PennyMac Mortgage Investment Trust Q1 FY2024 earnings call

• PMT produced solid results in Q1 with strong contributions from credit-sensitive strategy and correspondent production business, partially offset by net fair value declines in interest rate-sensitive strategies. - Current third-party estimates for 2024 total originations are optimistic but expected to decline further due to higher for longer interest rates. - Leveraged relationship with PFSI, sold $111 million of floating rate GSE CRT bonds realizing gains, and issued over $550 million in CRT term notes. - Seasoned portfolio, including MSRs and GSE lender risk share transactions, is expected to perform well with low delinquencies. - MSR investments are expected to continue producing stable cash flows, and their values benefit from current interest rate environment. - Lender risk share investments have low delinquencies and low weighted average current loan-to-value ratio. - Slide 7 outlines run rate return potential for next 4 quarters, with current run rate at $0.35 per share up from prior quarter.

In the first quarter, PMT's credit-sensitive strategies contributed $61 million in pretax income, including $48 million from organically created CRT investments. Income from opportunistic investments in CAS and STACR bonds issued by the GSEs totaled $8.9 million. The interest rate-sensitive strategies contributed a pretax loss of $27 million. Income from PMT's correspondent production segment was up slightly from last quarter, with total correspondent loan acquisition volume at $18 billion in the first quarter, down 23% from the prior quarter. MSR investments account for more than half of PMT's deployed equity, with the fair value of the MSR asset at the end of the quarter at $4 billion, up slightly from $3.9 billion at December 31. PMT issued more than $550 million in CRT term notes at attractive terms during and after the quarter end.

• Expect third-party estimates for 2024 total originations to decline further due to higher for longer interest rates. - Run rate is slightly below current dividend level but increased during the quarter, with expectation that run rate could move toward $0.40 dividend level as yield curve normalizes. - Current priority is investing in assets with highest risk-adjusted return, which presently seems more on interest rate-sensitive strategies.

• Interest rate volatility could negatively impact the company. - Total originations in 2024 are dependent on multiple interest rate cuts from Fed, which is uncertain. - CRT investments may not meet long-term return requirements. - MSR values and returns are affected by interest rate environment. - Secured leverage's floating rate debt is subject to interest rate changes.

Q: How do you view the sustainability of the dividend looking forward?

A: The run rate is slightly below current dividend level but increased during the quarter. Expect to maintain $0.40 dividend level for now unless market moves such that run rate doesn't move toward $0.40 dividend level.

Q: What are your priorities for new capital deployment given the rate outlook?

A: Prioritize investing in assets with highest risk-adjusted return, presently more on interest rate-sensitive strategies as credit spreads in CRT area have tightened and some investments fell below return thresholds.

Q: What drove the increase in return expectation, especially on the MSR?

A: Valuation methodology as interest rates increase impacts prepayment speeds of MSR, projected custodial income, and discount rate on MSR, leading to higher expected yield.

Q: How willing are you to go with share buyback when trading at a discount to book?

A: Will be patient with share buyback, continue to be patient as long as results are posted well. Fully reserved for 2024 maturity in liquidity forecasting and looking for opportunities to refinance convertible debt maturing in 2024 without dilutive equity raise.

Q: How are you thinking about credit investment in closed-end seconds or second liens?

A: Looking at execution opportunities of securitizations with close-end second and jumbos as PFSI increases activity in originating such assets, meeting PMT's required return.