PennyMac Mortgage Investment Trust (PMT) Earnings Call Transcript

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's Third Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information are available on PennyMac Mortgage Investment Trust 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 could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust's Chairman and Chief Executive Officer. Please go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our third quarter 2026 earnings call. Before discussing our financial results, I want to take a few moments to address the important leadership transitions we announced earlier today. First, after a [ storied ] career in the mortgage banking industry spanning several decades, including more than 15 years of exceptional leadership at PennyMac, Doug Jones, our President and Chief Mortgage Banking Officer, has made the decision to retire in June 30, 2027. Doug has been an integral partner to me and a cornerstone of PennyMac since its early days. Over the next several months, Doug's roles and responsibilities will transition smoothly to other senior leaders across our organization. Second, effective January 1, 2027, Kevin Ryan, currently, our Chief Strategy Officer, will assume the role of Chief Financial Officer. Dan Perotti, our current CFO, will remain in his current role through the end of this year, and we'll continue supporting the company in an advisory role through the first quarter of 2027. Kevin will continue to lead our strategy and business development teams alongside his financial leadership responsibilities. I want to express my extraordinary gratitude to both Doug and Dan for their long service to PennyMac. The relentless dedication and their enduring passion for our business. Both served in critical leadership positions, guiding PennyMac through dynamic market cycles and helping transform our organization to the premier mortgage company it is today. Their countless contributions have shaped our foundation and they will be greatly missed. Having said that, we have an exceptional leadership team and a deep bench of talent that is fully prepared to lead PMT into its next chapter. I have absolute confidence in this management team's ability to carry our strategy forward seamlessly while driving long-term value for our shareholders. Turning to our third quarter results on Slide 3. PMT reported a third quarter net loss attributable to common shareholders of $36 million or a loss of $0.41 per common share. These results were primarily impacted by market-driven value declines driven by mortgage spread widening and rate volatility. Excluding market-driven value changes, our investment strategies generated adjusted net income attributable to common shareholders of $30 million or $0.35 per common share, representing an annualized adjusted return on equity of 9%. PMT [ had ] a quarterly dividend of $0.40 per share and book value per share at September 30 was $14.03, down 5% from the end of the prior quarter. Finally, PMT's Board of Trustees approved a $130 million increase to our share repurchase authorization, bringing our total available capacity to over $200 million currently. On Slide 4, we summarize our 3 key capital allocation priorities. In recent periods, we have sold or committed to sell approximately $35 billion in UPB of Agency MSRs, including a meaningful amount of higher no-rate MSRs, and we will continue to evaluate additional sales opportunities to free up capital for redeployment into higher-yielding investments. Next, PMT's upcoming fourth quarter common dividend is expected to be reduced in order to maximize the potential for book value accretion and support the ongoing rotation of capital into higher returning assets. And finally, PMT's common shares continue to trade at a substantial discount to book value per share. In response, we are opportunistically looking to repurchase outstanding common shares where these repurchases meet our return hurdles, driving long-term value for our shareholders. Now turning to Slide 5. As I mentioned earlier, the third quarter was characterized by sharply higher interest rates and significant mortgage spread wide. Benchmark treasury yields increased 50 to 80 basis points across intermediate and long [ tenures ]. At the same time, benchmark MBS spreads to treasuries widened by more than 20 basis points, expanding aggressively in September to end the quarter at 116 basis points. This wider mortgage basis drove asset price declines and sector-wide headwinds related to hedging and pipeline management. Turning to Slide 6. We highlight why PMT is differentiated from peers and why our diversified model helped insulate us from these sector-wide headwinds. First, prepayment risk on our MSR asset remains very low with the portfolio carrying a weighted average coupon of 3.9%. Meanwhile, Agency MBS and credit-sensitive investments provide a natural hedge to our MSR portfolio, with residual exposure actively managed through interest rate derivatives. Second, as discussed last quarter, PMT's correspondent acquisitions are now limited to non-agency loans. And finally, PMT's synergistic relationship with its manager, PennyMac Financial Services, Inc., gives it unique access to PFSI's capacity to organically create investments in the residential mortgage market. Further, PFSI's best-in-class servicing platform ensures proactive delinquency management loss mitigation, which is expected to enhance the long-term performance of our investments. To discuss our portfolio sensitivity, the execution of our MSR sales and private label securitizations and our updated run rate return potential, I am pleased to introduce [ Marshall Sabre ], PMT's Chief Investment Officer.

