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spk07: Good afternoon and welcome to PennyMac Mortgage Investment Trust first quarter earnings call. Additional earnings materials including the presentation slides that will be referred into the call are available on PennyMac Mortgage Investment Trust website at pmt.pennymac.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 presentations. that could cause the company's actual result to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now, I'd like to introduce David Spector, Penny Mac Mortgage Investment Trust Chairman and Chief Executive Officer, and Dan Perotti, Penny Mac Mortgage Investment Trust Chief Financial Officer.
spk05: Thank you, Operator. PMT produced solid results in the first quarter with strong contributions from the credit-sensitive strategy and its correspondent production business. These results were partially offset by net fair value declines in the interest rate-sensitive strategies. Net income to common shareholders was $37 million, or diluted earnings per share of 39 cents. PMT's annualized return on common equity was 10%. and book value per share was $16.11 at March 31st, essentially unchanged from the end of the prior quarter. While many other mortgage REITs have been negatively impacted by increased levels of interest rate volatility in recent periods, PMT's book value per share has remained relatively comparatively stable due to its diversified portfolio and disciplined approach to hedging. Turning to the origination market, Current third-party estimates for total originations in 2024 average $1.8 trillion, reflecting growth from an estimated $1.5 trillion in 2023. However, we believe these estimates to be optimistic and dependent upon multiple interest rate cuts from the Federal Reserve in the second half of the year. With current expectations for market interest rates to remain higher for longer and mortgage rates back up into the 7% range, We expect these third-party estimates will decline further from their current levels. PMT's strong financial performance in recent periods highlights the strength of the fundamentals underlying its long-term mortgage assets and our expertise managing mortgage-related investments in a challenging environment. We remain focused on leveraging PMT's unique relationship with PFSI to actively manage PMT's portfolio. And in the first quarter, we took advantage of tighter credit spreads, selling $111 million of previously purchased floating rate GSE CRT bonds. Importantly, we realized significant gains on these investments with the sales driven by our belief that these investments no longer met our longer-term return requirements. Additionally, credit spread tightening drove our ability to issue more than $550 million in CRT term notes at attractive terms during and after the quarter end, effectively refinancing similar notes with extended maturities and reduced spreads. More than two-thirds of PMT shareholders' equity is currently invested in a season portfolio of MSRs and the unique GSC 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 in the foreseeable future, as low expected prepayments extend the expected asset lives. 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 more than half of PMT's deployed equity. The majority of the underlying mortgages remain far out of the money, and we expect the MSR asset to continue producing stable cash flows over an extended period of time. MSR values also benefit from the current interest rate environment, as the placement fee income PMT receives on custodial deposits is closely tied to short-term interest rates. Similarly, mortgages underlying PMT's large investment in lender risk share have low delinquencies and a low weighted average current loan to value ratio of 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. Slide seven outlines the run rate return potential expected from PMT's investment strategies over the next four quarters. PMT's current run rate reflects a quarterly average of 35 cents per share. This is up from the prior quarter, driven primarily by higher expected asset yields in the interest rate sensitive strategies. Now, I'll turn it over to Dan, who will review the drivers of PMT's first quarter financial performance.
spk02: Thank you, David. PMT earned $37 million in net income to common shareholders in the first quarter. or $0.39 per diluted common share. PMT's credit-sensitive strategies contributed $61 million in pre-tax income, including $48 million from PMT's organically created CRT investments. This amount included $36 million in market-driven fair value gains, reflecting the impact of tighter credit spreads. The fair value of these investments was up slightly from the prior quarter, as fair value gains more than offset the decline from runoff. 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 of 50% and a 60-day delinquency rate of 1.11%, both as of March 31st. Income from opportunistic investments in CAS and Stacker bonds issued by the GSEs totaled $8.9 million in the quarter. As mortgage credit spreads continued to tighten during the quarter, The go-forward returns on some of the opportunistic investments that we had previously made fell below our thresholds, and so we sold $111 million of these CAS and Stacker investments during the quarter. The interest rate-sensitive strategies contributed a pre-tax loss of $27 million. The fair value of PMT's MSR investment increased by $72 million as the increase in mortgage rates drove a decline in future prepayment projections and an increase in projections of future earnings on custodial balance. These fair value gains were more than offset by changes in the fair value of MBS, interest rate hedges, and the related tax effects during the quarter. MBS fair value decreased by $44 million, and interest rate hedges decreased by $70 million. Net fair value declines on assets held in PMT's taxable REIT subsidiary drove a tax benefit of $15 million. The fair value of PMT's MSR asset at the end of the quarter was $4 billion. up slightly from $3.9 billion at December 31st, as growth in the MSR portfolio from fair value gains, loan production, and MSR acquisitions more than offset runoff from prepayments. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, while servicing advances outstanding decreased to $110 million from $191 million at December 31st. No principal and interest advances are currently outstanding. Income from PMT's correspondent production segment was up slightly from last quarter as higher margins offset the impact of lower volumes. Total correspondent loan acquisition volume was $18 billion in the first quarter, down 23% from the prior quarter driven by our focus on profitability over volume. Conventional loans acquired for PMT's account totaled $1.8 billion, down 29% from the prior quarter. The weighted average fulfillment fee rate was 23 basis points. up from 20 basis points in the prior quarter. PMT reported $28 million of net income across its strategies, excluding market-driven value changes and related tax impacts, down from $41 million last quarter, primarily due to lower average yields on its interest rate-sensitive assets during the quarter. Turning to capital, we issued $306 million of new three-year CRT term notes during the quarter, effectively refinancing recently matured term notes. And in April, we issued $247 million of new three-year CRT term notes, which refinanced $213 million of notes that were due to mature in 2025, extending the maturities and reducing the spreads for the financing for our CRT assets. We'll now open it up for questions. Operator?
