PennyMac Mortgage Investment Trust - Earnings Call - Q2 2025

Executive Summary

• PMT reported a net loss to common shareholders of $2.9M (−$0.04 EPS) as solid core income was more than offset by extreme rate volatility hedge losses and a non‑recurring $14M tax expense; book value per share fell to $15.00 from $15.43.
• Results vs S&P Global consensus: EPS missed (−$0.04 vs $0.37*) while revenue beat ($145.3M* vs $95.5M*), driven by stronger top‑line but impacted by hedging/tax; seven EPS and four revenue estimates underpinned the consensus*.
• Strategic execution remained strong: three investor (NOO) securitizations and one jumbo securitization ($1.4B UPB) with >$150M retained at attractive returns; issued $105M senior notes due 2030, reinforcing liquidity and maturity profile.
• Management reiterated confidence in the $0.40 dividend and lifted run‑rate earnings potential to ~$0.38/share from $0.35 last quarter, with further upside if the yield curve steepens.
• Catalyst tracking: momentum in private‑label securitizations (expected cadence: one NOO/month, one jumbo/quarter) and stable leverage ex‑non‑recourse (5.6x) support medium‑term ROE expansion; near‑term stock reaction tends to hinge on hedge performance and clarity that the $14M tax item is one‑time.

Note: *Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Private‑label engine firing: completed 3 agency‑eligible investor securitizations and the first jumbo securitization since 2013 (combined $1.4B UPB), retaining >$150M at attractive returns; CEO: “firmly established PMT as a leading issuer of private label securitizations”.
• Core earnings power improved: management’s run‑rate EPS rose to ~$0.38 (from $0.35), supported by increased retention of non‑agency seniors/mezz and stronger correspondent execution; CFO: “If the yield curve steepens further, we expect PMT’s overall run rate would increase further”.
• Credit segment strength: credit‑sensitive strategies swung to $21.8M pretax, including $17.0M from organically created CRT as spreads tightened (valuation gains $7.8M; realized/carry ~$13.6M).

What Went Wrong

• Hedging headwinds: interest rate‑sensitive strategies posted a $4.9M pretax loss; MSR fair value gains (+$22.7M) were more than offset by hedging losses (−$60.6M) amid “extreme rate volatility in April”.
• Non‑recurring tax drag: recorded $9.5M tax expense including a $14.0M one‑time hit from state apportionment changes; excluding this, the quarter would have shown a $4.6M tax benefit.
• Book value pressure: book value per share declined to $15.00 (from $15.43) as rate volatility and hedge P&L weighed on equity despite solid core income.

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to PennyMac Mortgage Investment Trust's second quarter 2025 earnings call. Additional earnings materials, including the presentation slides that will be referred to in the call, are available on 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 two 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, and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. Please go ahead.

David Spector (CEO and Chairman)

Thank you, Operator. For the second quarter, PMT produced a net loss to common shareholders of $3 million, or a loss per share of $0.04, has solid levels of income excluding market-driven value changes while offset by fair value declines and a $14 million non-recurring tax adjustment that Dan will discuss later on. PMT declared a second quarter common dividend of $0.40 per share, and book value per share at June 30 was $15, down modestly from March 31. Interest rates were extremely volatile this quarter, with the 10 year treasury yield traversing a range of more than 70 basis points, including intraday moves in one week in April alone. This created a challenging environment for our investment strategies. However, our diversified investment portfolio, efficient cost structure, and strong risk management practices enable us to effectively manage through these challenging market conditions.

Turning to slide five, I want to touch on our synergistic partnership with PFSI and how that provides PMT with unique and proven competitive advantages. First, PMT leverages PFSI's best-in-class operating platform, including its deep and experienced management team, scaled servicing operations, and its large and agile multi-channel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment. Second, our structure allows PMT to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. Third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private-label securitizations, provides PMT with the opportunity to invest in unique, organically created investments at attractive risk-adjusted returns. As can be seen on slide six, the increasing volume of non-owner-occupied and jumbo loans generated by the PennyMac platform underscores the potential for future investment.

This growing pipeline of loans provides us with flexibility and optionality, allowing us to strategically invest in assets that align with our long-term return objectives. In the second quarter, we successfully completed three securitizations of agency-eligible investor loans totaling $1.1 billion in UPB, retaining $71 million of new investments. And we also completed our first jumbo loan securitization since 2013, with a total UPB of $339 million and retained investments of $82 million. The graphic on the right of the slide highlights our rapid ascent to become a leading issuer of private-label securitizations. In recent periods, we've been a top three issuer of prime non-agency MBS. In fact, since the fourth quarter of 2024, we have successfully completed nine securitizations, totaling $3.2 billion in UPB, with new retained investments of $300 million. Targeted returns on equity for these investments are expected to be in the low to mid-teens.

