PennyMac Mortgage Investment Trust (PMT) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the first quarter earnings discussion for PennyMac Mortgage Investment Trust.

The slides that accompany this discussion are available from PennyMac Mortgage Investment Trust's website at www.pennymac-reit.com.

Before we begin, please take a few moments to read the disclaimer on Slide 2 of the presentation.

Thank you.

Now I'd like to turn the discussion over to Stan Kurland, PMT's Executive Chairman.

Thank you, Chris.

Let's begin with Slide 3.

PMT's first quarter results reflects strong performance of our CRT investments resulting from continued growth of the investment and credit spread tightening that reversed valuation-related losses from the prior quarter.

PMT reported net income attributable to common shareholders of $47.3 million or $0.68 per share compared to $35.3 million or $0.55 per share in the prior quarter.

The annualized return on average common equity was 14%, up from 11% in the prior quarter.

Book value per common share increased to $20.72 at quarter end from $20.61 at December 31, 2018, and PMT paid a dividend of $0.47 per share for the quarter.

Our operating results also reflect the effectiveness of our sophisticated interest rate risk management strategies that largely mitigated the impact of declining rates on the fair value of mortgage servicing rights and excess servicing spread assets.

Fair value losses on MSRs and ESS totaled $100.6 million and were partially offset by an $80.7 million gain from our MBS and hedged positions.

PMT reports results through 4 segments: Credit Sensitive Strategies, which contributed $58.4 million in pretax income; interest rate risk strategies, which contributed $800,000 in pretax income; Correspondent Production, which contributed $3.6 million in pretax income; and corporate, with a pretax loss of $12.9 million.

During the first quarter, PMT continued to grow its core CRT and MSR investments that resulted from its own Correspondent Production activities.

Conventional loan production totaled $9 billion in UPB, down 10% from the prior quarter.

Loans eligible for CRT deliveries totaled $7.3 billion in UPB, resulting in new firm commitments to purchase CRT securities totaling $282 million, and new MSR investments added during the quarter totaled $132 million.

I am pleased to announce the introduction of a groundbreaking new structure that provides term financing for PMT's CRT investments.

From this structure, we issued 3-year term notes secured by our first 3 CRT deals, replacing short-term securities repurchase financing at a similar effective cost and providing improved capital efficiency.

I will discuss this new financing structure in more detail later in my presentation.

Turning to Slide 4, let's discuss our review of the first quarter highlights.

We continued executing on our goal of prudently reducing our investments in distressed mortgage loans.

During and after the quarter, we entered into agreements to sell approximately $49 million in UPB of nonperforming loans from the distressed portfolio.

Combined, these sales represent approximately 26% of the distressed portfolio's UPB at March 31, 2019.

Finally, we raised approximately $147 million in net proceeds from the issuance of new common equity, $143 million of which was from the issuance of 7 million common shares in an underwritten equity offering, and $4.5 million of which was from our recently launched At The Market, or ATM, common equity issuance program.

Our ATM program provides us with the potential to raise a total of $200 million of additional capital as conditions allow.

These capital raises were driven by PMT's favorable growth outlook, which I will discuss later in my presentation.

Now let's turn to Slide 5 and discuss the current market environment.

The first quarter of 2019 saw improved market conditions aided by the Federal Reserve providing greater clarity on expectations for further rate increases this year.

The average 30-year fixed rate for the quarter was 41 basis points lower than the average rate in the prior quarter, driving a significant increase in refinancing volumes.

As a measure of activity, the Mortgage Bankers Association's Refinance Application Index was 1,786 at the end of March compared to 730 at the end of December.

Lower rates are also expected to have a positive impact on the purchase market as we head into the traditional home buying season.

Macroeconomic indicators, such as home sales, have shown modest improvement while, at the same time, purchase money origination forecasts have seen upward revisions, supported by improved affordability.

We also saw an overall improvement in market sentiment regarding credit investments during the first quarter.

Credit spreads on GSE credit risk transfer securities tightened during the quarter, reversing the 40 to 80 basis points of widening in the fourth quarter.

And finally, delinquency levels at March 31, 2019, improved and remained near their all-time lows, supported by the continued strength of the U.S. economy and strong employment trends.

Now let's turn to Slide 6 and discuss PMT's high-quality balance sheet.

