PennyMac Mortgage Investment Trust (PMT) Q2 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's second quarter 26 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press * to raise your hand. To withdraw your question, press * again. 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 the 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 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 their earnings materials. Now I would like to introduce David A. Spector, PennyMac Mortgage Investment Trust chairman and chief executive officer, and Daniel Stanley Perotti, PennyMac Mortgage Investment Trust chief financial officer. Please go ahead.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our second quarter 26 earnings call. Starting on slide 3, PMT's second quarter net income was $20 million or $0.23 per diluted common share representing a 6% annualized return on common equity. These results were impacted by a lower contribution from our Credit Sensitive Strategies, driven primarily by market driven value declines. as well as lower contributions from our aggregation and securitization strategies primarily due to lower volumes. These impacts were partially offset by improved results in our interest rate sensitive strategies. PMT paid a quarterly dividend of $0.40 per share. And book value per share at June 30 was $14.83. Down 1% from the end of the prior quarter. Turning to slide 4, during the second quarter, PMT acquired $2 billion in UPB of loans, through corresponding production activities. For which PMT pays fulfillment fees to PFSI. This number was down 8% from the prior quarter and 17% from the second quarter of 25. PMT also acquired $2.2 billion in UPB from PFSI production for inclusion in private label securitizations. Up 44% from the prior quarter and 123% from the second quarter of 25. In total, during the second quarter, PMT acquired $4.8 billion in UPB of loans. Beginning in June, PMT elected to stop acquiring agency eligible conventional conforming loans through correspondent production but will continue acquiring 100% of all non agency loan volume. This strategic decision allows us to optimize our capital allocation by pivoting away from MSR investments. Which have faced return headwinds in recent periods, and accelerating the redeployment of our capital to higher yielding, credit sensitive investments created from our private label securitization program. Consistent with this objective, I am pleased to announce that after quarter end, we entered into an agreement to sell $13 billion in UPB of low coupon agency MSRs. With a close expected at the end of August. Slide 5 highlights the continued success of our organic investment creation engine. During the quarter, we completed 6 private label securitizations totaling $2.2 billion in UPB. This activity resulted in the retention of $120 million of new subordinate bond investments in the credit sensitive strategies. We also generated $31 million of new MSR investments. Our momentum has continued after quarter end. With 2 additional securitizations completed, totaling $692 million in UPB, and 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, building a substantial foundation of investments with returns on equity, in the low to mid teens to support future earnings. slide 6, we provided a snapshot of high quality investments we are creating through our private label securitization. At quarter end, the fair value of retained bonds from this program totaled $936 million. 63% of this portfolio is comprised of bonds from non owner occupied loan securitizations, 21% is comprised of bonds from jumbo loan securitizations, with the remainder from agency eligible owner occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics. Including a weighted average FICO at origination of 774 a weighted average LTV at origination of 72%, and negligible delinquencies. The credit quality of these organically created assets underscores our ability to produce attractive high yielding investments in the current market. On slide 7, approximately half of PMT shareholders equity remains deployed to long standing investments in MSRs and 13% is comprised of our unique GSE credit risk transfer investment. Mortgage servicing rights provide stable cash flow from a portfolio with a low weighted average coupon of 3.9%. And our organically created GSE CRT investments consist of seasoned loans with a weighted average current loan to value of 45%. Turning to slide 8, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings excluding market driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.33 per quarter for the next year, up from the $0.31 projection in the prior quarter. In the credit sensitive strategies, return dynamics are similar to the prior quarter. The improvement of the overall run rate versus prior quarter is driven by reallocation of equity to subordinate bond investments and higher expected returns of our MSR assets in a higher rate environment. As is our standard practice, we continue to monitor our portfolio mix and allocate capital towards investments with the most attractive return protection potential. Our momentum in organic investment creation remains strong. And we have successfully positioned PMT as a leader in the private label securitization market. Given the success of our securitization program, we are shifting our equity allocation toward creative credit sensitive strategies. And I am confident this realignment of our balance sheet will bolster PMT's return profile to deliver attractive total returns over the long term. Now, I will turn it over to Daniel to review the second quarter financial performance.

