Q1 2025 PennyMac Mortgage Investment Trust Earnings Call
Speaker Change: Good afternoon and welcome to PennyMac Mortgage Investment Trust first quarter 2025 Ernie's call.
Speaker Change: Additional earnings materials, including the presentation slides, that will be referred to in the call or available on PennyMac Mortgage Investment Trust website at pmp.panimac.com
Speaker Change: Before we begin, let me remind you that this call may contain foreign-looking statements.
Speaker Change: that are subject to certain risk identified on slide 2 of the earnings presentation that could cost the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to their gap equivalent in the earnings materials.
David Spector: Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman, and Ship Executive Officer, and Dan Perotti, PennyMac Mortgage Investment Trust, Chase the National Officer.
David Spector: Thank you, operator. For the first quarter, PMT produced a net loss to common shareholders of $1 million or diluted earnings per share of negative one cent.
David Spector: Strong levels of income excluding market-driven value changes were offset by net-care value declines due to interest rate volatility and credit spread widening.
David Spector: P&T declared a first-quarter common dividend of 40 cents per share.
David Spector: Looks how you per share at March 31st with $15.43, down modestly from December 31st.
David Spector: Current third-party estimates for industry origination averaged $2 trillion in 2025, reflecting projections for growth and overall volume with moderate contributions from both refinance and purchase.
David Spector: Interest rates have been extremely volatile in recent periods, creating a challenging environment for most mortgage reads.
David Spector: However, our diversified investment portfolio, efficient cost structure, and strong risk management practices, enable us to effectively manage through these challenging market conditions.
David Spector: These risk management practices include a well-established interest rate hedging program and the establishment of unique non-marked-to-market financing arrangements for the vast majority of our credit risk transfer investment, which enable us to effectively manage through volatile markets.
David Spector: Turning the slide 5, our synergistic relationship with PFSI provides PNC with unique improvement competitive advantages.
First, P.M.C. leverages P.M.F.A.S Best in Class Operating Platform
David Spector: including its deep-and-experienced management team, scaled servicing operations and its large and agile multi-channel origination business which provides P&T with a consistent and high-quality pipeline of loans for investment.
David Spector: Second, our structure allows P&T to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing.
David Spector: And third, BFSI's deep access to the origination market, coupled with P&T's ability to execute private-label securitization and retain the related investment.
David Spector: Positions PNC to capitalize on the evolving landscape for secondary market execution should the GSEs reduce their foot part.
David Spector: This provides us with access to unique investment opportunities that we believe will generate attractive risk adjust to returns over time.
David Spector: Slide 6 highlights our ability to organically create investments from our own private label Securitization Activity, and importantly, the significant opportunity presented by the broader loan pipeline.
David Spector: The increased volume of non-owner occupied and jumble loans underscores the potential for future investments, and this scoring pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives.
David Spector: In recent periods, P&T has been among the largest issuers of private-label securitization, demonstrating our expertise and leadership in this space.
David Spector: In the first quarter, we successfully completed three securitizations of investor loans, totaling $1 billion an unpaid principle balance, retaining $94 million in new investment with returns on equity expected to be in the mid-team.
David Spector: We believe that our position as the producer of the underlying loans is a competitive advantage, providing us with the ability to review and
David Spector: Additionally, our position is the service of the underlying loans, uniquely positions us to work directly with forward and times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender credit risk transfer.
David Spector: Looking ahead, we expect to continue closing approximately one securitization of non-owner occupied loans per month and we anticipate closing approximately one-jumbo loan securitization per quarter, beginning of the second quarter.
David Spector: This consistent cadence of securitization underscores our commitment to leveraging our origination capabilities and actively participating in the private label securitization market.
David Spector: Turning to slide five, approximately two-thirds of PMT shareholders' equity is currently invested in the season portfolio of MSR and the unique GSE lender risk share transactions we invested in from 2015 to 2020.
David Spector: While credit-based spreads of whys in the current economic environment, the linkages remain low.
David Spector: This can be attributed to the overall credit strength of the consumer combined with the substantial accumulation of home equity in recent years due to continued home price appreciation.
David Spector: Mortgage's underlying P&C's large investment lender-originated risk share have a low weighted average current low-to-value ratio below 50%.
David Spector: As a result, we continue to expect that realized losses will be limited [inaudible]
David Spector: MSR investments account for approximately half of PNG's deployed equity. The majority of the underlying mortgages of these MSRs were made far out of the money and we expect the MSR assets to continue producing stable cash flows over an extended period of time.
David Spector: MSR values also continue to benefit in the higher interest rate environment, as the placement being in can PMT receive a custodial balances is closely tied to short term interest rates.
David Spector: Similarly, these characteristics are expected to support the performance of these assets over the long term.
Inclusion, a risk-managing capability in diversified investment strategies.