The majority of PMT's investments are sourced organically through its Correspondent Production business.

Combined with our interest rate-sensitive and credit-sensitive investments, we have created a portfolio of attractive investments that are truly unique among mortgage REITs.

A key element of PMT's strong performance is its high-quality balance sheet comprised of residential mortgage-related assets.

As the mortgage market and investment opportunities have changed over time, the composition of our investment strategies has also evolved.

PMT was a leading investor in distressed mortgage loans.

But as the attractiveness of that investment diminished, our focus has shifted to interest rate-sensitive investments and CRT.

Our MSR and ESS investments are held as part of a comprehensive interest rate sensitive strategy, along with MBS and other hedging instruments used to moderate the impact of interest rate volatility on the fair value of those investments.

As a result of our leadership position in conventional conforming loan production, we developed unique credit risk transfer investments in partnership with Fannie Mae, and we now create those CRT investments from a majority of the loans we produce.

Our CRT investments are essentially a residual interest on GSE loans comprised of collateral that we have vetted through our comprehensive loan acquisition process and, for which, we also own the mortgage servicing rights.

We believe that owning the credit risk and the servicing rights on the loans we produce creates a strong alignment of interest with attractive returns on equity.

PMT's mortgage-related investments have experienced solid growth over the past several years, growing from $5.1 billion at the end of 2015 to $7.8 billion at March 31, 2019, utilizing relatively low leverage versus other mortgage REITs.

Supporting this growth is a diverse financing structure that includes strong bank partnerships and other institutional investors.

We believe this places PMT in a strong position to support future growth and capitalize on new investment opportunities.

We have over $4 billion of warehouse line financing capacity sized to support growth of our production volumes, significant amounts of financing capacity for CRT investments which now includes term financing and an MSR financing structure that optimizes liquidity and leverage on our Fannie Mae MSR asset.

Now let's turn to Slide 7 and discuss PMT's strategies for long-term growth.

Our growth and leadership position in the conventional conforming market drives opportunities for PMT to continue deploying capital into its core investments of CRT and MSRs.

As a result, we are forecasting the deployment of between $400 million and $600 million of equity into new CRT and MSR investments over the next 12 months.

Actual deployment within this range will be dependent upon market conditions and the level of interest rates for the remainder of the year.

We also seek to expand investment opportunities to include new investments sourced from loan products recently launched by our manager, PennyMac Financial, including HELOCs and prime non-QM products.

These products address evolving consumer financing needs in today's marketplace, and we are optimistic about the growth prospects of these products over time.

However, these initiatives will take time to scale.

And as a result, we do not expect significant capital deployment into these investments in 2019.

Now let's turn to Slide 8 and discuss our innovative term note financing structure for our CRT investments.

As I mentioned earlier, during the first quarter, PMT launched a term note structure to more effectively finance certain of its CRT investments.

Through the recently completed structure, we issued 3-year secured term notes totaling $296 million to finance PMT's first 3 settled CRT transactions.

The new term notes replace short-term financing at a similar cost of funds.

The new financing structure provides other significant benefits, including better alignment to the expected life of the related CRT asset and an increase in our advance rate from approximately 70% to 75%.

Furthermore, secured term notes also diversify our CRT financing counterparties to include institutional investors and improve returns on equity through the reduction of internal cash reserves from the elimination of margin call exposure related to CRT investments currently financed through the structure.

We expect to utilize this new structure to finance all of our CRT investments eventually and to become a repeat issuer of term notes as our CRT investments grow.

Now let's turn to Slide 9 and review the run rate quarterly return potential of PMT's strategies.

Our expectation for PMT's activities is a run rate diluted EPS of $0.51 per quarter, which would result in an annualized return on common equity of approximately 10%.

PMT's run rate potential reflects our expectation for returns over the next several quarters.

Our income potential results from continued growth of CRT and MSRs organically driven by our Correspondent Production activities.

PMT's run rate equity allocation related to Credit Sensitive Strategies is 50%, with an expected annualized return on equity of 16% driven by expectations for continued growth and the strong performance of our CRT investments.

The run rate also reflects expectations for a reduced impact from the significantly smaller distressed loan portfolio.

Equity allocated to Interest Rate Sensitive Strategies is expected to average 34%, with an annualized return on equity of 11.8%.

