PennyMac Mortgage Investment Trust (PMT) 2023 Q4 法說會逐字稿

Good afternoon and welcome to PennyMac Mortgage Investment Trust fourth-quarter and full year 2023 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 may cause the company's actual results to differ materially, as well as non-GAAP measures that have been reconciled to the GAAP equivalent in 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, Chief Financial Officer.

Thank you, operator.

Good afternoon and thank you to everyone for participating in our fourth quarter earnings call.

PMT produced very strong results in the fourth quarter, with sizable contributions from the credit sensitive strategies and its correspondent production business.

These results were partially offset by fair value declines in the interest rate sensitive strategies.

Net income to common shareholders was $42 million or diluted earnings per share of $0.44.

PMT's annualized return on common equity was 12% and book value per share increased to $16.13 at December 31, up from $16.1 at the end of the prior quarter.

This strong financial performance marked the culmination of an outstanding year for PMT, demonstrating its resilience in a year of tremendous interest rate volatility and highlighting our management team's unwavering commitment to managing interest rate risk.

PMT was profitable every quarter in 2023, with annual income contributions from all three of its investment strategies.

Net income attributable to common sharehoslders for the year was $158 million ordiluted earnings per share of $1.63.

Return on common equity was 11% and book value per share grew 2%, net of $1.60 in common share dividends.

In 2023, we invested nearly $500 million into new MSR and opportunistic investments, which we believe will perform well over the long term.

As we head into 2024, we will remain disciplined in the deployment of capital, to continue to look for opportunistic investments across the residential mortgage landscape.

The strength of PMT's balance sheet has always been a key differentiator among mortgage rates, and I'm very proud of the work our management team has accomplished in 2023.

Not only did we return approximately $170 million to shareholders through common share, cash dividends, and share repurchases, but we further strengthened the balance sheet with new long-term debt issuances of $659 million and redemptions of $450 million in debt, with upcoming maturities.

As you can see on slide 5 of our fourth quarter presentation, the origination market is expected to have troughed in 2023 as mortgage rates have declined from their recent highs and anticipated future rate cuts have increased third party estimates for industry originations in 2024 to approximately $2 trillion.

Much of this anticipated growth is based on expectations for interest rate reductions later on in the year.

And we expect the first quarter of 2024 to remain seasonally low, before moving into spring and summer homebuying season.

Given the current environment, I remain very enthusiastic about the potential performance from PMT's investment portfolio.

More than two-thirds of PMT's shareholders' equity is currently invested in the 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 extend the expected asset life.

Additionally, delinquencies remain low due to the overall strength of the consumer, as well as a 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 rates declined during the quarter, the majority of the underlying mortgages remain far out of the money, and we expect the MSR asset to continue to produce stable cash flows over an extended period of time.

The 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 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 the realized losses over the life of these investments to be limited.

We remain focused on actively managing PMT's portfolio of opportunistic investments, which we believe have the potential for strong long-term risk-adjusted returns.

In the fourth quarter, we invested $17 million into floating rate GSE CRT bonds.

After quarter end, we sold $56 million of previously purchased floating rate GSCCRT bonds, as credit spreads have tightened, making capital available for PMT to deploy into additional opportunistic investments.

Slide 8 outlines the runway potential expected from PMT's investment strategies over the next four quarters.

PMT's current run rate reflects an average $0.31 per share over the next four quarters.

This is down modestly from the prior quarter due to the impact of interest rate changes on asset yields, compared to financing rates for the interest rate sensitive strategies.

The expected returns on these investments have the potential to improve if short-term rates decline, driving an increase in the overall run rate.

I will now turn it over to Dan, who will review the drivers of PMT's fourth quarter financial performance.

Thank you, David.

Turning to slide 12, PMT earned $42 million in net income to common shareholders in the fourth quarte or $0.44 per diluted common share.

PMT's credit sensitive strategies contributed $61 million in pretax income.

Pretax income from PMT's organically created CRT investments in the fourth quarter totaled $42 million.

This amount included $29 million in market-driven fair value gains, reflecting the impact of tighter credit spreads.

The fair value of these investments was essentially unchanged from the prior quarter as fair value gains were offset by 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 and a 60-day delinquency rate of 1.23% as of December 31.

Income from opportunistic investments in CAS and STACR bonds issued by the GSEs totaled $12.8 million in the quarter.

The interest rate sensitive strategies contributed a pretax loss of $17 million.

The fair value of PMT's MSR investment decreased by $145 million, as the decline in mortgage rates increased future prepayment projections.

Approximately 78% or $112 million of this MSR decline was offset by changes in the fair value of agency MBS, interest rate hedges, and related income tax effects.

Agency MBS fair value increased by $184 million, while interest rate hedges decreased by $94 million.

