PennyMac Mortgage Investment Trust (PMT) Earnings Call Transcript & Summary

Good afternoon and welcome to PennyMac Mortgage Investment Trust's Third Quarter 2025 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call, are available on PennyMac Mortgage Investment Trust's 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 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 and the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer.

Thank you, operator. In the third quarter, PMT produced outstanding results and growth in book value per share with a 14% annualized return on common equity. Net income to common shareholders was $48 million, and earnings per share was $0.55, with strong performance across all investment strategies. PMT declared a third quarter common dividend of $0.40 per share, and book value per share on September 30 was $15.16, up from $15 at June 30. Dan will talk about PMT's third quarter financial results in more detail later on in the presentation. On Slide 5, I want to start by reminding everyone about the synergistic relationship with PFSI and how important that is to providing PMT with unique and competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment. Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burns associated with origination and servicing. And third, PFSI's deep access to the origination market coupled with PMT's ability to execute private label securitizations provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is [Technical Difficulty]

Ladies and gentlemen, please stand by.

I want to apologize for the technical difficulties. Why don't I start from the beginning? In the third quarter, PMT produced outstanding results and growth in book value per share with a 14% annualized return on common equity. Net income to common shareholders was $48 million, and earnings per share was $0.55, with strong performance across all investment strategies. PMT declared a third quarter common dividend of $0.40 per share, and book value per share at September 30 was $15.16, up from $15 at June 30. Dan will talk about PMT's third quarter financial results in more detail later on in the presentation. On Slide 5, I want to start by reminding everyone about the synergistic relationship with PFSI and how important that is to providing PMT with unique and competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations and its large and agile multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment. Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations, provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is expected to have even more opportunities to organically grow its portfolio. As can be seen on Slide 6, the increasing volume of nonowner-occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment. And this growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives. In the third quarter, we successfully completed 3 securitizations of agency-eligible investor loans totaling $1.2 billion in UPB, retaining $93 million of new investments. We also completed our second consecutive quarterly jumbo loan securitization with a total of UPB of $300 million and retained investments of $45 million. After quarter end, we completed one additional investor and one additional jumbo securitization. And finally, we priced our inaugural securitization of agency-eligible owner-occupied loans. This securitization is particularly significant as it effectively mirrors the strategy of our historical GSE lender risk share transactions. In those prior risk share transactions, we invested in the credit risk associated with high-quality conventional loan production delivered to Fannie Mae. Similarly, in our most recent transaction, we are investing in the credit risk on the same type of high-quality conventional loans. All of these transactions highlight our ability to leverage our production and securitization capabilities to create high-quality assets for PMT's portfolio consistent with its long-term investment strategy. The graphic on the right side of the slide highlights our rapid ascent to become a leading issuer of private label securitizations. In recent periods, we've been a top 3 issuer of prime non-Agency MBS. In fact, since the fourth quarter of 2024 through today, we successfully completed 16 securitizations totaling $5.7 billion in UPB with retained investments of more than $460 million. This consistent cadence of securitizations underscores our commitment to leveraging our organic investment creation abilities and remaining a leader in the private label securitization market. Targeted returns on equity for these investments are expected to be in the low to mid-teens, and we believe that, over time, these new investments will continue to improve PMT's overall return profile. Turning to Slide 7. Approximately 60% of PMT's 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. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 46% of our deployed equity, down from a high point of 56% late in 2022. The majority of these mortgages underlying these MSRs remains far out of the money with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance. Borrowers underlying these MSRs also have a low weighted average current loan to value of approximately 53%. As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time. Furthermore, PMT's MSRs 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, PMT's unique credit risk transfer investments representing 14% of shareholders' equity are backed by seasoned loans with strong fundamentals that were originated during periods of low interest rates. Delinquencies have remained low on this portfolio as well. This positive borrower performance can be attributed to the overall credit strength of the consumer combined with the substantial accumulation of home equity in recent years due to continued home price appreciation, as evidenced by the low weighted average current loan-to-value ratio below 50%. As a result, we expect that realized losses on these investments will be limited and that these core investments will perform well over the foreseeable future. The pie charts on Slide 8 highlight our active management of the portfolio to maximize risk-adjusted returns. Our strategy is to recycle capital into assets that maximize risk-adjusted returns, transitioning capital from lower-yielding assets into high-quality investments with superior return profiles. As an example, this quarter, we sold $195 million of opportunistic investments in GSE-issued CRT that had appreciated significantly since being purchased and where our projected go-forward returns fell below our return requirements. The sale of these investments freed up capital for PMT to invest in newly created assets with higher expected returns from our ongoing private label securitization efforts. We have also identified and acted upon opportunities to deploy capital into higher returning assets available in the market. This quarter, we identified Agency floating rate MBS as an attractive investment with limited interest rate risk and purchased $877 million of these investments. We remain focused on optimizing our allocation to these investments with target ROEs in the 13% to 15% range. By strategically redeploying capital into these higher returning assets, we are successfully increasing the weighted average return profile of our overall portfolio. Turning to Slide 9. You can see 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 $0.42 per share, up from $0.38 per share in the prior quarter and higher than our $0.40 quarterly dividend. Overall, we expect increased returns in the credit-sensitive strategies given the sale of our opportunistic investments in GSE-issued CRT, which had lower projected go-forward returns, and increased activity in accretive investments from our private label securitizations as mentioned earlier. In the interest rate-sensitive strategies, expected returns on equity increased slightly as we deploy capital into Agency floating rate MBS. As the yield curve steepens, we expect PMT's overall run rate would increase further driven by higher overall spread of long-term asset yields to short-term financing rates. Finally, correspondent aggregation activities, particularly in jumbo loans had positive momentum, driving improved execution and an overall increase to our Correspondent Production segment's return potential. In closing, we are executing on a very clear value-enhancing strategy for PMT. Strong results this quarter, combined with our improved outlook, are a direct result of the competitive power of our platform. This success is rooted in the unique advantages derived from the synergistic relationship with PFSI, which fuels our proprietary investment engine and enables us to be a leader in the private label securitization market. By leveraging this integrated structure, PMT is exceptionally well positioned to substantially grow its earnings potential and deliver superior risk-adjusted returns to our shareholders. Now I'll turn it over to Dan, who will review the drivers of PMT's third quarter financial performance.

