PennyMac Mortgage Investment Trust Q4 2024 Earnings Report

PennyMac Mortgage Investment Trust EPS Results

• Actual EPS: $0.41
• Consensus EPS: $0.37
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A

PennyMac Mortgage Investment Trust Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $90.23 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

PennyMac Mortgage Investment Trust Announcement Details

• Quarter: Q4 2024
• Date: 1/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, January 30, 2025
• Conference Call Time: 6:00PM ET

PennyMac Mortgage Investment Trust (NYSE:PMT), through its subsidiary, primarily invests in mortgage-related assets in the United States. The company operates through: Credit Sensitive Strategies, Interest Rate Sensitive Strategies, Correspondent Production segments. Its Credit Sensitive Strategies segment invests in credit risk transfer (CRT) agreements, CRT securities, subordinate mortgage-backed securities (MBS), distressed loans, and real estate. The company's Interest Rate Sensitive Strategies segment engages in investing in mortgage servicing rights, excess servicing spreads, and agency and senior non-agency MBS, as well as related interest rate hedging activities. Its Correspondent Production segment is involved in purchasing, pooling, and reselling newly originated prime credit residential loans directly or in the form of MBS. The company primarily sells its loans to government-sponsored entities or PennyMac Loan Services, LLC. The company qualifies as a real estate investment trust for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its shareholders. The company was incorporated in 2009 and is headquartered in Westlake Village, California.

PennyMac Mortgage Investment Trust Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, and welcome to Pennamac Mortgage Investment Trust Fourth Quarter and Full Year 2024 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in this call are available on Pennimanc Mortgage Investment Trust website at pmt.pennimanc.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 their GAAP equivalent to the earnings materials. Now I'd like to introduce David Spector, Pennimanc Mortgage Investment Trust's Chairman and Chief Executive Officer and Don Perotti, Pennimanc Mortgage Investment Trust's Chief Financial Officer. You may begin.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Thank you, operator. PMT produced very strong results in the 4th quarter, generating a 10% return on equity driven by strong levels of income, excluding market driven value changes and excellent performance across all three investment strategies. Net income to common shareholders was $36,000,000 or diluted earnings per share of $0.41 and P and C declared a 4th quarter common dividend of $0.40 per share. Book value per share at year end was $15.87 up from the end of the prior quarter. Importantly, the 4th quarter marked a return to the organic creation of credit investments for PMT, which I will expand on later.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Turning to Slide 4. For the full year, P and C produced a return on common equity of 8% with $119,000,000 of net income attributable to common shareholders and income contributions from all three investment strategies. 2024 was a year characterized by significant interest rate volatility as evidenced by the yield on the 10 year treasury, which ranged from 3.6% to 4.7%. Even with this volatility, our dividend remained consistent and book value per share was stable throughout the year as the active hedging of mortgage servicing rights offset the majority of fair value changes in the interest rate sensitive strategies. Also during 2024, we worked on multiple facets of the business to reposition PMT's balance sheet for success in a higher interest rate environment.

[David Spector, CEO & Chairman at PennyMac Financial Services]

This included the opportunistic sale of certain investments as credit spreads tighten, a major rebalance of our Agency MBS portfolio and the issuance of $1,300,000,000 in term debt to address and extend upcoming maturities, generally at tighter financing spreads. We also renewed PMT's mortgage banking agreement with our manager and industry leader PFSI, solidifying this unique synergistic partnership between the two companies for another half a decade. All of these activities position PMT with a very strong foundation as we enter 2025. Turning to the origination market, current third party estimates for total originations in 2025 averaged $2,000,000,000,000 reflecting growth in overall volumes. Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time.

[David Spector, CEO & Chairman at PennyMac Financial Services]

PMT's stable performance in recent periods of heightened volatility highlights the strength of the fundamentals underlying its long term mortgage assets and our expertise managing mortgage related investments in its changing environment. Turning to Slide 6, a key competitive advantage throughout PMT's history has been the ability to organically create MSR and credit investments from its own production volumes. We believe that our position as the producer of the underlying loans is a competitive advantage providing us with an ability to review and diligence the loans selected for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we are uniquely positioned with the ability to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our unique investments in lender credit risk transfer. In recent periods, volume or pricing limits for the GSEs on certain type of loans such as non owner occupied and second homes, coupled with strong investor demand has driven increased private label securitizations of such loans.