Looking ahead, we expect to continue executing one securitization of agency-eligible, non-owner-occupied loans per month and one jumbo loan securitization per quarter. This consistent cadence of securitizations underscores our commitment to leveraging our organic investment creation ability and remaining a leader in the private-label securitization market. Turning to slide seven, approximately two-thirds of PMT shareholders' equity is currently invested in a seasoned portfolio of MSRs. and the unique GSE lender risk share transactions we invested in, from 2015-2020. These are highly stable and seasoned assets with strong underlying fundamentals. Our MSR investments account for approximately 47% of our deployed equity, down from 56% at the high during the end of 2022. The majority of the mortgages underlying these MSRs remain far out of the money, with a weighted average coupon of 3.9%, meaning borrowers have little incentive to refinance.

As a result, we expect the MSR asset to continue producing stable cash flows over an extended period of time. Furthermore, MSR values continue to benefit from the higher interest rate environment, as the placement fee income PMT receives on custodial balances is closely tied to short-term interest rates. Similarly, PMT's unique credit risk transfer investments, representing 16% of shareholders' equity, are backed by seasoned loans with strong fundamentals that were originated during periods of low interest rates. Delinquencies have remained low on this portfolio as well. This can be attributed to the overall credit strength of the consumer, combined with a substantial accumulation of home equity in recent years due to continued home price appreciation, as evidenced by the low weighted average current loan-to-value ratio below 50%. We continue to expect that realized losses will be limited and that these core investments will perform well over the foreseeable future.

As you can see on slide eight, a significant portion of PMT's equity is allocated to investments that we have organically created through PennyMac to above production volume. This is a key differentiator for PMT. Because we are the producer and servicer of the loans, we have unparalleled insight into their quality and performance. Our position as the producer of the underlying loans is a competitive advantage, providing us with the ability to review and diligence the loans for securitization and subsequent investment. Additionally, as the servicer of the underlying loans, we are uniquely positioned to work directly with borrowers in times of stress to minimize losses, as evidenced by the strong historical performance of our investments in lender credit risk transfer. This deep understanding from origination through servicing allows us to directly influence the ultimate credit outcome, minimizing losses and maximizing returns for our shareholders.

In closing, our risk management capabilities and diversified investment strategies, which include seasoned MSR and CRT portfolios, combined with a growing securitization platform built on our unique origination capabilities, position us exceptionally well to deliver attractive risk-adjusted returns to our shareholders in 2025 and beyond. We remain confident in our ability to successfully navigate a volatile and evolving market by leveraging our competitive advantages. Now, I'll turn it over to Dan, who will review the drivers of PMT's second quarter financial performance and PMT's run-rate return potential.

Dan Perotti (CFO)

Thank you David. PMT reported a net loss to common shareholders of $3 million in the second quarter, or negative $0.04 per diluted common share. The credit-sensitive strategies contributed $22 million to pre-tax income. Gains from organically created CRT investments were $17 million, including $9 million, primarily consisting of realized gains and carry, and $8 million of market-driven value changes from credit spread tightening. CAS and stacker bonds generated gains of $4 million, and investments in PMT non-agency subordinate MBS generated gains of $1 million. The interest rate-sensitive strategies contributed a pre-tax loss of $5 million. Fair value increases on MSR investments were $23 million. These fair value increases were more than offset by the combined impact of changes in the fair value of MBS, interest rate hedges, and related income tax benefits, totaling $45 million.

MBS fair value, which includes agency POs and securitized interest-only strips, increased by $12 million. Interest rate hedges decreased by $60 million. In the second quarter, PMT reported an income tax expense of $9 million, driven primarily by a $14 million non-recurring repricing of deferred tax balances due to state apportionment changes driven by recent legislation. The fair value of PMT's MSR asset at the end of the quarter was $3.8 billion, down slightly from March 31, as fair value increases and newly originated MSR investments were more than offset by runoff. Delinquency rates for borrowers underlying PMT's MSR portfolio remain low, and servicing advances outstanding decreased to $70 million from $84 million at March 31. No principal and interest advances are currently outstanding.

