PMT - NYSE

Good afternoon, and welcome to PennyMac Mortgage Investment Trust's Fourth Quarter 2025 Earnings Call. Additional 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 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. I'd like now 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.

Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. Starting on Slide 3, PMT generated strong financial results in the fourth quarter with net income to common shareholders of $42 million or a 13% annualized return on common equity. Diluted earnings per share was $0.48 in excess of PMT's $0.40 per share quarterly dividend, increasing book value per share to $15.25 at year-end from $15.16 on September 30. Dan will talk about PMT's fourth quarter financial results in more detail later on in the presentation. Turning to Slide 4, I'd like to highlight the significant progress we made in 2025, accelerating our organic investment creation activities resulting from private label securitizations. As you can see, over the course of the year, we successfully completed 19 securitizations, totaling $6.7 billion in UPB, a substantial increase from just 2 securitizations in 2024. Retained investments from these securitizations grew to $528 million, up nearly tenfold from just $54 million in 2024. This consistent cadence of securitization, actively -- activity firmly established PMT as a top 3 issuer of prime non-Agency MBS in 2025. At the same time, we rotated capital to better optimize PMT's return profile. This included the purchase of $876 million of agency floating rate MBS, and the sale of $195 million of opportunistic GSE-issued CRT investments, where we had realized significant gains. We decided to sell these GSE-issued CRT investments as their forward-looking expected returns fell below our targeted return requirements, and to free up capital for PMT to invest in newly created assets with higher expected returns from our ongoing private label securitization activity. Turning to Slide 6, our synergistic relationship with PFSI remains a unique and proven competitive advantage. 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 multichannel origination business, which provides PMT with a consistent and high-quality pipeline of loans for investment. Second, PMT is able to efficiently deploy capital into long-term mortgage assets without the operational burdens associated with origination and servicing. And third, PFSI's deep access to the origination market, coupled with PMT's ability to execute private label securitizations provides PMT with the unique opportunity to invest in organically created investments with attractive risk-adjusted returns. And as PFSI further grows its overall share of loan production, PMT is expected to have even more opportunities to organically grow its portfolio. Turning to Slide 7, approximately 60% of PMT's shareholders' equity is deployed to seasoned investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for 46% of shareholders' equity, providing stable cash flows as the loans underlying this investment at a weighted average coupon of 3.9%, far out of the money. Our GSE credit risk transfer investments represent 13% of shareholders' equity and consists of seasoned loans originated from 2015 to 2020. With a weighted average current LTV of 46%, we continue to expect realized lifetime losses on this portfolio to be limited. Slide 8 highlights our robust securitization activity in the fourth quarter and our ability to rapidly grow this business. We completed 8 securitizations totaling $2.8 billion in UPB and retain $184 million of new investments. Our fourth quarter activity included 3 nonowner-occupied deals, 3 jumbo deals, and 2 agency eligible owner-occupied deals. Our momentum has continued after quarter end, with 3 additional securitizations completed totaling $1.1 billion in UPB. Looking ahead and at this pace, we currently expect to complete approximately 30 securitizations in 2026, with targeted returns on equity for these retained investments in the low to mid-teens. The pie charts on Slide 9 highlights our active management of the portfolio to maximize risk-adjusted returns. As strong managers of capital, we expect to optimize returns by recycling capital into assets that maximize risk-adjusted returns, transitioning from lower-yielding assets and the high-quality investments with superior return profiles. We remain focused on optimizing our allocation towards investments with targeted ROEs in the 13% to 15% range. And as we strategically redeploy capital into these higher returning assets, we are successfully driving the long-term return potential of our overall portfolio higher. Turning to Slide 10, you can see the average quarterly run rate return potential expected from PMT's investment strategies over the next 4 quarters. PMT's current run rate reflects a quarterly average of $0.40 per share, down slightly from $0.42 per share in the prior quarter. As I noted earlier, we expect increased investments in accretive non-agency subordinate and senior bonds, primarily through organic securitization activity. Our expected returns from the interest rate-sensitive strategies remains unchanged from the prior quarter as lower return potential from MSRs due to higher prepayment expectations was offset by a decrease in projected hedge costs. In correspondent production, margins have declined, and our expectations for returns from the strategy are down from the prior quarter. Our legacy investments provide a stable foundation for continued strong performance, and we have succeeded in repositioning PMT as a leader in the private label securitization market, where we are organically creating new investments and driving our overall returns higher. As we look ahead, I am confident that this comprehensive and diversified investment platform will drive our ability to continue generating earnings that more than support our dividend and drive long-term value for our shareholders. Now I'll turn it over to Dan to review the fourth quarter financial performance.

