Q4 2024 PennyMac Mortgage Investment Trust Earnings Call
Speaker Change: Good afternoon and welcome to Panamak Mortgage Investment Trust's fourth quarter and full year 2024 earnings call.
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 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-to-the-earnings materials.
Speaker Change: Now, I'd like to introduce David Spector, Panamac Mortgage Investment Trust Chairman and Chief Executive Officer, and Don Perotti, Panamac Mortgage Investment Trust Chief Financial Officer. You may begin.
Speaker Change: Thank you, Operator. P&T produced very strong results in the fourth quarter, generating a 10% return on equity driven by strong levels of income, excluding market-driven value changes, and excellent performance across all three investment strategies.
Speaker Change: Net income to common shareholders was 36 million dollars for diluted earnings per share of 41 cents and P&T declared a fourth quarter common dividend of 40 cents per share.
Speaker Change: Book value per share year-end was $15.87 up from the end of the prior quarter. Importantly, the fourth quarter marked a return to the organic creation of credit investments for PMT, which I will expand on later.
Speaker Change: Turning to slide four, for the full year, P&T produced a return on common equity of 8%, with $119 million of net income attributable to common shareholders and income contributions from all three investment strategies.
Speaker Change: 2024 was a year characterized by significant interest rate volatility, as evidenced by the yield on the 10-year Treasury, which ranged from 3.6% to 4.7%.
Speaker Change: Also during 2024, we worked on multiple facets of the business to reposition PMT's balance sheet for success in a higher interest rate environment.
Speaker Change: A major rebalance of our agency MBS portfolio and the issuance of $1.3 billion in term debt to address and extend upcoming maturities, generally at tighter financing spreads.
Speaker Change: We also renewed PMT's mortgage banking agreement with our manager and industry leader PFSI, solidifying this unique synergistic partnership between the two companies for another half a decade.
Speaker Change: All of these activities position PMT with a very strong foundation as we enter 2025.
Speaker Change: Turning to the origination market, current third-party estimates for total originations in 2025 averaged two trillion dollars, reflecting growth in overall volumes.
Speaker Change: Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time.
Speaker Change: P&T's stable performance in recent periods of heightened volatility highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise managing mortgage-related investments in its changing environment.
Speaker Change: Turning to slide six, a key competitive advantage throughout P&T's history has been the ability to organically create MSR and credit investments from its own production volumes.
Speaker Change: We believe that our position as the producer of the underlying loans is a competitive advantage, providing us with an ability to review and diligence the loans selected for securitization and subsequent investment.
Speaker Change: Additionally, as the servicer of the underlying loans, we are uniquely positioned with the ability to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our unique investments in lender credit risk transfer.
Speaker Change: In recent periods, volume or pricing limits for the GSEs on certain types of loans, such as non-owner-occupied and second homes, coupled with strong investor demand, has driven increased private label securitizations of such loans.
Speaker Change: This development has created a renewed opportunity for P&T to organically create credit investments from its own production.
Speaker Change: We leveraged the strength of our correspondent production franchise and securitization expertise to complete two securitizations of agency-eligible investor loans, where we retained $52 million of new investments in credit subordinate bonds.
Speaker Change: Return on equity for these investments is expected to be in the low to mid teens.
Speaker Change: with the potential for increased investment opportunities through securitizations of other loan products, such as jumbo loans, as the origination market grows.
Turning to slide 7,
Speaker Change: As the majority of mortgages underlying these assets were originated during periods of very low interest rates,
Speaker Change: 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.
MSR investments account for approximately half of PMT's deployed equity.
Speaker Change: The majority of the underlying mortgages of these MSRs remain far out of the money and we expect the MSR asset to continue to producing stable cash flows over an extended period of time.
Speaker Change: MSR values also continue to benefit from the higher interest rate environment, as the placement fee income PMT receives on custodial balances is closely tied to short-term interest rates.
Speaker Change: Similarly, mortgages underlying PMT's large investment in lender-originated risk share have low delinquencies and a low-weighted average current loans evaluation of below 50%.
Speaker Change: 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.
Speaker Change: Given our expectations for P&T to be a consistent issuer and investor in private label securitizations,
Speaker Change: Alongside a seasoned portfolio of MSRs and CRT with strong underlying fundamentals, I am confident the company will continue to deliver attractive risk-adjusted returns in 2025 and beyond.
