reported $28 million of net income across its strategies, excluding market driven value changes and the related tax impact, down from $41 million last quarter, primarily due to lower average yields on interest rate sensitive assets during the Turning to capital, we issued $306 million of new three-year CRT term notes during the quarter, effectively refinancing recently matured term, And in April, we issued $247 million of new three-year CRT term notes, which refinanced $213 million of notes that were due to mature in 2025, extending the maturities and reducing the spreads for the financing for our CRTF. We'll now open it up for questions. Operator.

PMT reported $28 million of net income across its strategies, excluding market driven value changes and the related tax impacts down from $41 million last quarter, primarily due to lower average yields on its interest rate sensitive assets during the quarter.

Daniel Stanley Perotti: Turning to capital, we issued $306 million of new three year CRT term notes during the quarter effectively refinancing recently mature of term notes and in April we issued $247 million of new three year, CRT term notes, which refinanced $213 million of notes that were due to mature in 2025.

Daniel Stanley Perotti: Extending the maturities and reducing the spreads for the financing for our CRT asset.

Speaker Change: Well now open it up for questions operator.

Speaker Change: 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'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'd like to withdraw your question again, it's star 1. And your first question comes from the line of Jason Weaver of Jones Trading. Your line is now open. Hi, thank you for taking my order.

Speaker Change: I would like to remind everyone. We will only take questions related to Panamax mortgage investment trust or BMT.

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 we can answer we can answer as many questions as possible.

Speaker Change: So 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'd like to withdraw your question again its star one.

Speaker Change: Okay.

Speaker Change: And your first question comes from the line of Jason Weaver of Jones trading.

Jason Weaver: Your line is now open.

Jason Weaver: Alright, Thank you for taking my question.

Jason Price Weaver: Hi, thank you for taking my question. So I was curious about how you view the sustainability of the dividend looking forward. I thought I heard in David's prepared remarks something about a 35 cent earnings run rate. Excuse me if I'm misconstruing.

Jason Weaver: So I was curious about how you view the sustainability of the dividend looking forward I thought I heard in David's prepared remarks, something about 35% earnings run rate.

Jason Weaver: Excuse me, if I missed considering that.

Jason Weaver: Sure.

Daniel Stanley Perotti: Similar to what we've seen in prior quarters, our run rate is slightly below our current dividend level. However, we did see a run rate increase during the quarter, really driven by the, you know, inversion of the yield curve and the longer-term portion of the yield curve moving up, which increases asset yields on our MSRs and MBS portfolio and drives higher returns on our interest rates.

Speaker Change: So sort of similar to what we've seen in prior quarters, our run rate is slightly below our current dividend level.

Speaker Change: However, we did see the run rate increased during the quarter really driven by the <unk>.

Speaker Change: The inversion of the yield curve.

Speaker Change: The longer term portion of the yield curve, moving up which moves up the asset yields on our MSR, It's an MBS portfolio and drive higher returns in our interest rate sensitive strategies.

Daniel Stanley Perotti: Sensitive strategies As we see the yield curve continue to normalize or be invert, which we expect to happen over the next few periods, we expect that we could see further benefit from the interest rate sensitive strategies or our projection for the interest rate sensitive strategies to get back to that. You know, 40 cents, 40 cent projection, or above.

Speaker Change: As we see the yield curve continues to normalize our DN Bert.

Speaker Change: Which we expect to happen over the next few periods.

Speaker Change: We expect that we could see further benefit in the interest rate sensitive strategies or our projections for the interest rate sensitive strategies.

Speaker Change: To get back to that.

Speaker Change: 40 40.

Speaker Change: <unk> 40, <unk> projection or above.

Daniel Stanley Perotti: And so, you know, when we look at the 40 cent dividend, another sort of tenant of our dividend philosophy is around the stability of the dividend. And we're not looking to move the dividend to exactly match our projections quarter to quarter since they, they, you know, they move as the market moves, and we see the potential for the run rate to continue to move toward that 40 cents.