David Spector: which include a seasoned MSR and CRT portfolio combined with a growing securitization platform, position as very well to continue delivering attractive risk-adjusted returns to our shareholders in 2025 and beyond.
David Spector: and we remain confident in our ability to successfully navigate a volatile and evolving market. Now I'll turn it over to Dan, who will review the drivers of PMT's first quarter financial performance and PMT's run rate return potential.
Dan: Thank you, David. PMT reported a net loss to common shareholders of $1 million in the first quarter, or negative one cent for diluted common share.
The credit sensitive strategies contributed $1 million to pre-fact income.
Losses from organically-created CRK investments were $5 million million dollars.
Dan: Investments in non-agency subordinate MBS generated games of $4 million and investments in Caz and Stacker Bonds generated games of $2 million.
Other credit sensitive strategies contributed losses of $0.2 million million dollars.
Dan: The interest rate sensitive strategies contributed a pre-saxle loss of $5 million and $2 million.
Dan: Their value declines on MSR investments were $56 million, as the decrease in mortgage rates drove an increase in future procurement projections.
Dan: These fair value declines were partially offset by the combined impact of changes in the fair value of MBS interest rate hedges and related income tax benefits.
Dan: MBS fair value increased by $65 million each of the decline in market interest rates.
Interest rate set is decreased by $40 million and $20 million.
Dan: Declines on MSR's held in PMT's Taxable Reef subsidiary for the primary driver of the $16 million tax benefit.
Dan: The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from December 31st, as fair value declines and runoff were partially offset by newly originated MSR investors.
Dan: The lengthy race for borrowers underlying PMT's MSR portfolio remain low while servicing advances outstanding decrease to $84 million from $105 million at December 31st. No principal and interest advances are currently outstanding.
Dan: Total Correspondent loan acquisition volume was $23 billion in the first quarter, down 18% from the prior quarter and consistent with the overall decline in the size of the origination market.
Dan: Correspondent loans acquired for PMT's account total $3 billion, down 20% from the prior
Dan: PMC retained 21% of total conventional correspondent production in the first quarter, up from 19% in the fourth quarter.
Dan: We expect this percentage to remain between 15 to 25% in the second quarter of 2025 as we continue pursuing investment opportunities in the private label securitization market.
Dan: GMC also acquired $637 million in UPB of loans acquired or originated by TFSI for inclusion in private label securitization, but from $437 million in the prior quarter.
Dan: Income from PMT's correspondent production segment was $10 million, down from the prior quarter, which included gains on non-owner occupied loans due to credit spread tightening.
Dan: The weighted average for film and fee rate was 19 basis points, up from 18 basis points in the prior quarter.
Dan: Under the renewed Mortgage Banking Services Agreement with PFSI, effective July 1, 2025, Correspondent loans will initially be acquired by PFSI. However, PNP will retain the right to purchase up to 100% of non-government correspondent production from PFSI.
Dan: In total, PMC reported $41 million of net income across its strategies, excluding market-driven value changes in the related tax impacts, found from $51 million in the prior quarter, driven primarily by decreased income from correspondent production and seasonally low placements fees on custodial balances into profits.
Dan: Slide 8 of our earnings presentation outlines the run rate return potential expected from the PMC's investment strategies over the next four quarters.
Dan: TMT's current run rate reflects the quarterly average of 35 cents per share, down from 37 cents per share in the prior quarter.
Dan: The return potential for credit sensitive strategies increase due to higher expected yields as credit spreads of livens.
Dan: The return potential for interest rate sensitive strategies declined due to compression between longer dated asset yields and short term financing rates since the beginning of the year. If the yield curve steepens further, we expect PMC's overall run rate would increase, driven by higher overall yields and the interest rate sensitive strategy.
Dan: Turning to capital, in February , we issued $173 million in unsecured senior notes due in 2030. And we also retired $45 million of CRC term notes, where the remaining assets were financed via repurchase agreements due to the size of the position.
Dan: Through 2025, we will continue to seek opportunities to raise additional debt capital as we approach the maturity of our exchangeable node in 2026, as well as to provide additional funding for the potential expansion of our securitization efforts.
We'll now open it up for questions. Operator?
Dan: I would like to remind everyone we will only take questions related to PennyMac Mortgage Investment Trust, our 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 a week and answer as many questions as possible.
Speaker Change: If you would like to ask a question during this time, simply press star follow with the number one on your telephone keypad. And if you'd like to withdraw your question, again it's star one. Your first question comes from the line of Bose George with KBW, please go ahead.
Boss George: Hey, good afternoon. Just given the movement and rate since quarter-end, can you just talk about, you know, any changes in your book value and also changes in the expected ROE since quarter-end?
Boss George: So overall, there's been significant interest rates volatility since the end of the quarter, as well as
Boss George: Additional credits spread widening since the end of the first quarter. And we've had impacts on from both of those during the quarter.
