PennyMac Mortgage Investment Trust
Q4 2018 Earnings Call Transcript

Published: 8 Feb 2019

[Chris Oltmann:]

Good afternoon, and welcome to the Fourth 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.

[Stan Kurland:]

Thank you, Chris. Let's begin with Slide 3. For the fourth quarter, PMT reported net income attributable to common shareholders of $35.4 million or $0.55 per share. Annualized return on average common equity for the quarter was 11%, down from 13% in the prior quarter. PMT paid a dividend of $0.47 per share for the quarter, and book value per common share increased to $20.61 at quarter-end from $20.48 at September 30, 2018. Our operating results reflect solid contributions from our GSE credit risk transfer or CRT investments and Interest Rate Sensitive Strategies. Fair value declines in CRT and mortgage servicing rights investments held in PMT's taxable subsidiary drove $15.4 million in income tax benefits. PMT reports results through 4 segments

[David Spector:]

Thank you, Stan. Let's start with Slide 9 for a look at our Correspondent Production highlights. Correspondent acquisitions by PMT in the third quarter totaled $18.1 billion in UPB, up 9% quarter-over-quarter and up 17% year-over-year. Conventional conforming acquisitions for which PennyMac Financial performed fulfillment services for PMT totaled $9 billion in UPB in the fourth quarter, up 21% from the prior quarter and up 54% year-over-year. Government acquisitions were down 1% quarter-over-quarter while down 7% year-over-year. Total lock volume was $19.1 billion in UPB, up 7% from the prior quarter and 20% year-over-year. Additionally, PMT acquired $879 million in UPB of conventional conforming loans originated by PennyMac Financial during the fourth quarter, down slightly from the $897 million in the prior quarter. Correspondent Production recorded a small pretax loss in the fourth quarter compared to pretax income as a percentage of locks of 7 basis points in the prior quarter. While the market for conventional conforming loans remains competitive, our Correspondent Production segment results reflect PMT's ability to create attractive long-term investments in CRT and MSRs from its production. The weighted average fulfillment fee in the third quarter was 32 basis points, down from 35 basis points in the previous quarter, reflecting discretionary reductions made by PennyMac Financial to help facilitate successful loan acquisitions. We experienced substantial growth in our correspondent seller relationships during the fourth quarter, reaching 710 correspondent clients at quarter-end, up from 655 at September 30. This growth reflects our ongoing strategic initiatives to attract community banks and credit unions and our continued focus on growing the non-delegated business. In the fourth quarter, we originated $120 million in UPB of non-delegated correspondent loans, up 61% from $75 million in the prior quarter. Purchase-money loans comprised 88% of total fourth quarter acquisitions, up from 87% in the prior quarter and 76% in the fourth quarter of 2017. We also remain focused on developing new products to address consumers' evolving mortgage financing needs, and in January, we launched a prime non-QM loan product that utilizes a technology-based underwriting solution. Monthly production and interest rate lock commitment volumes in January totaled $5.2 billion in UPB. Finally, through 2018, we have benefited by receiving incentives under one of our master repurchase agreements to finance mortgage loans that satisfy certain consumer relief characteristics. We expect to cease accruing the incentives beginning in the second quarter of 2019. While the impact is uncertain, we expect that the decrease in our interest income resulting from this change will be offset by an improvement in pricing margins. Now let's turn to Slide 10 and discuss PMT's investments in GSE credit risk transfer. Eligible CRT loan deliveries in the fourth quarter represented 81% of PMT's total loan production, unchanged in the prior quarter but up significantly from the same period a year ago, with the increase enabled by our new REMIC CRT transaction structure with Fannie Mae. On a pro forma basis at December 31, PMT's outstanding CRT investments totaled $1.9 billion, with the UPB of the loans underlying the CRT agreements totaling $46 billion. The credit performance underlying our CRT loans remains strong, with lower delinquency levels at December 31 than at the end of the prior quarter. Losses recognized during the quarter were $700,000, bringing the cumulative lifetime losses on our CRT investments to $3.6 million, in line with expectations and normal portfolio seasoning. Now let's turn to Slide 11 and discuss MSR and ESS investments. PMT's organic MSR investments resulting from its Correspondent Production activity as well as conventional conforming loans acquired from PennyMac Financial increased to $1.2 billion at year-end, up from $1.1 billion at September 30. This increase was driven by additions from our loan production activities net of runoff, slightly offset by the decrease in fair value from lower mortgage rates at year-end. PMT's legacy ESS investments resulting from bulk, mini-bulk and flow MSR acquisitions by PennyMac Financial from 2013 to 2015 decreased slightly from $223 million at the end of the third quarter to $216 million at the end of the fourth quarter, with the ongoing reduction resulting from prepayments and amortization of the underlying loans. The UPB associated with ESS investments totaled $23.2 billion at December 31, down from $24.1 billion at the prior quarter-end. PMT's MSR portfolio totaled $92.4 billion in UPB at December 31, up from $84.4 billion at September 30. Now let's turn to Slide 12 and talk about the transition out of PMT's distressed loan investments through liquidations and sales. During the fourth quarter, we completed $267 million in UPB of previously announced distressed loan sales. At quarter-end, the distressed loan portfolio totaled $201 million in UPB, down from $488 million in UPB at the end of September. Performing loans in our distressed loan portfolio stood at $43 million in UPB, down substantially from $262 million at the end of the third quarter, driven by bulk sales. The non-performing loan portfolio ended the quarter at $158 million in UPB, a 30% decrease from the end of the prior quarter and down 70% from a year ago. Now I'd like to turn the discussion over to Andy Chang, PMT's Chief Financial Officer, to break down the fourth quarter's financial results.