The fair value declines on MSRs and interest rate hedges held in PMT's taxable rate subsidiary drove a tax benefit in the fourth quarter.

The fair value of PMT's MSR asset at the end of the quarter was $3.9 billion, down from $4.1 billion at September 30, as growth in the MSR portfolio from loan production was more than offset by fair value declines and runoff from prepayments.

Delinquency rates for borrowers underlying PMT's MSR portfolio remained low, while servicing advances outstanding increased to $191 million from $80 million at September 30, due to seasonal property tax payments.

No principal and interest advances or currently outstanding.

Income from PMT's correspondent production segment was up from last quarter, primarily due to higher margins.

Total correspondent loan acquisition volume was $24 billion in the fourth quarter, up 10% from the prior quarter.

Conventional loans acquired for PMT's account totaled $2.5 billion, down 10% from the prior quarter due to seasonal impacts.

The weighted average fulfillment fee rate was 20-basis-points, unchanged from the prior quarter.

PMT reported $41 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $32 million last quarter.

We'll now open it up for questions, operator.

(Operator Instructions) Bose George, KBW.

Hey, guys, on slide 8 where you give the run rate potential ROE declined and it looked like it declined on the return on the MSR, can you just talk about the returns expected this quarter versus last quarter?

And then I thought, like, as the curve steepens, that should benefit that number and is that right?

Hey, Bose, this is Dan.

The run rate did declined based on on the interest rate strategies, really, what we see there that the curve, if we're if we're thinking about the curve for the MSR, really -- inverted more if you're looking at versus really short term rates, which is where the financing where we're financing the MSR.

And especially at PMC, where the vast majority of the financing for the MSR is really secured.

So we have short rates that are still sticking and looks like, even through the first quarter year, probably at and at the same rate that they've been.

And meanwhile, the longer-term rates that drives the yield on the MSR came down pretty meaningfully in the fourth quarter.

And so that, it's compression in the short term, it's what drove the reduced expected return over, you know, over the run rate, which is really over just the next four quarters.

If short term interest rates decline, as we know, as we in the market are expecting them to, and we see that sort of through the forecast, and we expect that overall the overall spread to increase that would mean if the curve would be inverts and that would create a better spread in terms of driving higher ROE, for the MSRs and the Interest rate sensitive strategies overall.

And that could lead to a greater expectation of return potential for the interest rate sensitive strategies.

So we do, based on what forecasted in the market, expect that to evolve over the coming year.

But just looking out at the shortest term, currently, we see some compression in the in the interest rate sensitive strategies, while as the short rates still sticking up pretty high.

Okay, great.

Thanks a lot.

Matthew Howlett, B. Riley.

Hey, thanks for taking my question.

First, just on the on the credit side, I mean, you bought some CRT in the fourth quarter, then you sold a lot of it and stuff.

And generally, what's your view on spreads today with CRT and any update on securitization program on the horizon?

Maybe second liens or a loss and or a restart of the CRT and the GSEs are at with and some of their guidance today.

But just an update on the credit side and where you think you can maybe grow and what you think it spreads now?

Yes, sure.

Hey, Matt, it's David.

I think that, on the credit sensitive strategies front, we have very strong returns in 2022.

And that really speaks a really great job well, and the team are doing in terms of actively managing that portfolio.

We bought $17 million earlier in the quarter of CAS and STACR bonds.

We sold $56 million after quarter end, opportunistically, as spreads tightened.

And look, we're going to continue to monitor the market.

The sale of the bonds were because the yields were well below our required returns and we are just redeploying them even to pay down where our lines made made sense, and as a way to have dry powder to be able to invest in credit-sensitive assets as we see them.

In terms of a securitization program, we're starting to see some asset securitizations of second liens, albeit, the credit pieces of those securitizations don't meet our required returns at PMT, although we're monitoring them very, very closely.

And I think that that's something that we're just going to continue to monitor.

I don't see the GSEs coming back with a lender credit risk program until we see an increase in the overall size of the mortgage market at a minimum.

They, right now, and all the production they can get to support their own CAS and STACR bonds.

And so, it's something that we're continuing to stay in dialogue with them, But I don't see that.

I think, look, we are in a position where we have dry powder to invest when we see the opportunities and can continue to deliver the returns we need to maintain our dividend.

We had a great year in PMT.

Overall, for the fourth quarter, we delivered 12% for the year.

We had 11% were earnings exceeded the dividend, and we see the dividend in a nice way.

We had minor book value growth per share, which in the REIT sector says a lot, given the volatility that we saw.

And speaks to the the hedging that we do as well as the opportunities that we see in the marketplace.

So I think, by and large, it's going to be, until we can raise capital, and I see that as an opportunity that presented itself, hopefully, later parts of the year as we see rates decline.

But we will continue to actively manage the portfolio.