Thank you, David. On Slide 7, you can see how PMT carries significantly less sensitivity to both interest rate and spread changes compared to other mortgage REITs. Entering the third quarter, our modeled book value sensitivity to instantaneous 50 basis point parallel rate shock was just 0.7%, less than 1/4 of the 3.6% average across the peer group [ of ] publicly traded mortgage REITs. Similarly, under a 10 basis point spread widening shock, PMT's modeled book value loss was 1.3%, compared to 4.4% for the peer group. This lower sensitivity is a direct result of our portfolio diversification. Because fair value changes on our MSRs are naturally offset by our investments in agency MBS and credit assets, PMT's duration and spread exposures are partially mitigated before hedging activities. While mortgage spreads widened aggressively across the market, 85% or $56 million of our $66 million in net market-driven value declines was attributable to spread widening. At the same time, excluding market-driven value changes, our strategy has generated stable cash flows with our credit-sensitive and interest rate-sensitive strategies producing $12 million and $37 million of pretax income, respectively. Looking ahead, our strategic road map is clear. We are actively rotating capital away from certain lower-yielding MSR assets and reinvesting into accretive, organically created credit investments with expected ROEs in the low to mid-teens. This deliberate rotation expands our run rate earnings power, reinforces our book value stability and positions PMT to deliver attractive, sustainable total returns to shareholders. Moving now to Slide 8. We continue to actively rotate equity away from lower-yielding MSR investments and redeploy that capital into higher returning organically created credit investments from our private label securitization activity. During the third quarter, we sold $13 billion in UPB of Agency MSRs and entered into an agreement to sell an additional $10 billion in UPB. After quarter end, we entered into an agreement to sell another $12 billion in UPB, bringing our total closed and committed MSR sales to approximately $35 billion. Importantly, these transactions were executed at prices at or near fair value. And we will continue to evaluate additional sales opportunities as they arise in order to optimize our return on capital and create a more balanced weighting between credit and interest rates and strategies. In our private label securitization business, we completed [ 8 ] transactions in the third quarter across nonowner occupied, jumbo and owner-occupied collateral, retaining $167 million of accretive investments with expected ROEs in the mid-teens. As shown on Slide 9, this ongoing capital rotation, combined with the current rate environment, has increased our projected run rate return potential over the next 4 quarters to $0.38 per common share, up 15% from $0.33 in the prior quarter. This translates to an expected average annualized return on common equity of 10.6%. This expansion in our forward-looking [ returns ] is driven by 2 key dynamics. First, higher interest rates as well as recent sales of MSRs have driven prepayment expectations lower which substantially reduces our projections for amortization. As a result, our MSR asset is projected to deliver an annualized return on equity of 12.8% over the next 4 quarters. And as discussed previously, we are accelerating the deployment of capital release from MSR sales into organically created investments from our private label securitization. These investments carry targeted ROEs in the low to mid-teens, which compares favorably to run rate returns and certain MSRs. Overall, we expect improved performance across all 3 of our primary investment strategies. As David highlighted earlier, we will continue actively monitoring our equity allocation with PMT's upcoming fourth quarter dividend expected to be adjusted to maximize book value accretion while also considering projections of [ tax ]. Now I'd like to introduce our current Chief Strategy Officer and incoming CFO, Kevin Ryan.