So are.

Speaker Change: You know when we look at the 40 dividend another tenet of our dividend philosophy is around stability of the dividend and we're not looking to move the dividend to exactly matched to.

Speaker Change: So our projections quarter to quarter since they they they move as the market moves and we see the potential for.

Speaker Change: Or the run rate to continue to move toward that 40.

Daniel Stanley Perotti: The 40 cent dividend level, and so our expectation is to keep the 40 cent dividend level stable for now, unless or until we see the market move in such a way that, you know, we don't expect the run rate to continue moving toward that 40 cent dividend level. But at present, especially given the trajectory that we've seen during the quarter and the normalization of the yield curve, our expectation is that we'd maintain the 40 cent dividend for the current period and, most likely, the next few periods.

Speaker Change: The <unk> 40 dividend level and so our expectation is to keep that 40 dividend level stable for now.

Speaker Change: Until we see you see the market move in such a way.

That's that.

Speaker Change: We don't expect the run rate to continue moving toward toward.

Speaker Change: Toward that 40% dividend level, but at present, especially given the trajectory that we've seen during the quarter and the normalization of the yield curve, our expectations that we would maintain a 40% dividend for.

For the current period end.

Speaker Change: It's likely the next few periods.

Speaker Change: Alright Thats helpful. Thank you for that.

David A. Spector: Alright, that's helpful. Thank you for that. And then, just noting the CRT sales, curious about your priorities for new capital deployment, given the rate outlook today, whether that may be tilted more towards interest rate strategies still and less into CRT.

Speaker Change: Just noting the CRT sales.

Speaker Change: Various about your priorities for new capital deployment, given the given the rates outlook today.

Speaker Change: Whether that is.

Speaker Change: Maybe tilted more towards interest rate strategy is still add less into CRT.

Jason Price Weaver: I think that, yeah, I think that's fair to say. We've seen, you know, we've seen more opportunity and have invested some in low-rate MSR portfolios over the past couple of periods. As we discussed earlier, we've seen credit spreads tighten pretty significantly in the CRT area or in mortgage credit, where some of those investments have fallen below our return thresholds. And especially if we continue to see a normalization of the yield curve, we think probably the opportunities lie more in the interest rate-sensitive strategies than in the credit-sensitive strategies, barring some change in the overall environment.

Speaker Change: I think that again, I think thats fair to say we've seen.

Speaker Change: We've seen more opportunity and have invested some into low rate MSR portfolios over the past couple of periods.

Speaker Change: As we discussed earlier, we've seen credit spreads tightened pretty significantly in.

Speaker Change: In the in the CRT area or in mortgage credit.

Where some of those investments have fallen below our return thresholds and especially if we continue to see a normalization of the yield curve.

Speaker Change: We think probably the opportunities lie more in the interest rate sensitive strategies.

Speaker Change: Then in the credit sensitive strategies barring some change in that and the overall environment.

Jason Price Weaver: But the way that we view it, you know, I think in previous periods we've talked about, we would prefer to have a bit more balance in terms of the credit-sensitive strategies and interest rate-sensitive strategies. Our interest rate-sensitive strategies, you know, we currently have a greater allocation to, but our first priority is, you know, investing into assets where we believe the risk-adjusted return is the highest and meets our hurdles, and that presently seems to be more interest rate-sensitive strategies. Okay, thanks.

Speaker Change: But the way that we view it.

Speaker Change: I think in previous periods, we've talked about we would.

Speaker Change: I prefer to have a bit more balanced in terms of the credit sensitive strategies and interest rate sensitive strategies are interest rate sensitive strategies. We currently have a greater allocation toward.

Speaker Change: But our first priority is.

Speaker Change: Investing into assets, where we believe the risk adjusted return is the highest and meets our hurdles in that presently seems to be more of the interest rate sensitive strategies.

Speaker Change: Okay. Thanks, again, I'll hop back in the queue.

