PennyMac Mortgage Investment Trust Q3 FY2024 earnings call

• Balance sheet: Effectively completed refinancing of $457 million of CRT and MSR term notes with new term notes at lower cost and extended durations. - Investment portfolio: Approximately two-thirds of equity in seasoned MSRs and GSE lender risk share transactions; low delinquencies and home equity support performance. - Production and investments: Retained increased percentage of conventional correspondent loan production in Q3, investing $90 million in new MSRs; expects to retain smaller percentage in Q4 to optimize capital allocation and explore private label securitization opportunities. - Run rate potential: Current run rate $0.37 per share, up from $0.33, driven by short-term rate decline; yield curve steepening could push run rate closer to $0.40. - Capital and liquidity: Liquidity in place for repayment of exchangeable senior notes; strengthened capital position via refinancing term notes.

PMT's third quarter financial results showed solid income excluding market-driven value changes. Net income to common shareholders was $31 million or $0.36 diluted EPS. MSR investments account for more than half of deployed equity. Credit-sensitive strategies contributed $26 million in pre-tax income in Q3, including $17 million from organically created CRT investments, $6 million from non-agency subordinate MBS, and $3 million from other GSE CRT. The correspondent production segment had $26 billion in loan acquisition volume in Q3, up 15% from prior quarter, with conventional loans acquired $5.9 billion, up 167% due to higher retention.

• Run rate potential: Quarterly average of $0.37 per share, up from $0.33; yield curve steepening could push run rate to $0.40 range. - Production and investments: Expect to retain smaller percentage of conventional production in Q4 to optimize capital and explore private label securitization; planning to close securitization of agency-eligible non-owner occupied and second home loans in Q4 and another in Q1 next year.

• Market volatility: Impact on fair values of investments. - Interest rate changes: Affect yield curve steepening and financing costs. - Prepayment risk: Impact on MSR fair values and cash flows. - Securitization challenges: Meeting return targets and market disruptions affecting securitization of certain loans.

Q: Jason Weaver asks about how the steepness of the yield curve changes the dividend policy calculus.

A: David Spector says expected earnings power from yield curve changes supports dividend evaluation, with run rate moving toward $0.40.

Q: Jason Weaver follows up on emerging opportunities to shift equity allocation to credit-sensitive strategies.

A: Dan Perotti mentions opportunities in private label securitization of jumbo loans and other loans, planning to kick off securitization efforts.

Q: Bose George asks about steepening curve impact on returns and jumbo loan securitization returns.

A: David Spector says agnostic to curve steepening direction; Dan Perotti talks about jumbo securitization progress and market opportunities.

Q: Doug Harter asks about second liens securitization and MSR retention.

A: David Spector says second liens still need to meet return targets; Dan Perotti talks about using CRT runoff capital for redeployment.

Q: Matthew Howlett asks about MSR retention and credit segment goals.

A: Dan Perotti talks about reducing conventional correspondent retention to free capital for securitization; David Spector aims for better balance between credit and interest rate strategies.

Q: Eric Hagen asks about cash/liquidity for debt repayment and leverage.

A: Dan Perotti says using secured lines for repayment, leverage remains similar.

Q: Bose George asks about whole loan market buyers for jumbos and second liens.

A: David Spector says wide range of buyers including insurance companies and private equity shops.