[David Spector, CEO & Chairman at PennyMac Financial Services]

This development has created renewed opportunity for P and T to organically create credit investments from its own production. We leveraged the strength of our correspondent production franchise and securitization expertise to complete 2 securitizations of agency eligible investor loans, where we retained $52,000,000 of new investments in credit subordinate bonds. After quarter end, we completed a 3rd securitization of investor loans and thus retained an additional $21,000,000 of new investments in credit subordinate bonds. Return on equity for these investments is expected to be in the low to mid teens. With a growing pipeline of loans available for private label securitization and a receptive market for these securities, we expect similar levels of activity well into 2025 with the potential for increased investment opportunities through securitizations of other loan products such as jumbo loans as the origination market grows.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Turning to Slide 7, approximately 2 thirds of P and T 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 over the foreseeable future as low expected prepayments have extended the expected lives of these assets. 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 approximately half of PMT's deployed equity. The majority of the underlying mortgages of these MSRs remain far out of the money and we expect the MSR asset to continue to producing stable cash flows over an extended period of time.

[David Spector, CEO & Chairman at PennyMac Financial Services]

MSR values also continue to benefit from the higher interest rate environment as the placement fee income PMT receives on custodial balances is closely tied to short term interest rates. Similarly, mortgages underlying PMT's large investment in lender originated risk share have low delinquencies and a low weighted average current loan to valuation of below 50%. These characteristics are expected to support the performance of these assets over the long term and we continue to expect that realized losses will be limited. Given our expectations for PMT to be a consistent issuer and investor in private label securitizations alongside a seasoned portfolio of MSRs and CRT with strong underlying fundamentals, I am confident the company will continue to deliver attractive risk adjusted returns in 2025 and beyond. Now I'll turn it over to Dan, who will review the drivers of PMT's 4th quarter financial performance and PMT's run rate return potential.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Thank you, David. PMT earned $36,000,000 in net income to common shareholders in the Q4 or $0.41 per diluted common share. The credit sensitive strategies contributed $20,000,000 in pretax income. The contribution from organically created CRT investments was $20,000,000 while the contribution from opportunistic investments in CAS and Stacker bonds was offset by losses on non agency subordinate MBS due to increasing interest rates and losses on other credit sensitive strategies. As David mentioned, the outlook for our current investments in organically created CRT remains favorable with a low underlying current weighted average loan to value ratio below 50% and a 60 day delinquency rate of 1.5 percent both as of December 31.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

The interest rate sensitive strategies contributed pretax income of $25,000,000 Fair value increases on MSR investments were $184,000,000 as the increase in mortgage rates drove a decrease in future prepayment projections. These fair value increases were offset by the combined impact of changes in the fair value of MBS, interest rate hedges and the related income tax effects. MBS fair value decreased by $140,000,000 due to the increase in mortgage rates. Interest rate hedges decreased by $51,000,000 Income from correspondent production and gains on MSRs held in PMT's taxable REIT subsidiary were the primary driver of the $9,000,000 tax expense. The fair value of PMT's MSR asset at the end of the quarter was $3,900,000,000 up slightly from $3,800,000,000 at September 30th as fair value gains and newly originated MSR investments were slightly offset by runoff from prepayments.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding increased to $105,000,000 from $71,000,000 at September 30 due to seasonal property tax payments. No principal and interest advances are currently outstanding. Total correspondent loan acquisition volume was $28,000,000,000 in the 4th quarter, up 9% from the prior quarter driven by the larger overall market. Correspondent loans acquired for PMT's account totaled $3,500,000,000 down 41% from the prior quarter due to PMT retaining a smaller percentage of the conventional conforming correspondent loan production. PMT retained 19% of total conventional correspondent production in the 4th quarter, down from 42% in the 3rd quarter.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

We expect this percentage to remain between 15% to 25% in the Q1 of 2025 as we continue pursuing investment opportunities in the private label securitization market. Income from PMT's correspondent production segment was up from last quarter, driven by increased demand for private label securitization and whole loan execution for investor loans during the quarter. The contribution of pre tax income related to the strong execution of our private label securitizations in the quarter was approximately $9,000,000 Profitability in this segment in recent periods has also benefited from the release of liabilities related to representations and warranties provided at the time of securitization as the high volumes of loans produced from 2020 to 2022 past the 3 year window for violations with minimal repurchase related losses. The weighted average fulfillment fee rate was 18 basis points, down from 19 basis points in the prior quarter. Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans will initially be acquired by PFSI.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