Jason Price Weaver: Okay, thanks again. I'll hop back in the queue.

Speaker Change: Okay.

Speaker Change: Your next question comes from the line of George Bose of JV W. Your line is now open.

Operator: Your next question comes from the line of George Bose of KBW. Your line is now open.

Bose Thomas George: Hey guys, this is Bose. I just wanted to follow up on the return expectation. The increase, a lot of it looked like it was based on a higher return expectation on the MSR. And so is that a slower prepayment expectation with higher rates? Or just, yeah, just curious what kind of drove that.

Bose Thomas George: Hey, guys. This is bose actually I just wanted to follow up on the.

Bose Thomas George: The total return expectation the increase a lot of it looked like it was based on a higher return expectation on the MSR and so as that.

Bose Thomas George: A slower prepayment expectations with higher rates or just yeah.

Just curious what kind of drove that please.

Bose Thomas George: Not so much a higher or a lower prepayment expectation necessarily but are.

Daniel Stanley Perotti: not so much a higher or lower prepayment expectation necessarily, but are you know, our valuation methodology as interest rates, as interest rates increase, it has an impact on the prepayment speeds of the, you know, expected prepayment speeds of the MSR, as well as the projected, you know, custodial income, but also, you know, that we value our MSRs at a spread over the risk-free rate. So, as risk-free rates increase, you know, our overall yield or discount rate on the, you know, on the MSR also increases, and so, you know, we would expect to earn, even if the cash flows were the same or similar, you know, a greater, you know, a greater yield as we move forward due to the fact that we're, you know, we're discounting those cash flows at a higher rate to get to the value that we're at today.

Bose Thomas George: <unk>.

Bose Thomas George: Our valuation methodology as interest rates.

Bose Thomas George: As interest rates increase it has an impact on the prepayment speeds of the expected prepayment speeds of the MSR as well as the projected custodial income but also.

Bose Thomas George: We value our MSR is at a spread over the different got it over the risk free rates, so as risk free rates increase our overall yield our discount rate on the on the MSR also increases.

Bose Thomas George: And so we.

Bose Thomas George: We would expect to earn even if the cash flows were at the same or similar.

Bose Thomas George: A greater.

Bose Thomas George: The greater yield as we as we move forward.

Bose Thomas George: Due to the fact that work we're discounting those cash flows at a higher rate to get to the value that we're at today.

Daniel Stanley Perotti: And, you know, similarly with the MBS, because we mark the MBS, you know, to market as interest rates increase and the yield on MBS increases, we'd also expect that MBS, you know, that MBS return to be higher as we move forward.

Bose Thomas George: Similarly, with MBS, because we mark the MBS market.

Bose Thomas George: <unk>.

Bose Thomas George: As interest rates increase in the yield on MBS increase we would also expect that MBS.

<unk> returned to be to be higher as we move forward.

Speaker Change: Okay, Great. Thanks, and then you talked about the benefit from the yield curve Dean Berthing.

Bose Thomas George: Okay, great. Thanks.

Daniel Stanley Perotti: And then you talked about the, you know, the benefit from the yield curve de-inverting, but does that have to happen with the yield curve with long rates remaining relatively elevated? Like, if there's a shift down, kind of a parallel shift down in the curve, and then the curve, you know, de-inverts, does that, you know, hurt you to some degree? So it's kind of higher for longer with a yield steeper curve.

Speaker Change: And but does that have to happen with the yield curve.

Speaker Change: With long rates remaining relatively elevated like if there's a shift down kind of a parallel shift down in the curve.

Speaker Change: Then the carbon Dean Bernstein.

Speaker Change: Does that sort of hurt you to some degree is kind of a higher for longer with the yield steeper curve better.