The other piece that I mentioned, Matt, is that if you look at our portfolio, around 70% of the portfolio is invested in our core assets in terms of MSR and our existing vendor credit risk share that we have outstanding, given where interest rates have been and the note rates on those portfolios, the runoff of those is very slow.

So our need to redeploy, at this point is it is not huge.

So as David mentioned, we're looking for the opportunities and investing opportunistically where we see those opportunities.

But in terms of the overall portfolio, the runoff is not that great at this point in time.

Right, that's a good point.

And then on the subject of a prudent allocation of capital, how long will this interplay with PMT selling a big chunk of their conventional production to be at is at?

How long can we expect you guys to hit in the first quarter?

Obviously, there's huge synergies between the two companies.

How do you see that continuing and what will this change for PMT to start retaining that production?

And the question, David, you bring up the dividend and just any other sense you want to keep the in terms of this interplay between buying back stock and just paying that dividend.

Do you feel like you want to pay the dividend?

Or given the stock's discount to book, what do you what would you see allocating more capital to buybacks?

Just curious on that.

Thank you very much.

So on the correspondent side, look, I think that it speaks volumes about the synergistic relationship we have with PFSI, that we have the ability to move loans over to PFSI in this period of time, where we have alternative investments at a higher return, and we're trying to pace how we deploy that capital really with an eye towards credit-sensitive strategies as opposed to -- the MSR port is very large and we want to get that more in balance.

And I think, look, it's going to be for Q2, I don't see it changing in Q1, Q2.

It's a capital allocation issue from the point of view.

Is it should we raise capital?

We have more capital to deploy and we want to deploy at MSRs, PMC will sell less loans to PFS I mean.

I think it's nothing more complex than that.

But I think for now, it speaks to the active management that we're taking in the portfolio in PMT and how we think about the split between credit sensitive strategies and interest rate sensitive strategies.

Dan, you want to talk about the dividend?

Sure.

With respect to the dividend and the trade-off that you that you mentioned that where we've seen the price to book in recent periods where we have been moving closer to price to book, we have not seen the data repurchase of shares as attractive, as we obviously, have historically made share repurchases where we see that disconnect become meaningful.

But I think, in order for us to look at repurchasing more shares in a significant way, we wanted to not that we would want to see but we wouldn't do that unless we saw at the end of the price-to-book ratio drop from where it is today.

We believe for PMC, and we've stated this before that, having a stable dividend is sort of important and meaningful.

We do see a path consistent with what I was discussing earlier on and what we've discussed before for our run rate to move back toward the current dividend level at this point.

We don't think that it warrants a change in the dividend, and so we expect to, at least in the near term, have our dividend remain level consistent.

If we don't see a path back to the run rate back to that $0.4 per share, then that would precipitate us reevaluating that.

But given what the market expects and how that would impact the earnings potential of our portfolio, we do see that path as a likely potential in the future.

Kevin Barker, Piper Sandler.

Hello again, I'm just trying to follow up -- you sold some CRT this quarter.

Do you see any opportunities to make some structural changes that could potentially enhance the ROE of the business to bring it closer to the [$0.4] dividend run rate, particularly with you have a couple of debt maturities coming due here in 2024?

Could you potentially move some assets, pay down that debt, and maybe shift the balance sheet a bit?

Just some additional color there on what you're considering.

Thanks.

With respect to the maturities in 2024, -- so we have a couple of secured maturities, specifically a CRT maturity that's coming up that we expect to look to probably put some of thesecurities on repo for a period of time and then look to refinance that.

The market has improved a bit for the financing of our credit risk transfer securities into the types of structures that we've got that we've had previously.

And so we see that as an opportunity there, and that could somewhat improve the return profile, though, that's for a limited part of the portfolio.

As we look out further into the maturities, we do have a maturity on our convertible debt later in 2024.

We've partially addressed that last year with our baby bond issuance.

We have seen the baby bond market be active, somewhat active, in terms of issuance in the mortgage rate space, that's a potential there or another convertible debt issuance or potentially it didn't get neither of those as attractive to your point with respect to the overall of the portfolio, then you could look to delever and we do have the ability to do that without really significantly repositioning the portfolio.

At this point in time, I don't think we're considering a significant shift in terms of the overall makeup of the portfolio.

We think what we have in both cases, like I said on that on the credit sensitive side generates, it generates meaningful returns even at the now the tighter spreads, and we've repositioned or rotated out of the assets where we didn't think that those returns were commensurate with the risk-adjusted returns were commensurate with where we wanted to be invested.

And on the on interest rate-sensitive side, I think that's really, again, a matter of the shape of the yield curve at this point in time, which is really expected to normalize, and that's where we expect to drive up the return profile in that case.

So no significant shift in terms of the makeup of the portfolio.