Thank you, David. PMT reported net income to common shareholders of $48 million in the third quarter or $0.55 per diluted common share. Let's start with the credit-sensitive strategies with a $19 million contribution to pretax income. Gains from organically created CRT investments were $10 million, including $8 million primarily consisting of realized gains in carry and $2 million of market-driven value gains from credit spread tightening. Opportunistic investments in CAS & STACR bonds generated gains of $2 million for the quarter. As David mentioned, we sold $195 million of these investments as the expected go-forward returns were below our return hurdles, and we see more attractive investments resulting from our private label securitization program. Investments in PMT's non-agency subordinate MBS generated gains of $7 million. The interest-rate-sensitive strategies had strong results with pretax income of $32 million. Income excluding market-driven value changes in the segment was $36 million, primarily driven by higher income from MSR investments due to increased placement fee income on custodial balances and lower realization of MSR cash flows. Net fair value losses in the segment were $4 million. The fair value of MSRs declined by $27 million, and the fair value of our interest rate hedges also declined by $27 million. These declines were mostly offset by $51 million of fair value gains on Agency MBS, Agency-structured products and non-Agency senior MBS primarily due to the active addition of exposure to mortgage spreads, which tightened during the quarter. In the third quarter, PMT reported an income tax benefit of $11 million, driven primarily by fair value declines on MSRs and interest rate hedges held in PMT's taxable REIT subsidiary. The fair value of PMT's MSR asset at the end of the quarter was $3.7 billion, down slightly from June 30 as newly originated MSR investments were more than offset by runoff in fair value declines. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low and servicing advances outstanding decreased to $62 million from $70 million at June 30. No principal and interest advances are currently outstanding. Under the renewed mortgage banking services agreement with PFSI, correspondent loans are now initially acquired by PFSI. As part of the agreement, PMT retains the right to purchase up to 100% of nongovernment correspondent production from PFSI. Loans acquired from PFSI's correspondent production through this agreement totaled $3 billion, essentially unchanged from the volume of correspondent production retained by PMT in the prior quarter. PMT purchased 17% of PFSI's total comp conventional conforming correspondent production and 100% of PFSI's correspondent jumbo production in the third quarter, similar to the amount PMT retained [Technical Difficulty]

Please stand by. The event is currently paused.

All right. Apologies again for the interruption. Get back into it. I want to take a minute to comment on PMT's overall leverage ratio, which is -- we show on Slide 15. The increase in total debt to equity in recent quarters is primarily a reflection of growth in nonrecourse debt related to our increased private label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as the financing of the loans rather than retained interest in the securitizations. The source of repayment for this nonrecourse debt is limited to cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We believe that the best metric to measure the leverage of our balance sheet is debt to equity, excluding the nonrecourse debt related to the securitizations, which we have shown on Page 15. We expect the divergence between total debt to equity and debt to equity, excluding nonrecourse debt to continue increasing in future periods as we continue our retention of investments from our securitization program. Excluding nonrecourse debt, our debt-to-equity ratio at September 30 was 5.8x, within the range of our expected and historical levels. We'll now open it up for questions. Operator?

[Operator Instructions] Our first question comes from Doug Harter of UBS.