Boss George: during the quarter thus far. Overall, we're very pleased with the, you know, the insulation that we've had from our hedging program on the, you know, which respect to the interest rate volatility, but the combination of the higher hedge costs, some of the interest rate volatility and the spread widening has decreased our, our book value by about two to three percent since the end of the quarter. Thank you very much.
Boss George: But, you know, that remains fairly contained and obviously there's a significant amount of the quarter left to run.
Boss George: With respect to the ongoing ROE, other than those fair value impacts, you know, during the, or in the, with respect to Q2, the ongoing ROE, our run rate return potential reflects.
really, you know, where we've landed since the—
Boss George: Given the nature of our debt, especially in CRT where we don't want to mark it and not subject to margin call provisions, it's a time like this where it's really critical when spread wide and we don't have assets that, you know, in the worst case, we'd have to sell.
Boss George: It's an important aspect to look at the liability structure we have in place that the underlying fundamentals. I know.
for the lonesome
You know, remains the same, you know, in our CRT portfolio yet.
A lot of balls
You know, a lot of equity, I-credit-quality [inaudible]
Boss George: And I don't, you know, that they're so seasoned at this point.
Boss George: You know, it would take something really serious for them to be affected. And so I think, you know, and the same thing holds true to the MSR as well. We have so much of low rate servicing with active likewise equity in the underlying properties. The fundamentals.
Boss George: You know, Steve is saying. And so I think it's, you know, it's times like this. It's the fact that we had just important. And it's the fact that we've turned out our debt without the mark to market for the assets that we can not hedge. That's, you know, just as important.
Speaker Change: Yeah, okay. Great. Thanks. I definitely appreciate the strength of the capital structure. Actually, just one more on this on the mortgage banking is just given the change in the or the update in the mortgage banking agreement between PennyMac and PFI. Is there an expectation that PMT could acquire a larger percentage of loans from PFI in the back half of the year? Yeah.
Speaker Change: The PMC's acquisition amounts, you know, really goes to where we see it as most advantageous to deploy capital. So, you know, currently we've been more focused on increasing our investments.
in the Credit Sensitive Strategies. [inaudible]
Speaker Change: and overall, in terms of the interest rate sensitive strategies with the amount that's going through the correspondence channel and the MSR that's retained there, that has been roughly holding constant in terms of the interest rate sensitive strategies. [inaudible]
Speaker Change: And so, you know, in terms of what our outlook is currently, we wouldn't necessarily expect an increase in the proportion of loans that PMT is retaining or teasing in the back half of the year, since we're more focused on building up the credit sensitive strategies as opposed to, you know, creating more MSR that would go into the interest rate sensitive strategies.
Okay, great makes sense. Thank you
Speaker Change: You're next. Your next question comes from the line of Jason Weaver with Joel's trading. Please go ahead.
Hi guys, good afternoon.
Speaker Change: Can you update on a little bit on your thinking given the current dislocation into 2Q right now about where you want to commit capital and what looks most attractive right now?
Speaker Change: What I would say to you is that we're generally pleased with the capital allocation as we have it today.
Speaker Change: Being a serial issuer is very important. We're seeing the benefits of that and our securitizations and the spread typing that's taking place.
Speaker Change: with the senior bonds that get issued. You know, I want to continue to explore during the Jembo Securitization every quarter. We're going to do our first one this quarter. And so I think that, you know, if the good nation market.
Speaker Change: Growth and Normalizes where the GSEs reduce their footprint through increasing on-level price adjustments, we could do more securitizations. Having said that, I'd like to see PMT also continue to benefit from the corresponded activity.
Speaker Change: that I would like to see in that position. And of course, it's all, you know, it comes into two issues. It's the amount of capital we have to invest in the best execution for that capital.
Speaker Change: And that's probably the biggest change in how we think about PMT versus two years ago, and that we want to focus on continuing.
Speaker Change: to increase the returns of PNT and really focus on it from an investment manager, investment management point of view by looking at the best execution for all the investments.
Speaker Change: Thank you. That's helpful. And then on correspondence specifically, just given the decline in Mortgage race that was apparent during the second half of the first quarter, what kind of visibility do you have coming into 2Q about volumes just from those loans closing?
Speaker Change: You know, I think to your point in correspondence, I expect to see increased correspondence activity starting at the end of this month and running into May as the loans that were locked into our correspondence pipelines fund.
Speaker Change: Where you have greater volatility, you're going to be short periods of refinance activity followed by longer periods or perhaps short periods of higher rates.
Speaker Change: And so with this volatility, you know, the total origination can move as well, but I think we're all, you know, still convicted that we're in a $2 trillion market, but, you know, we're only in April as we speak.
Speaker Change: Agreed. Okay, well, thank you for that color and helpful as always. Thanks so much.