Thank you, [ Marshall ]. I am honored and excited to assume the CFO role of PMT and I want to thank David and the Board for their trust and confidence. I also want to express my sincere gratitude to Dan. Over his years of leadership and has built an exceptional world-class finance organization and established a remarkably resilient balance sheet. He and I will be working closely together over the coming months to ensure continuity and a seamless operational handoff. As CFO, my commitment is to ensure this unique platform translates into superior risk-adjusted returns and long-term total value for our shareholders. I look forward to engaging directly with our shareholders and the broader investment community in the months ahead. And with that, I will now turn the call over to Dan, who will review the drivers of PMT's third quarter financial performance.

Thank you, Kevin. On Slide 11, net loss to common shareholders was $36 million or $0.41 per diluted common share in the third quarter. Our credit-sensitive strategies contributed $42 million to pretax loss. Organically created CRT contributed $6 million of pretax income, primarily consisting of realized gains in carry. Investments in subordinate MBS from our private label securitizations generated losses of $48 million as $6 million of income, excluding market-driven value changes was more than offset by a $54 million decline in market-driven value declines from the impact of increasing interest rates which are managed as a part of our global hedge program. The interest rate sensitive strategies contributed pretax income of $36 million for an annualized ROE of 12%. Income, excluding market-driven value changes for this segment was $37 million, up from $20 million in the prior quarter as decreased prepayment speeds during the quarter drove slower runoff of our MSR assets. During the quarter, we purchased $548 million of Agency floating rate MBS and the fair value of our MBS portfolio increased to $4.3 billion at September 30, up from $4.1 billion at June 30. Regarding market-driven fair value changes. Our hedging activities during the quarter effectively mitigated our interest rate risk exposure as the $226 million MSR fair value increase was offset by $240 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefits. The aggregation and securitization segment reported a pretax income of $2 million, down from $11 million in the prior quarter. Net gains on loans acquired for sale declined from the prior quarter, primarily due to the impact of spread widening on jumbo and non-QM loans during aggregation for securitization and lower volumes. In total, PMT reported $0.35 in adjusted earnings per share or a 9% adjusted ROE, up from $0.25 or a 6% adjusted ROE in the prior quarter primarily due to an increased contribution from the interest rate-sensitive strategies, partially offset by a lower contribution from the aggregation and securitization segment. Slide 13 highlights the continued success of our organic investment creation engine. During the quarter, we completed 8 private label securitizations totaling $2.9 billion in UPB. This activity resulted in the retention of $167 million of new senior and subordinated investments. We also generated [ $17 million ] of new MSR investments. Our momentum has continued after quarter end. We completed 2 additional securitizations and priced PMT's inaugural non-QM DSCR securitization for a total of $1.1 billion in UPB with $119 million of expected retained investments. We remain on pace to complete approximately 30 securitizations in 2026. In total, through 2026, we expect we will have added more than $600 million of retained investments building a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On Slide 14, we have provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of retained investments from this program was over $1 billion. 58% of this portfolio is comprised of investments from nonowner-occupied loan securitizations. 20% is comprised of jumbo loan securitizations with the remainder from owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics, including a weighted average FICO at origination of 775 weighted average LTV at origination of 73% and negligible delinquencies. Credit quality of these organically created assets underscores our ability to produce attractive, high-yielding investments in the current market. Turning to Slide 16. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments with only $50 million in maturities of unsecured financing prior to 2029. And finally, on Slide 17, our core debt-to-equity metric, debt-to-equity, excluding nonrecourse debt increased to 6.5x at quarter end from 6.2x at the prior quarter end within the range of our expectations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization, mitigating any additional exposure to PMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program continues to grow. On a more personal note, I want to take a moment to express my sincere gratitude to David, our Board of Directors, and my colleagues for their trust, partnership and shared dedication throughout my time at PennyMac. I'm extraordinarily proud of what we've accomplished in my 18 years with the company, my 6 years in the CFO role, and in particular, I'm proud of the world-class finance organization and the resilient balance sheet we've built. Having worked alongside Kevin for the past year, I have the utmost confidence in his leadership and vision to steer our financial and strategic execution going forward as he assumes the CFO role. And finally, to our shareholders and the investment community, thank you for your thoughtful engagement, rigorous questions and constructive partnership over the years. It has been a privilege working with you. And now we'll open it up for questions. Operator?