Hoping to talk a little bit more about the conventional -- securitizing the conventional loans. How are you thinking about sizing that opportunity? How are you kind of deciding what loans get securitized versus delivered to the GSEs? Just if you could walk through that process, that would be great.

Sure, Doug. Thanks so much for the question. Look, we -- as we pointed out in our opening comments, we have tremendous familiarity, knowledge and success with our investment in lender CRT. And when that program was discontinued in 2020, we really took the time to understand how do we create a similar opportunity. And fortunately, the nonowner-occupied securitization really provided the greatest opportunity for us, and so we seized on that opportunity and began the securitization process there. But out of that, we began to look at owner-occupied loans and really through a combination of credit spread tightening and the GSEs raising guarantee fees or loan level price adjustments, certain owner-occupied loans became eligible or executed better into an owner-occupied securitization. And so while we cannot create investment in a private label securitization at the pace that we did in CRT, clearly, over time, we can increase the pace, and we can create a similar investment. And so that's what's exciting about this opportunity. Overall, the execution was superior to delivering the loans to the GSEs, and so there wasn't any gain on sale hits. And likewise, it provided us with an investment in the kind of the mid-teens range for the long term. So from my perspective, was a win-win. It's not going to replace delivering to the GSEs. I mean it's -- if we were to do a deal a month through securitizations and whole loan activity, we probably would end up delivering 15% of our loans outside the GSEs. So it's not meant to say that we don't need the GSEs because we do need the GSEs. They're an incredibly important business partner of ours. But what's important for me is we're creating meaningful investment for PMT and delivering the results to our shareholders.

So I guess as this opportunity continues to grow, does that ultimately change the level of the conventional correspondent business that PMT would look to buy from PFSI? Or does it change the type that you're buying from PFSI? I just wanted to know how those 2 kind of pieces look together.

Yes. So look, if -- what the level of correspondent activity is from the correspondent business is a function of what PMT wants to invest in on both credit and interest-rate-sensitive assets overall. If it needs some additional owner-occupied loans for securitization, it can go into the marketplace to buy those loans or it can go to PFSI to buy those loans. And obviously, going to PFSI to buy those loans is the easier path. So I think you have to think about it as there's going to be an allocation of correspondent loans to PMT and allocation to PFSI. But to the extent that PMT wants more loans to do more securitization and knows that it can go to PFSI and whether those loans come through their allocation of correspondent loans or through their broker originations or their own direct-to-consumer originations is just going to be a byproduct of the types of loans that PMT wants.

And I think, Doug, just as a -- to add on to that a little bit, we don't necessarily expect in terms of the percentage of loans that's going to PMT currently the 17%. As we said in the -- some of the comments, we don't expect that to change for the fourth quarter. And that's -- we think that that's a level at least in terms of our current outlook pretty consistent with where we expect to be as we're going into future periods at the moment.

Your next question comes from Frankie Labetti of KBW.

Can you hear me?

Yes.

This is Bose. Sorry, glitch in the system there. Yes, actually, a couple of questions. One, just in terms of the normalized run rate earnings that you guys discussed in the slide, just given the steeper curve driving that, should we think of the time line for that just when the Fed is further along in that process or like get there by the middle of next year? Is that kind of a good cadence?

It's a relatively good cadence. We do have -- there are some seasonal variations, both in volumes and in escrow balances, et cetera. But really, if you look at the earnings, excluding market value changes for this quarter, it's -- if you exclude that, it's around $0.40 already, and as we're moving into the next few quarters, we'd expect to be pretty close to that $0.42 level on a core basis. And then we can have some changes that come in through the -- market value changes in a given period. But our core -- on the core basis, we're expecting to generate around that $0.42 sort of out of the gate.

Okay. Great. And then just in terms of your -- just going back to Doug's question about this, the transaction, the securitization. How much of that is driven by the GSE pricing versus obviously the spreads in the market are extremely tight as well that's supporting that? Yes, just kind of the different pieces of kind of making that work now.

Yes. So I think that as it pertains to nonowner occupied, I think that's just a market -- I think it's markets and demand for that product. Spreads are tight, and I expect it to continue to remain tight. And the execution versus GSE deliveries is pretty significant, so I don't expect to change there. On the owner-occupied side, that's a little bit more sensitive. And I think that as we see spreads where they are, we see opportunities to do more owner-occupied deals. Sure, spreads were to widen out, we probably would take a pause and deliver those to the GSEs. Obviously, we're going to look at everything in its totality in terms of gain on sale versus long-term investment, but by and large, it's just more -- the owner-occupied transaction is a lot more sensitive to spread movement as it pertains to where the loans ultimately get delivered.

Your next question comes from Trevor Cranston of Citizens JMP.

