PennyMac Mortgage Investment Trust
Q1 2019 Earnings Call Transcript

Published: 6 May 2019

[Christopher Oltmann:]

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 would like to turn the discussion over to Stan Kurland, PMT’s Executive Chairman.

[Stan Kurland:]

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

[David Spector:]

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 and 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 31st of 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.

[Andy Chang:]

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.

[Stan Kurland:]

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.

[Christopher Oltmann:]

This concludes PennyMac Mortgage Investment Trust’s first quarter earnings discussion. For any questions, please visit our website at www.pennymac-reit.com, or call our Investor Relations department at [phone]. Thank you. [No Q&A session for this event]