[Operator Instructions]. I would like to remind everyone, we will only take questions related to PennyMac Mortgage Investment Trust, or PMT. [Operator Instructions]. Your first question is from the line of Doug Harter from BTIG. Please go ahead.

I was hoping, as you talk about kind of potentially reducing the dividend, kind of what are the key factors you're going to be thinking about as you look to size capital return between dividend and share repurchase?

Well, look, I think that as we've talked about in our opening remarks, the dividend is likely going to be reduced in the fourth quarter. And really, my focus is to maximize the potential for book value accretion with consideration given to the taxable income projections. So if you look at the run rate of $0.30, that kind of kicks out a dividend of about $0.30 a share and implies $0.08 per quarter of growth in book value per share. Now as it pertains to stock buybacks that we're going to look at vis-a-vis other alternative investments. And I think that's going to look to deploy capital into other residential mortgage assets, of which then we will look at that versus the stock buyback.

Got it. And how do you weigh in kind of determining stock buyback, wanting to kind of retain as much capital as possible at PMT to be able to help with the scale of growing and scaling the business and helping with efficiencies over time versus kind of the near-term financial benefit of accretion of buying back stock at these levels?

I think where we are today, I think that the scale issue, which is one that's always on my mind. I think that's a secondary issue to the fact that we believe that there's real value within the company that's not being recognized or reflected in the stock price and you look at the return of buying back stock versus other alternative investments. It's a pretty compelling case to make in terms of buying a stock. And as evidenced by the fact that we sold [ MSRs at the mark ] and the fact that we have a very mark-to-market asset composition, I go very strongly in the value. And so I do think that at these levels, I think looking at this from a return standpoint, what this means to our shareholders is really our primary objective. Obviously, as things change, we don't want to buy back to the point that we lose the scale of the equity base so that we become too small in [ red ], but it's just too compelling right now to even factor into our thinking.

The next question is from Bose George with KBW.

So just to follow up on the dividend. So I guess you said the dividend is probably going to be around $0.30. And so compare that, your operating EPS is likely to continue in the high 30s. And so the dividend looks well covered by that? Is that kind of a fair way to think about it?

Exactly. Exactly. We want -- dividend stability is very, very important to us. I think that we've -- we have historically tied it to GAAP earnings. And I think as Dan pointed out, we're giving more consideration to taxable income projections. And so I do think that the $0.30 amount, it has to be approved next [ for ] me, but I don't foresee it not. And I think that we believe that the $0.30 rate is one that's sustainable that really factors into future operating earnings of the REIT, and it's something that, at the same time will allow us to grow book value per share for the remaining $0.08.

Okay. Great. And then actually, as you guys sell the MSR, does that capital get redeployed quickly enough? Or is there any drag on the EPS?

Bose, it's Marshall. No, we look to redeploy that capital quickly rather than allowed to sit on the balance sheet in an investment. And you can see that what we've -- the strategy we've taken over the past few quarters. Obviously, over time, we're investing into the subordinate tranches but we bought over $500 million of CMO floaters during the quarter. Our agency investments in the interest rate sensitive strategies are obviously very liquid, and that's a place where we can deploy capital quickly upon sales of the MSRs in addition to, as David mentioned, repurchasing stock.

The next question is from the line of Jason Weaver with JonesTrading.

First of all, I want to dovetail off of Doug's second question there regarding the buyback. Look, I realized how attractive this is given the [ discount ] in the marketplace right now versus deploying into other investments. But help us understand how you think about sizing that relative to your overall leverage level. given the amount of capital that you could build up within the course of 4 quarters or so, would that be a limitation for you to push leverage higher by virtue of just repurchasing the stock?