spk07: I would like to remind everyone, we will only take questions related to Petrimac Mortgage Investment Trust, or PMT. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. So if you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question again, it's star one. And your first question comes from the line of Jason Weaver of Jones Trading. Your line is now open.
spk01: Hi. Thank you for taking my question. So I was curious about how you view the sustainability of the dividend looking forward. I thought I heard in David's prepared remarks something about a $0.35 earnings run rate. Excuse me if I'm misconstruing that.
spk02: Sure. So sort of similar to what we've seen in prior quarters, our run rate is slightly below our current dividend level. However, we did see the run rate increase during the quarter, really driven by the, you know, the de-inversion of the yield curve and the longer term portion of the yield curve moving up, which moves up the asset yields on our MSRs and MBS portfolio and drives higher returns in our interest rate sensitive strategies. As we see the yield curve continue to normalize or de-invert, which we expect to happen over the next few periods, You know, we expect that we could see further benefit in the interest rate-sensitive strategies or our projection for the interest rate-sensitive strategies to get back to that, you know, 40-cent projection or above. And so our, you know, when we look at the 40-cent dividend, another sort of tenet of our dividend philosophy is around stability of the dividend. We're not looking to move the dividend to exactly you know, match to, you know, to our projections quarter to quarter since they, you know, they move as the market moves. And we see the potential for the run rate to continue to move toward that 40-cent dividend level. And so our expectation is to keep the 40-cent dividend level stable for now unless or until we see, you know, see the market move in such a way that, you know, that we don't expect the run rate to continue moving toward that 40-cent dividend level. But at present, and especially given the trajectory that we've seen during the quarter and the normalization of the yield curve, our expectation is that we'd maintain the $0.40 dividend for the current period and most likely the next few periods.
spk01: All right. That's helpful. Thank you for that. And then just noting the CRT sales, I was curious about your priorities for new capital deployment given the rates outlook today, whether that is maybe tilted more towards interest rate strategies still and less into CRT?
spk02: I think that, yeah, I think that's fair to say. We've seen, you know, we've seen more opportunity and have invested some into low rate MSR portfolios over the past couple of periods. As we discussed earlier, we've seen credit spreads tighten pretty significantly in the in the CRT area or in mortgage credit and where some of those investments have fallen below our return thresholds. And especially if we continue to see a normalization of the yield curve, you know, we think probably the opportunities lie more in the interest rate sensitive strategies than in the credit sensitive strategies, barring some change in the overall environment. But the way that we view it, you know, I think in previous periods we've talked about we would prefer to have a bit more balance in terms of the credit-sensitive strategies and interest-rate-sensitive strategies. Our interest-rate-sensitive strategies, we currently have a greater allocation toward, but our first priority is investing into assets where we believe the risk-adjusted return is the highest and meets our hurdles, and that presently seems to be more the interest-rate-sensitive strategies.
spk01: Okay, thanks again. I'll hop back in the queue.
spk07: Your next question comes from the line of George Bose of KBW. Your line is now open.
spk04: Hey, guys. This is Bose. I just wanted to follow up on the return expectation. The increase, a lot of it looked like it was based on a higher return expectation on the MSR. And so is that a slower prepayment expectation with higher rates or just, yeah, just curious what kind of drove that piece?
