PennyMac Mortgage Investment Trust (NYSE:PMT) Q4 2021 Earnings Conference Call February 3, 2022 5:00 PM ET
David Spector – Chairman and Chief Executive Officer
Vandy Fartaj – Senior Managing Director and Chief Investment Officer
Dan Perotti – Senior Managing Director and Chief Financial Officer
Conference Call Participants
Good afternoon and welcome to the Fourth Quarter and Full Year 2021 Earnings Discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available on PennyMac Mortgage Investment Trust’s website at www.pennymac-reit.com. Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to the risks identified on Slide 2 that could cause our actual results to differ materially.
Now I’d like to introduce David Spector, PMT’s Chairman and Chief Executive Officer who will discuss the company’s fourth quarter and full year 2021 results.
Thank you, Isaac. For the fourth quarter 2021, PMT reported a net loss attributable to common shareholders of $27.3 million or $0.28 per common share, driven primarily by fair value declines in its interest rate sensitive strategies. These impacts were partially offset by strong returns in our credit sensitive strategies, which consist of investments in GSE credit risk transfers and investments in non-Agency subordinate bonds.
During the quarter, we repurchased 2.2 million common shares of PMT common stock for $39 million. PMT paid a common dividend of $0.47 per share. Book value per share decreased to $19.05 from $19.79 at the end of the prior quarter.
Our high quality loan production continues to organically generate assets for PMT and this quarter, $17.2 billion in UPB of conventional correspondent production led to the creation of $239 million in new, low-coupon mortgage servicing rights. We continue to create new credit investments in the form of subordinate bonds from non-Agency investor loan securitizations, also sourced from PMT’s production volumes. This quarter, PMT successfully completed two securitizations with an aggregate UPB of $713 million.
In total, the fair value of PMT’s investments in investor loan securitizations, net of associated asset-backed financing was approximately $87 million at the end of the year. The origination market is projected to decline substantially in 2022. Inside Mortgage Finance estimates the 2021 origination market was $4.8 trillion and current forecasts for 2022 total $3.1 trillion, a reduction of 35% year-over-year.
However, purchase originations are expected to remain strong at $2 trillion in 2022. The smaller origination market, combined with significant levels of competition for conventional loans in the correspondent channel, including from the GSEs, is expected to result in headwinds for PMT’s correspondent production business in the near-term. Despite these headwinds, however, we believe PMT’s scale and purchase market orientation positions it well over the long-term for continued organic asset creation.
PMT went public in July of 2009 and in our more than 12-year history we have delivered shareholder returns that have exceeded comparable REIT indices. Additionally, our book value over the same period has remained relatively stable, with an average of $20 per share. This performance can be attributed to PMT’s organic business model led by the deep and talented management at PFSI, with years of experience successfully navigating changing mortgage markets and the associated risks.
Organic asset creation remains a competitive advantage for PMT relative to other mortgage REITs. Combined with the platform and management team provided by PFSI, we believe PMT is uniquely positioned to capitalize on opportunities as they arise and evolve. An example of this is our recent success aggregating and securitizing investor loans while investing in the subordinate tranches of the resulting bonds.
In fact, over the last several months we have invested in subordinate tranches of investor loan securitizations with a total UPB of over $1.5 billion. Importantly, the most recent transactions we completed in the quarter were securitized by PMT, and we expect to be a programmatic issuer of investor and second home securitizations throughout 2022.
As we look ahead, we see additional opportunities for private label securitizations and subsequent investments for PMT, bolstered by recent GSE fee increases on certain loans as mandated by the FHFA. Loan level price adjustments for second homes and certain high balance loans have provided incentives for originators to sell these loans through the correspondent channel for securitization, particularly to scaled aggregators like PMT, rather than directly to Fannie Mae or Freddie Mac.
Turning to CRT, PMT is a leader in lender risk share transactions with nearly $120 billion in UPB of loans sold to Fannie Mae from 2015 to 2020. While we are not currently delivering loans into CRT transactions, we are actively engaged in discussions with the GSEs regarding the potential resumption of lender risk share investments.