Total correspondent loan acquisition volume was $30 billion in the second quarter, up 30% from the prior quarter and consistent with the estimated increase in the size of the overall origination market. Correspondent loans acquired for PMT's account totaled $3 billion, up 11% from the prior quarter. PMT retained 17% of total conventional correspondent production in the second quarter, down from 21% in the first quarter. Under the renewed mortgage banking services agreement with PFSI, effective July 1, 2025, correspondent loans are initially acquired by PFSI. However, PMT will retain the right to purchase up to 100% of non-government correspondent production from PFSI. We expect this percentage to remain between 15% to 25% in the third quarter of 2025 as we continue pursuing investment opportunities in the private-label securitization market.

PMT also acquired $1 billion in UPB of loans acquired or originated by PFSI for inclusion in private-label securitizations, up from $637 million in the prior quarter. Income from PMT's correspondent production segment was $14 million, up from the prior quarter, primarily due to gains on non-owner-occupied and jumbo loans due to credit spread tightening. The weighted average fulfillment fee rate was 19 basis points, unchanged from the prior quarter. In total, PMT reported $36 million of net income across its strategies, excluding market-driven value changes and the related impacts, down from $41 million in the prior quarter, driven primarily by increased realization of cash flows due to higher realized and projected prepayment activity. Slide 14 of our earnings presentation outlines the run-rate return potential expected from PMT's investment strategies over the next four quarters.

PMT's current run rate reflects a quarterly average of $0.38 per share, up from $0.35 per share in the prior quarter. Overall, we expect increased investment activity in accretive non-agency subordinate and senior bonds, primarily through organic securitization activity. Additionally, correspondent and aggregation activities have positive momentum, driving improved execution and an overall increase to our correspondent production segment's return potential. If the yield curve steepens further, we expect PMT's overall run rate would increase further, driven by higher overall yields in the interest rate-sensitive strategies. Turning to capital, in June, we issued $105 million in unsecured senior notes due in 2030, and we currently expect that the $345 million in exchangeable senior notes due in 2026 will be retired closer to maturity by utilizing capacity from existing financing lines. I want to take a minute to comment on PMT's overall leverage ratio, which has increased in recent quarters.

The increase is primarily a reflection of growth in non-recourse debt related to our increased private-label securitization activity and the related accounting treatment for these transactions, which requires us to record the transactions as the financing of the loans rather than retain interest in the securitizations. The source of repayment for this non-recourse debt is limited to the cash flows from the associated loans in each private-label securitization, mitigating any additional exposure to PMT. We believe that the best metric to measure the leverage of our balance sheet is debt to equity, excluding the non-recourse debt related to securitizations, which we have shown on page 15. This metric incorporates our exposure to the investments we are making in subordinate securities in a similar way to what we have seen in prior periods with our CRT investment, which has similar credit exposures to associated loan performance.

We expect this divergence between total debt to equity and debt to equity, excluding non-recourse debt, to increase in future periods as we continue our retention of investments from our securitization program. Excluding non-recourse debt, our debt to equity ratio at June 30 was 5.6 times, within the range of our expected and historical levels. We'll now open it up for questions. Operator?

Operator (participant)

Thank you. I would like to remind everyone we will only take questions related to PennyMac Mortgage Investment Trust, or PMT. We also ask that you please keep your questions limited to one preliminary question and one follow-up question, as we'd like to ensure we can answer as many questions as possible. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, it's star one again. We'll take the first question from Doug Harter, UBS.

Doug Harter (Director and Senior Equity Research Analyst)

Thanks. Hoping we could talk a little bit more about the non-agency securitization opportunity. Can you just talk kind of how the returns progressed over the course of the quarter, given the volatility, and how you are positioning the risk of those holdings going forward?

Dan Perotti (CFO)

Overall, the non-agency subordinate MBS, we obviously during the quarter had a significant amount of both rate and spread volatility. The non-agency subordinates are fixed-rate securities. Overall, during the quarter, with respect to credit investments, we did see generally credit spread tightening. You can see the reflection of that on the GSE credit risk transfer. We also saw a fair amount of interest rate volatility, and that led to a slight decline in terms of the fair value of the non-agency subordinate MBS. Income excluding market-driven value changes was in line with our expectations of really mid-teens or mid to low-teens returns. As we continue to add our additional subordinate investments, as well as non-agency senior MBS, we expect those to continue to be in the low to mid-teens returns in terms of their returns through time.