Speaker Change: Before going to the next question, again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line, if Doc Carter with UBS, please go ahead.
Doug Carter: Thanks. Can you talk about your outlook for the dividend given that you lowered run-rate earnings?
Speaker Change: and wanting the ability to retain as much capital for future growth and how the dividend fits into the total return strategy.
Speaker Change: So consistent with what we've seen previously as the run rate has moved around a little bit, we do expect the dividends to remain stable. We do think there's a value in the dividend stability, but also...
Speaker Change: But also, we do the primary reason for the decline in the run rate order over quarter really has to do with the shape of the yield curve and its impact on the interest rate sensitive strategies.
You know, longer term yields decline, but overall short-term financing rates
Not move further if that is on pause pause
Speaker Change: You know, that really puts some some pressure on the interest rate sensitive strategies and the net returns generated there. We do expect the yield curve to normalize to normalize over time.
Speaker Change: and drive up the expected returns on that interest rate sensitive strategy.
Speaker Change: And so, the decline in terms of the run rate is within the range that we've seen previously and doesn't really change our view currently in terms of the dividend and maintaining it at the level that we've had it at 40 cents.
Speaker Change: It seems like so far in April , you know, while volatile, the yield curve has steepened somewhat, and you know, I guess if you looked at the forward curve, it would imply kind of even steeper to just want to make sure I understand, you know, kind of when you think about run rate, how what pieces of that
Speaker Change: Either April or the Ford curve or kind of baked into that run rate expectation or is that kind of currently what you're seeing?
Yeah, yields move up a bit further.
Speaker Change: or short-term rates decline a bit, either of those would sort of lock in an increase in terms of our expectations with respect to the run rate return potential of the interest rate
Okay, I appreciate that Dan. Thank you.
Speaker Change: Your next question comes from the line of Trevor Cranston with Citizen JMP. Please go ahead.
Hey, thanks. Good afternoon.
Shrever Cranston: Do you guys talk about the return expectations you're seeing on new loan securitizations and if there's been any material change there with the spread-blogging we've seen so far in April , kind of versus where you were seeing expected returns in the first quarter. Thanks.
Shrever Cranston: Well, I mean, obviously with the credit spread widening, you know, we'd say that the return targets on the sub-bonds that we have in our position is...
Shrever Cranston: That's increased as one would expect, and I would say right now, the return targets on sub-bond are, you know, called mid teens, called 15% dish.
Shrever Cranston: And I think that that's something that intrigued us about the, that's one of the reasons why we're doing the Securitization Activity that we're doing. And I think that for us to get that returns, being in the organic creation of the security is really important.
We're not seeing a lot of secondary flows.
Shrever Cranston: in the market right now. And so to meaningfully deploy the capital into these returns having, having the structure that we have and having the ability to have the loans to grateful securitization, something that's really unique for PMT.
Got it. Okay, appreciate the comments. Thank you Thank you.
Eric Hagen: Your next question comes from the line of Eric Hagen with BTIG, please go ahead
Thanks.
Eric Hagen: a follow-up on the interest strategy. I mean, you typically manage an agency MBS portfolio alongside the MSR portfolio, sort of a pairing or kind of a hedge, if you will.
Eric Hagen: for somewhat of a substitute for the Asian CNBS portfolios and for risk profiles kind of similar or is that really not the way you guys are thinking about it?
Eric Hagen: So it depends on the portions of the capital structure that we retain and we identify, you know, we identify that and, you know,
Eric Hagen: in terms of the expected contributions from each of those and the expected equity.
in the run rate return potential. So today,
Eric Hagen: In terms of our securitization, we've retained on a few of the securitization [inaudible]
Eric Hagen: Some of the senior meds portion, which really has, as you know, interest rate sensitivity that's similar to the TBA to the TBA position with a little bit, you know, generally, generally wider spread.
Eric Hagen: And so those we do view as a substitute effectively for some of the agency and the S position, but primarily, you know, and we noted the investments that we've made in credit sensitive versus the interest rate sensitive in, you know, some of the earnings release of 60 in the last quarter, we received $66 million in credit sensitive or subordinate bonds.
Eric Hagen: which we don't view as a substitute, which are really more.
Eric Hagen: You know, first lost piece and credit sensitive, but 29 million of the somewhat more senior bonds that are more effectively substitutes for TVA.
Eric Hagen: The portion of it is a TBA substitute, but most of what we're investing in from the securitizations is really not comparable and more of a credit investment similar to the CRT.
Speaker Change: We have no further questions at this time, and we'll turn it back to David Spector for closing remarks.
Bye.
Speaker Change: Thank you, operator. I'd like to thank everyone for joining us today. Please don't hesitate to reach out to our investor relations team if you have any follow-up questions. And again, thank you all very much.