PennyMac Mortgage Investment Trust (NYSE:PMT) Q1 2024 Earnings Call Transcript

April 26, 2024

6 minutes read

PennyMac Mortgage Investment Trust (NYSE:PMT) Q1 2024 Earnings Call Transcript April 24, 2024

PennyMac Mortgage Investment Trust beats earnings expectations. Reported EPS is $0.39, expectations were $0.32. PennyMac Mortgage Investment Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to PennyMac Mortgage Investment Trust first-quarter earnings call. Additional earnings materials, including the presentation slides, that will be referred into 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 bear GAAP equivalent in the earnings materials. Now, I’d like to introduce David Spector, PennyMac Mortgage Investment Trust’s Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust’s Chief Financial Officer.

David Spector: Thank you, operator. PMT produce solid results in the first quarter, with strong contributions from the Credit Sensitive Strategies in its correspondent production business. These results were partially offset by net fair value declines in the Interest Rate Sensitive Strategies. Net income of common shareholder was $37 million, or diluted earnings per share of $0.39. 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. While many other mortgage rates have been negatively impacted by increased levels of interest rate volatility in recent periods, PMT book value per share has remained relatively comparatively stable due to its diversified portfolio and disciplined approach to hedges.

Turning to the origination market, current third party estimates for total originations in 2024 averaged $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 in the Federal Reserve in the second half of the year. 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. PMT’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 PMT’s portfolio. And in the first quarter, we took advantage of tighter credit spreads, selling $111 million of previously purchased floating rate GSE CRT bonds. Importantly, they will realize significant gains on these investments with the sales driven by our belief that these investments no longer met our longer-term return requirement. Additionally, credit spread tightening drove our ability to issue more than $550 million and CRT term notes at attractive terms during and after the quarter-end, effectively refinancing similar notes with extended maturities and reduced spreads. More than two thirds of PMT shareholders’ equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk-share transactions we invested in from 2015 to 2020.

As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well in the foreseeable future, as low expected prepayments extend the expected asset lives. 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 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 receive a custodial deposits is closely tied to short-term interest rates.

A businessman checking a graph, indicating the steady growth of his specialty finance company.

Similarly, mortgages underlying PMT’s large investment in lender risk share of low delinquencies in a low weighted average current loan to value ratio of 50%. These characteristics are expected to support the performance of these assets over the long term, and we continue to expect realized losses will be limited. Slide 7 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 $0.35 per share. 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.

Dan Perotti: Thank you, David. PMT earned $37 million in net income to common shareholders in the first quarter or $0.39 per diluted common share. PMT’s credit-sensitive strategies contributed $61 million in pretax income, including $48 million from PMT’s organically created CRT investments. This amount included $36 million in market driven fair value gains, reflecting the impact of tighter credit spreads. The fair value of these investments was up slightly from the prior quarter, that’s fair value gains more than offset the decline from runoff. 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 a 60-day delinquency rate of 1.11%, both as of March 31.

Income from opportunistic investments in cash and stock or bonds issued by the GSEs totaled $8.9 million in the quarter. 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 pretax loss of $27 million. 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. 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.

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 rate 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 31, as growth in the MSR portfolio from fair value gains, loan production, and MSR acquisitions more than offset runoff from prepayments. Delinquency rates for borrowers underlying PMT’s MSR portfolio remain low, while servicing advances outstanding decreased to $110 million from $191 million at December 31. No principal and interest advances are currently outstanding. Income from PMT’s correspondent production segment was up slightly from last quarter as higher margins offset the impact of lower volumes.

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 PMC’s accounts totaled $1.8 billion, down 29% from the prior quarter. The weighted average fulfilment fee rate was 23-basis-points, up from 20-basis-points in the prior quarter. 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. Turning to capital, we issued $306 million of new three-year CRT term notes during the quarter, effectively refinancing recently mature term notes.

And in April, we issued $247 million of new three-year CRRT 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 CRT assets. We’ll now open it up for questions. Operator?