spk02: Not so much a higher or a lower prepayment expectation necessarily, but our, you know, our valuation methodology as interest rates increase, it has an impact on the prepayment speeds of the, you know, expected prepayment speeds of the MSR, as well as the projected, you know, custodial income, but also You know, we value our MSRs at a spread over the risk-free rate. So as risk-free rates increase, you know, our overall yield or discount rate on the MSR also increases. And so, you know, we would expect to earn, even if the cash flows were the same or similar, you know, a greater yield as we move forward. due to the fact that we're, you know, we're discounting those cash flows at a higher rate to get to the value that we're at today. And, you know, similarly with the MBS, because we mark the MBS, you know, to market as interest rates increase and the yield on MBS increase, we'd also expect that MBS, you know, that MBS return to be higher as we move forward.
spk04: Okay, great. Thanks. And then you talked about the, you know, the benefit from the yield curve sort of de-inverting. But does that have to happen with the yield curve with long rates remaining relatively elevated? Like if there's a shift down, kind of a parallel shift down in the curve, and then the curve, you know, de-inverts, does that, you know, does that sort of hurt you to some degree so it's kind of a higher for longer with a yield steeper curve better?
spk02: um the i think overall for pmt just because overall asset returns would be higher um you know we would generally uh you know generally be preferable if we were you know flatter and higher rather than flatter and lower but the overall you know either way would be beneficial for the interest rate sensitive strategies whether you know where our since most of our financing is floating rate and based off of short rates if short rates move down relative to the longer term asset yields, you know, that is, you know, that is beneficial as well. But if, you know, the yield curve shape being constant, just because overall yields on the assets would be higher, technically, I think the, you know, higher rate environments with the same steepness of the yield curve would be preferable to a lower rate environment for the, you know, for the returns of the strategy, but either one would be better than a An inverted curve.
spk04: Yeah. Okay. Great. Thanks.
spk07: Your next question comes from the line of Matt Hallett from B Riley Securities. Please go ahead.
spk03: Oh, hey, thanks. Thanks for taking my question. The first question just is on, it must be frustrating with the stability you've put out and book value at earnings to be trading it. you know, in a discount to book, you're kind of in this mortgage rate group that's trading well below book and not in the group that's trading above group. And I know it must be frustrating. My question for you, David, is, you know, the buyback again, how willing would you be to go in and start buying back shares at a 20 plus percent discount to book? And then I'll tie that into when do you expect to be in the market to refinance the November 24?
spk05: Yeah, so look, there's things we can control and things we can't control. And I can't control the share price. I can only work to influence the results of the company. And to your point, we've produced really good results, especially, you know, you look back the last five, six quarters. And so I continue to, you know, insist that as long as we continue to post the results, the share price will take care of itself. And so that's something that, you know, we remind people here all the time. I think, look, we have a limited amount of capital and we're going to deploy judiciously. And I think that, you know, as we look at it in the marketplace, if we see opportunities to continue to deploy capital to meet our required return, we'll do so. I think that, you know, we've shown that we will buy back stock when the stock is discounted. I don't, you know, I think whether that, what that discount percentage is depends at the point in time. But suffice it to say, we can be patient and we have, well, we've always been patient, we'll continue to be patient.
spk02: And then with respect to the 2024 maturity, we continue to look for opportunities to raise additional capital, but we have fully reserved for the retirement of that maturity in our liquidity forecasting. So we have sufficient secured financing based on our current assets to be able to retire that maturity, even if we do not raise additional capital. That being said, we are looking for opportunities to raise capital that would replace some of that convertible debt that matures in 2024. We've not found what we view to be the right opportunity yet that supports our supports our financing cost goals, but we'll continue to look at the different avenues, whether that be baby bond, which we issued last year, convertible debt potentially, or depending on the market dynamics, to your point, if we eventually move above book value, potential equity raise, but we're not looking to do a dilutive equity raise in order to refinance that maturity. And we've, as I mentioned, fully reserved for that in terms of being able to use secured debt to refinance it if we don't find another opportunity that attracts us between that maturity and now.
spk03: Great, thanks. And just one last one. How long would the current interplay between PFSI, the selling of conventional loans to PFSI, And then you're out there sort of buying bulk packages. And how long will that interplay continue? Is there a certain rate level where you'd start not selling loans? Presumably you're out buying lower coupon bulk and you're selling the higher coupon current production to PFSIs. Is there some rate level where you sort of stop that, you change that interplay or go back to where it's been historically?
spk05: Look, I think it's really a function of capital and it's a capital allocation decision. You know, obviously, if we were to raise more capital and we had more capital to deploy, that would factor into the decisioning. I don't see changing, it's not going to change in Q2, and I don't necessarily see it changing in Q3, but I think it's, you know, if, you know, for some reason we raise a bunch of capital, we would look to, you know, we look to address it. And I think, you know, it speaks to the great synergistic relationship between the two enterprises. that, you know, P&T has this opportunity to deploy capital in MSRs when it's, you know, in current period MSRs when it has capital and the desire to do so, and then PSSI is there, you know, being that they want to continue to grow the servicing portfolio.