Bose Thomas George: I think overall for PMT, just because overall asset returns would be higher, we would generally, you know, generally be preferable if we were, you know, flatter and higher rather than, you know, flatter and lower, but the overall, you know, either way would be beneficial for interest rate sensitive strategies, whether, you know, we're our, since most of our financing is floating rate and based off of short rates, if short rates move down. Relative to the longer-term asset yields, you know, that is, you know, that is beneficial as well.

Speaker Change: I think overall for PMT had just because overall asset returns would be higher.

Speaker Change: We would generally.

Speaker Change: Generally be preferable, if we were flatter and higher rather than flatter and lower but the overall either way it would be beneficial for the interest rate sensitive strategies whether.

Our since most of our financing is floating rate and based off of short rates short rates move down relative to the longer term asset yields that is.

Speaker Change: That is beneficial as well.

Bose Thomas George: But if, you know, the yield curve shape was constant, just because overall yields on the assets would be higher, technically, I think higher rate environments with the same steepness of the yield curve would be preferable to a lower rate environment for the, for the, returns of the strategy, but either one would be better than the other. Either one would be better than an inverted curve. Yeah. Okay, great.

Speaker Change: But if the yield curve shape being constant just because overall yields on the assets would be higher technically I think the higher rate environment with the same steepness of the yield curve would be preferable to a lower rate environment for the for the for the returns of the strategy, but either one would be better.

Speaker Change: Then.

An inverted curve yeah, okay, great. Thanks.

Bose Thomas George: Yeah. Okay, great. Thanks.

Speaker Change: Okay.

Speaker Change: Your next question comes from the line of Mike Halloran from B Riley Securities. Please go ahead.

Operator: Your next question comes from the line of Maud Howlett from B Riley Securities. Please go ahead.

Matthew Philip Howlett: Oh, hey, thanks. Thanks for taking my question. The first question just is on, it must be frustrating with the stability you've put out and book value earnings to be trading it, you know, in a discount to discount to book. You're kind of in this mortgage group that's trading well below book and not in the group that's trading above book. And I know it must be frustrating. My question for you, David, is, you know, the buyback again. How willing would you be to start buying back shares at a 20 plus percent discount to book? And then I'll tie that into, when do you expect to be in the market to refinance on November 24?

Mike Halloran: Oh, hi, thanks, Thanks for taking my question. The first question just is on it must be frustrating with the stability you've put out in book value and earnings to be trading at.

Mike Halloran: And a discount the discount to book that you're kind of in this mortgage REIT group is trading well below book and not in the group that is trading above group and I know it must be frustrating. My question for you David is that the buyback again.

Mike Halloran: Willing would you be to go when to start buying back shares at a 20 plus percent discount to book and then I'll tie that into.

Mike Halloran: When do you expect to be in the market to refinance the November 24.

David A. Spector: Yeah, so look, there are things we can control and things we can't control. And I can't control the share price. I can only work to influence the results of the company.

David A. Spector: Yes. So look there are things, we can control and things we can't control I can't control the share price.

David A. Spector: We worked influenced the results for the company and to your point, we produced really good results.

David A. Spector: And to your point, we've produced really good results. Especially, you know, you look back on the last five, six quarters. And so I continue to, you know, insist that as long as we continue to post results, the share price will take care of itself. And so that's something that, you know, we remind people here all the time. I think, look, we have a limited amount of capital, and we're going to deploy

David A. Spector: You look back the last five six quarters and so I continue to.

David A. Spector: So as long as we continue to post the results the share price will take care of itself.

David A. Spector: And so that's something that we will.

David A. Spector: We remind people here all the time I think look we we have a limited amount of capital and we're going to deploy judicious.

David A. Spector: And I think that, you know, as we look at the marketplace, if we see opportunities to continue to deploy capital to meet our required return, we'll do so. And I think that, you know, we've shown that we will buy back stock when the stock is discounted. I don't, you know, I think whether that but what that discount percentage is depends on the point in time. But suffice it to say, we can be patient, and we have what we've always been patient with; we'll continue to be patient.

David A. Spector: And I think that.

