PennyMac (PMT) Q2 2025 Earnings Call Transcript

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DATE

• Tuesday, July 22, 2025, at 6 p.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — David Spector
• Chief Financial Officer — Daniel Perotti

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TAKEAWAYS

• Net Loss to Common Shareholders: $3 million, or a loss of 4¢ per share for the second quarter, reflecting a $14 million nonrecurring tax adjustment and market-driven fair value declines.
• Dividend: Declared at $0.40 per share, with management reiterating comfort in maintaining this payout level.
• Book Value Per Share: $15 at June 30, described as down modestly from March 31, with no further change reported post-quarter end to date.
• Securitization Activity: Three securitizations of agency-eligible investor loans were completed totaling $1.1 billion in UPB, with $71 million of new retained investment; one jumbo loan securitization totaling $339 million UPB was also completed, with $82 million retained investment.
• Total Securitizations Since Q4 2024: Nine securitizations totaling $3.2 billion in UPB since Q4 2024, with $300 million in new retained investments.
• Targeted Returns on Equity: Low to mid-teens expected for retained investments from recent securitizations, as stated by management.
• Run Rate Earnings Per Share: Current run rate for the next four quarters averages $0.38 per share.
• Segment Allocation: Approximately 47% of deployed equity in mortgage servicing rights (MSRs) as of June 30, 2025 and 16% in government-sponsored enterprise (GSE) credit risk transfer (CRT) investments as of June 30.
• Delinquency and Advances: MSR delinquency rates remain low; Servicing advances outstanding decreased to $70 million as of June 30, down from $84 million at March 31, with no principal and interest advances outstanding.
• Correspondent Loan Acquisition Volume: $30 billion acquired in total in the second quarter, up 30% sequentially; PMT’s own account volume was $3 billion, up 11% sequentially from Q1.
• Retention Rate: PMT retained 17% of total conventional correspondent production, down from 21% in the previous quarter.
• Income Tax Expense: $9 million of realized gains and carry from organically created CRT investments, driven by a $14 million nonrecurring adjustment due to state apportionment changes.
• Fulfillment Fee Rate: Weighted average rate held at 19 basis points, unchanged from prior quarter.
• Leverage Ratio (Excluding Nonrecourse Debt): 5.6 times as of June 30, within historical norms; management notes rising nonrecourse debt reflects increased securitization rather than higher risk exposure.
• Unsecured Senior Notes Issued: $105 million in June, with stated intention to retire $345 million in exchangeable senior notes due 2026 at or near maturity using existing financing capacity.
• Loan Quality and Monitoring: Management emphasized the unique insight and loss-minimization achieved by both producing and servicing underlying loans in portfolio.

SUMMARY

PennyMac Mortgage Investment Trust (NYSE:PMT) reported a GAAP net loss for Q2 2025 due to nonrecurring tax charges and market-driven fair value declines, while management maintained a stable $0.40 per share dividend. Continued growth in securitization volume enabled new investments. The company continued to allocate capital toward organically sourced MSR and CRT portfolios while expanding its private label securitization program. Leverage ratio excluding nonrecourse debt was 5.6 times as of June 30, consistent with past levels, as nonrecourse financing related to securitization grew materially. A renewed agreement with PennyMac Financial Services, Inc. ensures the option to purchase up to 100% of non-government correspondent production for strategic investment.

• Spector said, "... you know, we do place a value in the stability of the dividend and especially with the trajectory and proximity of the run rate currently to the expected dividend."
• Correspondent and aggregation segments achieved positive momentum, with management targeting a 20%-25% retention rate of non-government correspondent loans for the remainder of 2025.
• Senior management confirmed no material change to book value per share in July through the call date.
• Efficiency and risk management practices were highlighted as supporting navigation of a volatile interest rate and spread environment, aided by the ability to directly diligence and service underlying assets.

INDUSTRY GLOSSARY

• MSR (Mortgage Servicing Rights): The right to service a pool of mortgage loans and collect a fee for performing servicing functions, considered a key balance sheet asset in mortgage REITs.
• CRT (Credit Risk Transfer): Securities or contractual arrangements through which mortgage credit risk is transferred from GSEs to private investors, providing off-balance-sheet risk-sharing.
• UPB (Unpaid Principal Balance): The amount of principal outstanding on a pool of mortgage loans or securities.
• Private Label Securitization: A securitization of mortgage loans that are not guaranteed by a government agency or GSE, often involving non-agency or jumbo mortgages.
• Fulfillment Fee: The fee earned for performing loan processing and origination tasks within correspondent lending before sale or securitization.

Full Conference Call Transcript

David Spector: Thank you, operator. For the second quarter, PMT produced a net loss to common shareholders of $3 million or a loss per share of 4¢. Solid levels of income excluding market-driven value changes were offset by fair value declines and a $14 million nonrecurring 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 ten-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-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.

And 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 investment.

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 securitization. In recent periods, we've been a top-three issuer of 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 MSR and the unique GSE lender risk share transactions we invested in from 2015 to 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 the 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's robust 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 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: Thank you, David. PMT reported a net loss to common shareholders of $3 million in the second quarter, or negative 4¢ per diluted common share. The credit-sensitive strategies contributed $22 million to pretax 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 pretax 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 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 nonrecurring 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 20% to 25% in 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. This was 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 38¢ per share, up from 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 in 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.

We currently expect that the $345 million 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 nonrecourse debt related to our increased private label securitization activity, and the related accounting treatment for these transactions, which requires us to record the transaction as a financing of the loans rather than retain interest in the securitizations.