We consider the results from this segment in aggregate, as I discussed earlier.

Our expectations are primarily driven by our outlook for the earnings contributions from the growing MSR asset.

The Correspondent Production segment is expected to deliver an annualized return on equity of 11.4%, which reflects our outlook that the prevailing competitive production environment will continue for the foreseeable future.

This concludes my presentation.

I'd now like to turn the discussion over to David Spector, PMT's President and Chief Executive Officer, who will review our mortgage investment activities.

Thank you, Stan.

Let's start with Slide 11 for a look at our Correspondent Production highlights.

Correspondent acquisitions by PMT in the first quarter totaled $15.1 billion in UPB, seasonally down 17% from the prior quarter and up 15% year-over-year.

Conventional acquisitions accounted for 55% of correspondent acquisitions, or $8.3 billion in UPB in the first quarter, down 10% from the prior quarter while up 96% year-over-year.

The increase in conventional loan volumes over the last 12 months has been enabled by the unique execution capabilities of our manager, PennyMac Financial, and PMT's ability to retain attractive CRT investments.

Government loan acquisitions, for which PMT earns a sourcing fee from PennyMac Financial, accounted for 45% of total correspondent acquisitions or $6.8 billion in UPB in the first quarter, down from $8.9 billion in UPB in the prior quarter and $8.8 billion in UPB in the first quarter of 2018.

We continue to focus on growing our non-delegated correspondent volume, which increased 45% quarter-over-quarter to $174 million in UPB primarily driven by growth of government non-delegated volume following its release late last year.

PMT also acquired conventional loans originated by PFSI totaling $730 million in UPB.

This amount includes acquisitions of conventional loans originated by PennyMac Financial's consumer direct lending channel, totaling $609 million in UPB, and $121 million in UPB loans originated through its broker direct channel.

Conventional lock volume totaled $9 billion in UPB, down 7% from the prior quarter while up 108% from the first quarter of 2018.

While the correspondent market as a whole remains competitive, margins appear to be stabilizing as the Correspondent Production segment's profitability increased modestly in the first quarter.

The weighted average fulfillment fee paid to PFSI to facilitate correspondent loan production was 34 basis points, up from 32 basis points in the previous quarter.

We further increased the number of approved correspondent sellers in our network to 743 clients at quarter end, a 5% increase from 710 clients at the end of the prior quarter.

April's acquisition volumes were up significantly from last year, with total correspondent loan acquisitions of $6.5 billion in UPB compared to $4.7 billion in April of 2018.

Interest rate lock commitments in April totaled $7.5 billion in UPB, also up significantly from $5.6 billion in the same period last year.

Now let's turn to Slide 12 and discuss PMT's investment in GSE credit risk transfer.

Eligible CRT loan deliveries in the first quarter represented 86% of PMT's total loan production, up modestly from the prior quarter and have averaged 82% of total production for each full quarter period since the introduction of our REMIC CRT transaction structure initiated with Fannie Mae in June of 2018.

On a pro forma basis at March 31, PMT's outstanding CRT investments totaled $2.2 billion, with the UPB of the loans underlying the CRT agreements totaling $53 billion.

Total firm commitments to purchase CRT securities totaled $887 million at quarter end.

This commitment relates to our fifth CRT transaction and the first under the new REMIC structure, which is expected to settle in the second quarter.

We have initiated deliveries into a new CRT transaction during the second quarter.

The delinquency levels and incurred losses on the loans underlying our CRT agreements increased modestly in the first quarter, reflecting normal seasoning of the loans.

Losses recognized during the quarter were $895,000, bringing the cumulative lifetime losses on our CRT investments to $4.5 million, in line with expectations and typical portfolio seasoning.

Now let's turn to Slide 13 and discuss MSR and ESS investments.

PMT's organic MSR investments resulting from its correspondent conventional production activity totaled $1.2 billion at quarter end, essentially unchanged from December 31, 2018.

Additions from our loan production volumes, net of runoff, were largely offset by the decrease in fair value from the decline in mortgage rates during the quarter.

PMT's MSR portfolio totaled $99.3 billion in UPB at March 31, 2019, up from $92.4 billion at December 31, 2018.