[Andrew Chang:]

Thank you, David. Let's turn to Slide 14 and discuss the fourth quarter's income and return contributions by strategy. PMT's activities in the fourth quarter generated an annualized return on common equity of 11%, net of all expenses. In total, Credit Sensitive Strategies contributed $17.9 million to pretax income or an 11% annualized return on equity for the quarter. Within the segment, CRT investments contributed pretax income of $21.8 million, which I will expand upon in the next slide. Distressed loan investments contributed a $4.1 million pretax loss, down from a $9 million loss in the third quarter, primarily resulting from improved performing loan valuations and lower expenses as a result of a smaller portfolio. 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 $20.1 million of pretax income or a 10% annualized return on equity for the quarter. The fair value of our MSR investments declined due to the decrease in mortgage rates at the end of the quarter and was largely offset by the increase in the fair value of our Agency MBS positions. 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 a pretax loss of $600,000, driven by the market factors David discussed earlier. The Corporate segment contributed an $11.2 million pretax loss. Lastly, as Stan mentioned, fair value declines in PMT's taxable REIT subsidiary drove a $15.4 million benefit for income tax expense. Now let's turn to Slide 15 and break down the performance of our GSE credit risk transfer investments. Our CRT investments contributed $21.8 million of pretax income in the quarter, consisting of $5.7 million of losses from market-driven value changes, more than offset by $27.6 million of income from net realized gains and net interest income. Losses from market-driven value changes consisted of $19.6 million driven by credit spread widening on existing CRT investments, partially offset by $13.9 million of net gain on mortgage loans acquired for sale relating to the fair value recognition upon loan delivery under firm commitment to purchase CRT securities under the new REMIC structure. Excluding market-driven value changes, income related to our CRT investments totaled $27.6 million. Realized gains on existing CRT investments totaled $30.1 million, while losses recognized during the quarter totaled $0.7 million. Interest income, which we earn on cash deposits securing CRT investments, was $6.7 million, while interest expense, which relates to the financing of these investments, was $8.5 million. And with that, I'll turn the discussion back over to Stan for some closing remarks.

[Stan Kurland:]

Thank you, Andy. PMT's partnership with PennyMac Financial and exclusive access to unique investments in GSE CRT and MSR from its own conventional Correspondent Production have delivered strong results, placing PMT among the top performing residential mortgage REIT stocks in 2018. We remain focused on prudently growing PMT's core investments in CRT and MSRs while continuing to seek attractive new opportunities in the dynamic U.S. mortgage market. The recent launch of HELOC and prime non-QM products by our manager and service provider, PennyMac Financial, is expected to leverage PMT's ability to securitize and retain credit risk investments from securitizations while further diversifying its investment portfolio. Lastly, we encourage investors with any questions to reach out to our Investor Relations team by e-mail or phone. Thank you.

[Chris Oltmann:]

This concludes PennyMac Mortgage Investment Trust's fourth 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.