Thank you, David. Net income to common shareholders was $20 million or $0.23 per diluted common share in the second quarter, or a 6% annualized return on equity to common shareholders. Our credit sensitive strategies contributed $11 million to pretax income, generating an annualized return on equity of 11%. The contribution to pretax income from organically created CRT investments was $6 million. Which included $7 million of realized gains in carry and $1 million of market driven value declines. Investments in subordinate MBS from our private label securitization generated gains of $5 million down from $6 million in the prior quarter primarily due to lower valuation related gains. The interest rate sensitive strategies contributed pretax income of $9 million for an annualized ROE of 3%. Income excluding market driven value changes for this segment was $20 million up from $11 million in the prior quarter as decreased prepayment speeds during the quarter, particularly on higher note rate MSRs drove slower runoff of our MSR asset. During the quarter, we purchased $486 million of agency floating rate MBS, and the fair value of our MBS portfolio increased to $4.1 billion at June 30. Up from $3.8 billion at March 31. Regarding market driven fair value changes, our hedging activities during the quarter effectively mitigated our interest rate risk exposure. As the $18 million MSR fair value increase was offset by $18 million of net declines in fair value of MBS and interest rate hedges. Including the related tax benefits. The aggregation and securitization segment reported pretax income of $11 million down from $16 million in the prior quarter. Net gains on loans acquired for sale declined by approximately $8 million from the prior quarter, primarily due to lower volumes. In total, PMT reported $32 million of net income across its strategies excluding market driven value changes. Up from $28 million in the prior quarter, primarily due to an increased contribution from the interest rate sensitive strategies. I want to address our dividend in the context of our current results, and the updated run rate return potential. While projections for income excluding market driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend at $0.40 per share. This is supported by our taxable income, which we expect to be sufficient to fully cover the dividend at its current level in coming periods. Turning to slide 12, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. And finally, on slide 13, we continue to believe that debt to equity, excluding nonrecourse debt, is the best metric for measuring our core leverage. That ratio increased to 6.2x at quarter end from 5.6x at the prior quarter end due to growth in loans held for sale and remains in line with our expected levels. PMT's total debt to equity increased to approximately 12:1 from 11:1 at March 31. As we continue to retain investments from securitizations. 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 purpose. 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. We will now open it up for questions. Operator?

We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 to raise your hand. Withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Bose George from KBW. Your line is now open. Please go ahead.

Hey, guys. Just in terms of the move we have had in rates since quarter end, can you just talk about the impact of that on the run rate earnings? Is that help with the MSR returns? Just, yes, just color on that would be great.

Yeah. O overall, thanks for the question, Bose. Overall, as interest rates move higher and particularly long rates and talked about this a little bit before, it is beneficial to the expected earnings and run rate especially with the MSR. So we mentioned it in terms of the context of the run rate that as interest rates have moved higher, it is driven up our expectation for the returns of the MSR portfolio. You know, as rates as-- or if rates continue to move higher, longer rates, and mortgage rates, that further dampens the you know, the prepayment speeds on the MSR and could drive additional in the MSR returns, which would help to further bolster the would help to further bolster the MSR returns. I would say a little bit of an offset to that is that to the extent that short rates you know, increase meaningfully or the Fed increases short rates meaningfully, that has a bit of a dampening effect on the overall returns as that would drive up our financing costs. For any of our, you know, longer dated fixed rate assets in the interest rate sensitive strategies and with respect with respect to our subordinate bonds. You know, we have some of our investments in recent periods, we have invested those in assets that are less sensitive to that, in particular, CMO floaters. But those are the 2 sort of offsetting potential impacts from interest rates increasing.

Okay. But net, could we be a couple of pennies higher than the $0.33 that you have showed?

Given our concentration in mortgage servicing rights, and, you know, the fact that we have generally seen the long rates, I would say, move up a bit faster than we expect short rates to. It would generally be beneficial to the to the run rate.

Okay. Great. And then just on the MSR sales, I mean, could we see more MSR sales? It seems like the market for low coupon MSRs at least is very strong. And would it make sense to, you know, potentially do that, maybe park something agency MBSs, for instance, if it happens?

Look. We have as you know, Bose, we have we have become much more active in terms of managing the portfolio. And I think that as we look at the opportunities and we see the returns, in securitizations combined with the fact that there is a very robust bid for MSRs of with low note rates, that is something that we are clearly looking at.

So Great. Thank you.

The next question is from Marisa Lobo of UBS. Your line is open. Please go ahead.

Alright. Thank you. Just on the shift and the relationship to PFSI on the shift to 100% non agency acquisition. I mean, does that alter the economic relationship or the management agreement with PFSI?

So it does not alter the management agreement. Really, overall, the impacts that would have is that there are less loans flowing through the correspondence arrangement or the fulfillment agreement So we do PMT does pay a fulfillment fee to PFSI for all of the loans that come through that, correspondent loan arrangement or correspondent loan channel, you know, directly to PMT. So to the extent that there is a lower number of loans, you know, none of the agency eligible conventional loans flowing through that correspondent arrangement. That would be you know, a bit lower gain on sale being generated at PMT from those loans. But lower fulfillment fees flowing back to PFSI. You know, the just to emphasize the reason or rationale for that change is really to, you know, getting back to the allocation of equity to reduce the amount of capital that continues to be invested in MSRs and in particular higher rate MSRs where we believe PMT has a better allocation of equity into the subordinate bonds than it is generating from its private label securitizations. And so that drives, you know, what we expect to drive more beneficial and increased run rate over time. Through the reallocation of that. Okay. Got it. And on rate sensitivity, following the sale of the MSRs and your capital redeployment, mean, should we think about PMT's interest rate sensitivity and book value volatility versus today? Overall, it should be, you know, very similar. Our hedging practices remain the same as they have been, and our, you know, our overall strategy in PMT has generally been to insulate it from you know, from significant book value changes due to interest rate movements as you can see from this quarter's hedge results in particular have been successful in accomplishing that, and we expect that to continue as we reallocate equity away from MSRs and into the private label securitizations. So we do include you know, the those holdings from the private label securitizations. Those are also included in our global interest rate hedging and management and so you know, are considered in terms of our hedging positions.