I wouldn't say we're contemplating currently.

I realized you've made comments around the shape of the curve, but surely, you can quantify the impact of Fed rate cuts come relative to your earnings.

Now, obviously it could shift quite a bit, but is there any way to simply look at it from the Fed rate cuts perspective?

Yes, I mean, the way that you would generally look at it, if you assume that the the Fed rate cuts are baked in more or less and that the longer term in the current period and that the longer term yields wouldn't move significantly yo the extent that the Fed follows the path that currently contemplated if there's six fixed rate cuts or something along those lines baked in toward through the year, that's a point and a half that would come off of our floating rate debt on MSRs, which is a several hundred million dollars.

So it adds a meaningful amount, so the other assets, the interest rate sensitive assets, the returns, our expected returns would change or the amount that they're earning that our cost on the debt will decline meaningfully in terms of several million dollars just from those interest rate cuts, I think that's the way to think about that.

Thank you, Dan.

(Operator Instructions) Eric Hagen with BTIG.

Okay, thanks for taking my question here.

Looking at slide 19 with around $240 million of liquidity buffer relative to the FHFA requirement, can you share how much you've seen that liquidity buffer fluctuate, especially when rates are volatile?

And how close maybe you got to that threshold during periods of higher volatility like we saw last fall?

Yeah, no, our liquidity has been a pretty stable.

Part of what we look at in terms of our hedge profile is the impact that the interest rate shifts can have on liquidity.

I mean, we keep a reserve as part of our liquidity forecasting and our amounts of required liquidity in terms of managing the business, that accounts for interest rate volatility and the impact that that could have on our liquidity available.

But if you look at our liquidity that's been on the balance sheet in the last couple of quarters, I believe that we kept it at a pretty stable level there, which is two times what the requirement is.So that really has not has not been an issue even given the interest rate volatility that we've seen over the past couple of quarters.

Right.

Okay, and then on slide 12, it looks like you have about $1 billion free of capital in the interest rate sensitive strategies.

Can you split apart how much is in the MSR versus the MBS and hedges, and maybe how how much capital you see yourselves allocate into MBS and hedges going forward?

Yeah, so, the vast majority of the capital in there is allocated to the MSRs that's the most honest, the most capital intensive assets.

I think that we stated earlier in the presentation that 56% of the shareholders' equity is in the MSRs.

And so that's over well over $1 billion of that $1.2 billion.

On the agency MBS, if we just look at them on their face, even though it's a significant portfolio, the haircut on that the yen was relatively is relatively low.

So it doesn't take nearly as much as much equity.

And that's similar for the rest of the assets that are in this section, so it's really it's really predominantly the MSRs.

And even if we add significantly to the agency MBS portfolio, on it on a stand-alone basis in terms of the equity allocated, although we may have to increase our reserves depending on the interest rate sensitivity and how much we would want to hold for margin calls on its face, wouldn't increase the equity allocation that much to hold additional MBS there

.

Yeah, that does make sense.

Thank you guys.

Jason Weaver, Jones Trading.

Hey, guys, thanks for taking my question.

So as of today, can you give us some sort of Brent context on the level of spreads and overall incremental ROE potential on new CRT, such as the STACR bonds that you are buying?

I mean, where we've seen new STACR and CAS today, I mean, we, as was mentioned, we just sold a bit of those.

And so I think it's fair to say it does that in terms of those assets didn't commensurate with the sort of return profile that we have in the in the mid-10s for the CRP and sort of the target that we've had there.

But the overall, including the margin call reserves, that we would look to look to hold on on the on the CRP that's out in the market, probably high single or low low double-digits is what we see in sort of current market or recent recent trades, that fluctuates.

And so opportunistically, in the fourth quarter, we invested where we saw attractive spreads that met our return hurdles.

But that's sort of the most recent color in terms of what we're seeing.

Thanks.

And I apologize if this was addressed during the prepared remarks, but what would you ballpark book value change year-to-date?

We don't we don't typically get into give a mark for that.

But overall, if you look at historically where we've been in terms of overall book value, it's been pretty stable over the past few quarters.

That's been really the benefit of having the hedging program that we've had is that we don't see that type, even with interest rates being pretty volatile, we don't see the book value fluctuate in the same way that certain other portfolios do.

So overall, just give a color, it's pretty a pretty stable book value quarter-to-date.

All right.

Thank you, David, for the color.

We have no further questions at this time.

I will now turn the call back over to Mr. Spector for closing remarks.

Thank you, operator, and thank you all for joining us this afternoon.

I appreciate the questions and the time and I encourage investors and analysts or with any additional questions to contact our Investor Relations team by e-mail or phone, and thank you all very much for staying up at the late hour on the East Coast.

Have a good day.

This concludes today's call.

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