Question with mortgage rates coming down a fair amount over the last few months. Can you talk about what you guys are seeing in terms of prepay speeds, particularly, I guess, on the jumbo loan securitizations you guys have done over the last year or so? And maybe more generally, if you could also comment on kind of how sensitive projected returns are on those investments to changes in prepay speeds.

Sure. So overall, in terms of the prepay speeds, I think a little early yet on the jumbo securitizations. We really only started doing those in earnest in the middle of this year and so -- and this is really, I'd say, the first -- probably the end of September here. Part of September is where some of those may have had a potential to start refinancing. So I think the reactiveness to that, still have yet to see in full. But with respect to our sensitivity to those prepayments since we own the subordinate tranches, generally speaking, prepayments on -- from the jumbo loans are beneficial to those investments. Typically, we own them at a discount. And so as prepayments increase, it increases the accretion of those over time or basically shortens the life. So overall, in terms of prepayment speeds, it's not a significantly negative impact or it's not a negative impact to our investment.

And this is the -- the MSRs that we own backing these deals, obviously, having the hedge in place to be able to counter the prepayment speed issue's vitally important. I think the hedge results this quarter were really very good. Marshall and the team have done a great job in getting us set up to be able to really see the benefit of an active hedge process in the portfolio. And so hedging those assets helps mute a lot of the prepayment risk associated with owning MSRs.

[Operator Instructions] Your next question comes from Crispin Love, Piper Sandler.

First, can you just speak to where you're seeing the best opportunities for risk-adjusted returns right now just between the interest-rate-sensitive and credit-sensitive strategies and where you're most focused on allocating capital in the near term?

Yes. Crispin, I think from my perspective, the best opportunity right now is in the credit-sensitive strategies sector. Whether it's doing owner-occupied securitizations or nonowner-occupied securitizations, we are getting long-term really stable investments in subordinate tranches at the mid-teens levels. The MSRs are slightly less than that, but I think what's -- and maybe a little bit more than slightly, but they're probably lower teens. But what's driving our motivation there is to get more balanced between interest-rate-sensitive investments and credit-sensitive investments. And so as I mentioned, historically, we've been closer to 50-50. We got as high as 55% interest-rate-sensitive assets back in 2022. So I'm really focused on being able to invest in credit-sensitive strategies. I think that our vehicle has proven to be very valuable in investing in credit-sensitive strategies. And I think given the underwriting and the due diligence and the servicing behind it, the ability to manage the outcomes in a more active way is something that we've shown ourselves to be able to do, is really, if you think about during COVID, our losses were much lower on CRT than other CRT investments. And so I think for the time being, we're very excited about the opportunities it's presented to us. And I think that this is something you're going to continue to see us participate in. And as we produce the results, I'm really hopeful that we'll be able to grow the REIT to be able to deploy even more capital.

And the one thing I'd add on to that is that if we do -- when we do see opportunities in the interest-rate-sensitive strategies, although over time, we do think the best deployment is in credit, and that's really what we see as the best use of our synergy with PFSI and all of the things that David mentioned, but to the extent that we see opportunities in the interest-rate-sensitive strategies as we did with floater -- floating rate MBS or CMO floaters in this quarter, we will deploy those to take advantage of the opportunities for returns that we see and returns on a basis that we think is fairly insulated from changes in interest rates. But that -- really, over time, that credit-sensitive opportunity I think is the best deployment of our capital.

Okay. Great. Appreciate that. And then just big picture, can you just share your latest thoughts on potential changes to the GSEs? Any thoughts on timing, the potential impact of PMT just based on what we've heard so far from the administration, the FHFA?

Sure. Look, I think that, obviously, there's a lot of discussions going on as it pertains to the GSEs. And so from my perspective, when I get asked the question, any action shouldn't harm consumers of the mortgage market. Housing is just too big a part of the GDP to really disrupt it. I think that as it pertains to PMT, we've got a tremendous relationship with the GSEs. Having the relationship with PFSI is vitally important, but also the platform between the 2 companies is on its way to delivering 15% of its production outside of the GSEs. And that's what we need to continue to do, is to be able to be agile that if there is a disruption in the marketplace, that we can continue to operate and grow in that period of disruption. And that's why doing these securitizations and engaging in outright whole loan sales is vitally important, under the heading of just focus on what you can control, and that's what we're trying to do here. Quite successfully, might I add. And I think it's really a credit to the team that you're just seeing more active management of the portfolio, and that's what we need to do in a period of uncertainty.

We have no further questions at this time. I'll now turn it back to David Spector for closing remarks.

Thank you, operator, and thank you all for joining us this afternoon. Again, apologies for the technical difficulties. We'll work it out with our business partner here. But we encourage investors or any of you as well with any additional questions to contact our Investor Relations team by e-mail or phone. Thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.