Those are very stable in terms of the returns with respect to reasonable shocks in terms of credit performance as well. We believe that those are very stable and accretive investments for us over time.

Doug Harter (Director and Senior Equity Research Analyst)

Great. Just as a follow-up, it looks like the amount of retained interest on the jumbo was a much higher percentage relative to the non-owner-occupied. Could you talk about, you know, I guess how high up the stack, and was that opportunistic, or is that something that you would expect to continue on the jumbo side?

Dan Perotti (CFO)

With respect to that, we did retain a senior mezzanine tranche on the jumbo securitization. As we look on a deal-by-deal basis, we are sort of making the decision based on the amount of capital we have to deploy. The jumbo securitization did occur after we had raised the additional unsecured debt. As we are looking to deploy additional capital, I think at least over the next few periods, it's likely that we would be retaining a greater portion of the interest, both the subordinate bonds and the senior mezzanine piece from many of these securitizations. We do make the decision on a deal-by-deal basis based on the capital that we're looking to deploy.

David Spector (CEO and Chairman)

I think, Doug, the important thing is that the team is dynamically managing the portfolio. As you raise capital and you have capital to deploy, obviously, deploying it into the subordinate tranches is something that's more of a long-term investment in nature. There are other tranches you can invest at an appropriate return. That is, we're doing more securitizations. If we need to recycle the capital, we can do so.

Doug Harter (Director and Senior Equity Research Analyst)

Great. Thank you both.

Operator (participant)

We'll take the next question from Jason Weaver, Jones Trading.

Jason Weaver (Stock Analyst)

Hi, guys. Hope you're doing well. Thanks for taking my time. Thanks for taking my question. First of all, David, I think we've talked about this before, but maybe just an update if you have any insight under possible GSE privatization for the future of credit risk transfer.

David Spector (CEO and Chairman)

Yeah, look, I think that right now we're not hearing much out of the folks in D.C. on anything GSE reform related. The GSEs have been active in their credit risk transfer program using the reinsurance vehicles. In terms of a return to lender CRT, like we were able to do from 2015-2020, I don't see that really on the horizon. This is what's so exciting about our non-agency securitization program. The fact that we can create very comparable investments, albeit not as rapidly or not as voluminously, but we can create a similar type of investment by doing these securitizations. That's what the team has done a really great job at, being able to really, really issue these securitizations every three weeks on a relative basis. I think that's something that's really exciting.

We're able to take the product that executes better outside the GSEs and be able to create comparable securitizations. Obviously, it allows us also to get expertise and real muscle memory if we need to do more. If we want to issue more, if there's other agency-eligible products that execute better outside the GSE, that's where PMT is in a really advantageous state in the fact that it's really got this credit investment thesis that it can continue to grow credit investment to mid-teen returns. That's something that we want to continue to focus on. We have very good exposure to MSRs and they're low-rate MSRs where the range of outcomes are much more limited than current no-rate MSRs.

If you combine those with the existing CRT that we have from 2015 to 2020, along with new credit investments, I think that you're going to continue to see us climbing to consistent mid-teen returns.

Jason Weaver (Stock Analyst)

Gotcha. Just to refresh, on the three securitizations you've done so far this quarter, what sort of execution levels were you getting on your AAAs and what sort of advance rates?

David Spector (CEO and Chairman)

I don't want to speak out of scope. We're getting spreads are leaning into their tights. We had a really volatile period at the beginning of the quarter, but things quickly snapped back. I don't want to speak out of scope. We'll definitely get back to you with more detailed reporting on the embedded leverage. I think suffice it to say, it beats agency execution by a material amount. I think that was the goal of FHFA and the GSEs, to drive out some of the more non-owner-occupied and second homes into the private-label markets. It's done a really nice job revitalizing the private-label markets. It's a very active market, and it's had benefits not just to agency-eligible production, but you can see in the jumbo loan securitization market, that's become a lot more active. Non-QM is running at about a $75-$80 billion pace this year.

It's really the most active, robust private-label securitization market I've seen in our 18-plus years here at the company.

Jason Weaver (Stock Analyst)

That's helpful. Thank you, gentlemen.

David Spector (CEO and Chairman)

Thank you.

Operator (participant)

Next up is Bose George from KBW.

Bose George (Stock Analyst)

Hey, guys. Good afternoon. In slide 13, where you have the run rate ROE, it looks like the increase there is really mainly on the rate side. Can you just walk through the drivers of the increase over the last quarter?

