PennyMac Mortgage Investment Trust (PMT) 2022 Q2 法說會逐字稿

Good afternoon, and welcome to the second quarter earnings discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available on PennyMac Mortgage Investment Trust's website at www.pennymac-reit.com. Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to the risks identified on Slide 2 that could cause our actual results to differ materially.

Now I'd like to introduce David Spector, PMT's Chairman and Chief Executive Officer, who will discuss the company's second quarter 2022 results.

Thank you, Isaac. PMT reported a net loss of $81.2 million or $0.88 per common share for the second quarter as fair value declines in its Credit Sensitive Strategies due to continued spread widening more than offset strong performance from its strategies, excluding the impacts of market-driven fair value changes. Additionally, PMT recorded a tax expense related to fair value gains on its MSR assets and its taxable REIT subsidiary, which also impacted results.

PMT paid a common dividend of $0.47 per share. Book value per share decreased to $16.59 from $17.87 at the end of the prior quarter. Dan Perotti, Senior Managing Director and Chief Financial Officer, will review additional detail of PMT's financial performance later on in this discussion.

During the quarter, we repurchased 1.9 million shares of PMT's common stock for $28 million at an average price of $14.72, significantly below current book value per share. And in July, we repurchased an additional 510,000 shares for an approximate cost of $7.3 million at $14.30 per share.

One of PMT's greatest strengths is its ability to organically generate investments through our high-quality loan production sourced from correspondent sellers across the country. This quarter, $10.3 billion in UPB of conventional Correspondent Production led to the creation of $171 million in high-quality mortgage servicing rights.

Although current forecast for 2022 total originations range from $2.4 billion to $2.8 trillion primarily due to activity in the first half of the year, mortgage application indices point to further declines in the second half as the market reacts to the rapid increase in mortgage rates.

While we believe there is potential for these forecasts to decrease further, we believe PMT's leadership has the largest correspondent aggregator and one of the largest producers of purchase money loans in the country positions us well to execute over the long term.

Now I'd like to turn the call over to Vandy Fartaj, Senior Managing Director and Chief Investment Officer, who will talk about potential investment opportunities, drivers of PMT's outlook and second quarter investment performance.

Thank you, David. The rapid shift in market interest rates and credit spreads created opportunities for PMT to make investments in addition to those normally created from its Correspondent Production activities. Although our ability to organically produce investments distinguishes PMT from most other public mortgage REITs, we also have the strong balance sheet and risk management capabilities necessary to deploy capital and investments from third parties when attractive opportunities arise.

Year-to-date, we've invested nearly $170 million in these investments and continue to monitor the market for opportunities to deploy capital at attractive returns. We remain prudent and selective deploying capital given the currently volatile and uncertain mortgage landscape.

Turning to lender-based CRT. PMT is a leader in lender risk-share transactions with nearly $120 billion in UPB of loans sold to Fannie Mae from 2015 to 2020. While we are not currently delivering loans into CRT transactions, we are actively engaged in discussions with the GSEs regarding the potential resumption of lender risk-share investments. We believe we are well positioned to lead broadly on this effort, given our history, platform and expertise.

Because of the greater capital relief, CRT provides the GSEs under the amended enterprise regulatory capital framework and the additional private capital CRT provides to the housing ecosystem, we remain optimistic for the future of lender risk share. Most importantly, the alignment of interest as acquirer and servicer of the loans should be compelling for the GSEs, given we can work directly with our borrowers in times of hardship. While our ongoing discussions with the GSEs are encouraging, we have no further update on the potential resumption of our lender risk-share transactions.

Let's now take a look at our potential returns across the investment portfolio. On Slide 6 of our second quarter earnings presentation, we illustrate the run rate potential from PMT's investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next 4 quarters. In total, we expect the quarterly run rate for PMT strategies to average $0.40 per share or 9.6% annualized return on common equity.

This run rate potential reflects performance expectations in the highly competitive transitioning mortgage market. In our Credit Sensitive Strategies, the potential return from PMT's organically created CRT investments increased from last quarter, reflecting credit spreads that continue to widen. In the Interest Rate Sensitive Strategies, we expect more consistent returns given slower prepayment speeds.

In Correspondent Production, the projected returns reflect our expectation for high levels of competition with low volumes and tight margins. This analysis excludes potential contributions from additional opportunistic investments and opportunities under exploration, such as new investments in PMT's organically created GSE CRT.

Our forecast for PMT's taxable income and liquidity continues to support the common dividend at its current level of $0.47 per share through the remainder of 2022. Thereafter, the dividend level will be driven primarily by projections of PMT's earnings potential.

Now let's discuss the drivers of second quarter results in our Correspondent Production segment. Total correspondent loan acquisition volume was $21 billion in the second quarter, 49% or $10.3 billion were conventional loans and 51% or $10.6 billion were government loans. Purchase volume was 82% of total acquisitions, up from 69% last quarter, demonstrating PMT's ability to quickly adapt in a transitioning mortgage environment.

Conventional lock volume in the second quarter was $11.1 billion, up from the prior quarter as correspondents seek high-quality aggregators to sell loans servicing released in the current environment. Our reputation in the industry and consistent commitment in the channel has provided our partners the stability and support they need to navigate the current environment.

PMT's Correspondent Production segment pretax income as a percentage of interest rate lock commitments was 9 basis points, up from 4 basis points in the prior quarter, and the weighted average fulfillment fee rate in the second quarter was 20 basis points, up from 17 basis points in the prior quarter. Acquisition volumes in July were $7 billion, and locks were $6.8 billion.