spk03: Makes total sense. Thanks, guys. I really appreciate it. Thanks, Matt.
spk07: Your next question comes from the line of Eric Hagen from PTIG. Your line is now open.
spk06: Hey, again. Thanks a lot. Hey, has PMT ever sold any MSRs, and do you ever look at that as a viable option to generate liquidity, or is it maybe not really a reasonable option just given the market and the assets are kind of higher than what we see in the rest of the market?
spk05: Well, look, we're an investment vehicle. It's not something that we've historically looked at. That's not to say we couldn't do it. But I think, you know, we look at P&T as an investment vehicle. And I think that, you know, the reason we sold the CRT was because it was bought in a period of time where spreads were wide. And that's been the strategy of P&T going back the last year is to strategically deploy capital and credit sensitive assets. And, you know, I think given the fact that the return on that on those assets went below the required return, we felt it was an opportunity to sell, you know, the investments. It's, you know, we're in a period of time where PMT can't be a serial issuer of capital. So it has to be mindful of having capital to deploy in strategic investments. And so when it gets below the required return, the decision is made to sell. But having said that, there's nothing to preclude PMT from selling servicing. It's just not something that, you know, is on the docket.
spk02: Yeah, I mean, I think that when we look at the core investments of PMT, you know, between the MSR and our historical credit risk transfer and that, you know, comprising a, I think, around 70% of our total equity deployed, you know, we view those as sort of the anchor investments of the company. And given how the characteristics of those investments, you know, the low interest rate and so, you know, running off at a slow pace. The positive credit characteristics and the synergy with PSSI's operations in the case that there were some sort of issue and we saw that come up during COVID where we were able to implement some, you know, some innovative programs for our borrowers to enable us to minimize the losses on our CRTs that would be realized. you know, we think that it makes sense to generally maintain both of those assets. But as David said, to the extent that we saw, you know, an environment in which, you know, in which we thought that it was beneficial to PMT, you know, to sell a portion of the MSRs, then that's something that we could consider. But, you know, we generally think of those as our two sort of, you know, core assets for the company. And given the current position, far out of the money, stable cash flows, low credit exposure, generally think that it probably makes sense to maintain those.
spk06: Yep. That's a helpful answer. On the secured leverage side, how much of the funding is fixed versus floating rate at this point? Thank you, guys.
spk02: On the secured side, all of our debt on the secured side is floating rate.
spk06: Okay. Should we think of any hedges?
spk02: So, you know, our hedging, when we look at the hedging, when we look at our hedging, I mean, the way that we think about it is generally against our, you know, our asset base. Our asset base, we mark everything to market, and so the discount rate on the assets, you know, incorporates the short-term rates as well, and so our hedges you know, we think of as effectively hedging the short-term as well as the, you know, long-term, you know, the long-term part of the rate sensitivity over time. But we don't have any specific hedges against, you know, against our debt that from a gap perspective, for example, neutralize the impact of the, you know, of short rate changes.
spk06: All right. Thank you guys so much. Appreciate it.
spk02: Sorry, one other detail on that is just that our, you know, if you think of the MSRs, our earnings on the escrow balances on the MSRs are also generally floating rate or tied to short rates. Our earnings rate on those are generally tied to short rates, and so that is also an offset to the floating rate nature of a lot of the secured debt. And then on the CRT side, the assets are floating rate, and so it makes sense to pair them with the the floating rate.
spk06: Thank you guys so much. Appreciate it.
spk07: Again, if you would like to ask a question, please press star 1 on your telephone keypad. And your next question comes from the line of Douglas Harter of UBS. Please go ahead.
spk00: Thanks. As you guys are thinking about investment opportunities, Yeah, how are you thinking about, you know, sort of a credit investment in closed-end seconds or the second liens that PennyMac is originating?
spk05: Look, we're looking at the execution opportunities. We're looking at the investment opportunities of periodizations that are being done with closed-end seconds and jumbos, you know, because I think that emphasizing increased activity and origination of both assets. We don't see the investment opportunity meeting the required return that PMT needs or has set out. But suffice it to say that if we just typically spread wide and there was an opportunity to invest, there's enough activity going on in PFSI that PMT could do a securitization. And I think it's just a function. From a PFSI standpoint, they're looking for best execution. For PMT, they're looking to achieve their required return.
spk00: Great. Thank you, David.
spk07: We have no further questions at this time. I'll now turn it back to Mr. Spector for closing remarks.
spk05: Thank you. Thank you all for joining us today. If you have any additional questions, please don't hesitate to reach out to our IR department. We appreciate your time and looking forward to speaking to all of you in the near future. Take care.
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