We believe we are well-positioned to lead broadly on this effort given our history, platform and expertise. Because of the greater capital relief CRT provides the GSEs under the amended Enterprise Regulatory Capital Framework, and the additional private capital CRT provides to the housing ecosystem, we remain optimistic for the future of lender risk share. Most importantly, the alignment of interest as acquirer and servicer of the loans should be compelling for the GSEs, given we can work directly with our borrowers in times of hardship.
On Slide 8, we illustrate the run-rate return potential from PMT’s investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters. In total, we expect the quarterly run-rate for PMT’s strategies to average $0.37 per share or 7.7% annualized return on equity. This run-rate potential reflects performance expectations in the highly-competitive, transitioning mortgage market.
In our credit sensitive strategies, CRT returns reflect credit spreads that have tightened over time. In addition, we expect to increase investments in non-Agency subordinate MBS at attractive returns through private label securitizations. In the interest rate sensitive strategies, we expect more consistent returns as prepayment speeds stabilize. In correspondent production, the expected returns reflect our view that significant levels of competition to acquire conventional loans will result in lower volumes and margins than we have experienced in recent quarters.
This analysis excludes potential contributions from opportunities under exploration, such as new investments in CRT or the introduction of new products other than investor loans. It is also important to note important our forecast for PMT’s taxable income and liquidity continues to support the common dividend at its current level of $0.47 per share over this period.
Now I’d like to turn the call over to Vandy Fartaj, PMT’s Senior Managing Director and Chief Investment Officer, who will discuss the drivers of PMT’s fourth quarter investment performance.
Thank you, David. Let’s begin with highlights in our Correspondent Production segment. Total correspondent acquisition volume in the quarter was $32.8 billion, down 25% from the prior quarter and down 42% from the fourth quarter of 2020. 52% of PMT’s acquisition volumes were conventional loans, down from 65% in the prior quarter. We maintained our leadership position in the channel as a result of our consistency, competitive pricing and the operational excellence we continue to provide to our nearly 770 correspondent sellers.
Conventional lock volume in the quarter was $14.7 billion, down 50% from the prior quarter and down 63% year-over-year as we maintained our pricing discipline despite significant competition for conventional loans in a smaller origination market, including the GSE cash window.
PMT’s Correspondent Production segment pre-tax income as a percentage of interest rate lock commitments was 3 basis points, down from 9 basis points in the prior quarter. The weighted average fulfillment fee rate in the fourth quarter was 12 basis points, down from 15 basis points in the prior quarter, reflecting discretionary reductions made by PFSI to facilitate successful loan acquisitions by PMT.
Acquisition volumes in January were $7.6 billion in UPB, and locks were $7.5 billion in UPB. PMT’s Interest Rate Sensitive strategies consist of our investments in MSRs sourced from our correspondent production, and investments in Agency MBS, non-Agency senior MBS and interest rate derivatives with offsetting interest rate exposure.
The fair value of PMT’s MSR investments at the end of the fourth quarter was $2.9 billion, up slightly from $2.8 billion at the end of the prior quarter. The increase reflects newly originated MSRs resulting from conventional production volumes that more than offset fair value declines and prepayments. Similarly, the UPB of loans underlying PMT’s MSR investments totaled $216 billion, up from $212 billion.
Now I would like to discuss PMT’s Credit Sensitive Strategies, which primarily consist of investments in CRT. The total UPB of loans underlying our CRT investments as of December 31st was $30.8 billion, down 13% quarter-over-quarter. Fair value of our CRT investments at the end of the quarter was $1.7 billion, down from $1.9 billion at September 30th due to declines in asset value that resulted from prepayments.
The 60-plus day delinquency rate underlying our CRT investments continued to improve and declined to 3.06% from 3.79% at September 30th. And the outlook for our current investments in CRT remains favorable, with the current weighted average loan-to-value ratio of approximately 64% at year end, benefiting from the home price appreciation experienced in recent years.
PFSI’s position as the manager and servicer of loans underlying PMT’s CRT investments gives PMT a strategic advantage, since we can work directly with borrowers who have loans underlying PMT’s investments that have experienced hardships. PFSI uses a variety of loss mitigation strategies to assist delinquent borrowers, and because the scheduled loss transactions, notably PMTT1-3 and L Street Securities 2017 PM1, trigger a loss if a borrower becomes 180 days or more delinquent, we have deployed additional loss mitigation resources and continue to assist those borrowers at risk.
