Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PennyMac Mortgage Investment Trust (PMT, Financial) reported net income to common shareholders of $15 million for the second quarter, translating to $0.17 per diluted share.
- PMT successfully issued $217 million of exchangeable senior notes and $355 million of term notes secured by Fannie Mae MSR at attractive terms.
- Delinquencies remain low due to the overall strength of the consumer and substantial home equity accumulation, supporting the performance of MSR investments.
- PMT's credit-sensitive strategies contributed $16 million in pre-tax income, with a favorable outlook for organically created CRT investments.
- PMT's interest rate-sensitive strategies contributed $17 million of pre-tax income, with the fair value of MSR investments increasing by $46 million due to higher mortgage rates.
Negative Points
- Book value per share decreased slightly to $15.89 at the end of the second quarter, down from the prior quarter.
- The run rate potential for PMT's investment strategies decreased to a quarterly average of $0.33 per share, down from $0.35 per share last quarter.
- Income from opportunistic investments in cash and stacker bonds issued by the GSEs totaled only $6 million, with some investments falling below return thresholds.
- The fair value of MBS decreased by $39 million and interest rate hedges decreased by $18 million, impacting overall income.
- Pre-tax income from the correspondent production segment was down slightly from the prior quarter due to lower margins despite higher volumes.
Q & A Highlights
Q: Can you talk about the form that retaining more correspondent production will take? Will it be as simple as keeping more whole loans on the balance sheet, or will you be looking to term fund that via securitization eventually?
A: For the additional loans PMT will be retaining through the correspondent channel, they will primarily consist of Fannie Mae and Freddie eligible loans. Generally, we sell or securitize these to the agencies, with a few sold as whole loans to third parties. We don't currently plan to retain loans specifically on balance sheets other than potentially through securitization of certain sets of loans, which we've done in the past and may do again in the current environment. - David Spector, Chairman and CEO
Q: At what level or range of benchmark 30-year mortgage rates do you see as the inflection point for refinancing activity and prepayment?
A: It's a gradual decline. I think when rates get to 6.5%, refinancing activity picks up steam, and at 6%, we enter a robust refi market. It's not just existing firsts that are in the money; loans at 4% and 5% could take out debt consolidation, cash-out refinances, etc. The signal of a true new market or phase of refinanceability is when the 10-year is around 3% to 3.75%, and mortgages are down 50 basis points. - David Spector, Chairman and CEO
Q: How are you thinking about the dividend given the slight tick down in run rate earnings this quarter?
A: We take a long-term approach to the dividend, aiming for it to reflect the earnings capacity of the company over time. Despite a slight tick down in run rates from $0.35 to $0.33 versus the dividend of $0.40, driven by yield curve inversion, we see potential for EPS to move back above $0.40 later next year. Therefore, we don't expect to adjust the dividend in the short term. - David Spector, Chairman and CEO
Q: What other factors could help get run rate earnings back to the dividend level?
A: Deployment of capital is crucial. We're adjusting to deploy more capital through the correspondent channel, which we view as the best option currently. We're also looking at potential securitizations of certain loan subsets, notably investor and second home loans. Additionally, a decline in short-term rates would drive down our financing rates, potentially increasing our EPS above the $0.40 level. - David Spector, Chairman and CEO
Q: Can you speak to the investment opportunities you're seeing in the interest rate-sensitive strategy segment and how they compare to the credit side?
A: Currently, the most attractive opportunities are in mortgage servicing rights (MSRs). We're shifting a portion of conventional correspondent loans to retain more MSRs. We're also looking at MSR portfolios in the secondary market, though recent pricing has been aggressive. Additionally, we're exploring securitizations of production from the correspondent channel and direct channels at PFSI, retaining subordinate bonds. - Daniel Perotti, CFO
Q: Do you believe the third-party estimates for mortgage originations of $1.7 trillion in 2024 and $2.1 trillion in 2025 are accurate?
A: These estimates are backloaded to Q3 and Q4, assuming rates will decline. If you analyze the current run rate or the first two quarters, you don't get to $1.7 trillion. The general direction of rates in the coming quarters will determine if these estimates are accurate. - David Spector, Chairman and CEO
Q: How are you thinking about the different profile of the current coupon MSR from correspondent versus the lower coupon that's currently in the portfolio?
A: PMT prefers lower coupon MSRs due to their lower and more stable prepayment speeds. However, these portfolios are aggressively priced in the bulk market. Through the correspondent market, PMT acquires more recently originated loans with higher note rates, which are more sensitive to refinances. PMT has a recapture arrangement with PFSI, allowing it to recapture around 35% of the MSR value if PFSI recaptures loans that are part of PMT's MSR. - Daniel Perotti, CFO
Q: Does PMT have any interest in issuing equity below book value?
A: No, we are not looking to issue equity below book value. We renewed our equity shelf and at-the-money agreements with underwriters, but we would only utilize them if PMT's price moves above book value and we have opportunities to deploy the capital. - David Spector, Chairman and CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