Thank you, David. Net income to common shareholders was $42 million or $0.48 per diluted common share in the fourth quarter or a 13% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $24 million to pretax income, generating an annualized return on equity of 27%. Gains from organically created CRT investments were $12 million, which included $8 million of realized gains and carry, and $4 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $11 million, including $9 million of market-driven value gains. The interest rate sensitive strategies contributed pretax income of $28 million, generating an annualized ROE of 10%. The returns in this segment were impacted by increased prepayment speeds during the quarter, driving higher runoff of our MSR assets. Income excluding market-driven value changes for this segment was $21 million, down from $36 million in the prior quarter. However, our hedging activities during the quarter yielded net favorable results as the increase of $26 million in MSR fair value was partially offset by $7 million of net declines in fair value of MBS and interest rate hedges, including the related tax benefit. Our MSR asset at year-end was valued at $3.6 billion, down slightly from the prior quarter as gains from changes in fair value inputs and new MSRs from production were offset by the higher levels of runoff. Overall mortgage delinquency rates for PMT's primarily conventional MSR portfolio remains steady. Servicing advances increased to $97 million from $63 million in the prior quarter due to seasonal property tax payments. No principal and interest advances are outstanding. The Correspondent Production segment reported a pretax loss of $1 million. The negative result was due primarily to spread widening on jumbo loans during the aggregation period, as well as lower overall channel margins as competition increased during the quarter. The UPB of loans acquired from PFSI's Correspondent Production through our fulfillment agreement totaled $3.7 billion. Of this, $2.9 billion in UPB was conventional conforming correspondent volume and $800 million in UPB was non-agency-eligible correspondent volume. PMT purchased 17% of total conventional conforming Correspondent Production and 100% of non-agency eligible Correspondent Production for PFSI in the fourth quarter. In the first quarter of 2026, PMT expects to purchase 15% to 25% of conventional conforming Correspondent Production and 100% of correspondent non-agency eligible loan volume, consistent with levels reported in recent periods. PMT also acquired $1.8 billion in UPB of loans from PFSI's production outside of their fulfillment agreement for inclusion in private label securitizations. The weighted average fulfillment fee rate was unchanged from the prior quarter at 18 basis points. In total, PMT reported $21 million of net income across its strategies, excluding market-driven value changes, down from the prior quarter, primarily due to a decreased contribution from the Correspondent segment and increased runoff from MSRs as discussed earlier. Turning to Slide 15, we highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we raised $150 million of new unsecured financing through opportunistic reopenings of our exchangeable senior notes due in 2029. We currently expect to retire the $345 million in exchangeable senior notes due in 2026 using capacity from existing financing lines. Finally, on Slide 16, PMT's total debt-to-equity ratio increased to approximately 10:1 from 9:1 at September 30, as we continue to retain investments from securitizations. The increase in our total debt-to-equity 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 continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage, and that ratio remained within our expected range at 6:1. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows. We'll now open it up for questions. Operator?

I would like to remind everyone, we would like to only take questions related to PennyMac Mortgage Investment Trust, or PMT. [Operator Instructions] Your first question comes from Doug Harter from USB (sic) [ UBS ].