With respect to PMTT1-3, which comprises 6% of the fair value of PMT’s overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $11 million. Through the end of the quarter, losses to-date totaled $13 million.
Moving on to L Street Securities 2017-PM1, which comprises 19% of the total fair value of PMT’s CRT investment, such losses will become reversed credit events if the payment status is reported as current after a forbearance period due to COVID-19. PMT recorded $17 million in net losses reversed in the fourth quarter, as $19 million of losses reversed more than offset the $2 million in additional realized losses.
We estimate that an additional $18 million of these losses were eligible for reversal as of 31st subject to review by Fannie Mae and we expect this amount to continue to increase as additional borrowers exit forbearance and reperform. We estimate that only $17 million of $48 million in losses to-date had no potential for reversal. This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017-PM1 exceeding its face amount by $12 million at the end of the quarter.
As David mentioned earlier, we continued to invest in securitizations collateralized by investor loans. During the quarter, we added $42 million in fair value of new investor loan securitization investments and ended the year with $87 million of such investments. In total, this year we have successfully deployed the runoff from elevated prepayments on CRT investments and on Slide 7 you can see $1.1 billion of net new investments in long-term mortgage assets offset by $1.1 billion in runoff from prepayments on CRT assets. Additionally, we opportunistically deployed $56. 9 million to repurchase 3.1 million of PMT’s common shares in 2021. Under our current program, capital remains available for repurchases at attractive price levels.
Now I would like to turn the call over to Dan Perotti, our Senior Managing Director and Chief Financial Officer, who will review our quarterly financial results.
Thank you, Vandy. PMT reports results through four segments: Credit Sensitive Strategies, which contributed $33.2 million in pre-tax income; Interest Rate Sensitive Strategies, which contributed $43.2 million in pre-tax loss; Correspondent Production, which contributed $4.6 million in pre-tax income; and the Corporate segment, which had a pre-tax loss of $14 million.
The contribution from PMT’s CRT investments totaled $31.3 million. This amount included $1.6 million in market-driven value gains, reflecting the impact of slight credit spread tightening and elevated prepayment speeds. As a reminder, faster prepayment speeds benefit PMT’s CRT investments as payoffs of the associated loans reduce potential for realized losses.
Net gain on CRT investments also included $26.9 million in realized gains and carry, $14.5 million in net losses reversed, primarily related to L Street Securities 2017-PM1 which Vandy discussed earlier, $100,000 in interest income on cash deposits, $11.7 million of financing expenses, and $200,000 of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic.
PMT’s interest rate sensitive strategies contributed a loss of $43.2 million in the quarter. MSR fair value decreased a total of $84 million during the quarter and included $49 million in fair value declines due to changes in interest rates, primarily due to a significant flattening of the yield curve, and $35 million of valuation decreases due to increases to short-term prepayment projections.
The fair value on Agency MBS and interest rate hedges also declined by $7 million largely due to elevated hedge costs during the quarter. PMT’s Correspondent Production segment contributed $4.6 million to pre-tax income for the quarter. PMT’s Corporate segment includes interest income from cash and short-term investments, management fees and corporate expenses. The segment’s contribution for the quarter was a pre-tax loss of $14 million. Finally, we recognized a tax benefit of $2.6 million in the fourth quarter driven by fair value declines in MSRs held in PMT’s taxable subsidiary.
And with that, I’ll turn the discussion back over to David for some closing remarks.
Thank you, Dan. As the market transitions to a higher rate environment, we believe the return volatility of our investments will stabilize and the competitive climate will improve as correspondent aggregators adjust capacity to the new market. Until that takes place, we expect headwinds for the return potential of PMT’s strategies. However, there are significant investment opportunities we are pursuing in the form of private-label securitization and the potential to resume new CRT investments and we are encouraged by our continued active discussions with the GSEs and FHFA on that front.
As a public company in our 13th year of operations with a very seasoned management team, we have been disciplined through numerous mortgage cycles and have a strong track record of performance throughout our history. While we acknowledge the headwinds in this currently transitioning mortgage market, we are optimistic about PMT’s ability to execute on opportunities and deliver attractive risk-adjusted returns to shareholders over the long-term. We encourage investors with any questions to reach out to our Investor Relations team by email or phone. Thank you.
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.