Speaker Change: Now, I'll turn it over to Dan, who will review the drivers of PMT's fourth quarter financial performance and PMT's run rate to return potential.
Dan: Thank you, David. PMT earned $36 million in net income to common shareholders in the fourth quarter, or $0.41 per diluted common share. The credit-sensitive strategies contributed $20 million in pre-tax income.
Dan: The contribution from organically created CRT investments was $20 million, while the contribution from opportunistic investments in CAS and stacker bonds was offset by losses on non-agency subordinate MBS due to increasing interest rates and losses on other credit-sensitive strategies.
Dan: 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 below 50% and a 60-day delinquency rate of 1.5%, both as of December 31st.
Interest rate sensitive strategies contributed pre-tax income of $25 million.
Dan: Fair value increases on MSR investments were 184 million dollars as the increase in mortgage rates drove a decrease in future pre-payment projections.
Dan: These fair value increases were offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and the related income tax effects.
Dan: NBS fare value decreased by $140 million due to the increase in mortgage rates. Interest rate hedges decreased by $51 million.
Dan: Income from correspondent production and gains on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $9 million tax expense.
Dan: The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, up slightly from $3.8 billion at September 30th, but fair value gains and newly originated MSR investments were slightly offset by runoff from prepayments.
Dan: Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding increased to $105 million from $71 million at September 30th due to seasonal property tax payments.
No principal and interest advances are currently outstanding.
Dan: Total Correspondent Loan Acquisition Volume was $28 billion in the fourth quarter, up 9% from the prior quarter driven by the larger overall market.
Dan: Correspondent loans acquired for PMT's account total $3.5 billion, down 41% from the prior quarter due to PMT retaining a smaller percentage of the conventional conforming correspondent loan production.
Dan: PMT retained 19% of total conventional correspondent production in the fourth quarter, down from 42% in the third quarter.
Dan: We expect this percentage to remain between 15 to 25 percent in the first quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market.
Dan: Income from PMT's correspondent production segment was up from last quarter, driven by increased demand for private label securitization and whole loan execution for investor loans during the quarter.
Dan: The contribution of pre-tax income related to the strong execution of our private label securitizations in the quarter was approximately nine million dollars.
Dan: Profitability in this segment in recent periods has also benefited from the release of liabilities related to representations and warranties provided at the time of securitization, as the high volumes of loans produced from 2020 to 2022 passed the three-year window for violations with minimal repurchase-related losses.
Dan: The Weighted Average Fulfillment Fee Rate was 18 basis points, down from 19 basis points in the prior quarter.
Dan: Under the Renewed Mortgage Banking Services Agreement with PFSI, effective July 1st, 2025, correspondent loans will initially be acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent production from PFSI.
Dan: In total, PMT reported $51 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $35 million in the prior quarter, driven primarily by decreased realization of MSR cash flows and correspondent production income.
Dan: Looking ahead, slide eight outlines the run rate return potential expected from PMT's investment strategies over the next four quarters.
Dan: PMT's current run rate reflects a quarterly average of $0.37 per share, unchanged from the prior quarter. We see slightly increased return potential for the credit-sensitive strategies as short-term interest rates are expected to remain higher for longer.
Dan: We also see improvement in the interest-sensitive strategy segment as the yield curve is steepened.
Dan: The improvements in these segments was somewhat offset by a slightly decreased return potential in the correspondent production given the current expected margin environment.
Dan: If the yield curve steepens further, we expect TMC's overall run rate would increase, closer to the $0.40 range, driven by higher overall yields in the interest rate sensitive strategies.
Dan: Turning to our capital position, we retired $43 million of CRT term notes that were due to mature in October, where the remaining assets were financed via a repurchase agreement due to the size of the position. Also, we repaid in full $210 million of exchangeable senior notes that matured in November.
Dan: Through 2025, we will continue to look for opportunities to raise additional debt capital to address the maturity of our exchangeable note in 2026, as well as to provide additional funding for potential expansion of our securitization efforts.
We'll now open it up for questions. Operator?
Speaker Change: Thank you. I would like to remind everyone we will only take questions related to Panamak 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.
Speaker Change: If you would like to ask a question during this time, please press the star followed by the number one on your telephone keypad. And if you would like to revise your question, please press the star one again.
Speaker Change: Your first question comes from the line of Bruce George with KBWP. Go ahead.