Dan Perotti (CFO)

Sure. If you really look at what contributes to the bottom line there, there's a slight increase in the net interest rate sensitive. I think that is really driven by some additions on the non-agency or an addition in terms of the equity allocated to the non-agency senior and IOMBS. That's really the retention of those interests from the securitization side that we're expecting over the next 12 months to help. That should, given the expected returns from that, help push up or slightly increase the net interest rate sensitive strategies. We also have an increase or the ROE from correspondent production. The ROE from correspondent production is also up quarter over quarter based on the outlook that we have for volumes and margins and the margin activity that we've seen coming into the third quarter, which we currently project to persist over the next few quarters.

Additionally, driving up the overall run rate is additional investment in the non-agency subordinate piece, which also has returns which help pull up the rest of the overall forecast and a sort of greater allocation there.

Bose George (Stock Analyst)

Okay. As you retain more sub-pieces from the securitizations, the NII from that is flowing through the rate-sensitive line?

Dan Perotti (CFO)

It's both. Both the, if we're retaining seniors or senior mezzanine pieces, it would flow through the net interest rate sensitive. For every securitization, we are retaining non-agency subordinate MBS, and that flows through the credit sensitive. Both of those are having positive contributions to the run rate.

Bose George (Stock Analyst)

Got it. Okay. Great. Thank you.

Operator (participant)

Our next question is from Crispin Love, Piper Sandler.

Crispin Love (Senior Research Analyst)

Thank you. Good afternoon. Can you just discuss your thoughts on the sustainability of the $0.40 dividend level here, the operating earnings run rate that you discussed? Improved quarter over quarter, but still slightly below the dividend. You did mention some ways how you could see that level improve further in the coming quarters. Curious on you and the board's comfortability with the dividend today.

Dan Perotti (CFO)

Yeah, thanks, Crispin. We continue to be comfortable with the $0.40 dividend level. When we look at the potential for returns as we're moving out through the next four quarters at the $0.38 level, which, as you noted, improved from $0.35, really, we think has the potential to further increase up towards $0.40. If you look at our history, we do place a value in the stability of the dividend, especially with the trajectory and proximity of the run rate currently to the expected dividend. We are comfortable with our position at the $0.40 level currently. In addition to that, as we look at our taxable income and the taxable income being generated from our strategies, it continues to move toward that $0.40 level as well and be supportive of the $0.40 level. Our expectation is that that taxable income level will also be maintained.

As we add additional investments that are not in our taxable REIT subsidiary, namely the non-agency subordinate and senior MBS, that further bolsters that underlying taxable income supporting the $0.40 dividend level.

Crispin Love (Senior Research Analyst)

Great. Are you able to provide an update on book value in July to date?

Dan Perotti (CFO)

Overall, book value in July to date is very stable with respect to where we ended the prior quarter.

Crispin Love (Senior Research Analyst)

Great. Thank you. I appreciate you taking my questions.

Dan Perotti (CFO)

Thank you.

Operator (participant)

Just a reminder, everyone, it is star one if you have a question. We'll go next to Eric Hagen, BTIG.

Eric Hagen (Managing Director and Specialty Finance Analyst)

Thank you, guys. Feels like a lot of attention, a lot more of a concerted effort around finally making reforms to title insurance. We have the new pilots from the GSEs. I mean, when we combine that with really strong HPA, do you see that potentially driving these low coupon borrowers to mobilize or do a cash-out refinance at some point?

David Spector (CEO and Chairman)

I think that it's going to help on the purchase side, obviously. I think that, look, we're seeing on the PFSI side, an increasing amount of closed-end seconds coming out of low-interest-rate homeowners. I think that anything we can do to drive down the cost is a good thing. It's going to be about $400 a loan. I think that I'm not expecting to really accelerate the prepayment speeds on the low-interest-rate loans.

Eric Hagen (Managing Director and Specialty Finance Analyst)

Gotcha. Thank you, guys.

David Spector (CEO and Chairman)

Thank you.

Operator (participant)

At this time, there are no further questions. I would like to turn the conference back to David Spector for closing remarks.

David Spector (CEO and Chairman)

Thank you, Operator. Thank you, everyone, for joining us here today and asking good, thoughtful questions. We are obviously here for any follow-up that you may have, so please reach out to Isaac and the team. Thanks again for the time, and I look forward to speaking to all of you in the future.

Operator (participant)

Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. We encourage investors with additional questions to contact our investor relations team by email or phone. Thank you.