PennyMac Mortgage Investment Trust Q1 FY2025 earnings call

David Spector noted PMT had a net loss, book value per share down modestly, industry originations estimated at $2 trillion in 2025, diversified portfolio and risk management helped navigate volatile markets. Synergistic relationship with PFSI provides advantages like leveraging PFSI's platform, efficient capital deployment, and access to origination market. Slide 5 details these. Slide 6 highlights ability to create investments from private-label securitization and growing loan pipeline. In Q1, completed 3 securitizations of investor loans totaling $1 billion, retained $94 million in new investments with mid-teens ROE, expecting to close ~1 non-owner-occupied securitization per month and ~1 jumbo loan securitization per quarter starting Q2. ~2/3 of equity invested in seasoned MSRs and GSE lender risk share transactions, MSR investments account for ~half of deployed equity with stable cash flow expected. Dan Perotti discussed Q1 financial performance, net loss, credit-sensitive and interest rate-sensitive strategy contributions, MSR fair value, correspondent loan activity, and run rate return potential, noting current run rate $0.35 per share down from $0.37, credit-sensitive return potential increased, interest rate-sensitive declined, and capital actions like issuing notes and seeking additional debt.

For the first quarter, PMT had a net loss to common shareholders of $1 million or diluted earnings per share of negative $0.01. Credit-sensitive strategies contributed $1 million to pre-tax income, while losses from organically created CRT investments were $5 million. Investments in non-agency subordinate MBS generated gains of $4 million and investments in cash and stacker bonds generated gains of $2 million. Other credit-sensitive strategies contributed losses of $0.2 million. Interest rate-sensitive strategies contributed a pre-tax loss of $5 million. Fair value declines on MSR investments were $56 million, partially offset by MBS fair value increase of $65 million and interest rate hedge changes. Total correspondent loan acquisition volume was $23 billion in Q1, down 18% from prior quarter; correspondent loans acquired for PMT's account totaled $3 billion, down 20%. PMT retained 21% of total conventional correspondent production in Q1, expected to be between 15% to 25% in Q2 2025. PMT acquired $637 million in UPB of loans from PFSI for private label securitization, up from $437 million in prior quarter. Income from PMT's correspondent production segment was $10 million, down from prior quarter, with a weighted average fulfillment fee rate of 19 basis points, up from 18 basis points in prior quarter.

Third-party estimates for industry originations in 2025 average $2 trillion. Expect to continue closing ~1 non-owner-occupied securitization per month and ~1 jumbo loan securitization per quarter starting Q2. Run rate return potential: current run rate $0.35 per share down from $0.37; credit-sensitive return potential increased due to wider credit spreads, interest rate-sensitive declined due to yield curve compression; expect yield curve to steepen further to increase overall run rate; will continue seeking opportunities to raise additional debt capital.

Interest rate volatility in recent periods, challenging for mortgage REITs; credit spread widening impacted fair value declines; challenging market conditions for most mortgage REITs.

Q: Given movement in rates since quarter end, any changes in book value and expected ROE?

A: Significant interest rate volatility and credit spread widening since quarter end, book value decreased by ~2%-3%, ongoing ROE reflects quarter-to-date and forward expectations. CRT and MSR fundamentals remain strong with low delinquencies and high equity.

Q: Expectation on acquiring larger percentage of loans from PFSI in back half of year?

A: PMT's acquisition amount depends on capital deployment; currently focused on credit-sensitive strategies, not expecting increase in loan retention percentage.

Q: Update on capital allocation given current dislocation in 2Q?

A: Pleased with current capital allocation, focus on growing credit-sensitive strategy position, serial issuer of securitizations, expect to do jumbo securitization quarterly, want to benefit from correspondent activity and replenish interest rate-sensitive position.

Q: Outlook for dividend given lowered run rate earnings?

A: Dividend expected to remain stable; decline in run rate due to yield curve shape impact on interest rate-sensitive strategies, expect yield curve to normalize and increase returns, dividend maintained at $0.40.

Q: Change in return expectations on new loan securitizations with spread widening in April?

A: Credit spread widening increased return targets on sub-bonds to mid-teens, securitization activity important for organic creation of securities.

Q: Jumbo and investor property loans as substitute for agency MBS portfolio?

A: Portion of retained senior mezz portion in securitizations is TBA substitute, but most invested in credit-sensitive investments similar to CRT, not all substitutes.