David A. Spector: As we look out in the marketplace, if we see opportunities to continue to deploy capital to meet our required return we will do so.

David A. Spector: I think that we.

David A. Spector: We've shown that we'll buy back stock when the stock is discounted I don't.

David A. Spector: I think I think whether that but thats, what that discount percentages depends at the at the point in time.

David A. Spector: But suffice it to say, we can we can be patient and we have well we have always been patient and will continue to be patient.

David A. Spector: And then with respect to the.

David A. Spector: And then with respect to the, you know, the 2024 maturity. We continue to look for opportunities to raise additional capital, but we have fully reserved for the retirement of that maturity in our liquidity forecasting. So we have sufficient secured financing based on our current assets to be able to retire that maturity, even if we do not raise additional capital. That being said, we are looking for opportunities to raise, you know, capital that would replace some of that, you know, that convertible debt that matures in 2024.

David A. Spector: The 2020 for maturity.

We continue to look for opportunities to.

David A. Spector: To raise additional capital, but we have fully reserved for further retirement of that maturity in our liquidity and our liquidity forecasting so we have.

David A. Spector: Sufficient secured financing based on our current assets to be able to retire that maturity, even if we do not raise additional raise additional capital that being said we.

David A. Spector: Looking for opportunities to raise.

Raise capital that would replace some of that that convertible that convertible debt that matures in 2024, we've not found what we view to be the right opportunity.

David A. Spector: You know, we've not found what we view to be the right opportunity yet that supports our financing costs goals, but we'll continue to look at the different avenues, whether that be, you know, the baby bond, which we issued last year. Convertible debt, potentially, or depending on the market dynamics, to your point, if we eventually move above the value of the potential equity raise, but we're not looking to, you know, do a dilutive equity raise in order to refinance that, refinance that maturity. And we've, as I mentioned, fully reserved for that in terms of being able to use secured debt to refinance it if we don't find another opportunity that attracts us between maturity and now.

David A. Spector: Yes that supports our.

David A. Spector: Supports are basically financing costs.

David A. Spector: Goals, but we will continue to look at the different avenues, whether that be baby bond, which we issued last year.

David A. Spector: Convertible debt potentially or.

David A. Spector: Depending on the market dynamics to your point, if we eventually moved above if we move to <unk>.

David A. Spector: Book value potential.

David A. Spector: QWERTY raise but we're not.

David A. Spector: We're not looking too.

David A. Spector: Do a dilutive equity raise in order to.

David A. Spector: Refinance that.

David A. Spector: Refinance that maturity.

David A. Spector: As I mentioned fully reserve for that in terms of being able to use secured debt to refinance it if we don't find another opportunity that attracts us between that maturity.

Speaker Change: Great. Thanks, and then just one last one how long with the current interplay between Pia beside that the selling of conventional loans to be episodic and then you're out there sort of buying bulk packages and how long will that interplay continue I mean is there a certain rate level.

Matthew Philip Howlett: Great, thanks. And just one last one.

David A. Spector: How long will the current interplay between PFSI, the selling of conventional loans to PFSI, and then you're out there sort of buying bulk packages, and how long will that interplay continue? I mean, is there a certain rate level where you'd start not selling loans, and presumably you're out buying lower coupon bulk, and you're selling the higher coupon current production to PFSI? Is there some rate level where you sort of stop that, you change that interplay, or go back to where it's been historically?

Speaker Change: You would start.

Speaker Change: Not selling loans and that presumably youre alpine lower coupon bulk and youre selling the higher coupon current production. The PFS side is there some rate level, where you sort of stopped that you've changed that underplay or go back to where it's been historically.

Speaker Change: Okay.

Matthew Philip Howlett: Look, I think it's really a function of capital, and it's a capital allocation decision. You know, obviously, if we were to raise more capital, and we had more capital to deploy, that would factor into the decision. I don't see it changing. It's not going to change in Q2 and I don't necessarily see it changing in Q3. But I think, you know, we if we, for some reason, we raise a bunch of capital, we would look to, you know, address it.