Just hoping you could talk about the return expectations for the interest rate strategy. I would expect that prepayments probably stay elevated, kind of how do you offset the decline in that profitability to kind of get back to the target range?

So overall, in terms of the MSRs, there's a limited portion of the MSRs that have that responsiveness to higher level interest rates. And so there's -- it's really a combination of both -- a combination of both additional recapture, which we expect to grow on those loans, which we expect to grow through the year from PMT's recapture provider, which is PFSI. As well as we expect the impact of those prepayments to dilute a bit through the year as well just based on the percentage of the portfolio that they represent and the fact that we are adding at a slower pace and that overall portion of the portfolio is generally not expanding at a rapid pace. But I would note that overall, in terms of the -- in some sense, those -- the MSRs need to be viewed in the context of the entire interest rate sensitive strategy, which if you look at our -- which if you look at our run rate on Page 10 of the earnings presentation, remained at that 12.5% annualized ROE overall. And so there is some complementarity between those MSRs and the offsetting interest rate exposure that they have versus the agency MBS, which, generally speaking, have had over the past few quarters, elevating returns on equity.

Your next question is from Bose George with KBW.

Can you talk about competition in the non-agency space on the production side?

Yes. So I think it's -- it's what you'd expect. I think on the jumbo side, we're seeing very healthy activity from the likes of Rocket Mortgage on the retail side and EWM on the broker side. I think that we have been outperforming both as a percentage of our originations, which speaks to the dynamic nature to how we manage our secondary marketing efforts. But I do think that, for now, we don't see a lot of bank competition. We do see -- the third name I should mention is Redwood Trust. I mean, they are active in the jumbo market from time to time. But by and large, it's really those -- those are the shops that we're seeing as our competition.

Great. That's helpful. And then in terms of the equity allocation to the non-agency securitization, where do you see that trending, say, by year-end?

Overall -- I mean, overall, if you again look at the run rate, our weighted average allocation reflects the -- basically the average through the next 12 months. So we have it at 9% as an average through the next few months. As we get to the end of the year, it's a few percentage points higher than that. So pressing above to probably 11% or 12% by the end of the year.

Bose, what I think in doing non-agency securitizations, one of the things that we balance, of course, we like the returns on the investment, but there's an aggregation risk in terms of holding the loans until securitization. And so we're trying to manage that risk in keeping in mind, especially on jumbo securitization just kind of trying to dimension and monitoring what that risk is. So that's why we're -- we've grown our production and securitizations in a meaningful, meaningful way. But I do think that, that's something that we're going to look to find exciting and alternative solutions to do more while not taking on the incremental risk of growing an aggregation pipeline to $2 billion, $3 billion.

Your next question is from Jason Weaver with Jones Research.

As it pertains to the securitization opportunity, can you comment on financing costs you've seen for investor jumbo and [ HC ] eligible deals as of late. And also, is there any possible deals that -- legacy deals that you might look at to call and resecuritize near term?

I think that as it pertains the -- on the financing side, it's a robust competitive market for financing. And so 1 of the things that we've been very -- we've been the beneficiaries of this taking advantage of that. Having said that, in Q4, we implemented a facility that doesn't have a mark-to-market feature, and that's very important from a risk management standpoint. It's something, if you recall during COVID, we had similar type structure in place where we did have mark-to-market -- we didn't have the mark-to-market risk. And so this is it. It doesn't take away all of the mark-to-market risk that would take a very dramatic event and then the ability to work out of a major event is contemplated. And so there's a bit of a trade-off in terms of the cost versus the risk. But suffice it to say, and the IR team could get back to you on the absolute levels. But it's a pretty competitive market out there. There's a lot of capital flowing to finance these assets.

All right. And then so under some of these affordability driven initiatives that the administration is floating, can you talk a bit about the origination capacity of the correspondent chattel, which is PFSI inclusive and it's bill to expand under what could be greater demand going forward?