Appreciate the answers.

Our next question is from Trevor Cranston of Citizens JMP. Your line is open. Please go ahead.

Hey. Thanks. As we think about the pace of capital transition going forward, It seems like broadly speaking, kind of nonagency securitization activity has been fairly robust recently. Are you guys finding any opportunities to potentially, you know, deploy capital into third party securitizations? Or should the expectation be more so that you guys will continue to focus on your own organically created investment plan?

Yeah. So you know, we look at we look at a lot of a lot of bonds being offered you know, by street desks. We buy smaller pieces here and there, not because we have any bias necessarily to wanting to do the organic creation the organic creation but we believe in the economic value of it. I think given the fact that you know, the our manager is servicing the loans and we have the investment in the loans and our manager has done the diligence on the loans. We feel very, very comfortable with the underlying assets in the securitization versus buying in this, you know, in the secondary market from other from other originators for loans that are being serviced by others. But it is not it is not a policy. We will not do it. You know, for the for, you know, what we believe an appropriate return We have bought in the past, and we will buy in the future, but it is just, you know, from a best execution standpoint, the best path to re redeploying the capital is to redeploy it into the securitizations that we have been doing.

Okay. Thank you.

Our next question is from Douglas Harter of BTIG. Your line is open. Please go ahead.

Thanks, and good afternoon. Can you talk about the pacing of securitization activity to the extent that you are able to free up more capital through MSR sales? Do you think that could accelerate? Or is the pace that you have been operating at you know, kind of the pace that the market, you know, that you see the opportunity as today?

No, look, this is the advantage that, you know, PMT has given its synergistic relationship with PFSI. And look, I think that as we have capital to deploy, I can see us doing a larger securitizations to create larger investments. You know, we have we have been redeploying some of the capital into, you know, the-- the, you know, the floaters But I do not you know, I think that we have look. With the leading PFSI is the leading correspondent aggregator. there is securitization activity around call it 25 to 30% of the owner occupied loans that go to the GSEs, there is securitization activity around the investor and second homes that go to the GSEs, We at PMT could do jumbo securitizations. And, you know, given the pace of activity of non QM, that we are doing in PMT combined with the fact that you know, PFSI is doing a robust amount out of its broker division and is selling in the secondary market for which PMT could buy, we could do a non QM securitization, which you know, I am hopeful we can get 1 done, you know, in the second half of the year. And so there is a lot of opportunity for us to deploy capital into this securitization market. So, you know, it is not you know, it is not a necessarily a function of redeployment as we sell assets it is, you know, understanding that, you know, if we are going to sell servicing, what the servicing landscape looks like, and, you know, identifying that you know, are we maximizing our you know, the capital upon the sale in addition to maximizing the return upon the redeployment.

Appreciate that. David. And can you just briefly talk what impact if any, do you think the move higher in rates that we have seen will have on kind of securitization execution?

So any higher anytime you move higher in rates, it does have an effect. On production. But I will tell you, we have been running at, you know, I would say slower levels over the past you know, call it 2 months, And I think that, you know, you are going to continue to see things slow down. there is still there is still a lot of activity you know, in the, you know, on the on the origination side. And the non QM space. there is a lot of activity on the investor and second home space. And there is a good amount of activity in cash out refinances. But there is no escaping the fact that you know, mortgage is a cyclical is a cyclical endeavor and as rates go up, activity does slow down.

With respect to the execution, a bit of the offset to that too, though, when we are talking about execution, is that to the extent that there is you know, less supply flowing into the market you know, that can help in terms of investor demand for the securitization. Just because there is less overall supply. So to the extent that there is still a good amount of loans, as David was talking about, sort of raw material to generate the securitizations. Coming through from PMT's partnership with PFSI. That does give us that advantage in potentially a little bit of tailwinds with respect to the securitization execution.

Great. Appreciate it. Thank you.

There are no further questions at this time. I will now turn the call back to David A. Spector for closing remarks.

Thank you, operator, and thank you all for joining us. If you have any additional questions, please do not hesitate to reach out to our investor relations team. Thank you so much.

This concludes today's call. Thank you for attending. You may now disconnect.