However, PMT will retain the right to purchase up to 100 percent of non government correspondent production from PFSI. In total, PMT reported $51,000,000 of net income across its strategies, excluding market driven value changes and the related tax impacts, up from $35,000,000 in the prior quarter, driven primarily by decreased realization of MSR cash flows and correspondent production income. Looking ahead, Slide 8 outlines the run rate return potential expected from PMT's investment strategies over the next 4 quarters. PMT's current run rate reflects a quarterly average of $0.37 per share, unchanged from the prior quarter. We see slightly increased return potential for the credit sensitive strategies as short term interest rates are expected to remain higher for longer.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

We also see improvement in the interest sensitive strategies segment as the yield curve is steepened. The improvements in these segments was somewhat offset by a slightly decreased return potential in the correspondent production given the current expected margin environment. If the yield curve steepens further, we expect PMT's overall run rate would increase closer to the $0.40 range driven by higher overall yields in the interest rate sensitive strategies. Turning to our capital position, we retired $43,000,000 of CRT term notes that were due to mature in October where the remaining assets were financed via repurchase agreement due to the size of the position. Also, we repaid in full $210,000,000 of exchangeable senior notes that matured in November.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Through 2025, we will continue to look for opportunities to raise additional debt capital to address the maturity of our exchangeable note in 2026 as well as to provide additional funding for potential expansion of our securitization efforts. We'll now open it up for questions. Operator?

[Operator]

Thank you. I would like to remind everyone, we will only take questions related to Panamax Mortgage Investment Trust or PMT. We also ask that you please keep your questions limited to one preliminary question Your first question comes from the line of Bruce George with KBW. Please go ahead.

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, guys. Good afternoon. So you mentioned the yield curve steepens that helps the run rate outlook. Again, does that matter if it's if we see a sell off on the long end? Does that kind of get you there as well?

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Or do we need the Fed to cut a little bit?

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

No, that's correct, Bose. If we see the long end go up, basically, if we see differentiation the greater the spread between really short truly short term rates and longer dated rates really improves the outlook for the interest rate sensitive strategies, just the overall steepness of the curve there. And from that perspective, we're somewhat ambivalent around whether the longer end goes up or the shorter end goes down.

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Okay, great. Thanks. And then in terms of your MSR hedge, is your strategy kind of similar at PMT versus PFSI? Or is it sort of a tighter hedge here? Or just how would you characterize it?

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Generally speaking, we run a tighter hedge at PMT over time or we have run a tighter hedge from a hedge ratio perspective. The composition of the MSR portfolio in PMT versus PFSI is somewhat different at this point since PMT's MSR portfolio given that it has acquired fewer loans, more loans have been going to PFSI through the correspondent channel over the last few years than PMT has retained. It still has it has a greater concentration of lower note rate loans, which are less have less sensitivity to interest rates changing and refinance. And also PMT has less benefit on the other side from origination up ticking because although it gets some of the recapture benefit due to its agreement with PFSI, if those loans are refinanced, through PFSI, it only retains really a portion of the benefit, not the same amount of benefit that PFSI retains if it refinances its own loans. And so for those reasons, because for those two reasons, we run generally a tighter hedge at PMT, but I think it's also important to note that the sensitivity at PMT of the MSR portfolio is also lower.

[Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)]

Okay, great. Makes sense. Thank you.

[Operator]

And your next question comes from the line of Matthew Erdner with Jones Trading. Please go ahead.

[Matthew Erdner, Director at Jones Trading]

Hey guys, thanks for taking the question. I'd like to touch on GSE reform and kind of how you guys seeing it play out. And then kind of as a follow-up to it with the new FHFA Director coming in, what are you guys expecting? And do you expect their footprint to just kind of shrink as a whole? Thanks.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Well, thank you, Matthew. I think look, I think that it's still really early to really have a point of view on what the new FHA Director is going to do vis a vis the prior one. I can tell you, we've always had a good relationship with FHFA and the GSEs and I'm excited to work with the new Director. But I think my general sense is it's going to be a little bit of a return to the way things were the last time we had this administration in place. I think as it pertains to GSE reform, I have a similar point of view that it's still really early to say one way or another how it's going to play out.