Yes. Look, I think that there is a good amount of capacity in the system to deal with any program that the GSEs put out. Obviously, if you put out something that's along the lines of a streamlined refi program in the conventional space, that's going to introduce a level of demand for refinances. It's going to outstrip the capacity. But ultimately, that will take care of itself. And as I mentioned on the PFSI call, 1 of the issues that we're observing in the marketplace is there's actually excess -- more excess capacity in the sector than I thought there would be. And I think it's basically because there's been such -- there's been talk about rates coming down now for upwards over the last 12 months that has given people the opportunity to grow their capacity. Now as I said, if something meaningful gets deployed and all of a sudden, you go from 20% of the market being refinanced with the 50% of the market, that's going to change this dynamic. But I think that we as an industry and our correspondence, I know are in pretty good shape for, call it, $2.4 trillion, $2.5 trillion market. Much beyond that, we would require to bring up more capacity.

[Operator Instructions] Our next question comes from Eric Hagen with BTIG.

I think I just have one. I can't recall if PMT has ever sold any MSRs, but would you ever consider that as an option either opportunistically or for risk management purposes to delever the balance sheet?

We would consider it. I think that one of the things that I'm really pleased about in 2025, and this is the theme throughout the years, we've been much more agile and dynamic in terms of managing the portfolio. And so as we've been fortunate enough to raise capital to focus on being able to pay off the convert and do other things. As we find ourselves in a position where we can see higher returning assets versus MSRs, of course, we would look at it. And as evidenced by the MSR trade that we did out of PFSI, this management team knows how to sell and close and transfer servicing. And so that's something that we would clearly contemplate.

Our next question comes from Trevor Cranston with Citizens JMP.

Can you guys talk about what you've seen in terms of spread behavior in the non-agency market in January, given the significant amount of tightening that's happened within the agency space? And if that's flowed through to any meaningful change in securitization execution?

Yes. Overall, I think in the non-agency space, spreads have been stable to a tightening in sympathy with the agency spreads. Overall, we've continued to see fairly robust demand for securitizations in January. And so overall, it's been supportive of our continued securitization activity. We noted our securitization activity in January, we completed 1 of each of the types of deals that we are -- that one deal under each collateral type that we've been issuing under thus far nonowner-occupied jumbo and agency eligible owner-occupied, as I said, saw robust demand for each of those. And so overall, we continue to see the market as being supportive of the securitization activity.

Got it. Okay. And then looking at the prospective return slide, the returns on the CRT position look like they're pretty competitive with what you guys are expecting on the new subordinate retention. Would you expect to find more opportunities to opportunistically sell within the CRT book? Or do you think that's kind of reached a point where it's likely to be kind of -- and more of a stable runoff mode at this point?

So the -- what we had sold from the CRT book was actually CRTs that were not specific to PMT collateral that we had acquired opportunistically when spreads were wider. Basically, spreads tightened in significantly and the returns on those had fallen below our threshold. And so we sold entirely out of that third-party CRT opportunistic position. We have retained all of our -- all of the credit risk transfer that was based -- that's based on our lender credit risk share that came directly from our production, from PMT's production. We would expect to continue to retain that. Some of that has been on our books for quite a long period at this point. We actually had 1 of our deals, which had a 10-year maturity, mature late last year. We have a few of the smaller deals maturing as we move forward. Given the return profile and the really high-quality nature of the underlying loans that have really significant home price appreciation, low mark-to-market LTVs, high FICOs, low expected future credit losses, we'd expect to maintain that position as we go forward.

We have no further questions at this time. So I'll now turn it back to David Spector for closing remarks.

Thank you all for joining us. We are very proud of the transformation PMT has undergone this year and look forward to all the opportunities ahead in 2026. If you have any additional questions, please reach out to our Investor Relations team, and thank you very much for the time and thoughtful questions.