PMT's ESS investments resulting from bulk, mini-bulk and flow MSR acquisitions by PennyMac Financial from 2013 to 2015 decreased slightly from $216 million at the end of 2018 to $205 million at the end of the first quarter, with the ongoing reduction resulting from prepayments and amortizations of the underlying loans in addition to interest rate-driven fair value losses on the investments.

The UPB associated with ESS investments totaled $22.7 billion at March 31, 2019, down from $23.2 billion at December 31, 2018.

Now I'd like to turn the discussion over to Andy Chang, PMT's Chief Financial Officer, to review the first quarter's financial results.

Thank you, David.

Let's turn to Slide 15 and discuss the first quarter's income and return contributions by strategy.

PMT's activities in the first quarter generated an annualized return on common equity of 14% net of all expenses.

In total, Credit Sensitive Strategies contributed $58.4 million to pretax income or a 39% annualized return on equity for the quarter.

Within the segment, CRT investments contributed pretax income of $61.5 million, which I will expand upon in the next slide.

Distressed loan investments contributed a $3.5 million pretax loss, primarily resulting from financing costs and expenses related to the continued liquidation of the distressed loan and REO portfolios.

Interest Rate Sensitive Strategies, which include the performance of our MSRs, ESS and Agency and non-Agency senior MBS positions and related interest rate hedges, together contributed $800,000 to pretax income, or a 0.4% annualized return on equity for the quarter.

As Stan mentioned earlier, these results were driven by fair value losses on our MSR and ESS investments, which resulted from the decrease in mortgage rates, and were partially offset by gains in the fair value of our Agency MBS and other interest rate hedges.

While we show the income contribution for each of these Interest Rate Sensitive Strategies separately, they are managed together as the interest rate sensitivity of MSRs and ESS is inversely correlated to that of MBS and our other interest rate hedges.

Correspondent Production contributed $3.6 million to pretax income or an 8% annualized return on equity for the quarter.

The corporate segment contributed a pretax loss of $12.9 million.

Lastly, we recorded a $3.7 million benefit for income tax expense driven by fair value losses on investments held in PMT's taxable REIT subsidiary.

Now let's turn to Slide 16 and break down the performance of our GSE credit risk transfer investments.

Our CRT investments contributed $61.5 million of pretax income in the first quarter, consisting of $31.4 million of gains from market-driven value changes and $30.1 million of income excluding market-driven value changes.

Gains from market-driven value changes included $20.4 million driven by credit spread tightening on existing CRT investments, reversing losses from credit spread widening in the prior quarter.

Also included in market-driven value changes this quarter were $11 million of net gain on mortgage loans acquired for sale.

These gains relate to the fair value recognition upon loan delivery under firm commitments to purchase CRT securities under the new REMIC structure.

$8.6 million of such gains were attributed to the Correspondent Production segment in the first quarter.

Income, excluding market-driven value changes, consists of net realized gains and net interest expense related to our CRT investments.

For the quarter, realized gains on existing CRT investments totaled $33.6 million and losses recognized totaled $900,000.

Interest income earned on cash deposits securing CRT investments was $6.8 million, while interest expense relating to the financing of these investments was $9.5 million.

And with that, I'll turn the discussion back over to Stan for some closing remarks.

Thank you, Andy.

The availability of opportunities in today's mortgage market, combined with PMT's access to the operational capabilities of PennyMac Financial to organically generate attractive investments, drives our optimistic outlook.

To facilitate our long-term growth and maximize returns, we continue to develop innovative ways to strengthen our balance sheet and reduce liquidity risk.

The groundbreaking CRT financing structure we launched this quarter began to provide term financing for our CRT investments through a cost-effective and capital-efficient structure.

The term notes we issued more effectively matched the duration of our CRT assets and improved the return on equity of our CRT investments.

We now have in place term financing solutions for both of PMT's core investments, CRT and MSRs, which will help PMT support its growth and strong performance in the future.

As we pursue PMT's growth strategies, we also expect to gain efficiencies as we leverage our corporate infrastructure across a larger asset base and realize greater economies of scale.

Lastly, we encourage investors with any questions to reach out to our Investor Relations team by e-mail or phone.

Thank you.

This concludes PennyMac Mortgage Investment Trust's first quarter earnings discussions.

For any questions, please visit our website at www.pennymac-reit.com, or call our Investor Relations department at (818) 224-7028.

Thank you.