Bruce George: Hi guys, good afternoon. So you mentioned, you know, the yield curve steepens that helps the run rate outlook. Again, does that matter if we see a fell off on the long end? Does that kind of get you there as well or do we need the Fed to, you know, cut a little bit?
Bruce George: Really short, truly short term rates and longer dated rates really improves the outlook for the interest rate sensitive strategies. Just the overall steepness of the curve there and
Bruce George: from that perspective or somewhat ambivalent around whether the longer end goes up or the shorter end goes down.
Speaker Change: Okay, great, thanks. And then in terms of your MSR hedge, is your strategy kind of similar at PMT versus PFSI, or is it sort of a tighter hedge here, or just how would you characterize it?
Speaker Change: Generally speaking, we run a tighter hedge at PMT over time, or we have run a tighter hedge from a hedge ratio perspective.
Speaker Change: You know, the composition of the MSR portfolio in PMT versus PSSI is somewhat different at this point since
have
less sensitivity to interest rates changing and refinance.
Speaker Change: some of the reCAPTCHA benefit due to its agreement with PFSI if those loans are refinanced.
Speaker Change: through PFSI, it only retains really a portion of the benefit, not the same amount of benefit that that PFSI retains if it refinances its own loans.
Speaker Change: For those two reasons, we run generally at a tighter hedge at PMT, but I think it's also important to note that the sensitivity at PMT of the MSR portfolio is also lower. Okay, great. Makes sense. Thank you.
Speaker Change: And your next question comes from the line of Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner: Hey guys, thanks for taking the question. I'd like to touch on GSE reform and kind of how you guys seeing it play out. And then, you know, kind of as a follow up to it with the new FHFA director coming in, you know, what are you guys expecting? And, you know, do you expect their footprint to just kind of shrink as a whole? Thanks.
Speaker Change: Well, thank you, Matthew. I think, you know, look, I think that it's still really early.
to really have a point of view.
Speaker Change: on what the new FHFA director is going to do vis-a-vis the prior one. I can tell you we've always had a good relationship with FHFA and the GSEs, and I'm excited to work with the new director.
Speaker Change: But I think, you know, my general sense is it's going to be a little bit of a return to the way things were, you know, the last time we had this administration in place.
Speaker Change: I think as it pertains to GSU reform, I have a similar point of view that it's still really early to say, you know, one way or another how it's going to play out, but I can tell you we have, since we started the company, number one, always managed to a range of outcomes.
Speaker Change: So, you know, we're very much prepared to operate in an environment where 90% of the production goes to the GSEs, like we saw, you know, during the Obama administration, or we see GPs increase or continue to increase.
Speaker Change: just thus removing loans from the GSEs into the private label.
Speaker Change: Markets and that's what that's what's really exciting about what's taking place in PMT because as we've seen guarantee fees go up
Speaker Change: has given us the ability to organically create investments for PMT at appropriate returns. And that's how this company was set up to operate. It just took a long time for private label securitization to come back.
Speaker Change: You know, we're on pace to do a deal a quarter, and, you know, I expect that to continue into the future. But, you know, obviously that's subject to things that we can't control, but I think that, you know, the investor loan securitization market is one that we're very excited about.
Similarly, the organization is looking at other investments as well.
you know, the jumbo, you know, our jumbo loan origination.
Speaker Change: between PSSI and PMT are on pace to be over a billion dollars in the first quarter of this year.
Speaker Change: A lot of those loans are being sold whole loan, but my plan is to do a securitization sometime in the first half of this year.
and that will create an investment.
that has, you know, mid-collar to mid-teens as well.
Speaker Change: And so, as we continue to create investments in the low to mid-teens range,
Speaker Change: That's going to be very, very important for PMT in its ability to grow.
Speaker Change: and I'm really, I've been in the society of PMT in a very long time. I just think that we're in a very good position with the work that's been done over the last year and kind of repositioning the assets and the ability to do securitizations.
Speaker Change: to play a meaningful role in a market that we would see if the GSE footprint were to continue to shrink.
Speaker Change: And your next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.
All right, thanks.
Speaker Change: Can you clarify that specifically just related to investor loans or would that incorporate other products such as Prime Jumbo and can you guys also maybe
Speaker Change: Talk a little bit about kind of the product set and if there are other things you guys are thinking about for Securization beyond the investor loans and then Prime Jumbo. Thanks
Speaker Change: Yeah, look, we did two investor loans, second on securitization in Q4, we closed our first one of the year today as a matter of fact.
