PennyMac Mortgage Investment Trust (NYSE:PMT) Q4 2023 Earnings Call Transcript
PennyMac Mortgage Investment Trust (NYSE:PMT) Q4 2023 Earnings Call Transcript February 1, 2024
PennyMac Mortgage Investment Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to PennyMac Mortgage Investment Trust Fourth Quarter and Full Year 2023 Earnings Call. Additional earning material including the presentation slides that will be referred to in the call are available on PennyMac Mortgage Investment Trust website at pmt.pennymac.com. Before we begin, let me remind you that this call will – this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that may 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 earning material. Now I’d like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust, Chief Financial Officer.
David Spector: Thank you, operator. Good afternoon and thank you to everyone for participating in our fourth quarter earnings call. PMT produced very strong results in the fourth quarter with sizable contributions from the credit-sensitive strategies and its correspondent production business. These results were partially offset by fair value declines in the interest rate sensitive strategies. Net income to common shareholders was $42 million or diluted earnings per share of $0.44. PMT’s annualized return on common equity was 12% and book value per share increased to $16.13 at December 31st, up from $16.01 at the end of the prior quarter. This strong financial performance marked the culmination of an outstanding year for PMT, demonstrating its resilience in a year of tremendous interest rate volatility and highlighting our management team’s unwavering commitment to managing interest rate risk.
PMT was profitable every quarter in 2023 with annual income contributions from all three of its investment strategies. Net income attributable to common shareholders for the year was $158 million or diluted earnings per share of $1.63. Return on common equity was 11% and book value per share grew 2% net of $1.60 in common share dividends. In 2023, we invested nearly $500 million into new MSR and opportunistic investments, which we believe will perform well over the long-term. As we head into 2024, we will remain disciplined in the deployment of capital and continue to look for opportunistic investments across the residential mortgage landscape. The strength of PMT’s balance sheet has always been a key differentiator among mortgage REITs, and I am very proud of the work our management team has accomplished in 2023.
Not only that we return approximately $170 million to shareholders through common share cash dividends and share repurchases, but we further strengthened the balance sheet with new long-term debt issuances of $659 million and redemptions of $450 million in debt with upcoming maturities. As you can see on Slide 5 of our fourth quarter presentation, the origination market is expected to have dropped in 2023 as mortgage rates have declined from their recent highs and anticipated future rate cuts have increased third-party estimates for industry originations in 2024 to approximately $2 trillion. Much of this anticipated growth is based on expectations for interest rate reductions later on in the year, and we expect the first quarter of 2024 to remain seasonally low before moving into spring and summer home buying season.
Given the current environment, I remain very enthusiastic about the potential performance from PMT’s investment portfolio. More than two-thirds of PMT’s shareholders equity is currently invested in a seasoned portfolio of MSRs and the unique GSE lender risk share transactions we invested in from 2015 to 2020. As the majority of mortgages underlying these assets were originated during periods of very low interest rates, we continue to believe these investments will perform well over the foreseeable future as low, expected prepayments extend the expected asset life. Additionally, delinquencies remain low due to the overall strength of the consumer, as well as a substantial accumulation of home equity in recent years due to continued home price appreciation.
MSR investments account for more than half of PMT’s deployed equity. The rates declined during the quarter, the majority of the underlying mortgages remained far out of the money, and we expect the MSR to continue to produce stable cash flows over an extended period of time. The MSR values also benefit from the current interest rate environment as the placement fee income PMT receives on custodial deposits is closely tied to short-term rates. Similarly, mortgages underlying PMT’s large investment in lender risk share have low delinquencies and a low weighted average current loan-to-value ratio of 50%. These characteristics are expected to support the performance of these assets over the long term, and we continue to expect the realized losses over the life of these investments to be limited.
We remain focused on actively managing PMT’s portfolio of opportunistic investments, which we believe have the potential for strong, long-term, risk-adjusted returns. In the fourth quarter, we invested $17 million into floating rate GSE CRT bonds. After quarter end, we sold $56 million of previously purchased floating rate GSE CRT bonds as credit spreads have tightened, making capital available for PMT to deploy into additional opportunistic investments. Slide 8 outlines the runway potential expected from PMT’s investment strategies over the next four quarters. PMT’s current run rate reflects an average $0.31 per share over the next four quarters. This is down modestly from the prior quarter due to the impact of interest rate changes on asset yields compared to financing rates for the interest rate sensitive strategies.
The expected returns on these investments have the potential to improve if short-term rates decline, driving an increase in the overall run rate. I will now turn it over to Dan, who will review the drivers of PMT’s fourth quarter financial performance.
Dan Perotti: Thank you, David. Turning to Slide 12, PMT earned $42 million in net income to common shareholders in the fourth quarter, or $0.44 per diluted common share. PMT’s credit sensitive strategies contributed $61 million in pre-tax income. Pre-tax income from PMT’s organically created CRT investments in the fourth quarter totaled $42 million. This amount included $29 million in market-driven fair value gains, reflecting the impact of tighter credit spreads. The fair value of these investments was essentially unchanged from the prior quarter, as fair value gains were offset by runoff. As David mentioned, the outlook for our current investments in organically created CRT remains favorable, with a low underlying current weighted average loan-to-value ratio, and a 60-day delinquency rate of 1.23% as of December 31.
Income from opportunistic investments in CAS and STACR bonds issued by the GSEs totaled $12.8 million in the quarter. The interest rate sensitive strategies contributed a pre-tax loss of $17 million. The fair value of PMT’s MSR investment decreased by $145 million as the decline in mortgage rates increased future prepayment projections. Approximately 78% or $112 million of this MSR decline was offset by changes in the fair value of Agency MBS, interest rate hedges and related income tax effects. Agency MBS fair value increased by $184 million, while interest rate hedges decreased by $94 million. The fair value declines on MSRs and interest rate hedges held in PMT’s taxable REIT subsidiary drove a tax benefit in the fourth quarter. The fair value of PMT’s MSR asset at the end of the quarter was $3.9 billion, down from $4.1 billion at September 30, as growth in the MSR portfolio from loan production was more than offset by fair value declines and runoff from prepayments.
Delinquency rates for borrowers underlying PMT’s MSR portfolio remain low, while servicing advances outstanding increased to $191 million from $80 million at September 30 due to seasonal property tax payments. No principal and interest advances are currently outstanding. Income from PMT’s correspondent production segment was up from last quarter, primarily due to higher margins. Total correspondent loan acquisition volume was $24 billion in the fourth quarter, up 10% from the prior quarter. Conventional loans acquired for PMT’s account totaled $2.5 billion, down 10% from the prior quarter due to seasonal impacts. The weighted average fulfillment fee rate was 20 basis points, unchanged from the prior quarter. PMT reported $41 million of net income across its strategies, excluding market-driven value changes and the related tax impacts, up from $32 million last quarter.
We’ll now open it up for questions. Operator?
See also 15 Best Low Cost Stocks To Buy Under $75 and Hedge Fund Manager Charles Paquelet’s Top 10 Tech Stock Picks.
To continue reading the Q&A session, please click here.