Speaker Change: So it's really a function of capital, it's a capital allocation decision.

Speaker Change: Obviously, we continue to raise more capital and we had more capital to deploy that will that would factor into the decision.

Speaker Change: Don't see changing.

Speaker Change: Tucker change in Q2, and I don't necessarily see a change in Q3, but I think as we.

Speaker Change: If for some reason we raised a bunch of capital we would look to we look to address certain.

Matthew Philip Howlett: And I think, you know, it speaks to the great synergistic relationship between the two enterprises that we've got, you know, P&T has this opportunity to deploy capital and MSRs when it's, you know, in the current period MSRs, when it has capital and the desire to do so, and the PFSI is there, you know, being that they want to continue to grow the servicing portfolio.

Speaker Change: Thank you.

Speaker Change: It speaks to the great synergistic relationship between the two enterprises.

PMT has the opportunity to deploy capital in the <unk>.

Speaker Change: And current period MSR is that it has capital and the desire to do some <unk> there.

Speaker Change: Being that they want to continue to grow the servicing portfolio.

Speaker Change: This makes it makes total sense.

Matthew Philip Howlett: It makes total sense. Thanks, guys. I really appreciate it.

Speaker Change: Thanks, guys I really appreciate it thanks.

Thanks Pat.

Speaker Change: Your next question comes from the line of Eric Hagen from <unk>. Your line is that we're open.

Operator: Your next question comes from the line of Eric Hagen from PTIG. Your line is now open. Hey Hagen, thanks.

Eric J. Hagen: Hey Hagen, thanks a lot. Has PMT ever sold any MSRs, and do you ever look at that as like a viable option to generate liquidity, or is it maybe not really a reasonable option just given the mark and the assets, kind of higher than what we see in

Eric J. Hagen: Hey, Hey, again, thanks, a lot Hey has PMT ever sold in the MSR is and do you ever looked at that as a viable option to generate liquidity or is maybe not really a reasonable option just given the mark when the assets are higher than what we see in the.

David A. Spector: Well, look, I think I look, we're an investment vehicle. It's not something that we've historically looked at. That doesn't mean we couldn't do it.

Eric J. Hagen: The rest of the market.

Speaker Change: Well look I think as look we're an investment vehicle with its not something that we've historically looked at.

Speaker Change: Thats not to say, we couldnt do it.

David A. Spector: But I think, you know, we, you know, we look at P&T as an investment vehicle, and I think that, you know, the reason we sold the CRT was because it was bought in a period of time when spreads were wide. And that's been the strategy of P&T going back the last year to strategically deploy capital and credit-sensitive assets. And, you know, given the fact that the return on that, on those assets went below the required return, we felt it was an opportunity to sell the investments.

Speaker Change: But I think.

Speaker Change: We look we look at PMT as an investment vehicle and I think that the reason the reason we sold the CRT was because it was bought in a period of time, where spreads were wide and that's been that's been the strategy of TNT going back the last year.

Speaker Change: Strategically deploy capital and credit sensitive assets.

And I think given the fact that the return on that on those assets was below the required return we felt there was an opportunity to sell.

Speaker Change: The investments we are in a period of time with TMT can't be a serial issuer of capital. So it has to be mindful of having capital to deploy in strategic investments and so when it gets below the required returns a decision was made to sell but having said that there's nothing to preclude P&C from selling servicing it's just.

David A. Spector: It's, it's, you know, we're in a period of time when P&T can't be a serial issuer of capital. So it has to be mindful of having capital to deploy in strategic investments. And so when it gets below the required return, the decision is made to sell. But having said that, there's nothing to preclude P&T from selling, sir, but saying it's just not something that, you know, is on the docket. Yeah, I

Speaker Change: Not.

Speaker Change: Saying that number.

Speaker Change: On the docket.

Speaker Change: Yes, I mean, I think that if when we look at the core investments PMT.