I feel really good about maintaining that pace of activity.
Speaker Change: Having said that, we're also looking, as I said, at Jumbo Loans, which is another asset class under the residential umbrella that I'm really encouraged about. As I mentioned, my plan is to do at least one securitization in the first half of this year.
Speaker Change: I think, you know, we also just full disclosure, we, you know, PFSI is originating over, you know, 300 million a month, close in seconds. We've looked at securitizing those loans and retaining investment there. It doesn't quite achieve our return targets.
Speaker Change: And so there, it doesn't, it doesn't, it's not on the radar yet. I mean, it's on the radar, obviously, but it's not something that I see as an opportunity in the first half of this year. And the other asset class that we're starting to look at a little bit is non QM, particularly the prime non QM where.
Speaker Change: You know, we kind of are intrigued about the returns there, but there's a lot of work to be done there.
Speaker Change: you know, before we get, you know, before we do anything in that market. But it's really, it's a testament to the, to the organization that in PMT that they've built out.
Speaker Change: this enterprise that can value and price and understand all of the different assets.
Speaker Change: that they can invest in, and it's something that as we see more and more opportunities, we're going to seize upon.
Speaker Change: As it pertains to agency loans in particular, I mean, look, obviously, if we see guarantee fees go up, or loan level price adjustments go up, or, you know, I don't, you know, if they don't like high balance loans and they want to put an LLPA on that, you know, obviously, we're going to use our capabilities and our robust, you know, best execution engines to optimize for the best execution for PMT.
Got it. OK, that makes sense. Thanks a lot.
Speaker Change: Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Speaker Change: Hi guys, you have Jake Katsikis on here for Eric. Can you guys share how much liquidity you currently have, including the room you have to borrow more against the MSRs? And what is your most readily available source of liquidity to draw upon as you get closer to the maturity of the unsecured? Thanks.
Speaker Change: Sure, so if you look at the balance sheet in terms of the liquidity that we had, the direct liquidity that we had outstanding at the end of the quarter was about $430 million.
Speaker Change: In terms of our financing facilities, we have a few hundred million dollars also available to be able to draw against the current collateral that we have outstanding at the end of the quarter.
the maturity early next year in 2026.
Speaker Change: of the convertible. We are looking at opportunities, as I mentioned in the prepared remarks.
Speaker Change: or to replace some of that maturity that's upcoming next year.
Great, thank you guys.
Speaker Change: And your next question comes from the line of Doug Harther with UBS News. Go ahead.
Speaker Change: Thanks. Jan, I appreciate you giving us the details around the gain from the non-agency securitization. How should we think about the profitability of that business compared to the traditional conventional correspondent business?
Speaker Change: So the gains overall in the correspondence section, in terms of the aggregation gains,
Speaker Change: are generally a bit better or help influence the margin of the correspondent business.
Speaker Change: Upwards, however, we have been engaged in that in that business and, you know, although not necessarily securitizing selling those loans hold through whole loan channels for the past.
Speaker Change: Few or several quarters. I mean, although that business has been building over time. It's not not necessarily going to significantly impact upward versus our historical performance prior to this quarter.
Speaker Change: to execute these deals, these deals that we've been doing one a month for the past three months that did have a benefit on our overall aggregation pipeline. That's what led
Speaker Change: was a bit more specific to the tightening in that market that we saw in this quarter as we were aggregating. Doug, the really nice part of the investment of loans in second homes is that
Speaker Change: Daniel Perotti, M.D.: You know, right now, the securitization execution is really strong, but having said that the the the bid for homes is very deep.
Speaker Change: and many of those investors are holding the loans and not securitizing them. So there's a pretty robust market away from securitization if you were to see an event in the private label markets.
Speaker Change: And so there is that third avenue. And so it's not like other private label product that we've seen in the past where it's solely reliant on securitization. There's multiple avenues and paths for that product to be delivered.
Speaker Change: And we have no further questions at this time. I would like to turn it back to David Spector for closing remarks.
David Spector: Well, I want to thank everyone for joining us this afternoon. I want to encourage any of you with any additional questions to contact our investor relations team by email or phone, and they're available every day. And likewise, if you want to follow up with me or Dan, please don't hesitate to reach out. Thank you all for joining. Bye-bye.
Speaker Change: Thank you, presenters, and this concludes today's conference call. Thank you all for participating. You may now disconnect.