[David Spector, CEO & Chairman at PennyMac Financial Services]

But I can tell you, we have since we started the company, number 1, always managed to a range of outcomes. So we're very much prepared to operate in an environment where 90% of the production goes to the GSEs like we saw during the Obama administration or we see GPs increase or continue to increase, thus removing loans from the GSEs into the private label markets. And that's what's really exciting about what's taking place in PMT because as we've seen guarantee fees go up and we've seen credit spreads tighten, the ability to take investor loans and second home loans that we've historically delivered to the GSEs and securitize those has given us the ability to organically create investments for PMT at appropriate returns. And that's how this company was set up to operate. It just took a long time for private label securitization to come back.

[David Spector, CEO & Chairman at PennyMac Financial Services]

We're on pace to do a deal a quarter and I expect that to continue into the future. But obviously, that's subject to things that we can't control, but I think that the investor loan securitization market is one that we're very excited about. Similarly, the organization is looking at other investments as well. The jumbo our jumbo loan originations between PFSI and PMT are on pace to be over $1,000,000,000 in the Q1 of this year and a lot of those loans are being sold whole loan, but my plan is to do a securitization sometime in the first half of this year and that will create an investment that has, call it, low to mid teens as well. And so as we continue to create investments in the low to mid teens range, that's going to be very, very important for PMT in its ability to grow.

[David Spector, CEO & Chairman at PennyMac Financial Services]

And I'm really I haven't been the subscriber of PMT in a very long time. I just think that we're in a very good position with the work that's been done over the last year and kind of repositioning the assets and the ability to do securitizations to play a meaningful role in a market that we would see if the GSE footprint were to continue to shrink. Having said that, we can have status quo and PMT will be fine. And I don't see guarantee fees decline. So I feel really good about where we're at and I'm generally not generally, I'm very bullish about what the opportunity set is for PMT.

[David Spector, CEO & Chairman at PennyMac Financial Services]

T.

[Matthew Erdner, Director at Jones Trading]

Yes. That's great color. Thank you very much.

[Operator]

And your next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.

[Trevor Cranston, MD - Mortgage Finance Equity Research at JMP Securities LLC]

Hey, thanks. A bit of a follow-up to the previous comments on the credit opportunities. When you say on Slide 6, you're on track for securitization per month. Can you clarify, is that specifically just related to investor loans? Or would that incorporate other products such as prime jumbo?

[Trevor Cranston, MD - Mortgage Finance Equity Research at JMP Securities LLC]

And can you guys also maybe talk a little bit about kind of the product set and if there are other things you guys are thinking about for securitization beyond the investor loans and prime jumbo? Thanks.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Yes. Look, we did 2 investor loan second loan securitizations in Q4. We closed our first one of the year today as a matter of fact. And so I feel really good about maintaining that pace of activity. Having said that, we were also looking, as I said, at jumbo loans, which is another asset class under the residential umbrella that I'm really encouraged about.

[David Spector, CEO & Chairman at PennyMac Financial Services]

As I mentioned, we'll do my plan is umbrella that I'm really encouraged about. As I mentioned, we'll do my plan is to at least do at least one securitization in the first half of this year. I think we also just full disclosure, we PFSI is originating over $300,000,000 a month of closed end seconds. We've looked at securitizing those loans and retaining investment there. It doesn't quite achieve our return targets.

[David Spector, CEO & Chairman at PennyMac Financial Services]

And so there, it doesn't it's not on the radar yet. I mean, it's not on the radar, obviously, but it's not something that I see as an opportunity in the first half of this year. And the other asset class that we're starting to look at a little bit is NonQM, particularly the prime non QM where we kind of are intrigued about the returns there, but there's a lot of work to be done there before we get before we do anything in that market. But it's really it's a testament to the organization, that in PMT that they've built out this enterprise that can value and price and understand all of the different assets that they can invest in. And it's something that as we see more and more opportunities we're going to seize upon.

[David Spector, CEO & Chairman at PennyMac Financial Services]

As it pertains to agency loans in particular, I mean look obviously if we see guarantee fees go up or loan level price adjustments go up or I don't if they don't like high balance loans and they want to put an LLPA on that, obviously we're going to use our capabilities and our robust best execution engines to optimize for the best execution for PMT.

[Trevor Cranston, MD - Mortgage Finance Equity Research at JMP Securities LLC]

Got it. Okay. That makes sense. Thanks a lot.

[Operator]

Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.