Daniel Stanley Perotti: Yeah, I mean, I think that when we look at the core investments of PMT, you know, between the MSR and our historical credit risk transfer, and that, you know, comprising, I think, around 70% of our total equity deployed, you view those as sort of the anchor investments of the company. And given the characteristics of those investments, both, you know, the low interest rate.

Speaker Change: Between the MSR and the <unk>.

Speaker Change: Our historical credit risk transfer and that comprising.

Speaker Change: Comprising a I think around 70% of our total equity deployed we view those as sort of the anchor investments of the company.

And given how the characteristics of those investments.

Speaker Change: Yeah.

Speaker Change: The low interest rate and so running off at a at a slow pace.

Daniel Stanley Perotti: And so, you know, running off at a slow pace, the positive credit characteristics and the synergy with PSSI's operations in the case that there were some sort of issue. And we saw that come up during COVID, where we were able to implement some, you know, some innovative, innovative programs for our borrowers to enable us to minimize the losses on our CRTs that could be realized. We think that it makes sense to generally maintain both of those assets.

Speaker Change: The positive credit characteristics and the synergy with <unk> operations in the case that there were some sort of issue and we saw that come up during COVID-19, where we were able to implement.

Speaker Change: Innovative.

Speaker Change: Innovative programs for our borrowers to enable us to minimize the losses on our CRT is that could that would be realized.

Speaker Change: <unk>.

Speaker Change: We think that it makes sense to generally maintain both of those assets, but as David said to the extent that we saw.

Daniel Stanley Perotti: But, as David said, to the extent that we see an environment in which, you know, in which we think that it would be beneficial to PMT to sell a portion of the MSRs, then that's something that we could consider. But, you know, we generally think of those as our two sort of, you know, core assets for the company. And given the current position, far out of the money, stable cash flows, low credit exposure, you know, generally think that it probably makes sense to maintain them.

Speaker Change: In an environment in which.

Speaker Change: In which we.

Speaker Change: We thought that it was beneficial to PMT.

To sell a portion of the MSR is then that's something that we could consider but.

Speaker Change: We generally think of those as our two sort of core assets for the company and given the current position far out of the money stable cash flows low credit exposure.

Speaker Change: Generally think that it probably makes sense to maintain those.

Speaker Change: Okay.

Speaker Change: Yeah, that's a helpful answer.

Eric J. Hagen: Yep, that's a helpful answer. Hey, on the secured leverage side, how much of the funding is fixed versus floating rate at this point? On the secured side, all of our debt on the secured side is floating rates. Okay, so we'll think of any hedges. Unknown Attendee, PennyMac Mortgage Investment Trust.

Hey on the secured leverage side.

Speaker Change: How much of the funding as fixed versus floating rate at this point.

Speaker Change: On the secured side all of the all of our debt on the secured side is floating rate.

Speaker Change: Okay.

Speaker Change: So we think of any hedges.

What kind of impact.

Speaker Change: Okay.

Daniel Stanley Perotti: So, you know, our hedging, when we look at the hedging, when we look at that, our hedging is, I mean, the way that we think about it is generally against our, you know, our asset base, obvious, or asset base; we mark everything to market. And so the discount rate on the assets, you know, incorporates the, you know, the short-term rates as well. And so our hedges, you know, we think of as effectively hedging the short term as well as the, you know, long term part of the rate sensitivity over time. But we don't have any specific hedges against, you know, our debt that, from a gap perspective, for example, neutralize the impact of the, you know, short range.

Thank you.

Speaker Change: So our hedging when we look at the hedging.

Speaker Change: When we look at that our hedging it's I mean, the way that we think about it is generally against our our asset base obvious or our asset base, we mark everything to market and so that discount rate on the assets.

Speaker Change: Incorporates.

Speaker Change: The short term rates as well and so our hedges, we think of as effectively hedging the short term as well as the long term.

Speaker Change: The long term part of the rate sensitivity.