PMT's Interest Rate Sensitive Strategies consist of our investments in MSR sourced from our Correspondent Production and investments in Agency MBS, non-Agency senior MBS and interest rate derivatives with offsetting interest rate exposure. The fair value of PMT's MSR investments at the end of the second quarter was $3.7 billion, up from $3.4 billion at the end of the prior quarter. This increase reflects both newly originated MSRs resulting from conventional production volumes and fair value gains. The UPB of loans underlying PMT's MSR investments also continue to grow as new production more than offset runoff from prepayments.

Now I would like to discuss PMT's Credit Sensitive Strategies, which primarily consist of investments in organically created CRT from PMT's production, investments in non-Agency subordinate bonds from private-label securitizations of PMT's production and opportunistic investments in GSE CRT.

The total UPB of loans underlying PMT's organically created CRT investments as of June 30 was $26.3 billion, down 7% quarter-over-quarter. The fair value of our organically created CRT investments at the end of the quarter was $1.3 billion, down from $1.4 billion at March 31 due to fair value decreases that resulted from market credit spread widening and prepayments. The outlook for our current investments in organically created CRT remains favorable, with the current weighted average loan-to-value ratio of 63% at June 30, benefiting from the home price appreciation experienced in recent years. The 60-plus-day delinquency rate underlying these organically created GSE CRT investments continue to improve and declined to 1.31% at June 30 from 1.85% at March 31.

PMT also purchased $39 million in floating-rate CRT bonds issued by Fannie Mae and Freddie Mac during the quarter at attractive risk-adjusted returns. We will continue to evaluate investments across the mortgage landscape and be prudent in the deployment of capital given the widening of market credit spreads and increased volatility.

Now I would like to turn the call over to Dan, who will review our quarterly financial results.

Thank you, Vandy. PMT reports results through 4 segments: Credit Sensitive Strategies, which contributed $63.7 million in pretax loss; Interest Rate Sensitive Strategies, which contributed $29.4 million in pretax income; Correspondent Production, which contributed $9.8 million in pretax income; and the Corporate segment, which had a pretax loss of $15.3 million.

The losses on PMT's organically created CRT investments this quarter totaled $49.8 million. This amount included $67 million in market-driven fair value losses, reflecting the impact of wider credit spreads. Losses on PMT's organically created CRT investments also included $20.2 million in realized gains and carry, $4.5 million in net recoveries of previously realized losses, primarily related to L Street Securities 2017-PM1, $2.4 million in interest income on cash deposits, $9.7 million of financing expenses and $100,000 of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic.

PMT's Interest Rate Sensitive Strategies contributed income of $29.4 million in the quarter. MSR fair value increased $220 million during the quarter, driven by higher mortgage rates, resulting in expectations for lower prepayment activity in the future. These fair value gains held in PMT's taxable REIT subsidiary resulted in a provision for tax expense of $31 million. The fair value of Agency MBS and interest rate hedges declined by $234 million, primarily driven by higher interest rates.

PMT's Correspondent Production segment contributed $9.8 million of pretax income for the quarter. PMT's Corporate segment includes interest income from cash and short-term investments, management fees and corporate expenses. The segment's contribution for the quarter was a pretax loss of $15.3 million. Excluding market-driven value changes and the related tax impact, PMT reported $55.8 million of net income across its strategies.

Successfully navigating a challenging mortgage environment requires a strong balance sheet, expertise in the capital markets and strong investment management and capital planning disciplines, areas we have been focused on for years. Our financing arrangements are critical to our business, and we have worked diligently throughout our history to ensure that PMT has a solid capital structure and remains in a strong liquidity position.

PMT has $555 million outstanding of exchangeable senior notes. With more than 2 years left until the first maturity of these notes, this financing provides low fixed coupons and depth to our capital structure. This quarter, we issued $305 million in new 5-year term notes secured by Fannie Mae MSRs at favorable terms, bringing the total to $1.1 billion. In addition to the secured term notes, PMT maintained substantial revolving bank financing structures, which provide increased flexibility to support financing for fluctuating MSR and advanced balances.

Similar to our MSR financing, we have maintained strong financing structures related to our CRT investments. Our first 3 CRT transactions, representing 7% of the total fair value, are currently financed by securities repurchase agreements, while the remainder or 93% of the total fair value is currently financed by secured term notes. Importantly, these term notes collateralized by our CRT transactions do not contain mark-to-market or margin call provisions. This has served us extraordinarily well as we are not obligated to post collateral for the majority of our CRT investments if fair values decline.

Looking toward upcoming maturities. Although we expect to refinance the $450 million of MSR term notes that mature next year, PMT has the ability to extend the maturity for an additional 2 years in the event of market dislocation. Similarly, with respect to upcoming maturities of CRT term notes, we expect to refinance these notes utilizing securities repurchase agreements or new term notes depending on the market environment at the time.

Again, in the event of market dislocation, PMT also has the ability to extend the maturity of many of its CRT term notes for 2 years as well. As you can see, our risk governance emphasis provides a strong foundation to navigate the transitioning mortgage landscape with a diverse capital structure, low overall leverage and $890 million of available liquidity at June 30.

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

Thank you, Dan. The recent increase in spreads has improved our projected return potential for PMT's investment portfolio going forward and presents opportunities to prudently invest additional capital at attractive risk-adjusted returns. With our deep management team that has years of experience executing through mortgage cycles, a strong balance sheet, sophisticated financing structures and hedging strategies that mitigate volatility in book value and preserve a strong liquidity position, PMT is well positioned to deliver attractive returns to its shareholders in the long term.

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