PennyMac Mortgage Investment Trust Q2 FY2025 earnings call

• Synergistic Partnership with PFSI: PMT leverages PFSI's best-in-class operating platform, including its experienced management team, scaled servicing operations, and large multichannel origination business, providing a consistent high-quality pipeline of loans for investment. PMT can efficiently deploy capital into long-term mortgage assets without origination and servicing burdens. PFSI's access to the origination market combined with PMT's private label securitization ability creates unique investment opportunities with attractive risk-adjusted returns. • Second Quarter Securitizations: Successfully completed three securitizations of Agency-eligible investor loans totaling $1.1 billion in UPB, retaining $71 million in new investments. Also completed the first jumbo loan securitization since 2013 with $339 million UPB and retained $82 million. PMT has been a top 3 issuer of prime non-Agency MBS, with nine securitizations totaling $3.2 billion UPB and $300 million in new retained investments since the fourth quarter of 2024, targeting low to mid-teens returns on equity. • MSR and CRT Investments: Approximately 2/3 of shareholders' equity is in stable MSR and GSE lender risk share transactions. MSR investments have stable cash flows as most underlying mortgages are far out of the money with a low weighted average coupon, reducing refinancing incentives. CRT investments, representing 16% of equity, are backed by seasoned loans with strong fundamentals, low delinquencies, and a low weighted average current loan-to-value ratio below 50%. • Organic Investment Creation: A significant portion of PMT's equity is in investments organically created through PennyMac's robust production volumes. As the producer and servicer of loans, PMT has unparalleled insights into loan quality and performance, enabling thorough due diligence for securitization and influencing credit outcomes to minimize losses.

For the second quarter, PennyMac Mortgage Investment Trust (PMT) reported a net loss to common shareholders of $3 million or $0.04 per share. Credit Sensitive Strategies contributed $22 million to pretax income. Gains from organically created CRT investments were $17 million, including $9 million in realized gains and carry and $8 million from market-driven value changes due to credit spread tightening. CAS and STACR bonds generated $4 million in gains, and investments in non-Agency subordinate MBS generated $1 million in gains. Interest Rate Sensitive Strategies had a pretax loss of $5 million. Fair value increases on MSR investments were $23 million, but were more than offset by other fair value changes. Approximately 2/3 of shareholders' equity is invested in seasoned MSR and GSE lender risk share transactions. MSR investments account for ~47% of deployed equity, down from 56% at the end of 2022. CRT investments represent 16% of shareholders' equity, with low delinquencies and strong underlying fundamentals.

• Securitization Cadence: Expect to continue executing one securitization of Agency-eligible nonowner-occupied loans per month and one jumbo loan securitization per quarter. • Investment Activity: Anticipate increased investment activity in accretive non-Agency subordinate and senior bonds through organic securitization. • Return Potential: PMT's current run rate return potential is $0.38 per share per quarter, up from $0.35 per share in the prior quarter. Expect further increases driven by higher yields in Interest Rate Sensitive Strategies if the yield curve steepens further and increased investment in accretive non-Agency subordinate and senior bonds. • CRT Returns: Targeted returns on equity for CRT investments are expected to be in the low to mid-teens.

• Interest Rate Volatility: Extremely volatile interest rates this quarter, with the 10-year treasury yield traversing a range of over 70 basis points, posing challenges for investment strategies. • Leverage Changes: Increase in leverage ratio due to growth in nonrecourse debt related to private label securitization activity, with nonrecourse debt repayment limited to cash flows from associated loans in securitizations, but the debt-to-equity ratio excluding nonrecourse debt remains within expected levels.

Q: Hoping you could talk a little bit more about the non-Agency securitization opportunity. Can you just talk kind of how the returns progressed over the course of the quarter kind of given the volatility and kind of how you kind of are positioning the risk of that -- of those holdings kind of going forward.

A: Daniel Perotti stated that during the quarter, non-Agency subordinate MBS experienced rate and spread volatility. Credit spread tightened for credit investments, but interest rate volatility led to a slight decline in fair value of non-Agency subordinate MBS. Income excluding market-driven value changes was in line with mid- to low-teens return expectations, and non-Agency subordinate and senior MBS investments are expected to continue to have low to mid-teens returns with stable credit performance.

Q: And then just as a follow-up, it looks like the amount of retained interest on the jumbo was a much higher percentage relative to the nonowner-occupied. Can you just talk about, I guess, how high up the stack? And is that -- was that opportunistic? Or is that something that you would expect to continue on the jumbo side.

A: Daniel Perotti said a senior mezzanine tranche was retained on the jumbo securitization. The decision on deal-by-deal basis is based on capital deployment. After raising additional debt, likely to retain a greater proportion of interests from securitizations in the next few periods, but decisions are made on a deal-by-deal basis. David Spector added the team dynamically manages the portfolio, deploying capital into subordinate tranches as long-term investments, but can invest in other tranches at appropriate returns and recycle capital if needed.

Q: First of all, David, I think we've talked about this before, but maybe just an update, if you have any insights under possible GSE privatization for the future of credit risk transfer.

A: David Spector mentioned not hearing much on GSE reform in D.C. GSEs are active in credit risk transfer programs, but return to lender CRT is not on the horizon. PMT's non-Agency securitization program creates comparable investments, and private label markets have been revitalized, with nonowner-occupied and second homes moving to private label, and non-QM running at a $75 billion to $80 billion pace this year.

Q: So on Slide 13, where you have the run rate ROE, it looks like the increase there is really mainly on the rate side. Can you just walk through the drivers of the increase over the last quarter.

A: Daniel Perotti explained that the slight increase in net Interest Rate Sensitive is due to additions in non-Agency senior in IO MBS from securitization retention. The ROE from Correspondent Production is up quarter-over-quarter due to volumes, margins, and margin activity expected to persist. Additional investments in non-Agency subordinate pieces also contribute to pulling up the overall forecast.

Q: Can you just discuss your thoughts on the sustainability of the $0.40 dividend level here, the operating earnings run rate that you discussed, improved quarter-over-quarter, but still slightly below the dividend. And you did mention in some ways how you could see that level improve further in the coming quarters. But curious on you and the Board's comfortability with the dividend today.

A: Daniel Perotti stated that the board is comfortable with the $0.40 dividend level. The run rate is $0.38 per quarter, improved from $0.35, with potential to increase towards $0.40. Taxable income is moving toward the $0.40 level and is supported by non-Agency subordinate and senior MBS investments, bolstering the dividend level.

Q: It feels like a lot of attention, a lot more of a concerted effort around finally making reforms to title insurance. We got the new pilots and the GSEs. I mean, when we combine that with really strong HPA, I mean, do you see that potentially driving these low coupon borrowers to mobilize or do a cash out refi at some point.

A: David Spector said he doesn't expect to accelerate prepayment speeds on low interest rate loans. Title insurance reforms and strong HPA may help on the purchase side, but not expecting low coupon borrowers to mobilize for cash out refis.