[Eric Hagen, Managing Director at BTIG]

Hi, guys. You have Jake Kedzicas on here for Eric. Can you guys share how much liquidity you currently have, including the room you have to borrow more against the MSRs? And what is your most readily available source of liquidity to draw upon as you get closer to the maturity of the unsecured? Thanks.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Sure. So if you look at the balance sheet in terms of the liquidity that we had, the direct liquidity that we had outstanding at the end of the quarter was about $430,000,000 In terms of our financing facilities, we have a few $100,000,000 also available to be able to draw, against the current collateral that we have outstanding at the end of the quarter. As we're going as we're moving toward the maturity upcoming of or the maturity early next year in 2026 of the convertible, we are looking at opportunities, as I mentioned in the prepared remarks, to access the capital markets to potentially replace that debt or replace a portion of that debt. So we, a couple of years back, had done a baby bond issuance. That's an area that we would look at again.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

Potentially accessing the convertible debt markets as we did last year is also something that's available to us. But as we move through 2025, we will actively be looking at opportunities to access the market to offset some of that or to replace some of that maturity that's upcoming next year.

[Eric Hagen, Managing Director at BTIG]

Great. Thank you, guys.

[Operator]

And your next question comes from the line of Doug Harter with UBS. Please go ahead.

[Doug Harter, Equity Research Analyst at UBS Group]

Thanks. Jim, appreciate you giving us the details

[Doug Harter, Equity Research Analyst at UBS Group]

around the gain or from the non agency securitization. How should we think about the profitability of that business compared to the traditional conventional correspondent

[Doug Harter, Equity Research Analyst at UBS Group]

business?

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

So the gains overall in the correspondent section in terms of the aggregation gains are generally a bit better or help influence the margin of the correspondent business upwards. However, we have been engaged in that business and although not necessarily securitizing, selling those loans through whole loan channels for the past few or several quarters. I mean, although that business has been building over time, it's not necessarily going to significantly impact upward versus our historical performance prior to this quarter, the overall margin in the correspondent channel. And I think if you look at our run rate sort of reflects it reflects that. What we did see in this quarter was actually an improvement in the spreads at which those loans could execute over typical GSE execution.

[Dan Perotti, CFO at PennyMac Mortgage Investment Trust]

That was true both in terms of whole loan as well as securitization. And so given that we have been aggregating over a period of time to be able to execute these deals, these deals that we've been doing 1 a month for the past 3 months, that did have a benefit on our overall aggregation pipeline. That's what led to that improvement that we saw, that contribution that we saw to the correspondent channel in this quarter. But as you can see from our run rate, we don't necessarily expect that same level of contribution in each of the future quarters, was a bit more specific to the tightening in that market that we saw in this quarter as we were aggregating.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Doug, the really nice part of the investor loans in 2nd homes is that right now the securitization execution is really strong. But having said that, the bid for whole loans is very deep. And many of those investors are holding the loans and not securitizing them. So there's a pretty robust market away from securitization, if you were to see an event in the private label markets that cause spreads to widen rather dramatically. And then finally, those loans are deliverable to the GSE.

[David Spector, CEO & Chairman at PennyMac Financial Services]

And so there is that third avenue. And so it's not like other private label product that we've seen in the past where it's solely reliant on securitization. There's multiple avenues and paths for that product to be delivered.

[Doug Harter, Equity Research Analyst at UBS Group]

Great. Appreciate the answers.

[Doug Harter, Equity Research Analyst at UBS Group]

Thank you.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Thank you.

[Operator]

And we have no further questions at this time. I would like to turn it back to David Spector for closing remarks.

[David Spector, CEO & Chairman at PennyMac Financial Services]

Well, I want to thank everyone for joining us this afternoon. I want to encourage any of you with any additional questions to contact our Investor Relations team by e mail or phone and they're available every day. And I suppose if you want to follow-up with me or Dan, please don't hesitate to reach out. Thank you all for joining. Bye bye.

[Operator]

Thank you, presenters. And this concludes today's conference call. Thank you all for participating. You may now disconnect.

Participants

Executives

• Dan Perotti, CFO

Analysts

• David Spector, CEO & Chairman at PennyMac Financial Services
• Bose George, Managing Director at Keefe, Bruyette & Woods (KBW)
• Matthew Erdner, Director at Jones Trading
• Trevor Cranston, MD - Mortgage Finance Equity Research at JMP Securities LLC
• Eric Hagen, Managing Director at BTIG
• Doug Harter, Equity Research Analyst at UBS Group