Speaker Change: Over time, but we don't have any specific hedges against.

Against our debt that from a from a GAAP perspective for example, neutralized the impact of.

Speaker Change: Yeah.

Speaker Change: Short rate changes.

Speaker Change: Alright. Thank you guys. Good luck.

Eric J. Hagen: All right. Thank you guys so much.

Speaker Change: Sorry, one other one other.

Speaker Change: One other detail on that is just that our.

Daniel Stanley Perotti: One other detail on that is just that our earnings on the escrow balances on the MSRs are also generally floating rates, or are tied to tied to short rates; our earnings rate on those are generally tied to short rates. And so that is also an offset to the floating rate nature of a lot of the secured debt. And then on the CRP side, the assets are floating rate, and so it makes sense to pair them with floating rate debt. Thank you guys so much. Again, if you would like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: If you think of the MSR is the our earnings on the escrow balances on the MSR is are also generally floating rates.

Speaker Change: Or are tied to tied to short rates at our earnings rate on those are generally tied to short rates and so that is also an offset to the floating rate nature of a lot of the secured debt and then on the CRC side. The assets are floating rate and so it makes sense to pair them with floating rate debt.

Speaker Change: Thank you guys so much.

Speaker Change: Again, if you would like to ask a question. Please press star one on your telephone keypad and your next question comes from the line of Douglas Harter of UBS. Please go ahead.

Operator: Again, if you would like to ask a question, please press star 1 on your telephone keypad. And your next question comes from the line of Douglas Harter of UBS. Please go ahead. Thanks.

Speaker Change: Thanks.

Douglas Michael Harter: You guys are thinking about investment opportunities.

Douglas Michael Harter: How are you thinking about sort of a credit investment.

Seconds or the second liens that pennymac is originating.

Look we're looking at.

Douglas Michael Harter: But we're looking at We're looking at the execution opportunities to look at the investment opportunities of prioritizations that are being done with closing second and jumbo because I think that PFSI is seeing increased activity and origination of both assets. We see the investment opportunity meeting the required return that PMT needs that was set out. But suffice it to say that if we just spread wide and there was an opportunity to invest, there's enough activity going on in PFSI that PMT could do a securitization. And I think it's just a function from a PFSI standpoint; they're looking for best execution. For PMT, they're looking to achieve their required return.

Douglas Michael Harter: We're looking at the execution opportunities, we're looking at investment opportunities.

Douglas Michael Harter: The organizations that are being done with closed end seconds and jumbos.

Douglas Michael Harter: Because I think that deemphasizing increased activity and origination both assets.

Douglas Michael Harter: Okay.

Douglas Michael Harter: <unk> opportunity meeting the required return.

Douglas Michael Harter: PMT knee.

Douglas Michael Harter: Erez set out but.

Douglas Michael Harter: But suffice it to say that.

Douglas Michael Harter: Particularly spreads widened and there was an opportunity to invest.

Douglas Michael Harter: Enough activity going on in PFS Si that PMT could do a securitization and I think it's I think it's just a function from a <unk> standpoint. They are looking for best execution for PMT Theyre looking towards your required return.

Speaker Change: Great. Thank you David.

Speaker Change: Okay.

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

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

David A. Spector: Thank you. Thank you all for joining us today. You know, if you have any additional questions, please don't hesitate to reach out to our IR department. We appreciate your time and look forward to speaking to all of you in the near future. Take care.

Spector: Thank you. Thank you all for joining us today.

Spector: If you have any additional questions. Please don't hesitate to reach out to our IR Department.

David A. Spector: We appreciate your time and looking forward to speaking to all of you in the near future take care.

Mr. Spector: Yeah.

Yeah.

Thank you.

Mr. Spector: Okay.

Mr. Spector: Yeah.

Mr. Spector: Yeah.

Mr. Spector: Yeah.

Mr. Spector: Yeah.

Mr. Spector: Yeah.

Mr. Spector: Thank you.