The source of repayment for this nonrecourse 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 nonrecourse 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 nonrecourse debt to increase in future periods as we continue our retention of investments from our securitization program. Excluding nonrecourse debt, our debt-to-equity ratio as of 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: Thank you. I would like to remind everyone we will only take questions related to PennyMac 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. And 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: Thanks. Hoping to talk a little bit more about the non-agency securitization opportunity. Can you just talk, you know, kind of how the returns progressed over the course of the quarter given the volatility? And kind of how you are positioning the risk of those holdings going forward? So 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. And so, 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 also saw a fair amount of interest rate volatility, and so 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.

And so 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 mid to low to mid-teens returns in terms of their returns through time, and those are very stable in terms of the returns with respect to reasonable shocks in terms of credit performance as well. And so we believe that those are very stable and accretive investments for us over time.

Doug Harter: Great. And then 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. Can you just talk about how high up the stack? And is that was that opportunistic, or is that something that you would expect to continue on the jumbo side? So, 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.

And so as we're 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. And, look, I think, Doug, the important thing is that the team is dynamically managing the portfolio. So as you raise capital, your capital deploy, obviously, deploying it into the subordinate tranches, which is something that's more of a long-term investment in nature, but there are other tranches you can invest that are appropriate return.

That is, we're doing more securitizations if we need to recycle the capital we can do so.

Doug Harter: Great. Thank you both.

Operator: Take the next question from Jason Weaver, Jones Trading.

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

David Spector: Yeah. Look. I think that right now, we're not hearing much out of the folks in DC on anything GSE reform related. The GSEs have been active in their credit risk transfer program using the re And in terms of the returns of lender CRT, like we were able to do from 2015 to 2020, I don't see that really on the horizon. And this is what's so exciting about our non-agency securitization program is the fact that we can create very comparable investments albeit not as rapidly or not as voluminously, but we can create a similar type investment by doing these securitizations. And that's what the team has done a really great job at.

Is being able to really issue securitizations really every three weeks on a relative basis. And I think that's something that's really exciting. And so we're able to take the product that executes better outside the GSEs and be able to create comparable securitizations. Now, obviously, it allows us also to get expertise and real muscle memory if we need to do more. And so if we want to issue more if there's other agency-eligible product, that executes better outside, the GSE, that's where PMT is in a really advantageous state in the fact that really got this credit investment thesis that can continue to grow credit investments at mid-teen returns.

And that's something that we want to continue to focus on. We have very good exposure to MSRs and their low rate MSRs with a range of outcomes are much more limited than current low rate MSRs. And so if you can find those with the existing PRT 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: Gotcha. And just to refresh, on the three sorry. Was it three securitizations you've done so far this quarter, what sort of execution levels were you getting on your triple A's, and what sort of advance rates?

David Spector: You know, I don't want to speak out of school. We're getting you know, spreads are leaning into their types. I mean, we had a really volatile period at the beginning of the quarter. But things, you know, quickly snapped back. And so, you know, I don't want to be out of school. We'll definitely get back to you with more detailed reporting on the embedded leverage and I think suffice it to say, it beats agency execution by a material amount.

And I think that's, you know, that was the goal of FHFA and the GSEs was to drive out some of the more non-owner occupied and second homes into the private label markets, and it's done a really nice job revitalizing the private label market. I mean, 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 to $80 billion pace this year. And so it's really the most active, robust private label securitization market I've seen in our eighteen plus years here at the company.

Jason Weaver: That's helpful. Thank you, gentlemen.

David Spector: Thank you.

Operator: Next up is Bose George from KBW.

Bose George: 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 last quarter?

David Spector: Sure. Well, 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 addition in terms of the equity allocated to the non-agency senior and IOMBS. And so that's really the retention of those interests from the securitization side. That we're expecting over the next twelve 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 really, volumes and margins and the margin activity that we've seen coming into the third quarter, which we expect to persist over the next few quarters. Additionally, driving up the helping to drive up the overall run rate is additional investments in the non-agency subordinate piece, which also has returns, which help pull up the rest of the overall forecast and a greater allocation there.

Bose George: Okay. So as you retain more sub pieces from the securitization, the NII from that is flowing through the rate-sensitive line.

David Spector: It's both. So both the we're retaining seniors or senior mezz pieces, it would flow through the net interest rate sensitive. For every securitization, our non-agency subordinate MBS. And that flows through the credit sensitive. And both of those are having contributions to the run rate.

Bose George: Okay. Great. Thank you.

Operator: Our next question is from Crispin Love, Piper Sandler.

Crispin Love: 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. And you did mention some ways how you could see that level improve further in the coming quarters. But curious on you and the Board's comfortability with the dividend today.

David Spector: Yeah. Thanks, Crispin. We continue to be comfortable with the 40-cent dividend level. When we look at the potential for returns as we're moving out through the next four quarters at the 38-cent level, which as you noted, improved from 35 cents really, we think has the potential to further increase up towards 40 cents. You look at our history, you know, we do place a value in the stability of the dividend and especially with the trajectory and proximity of the run rate currently to the expected dividend, we are comfortable with our position at the 40-cent level currently.

In addition to that, as we look at our taxable and the taxable income being generated from our strategies, it continues to move towards that 40-cent level as well, and be supportive of the 40-cent level. And so our expectation is that taxable income level will also be maintained, and as we add additional investments into our 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 40¢ dividend level.

Crispin Love: Great. And then are you able to provide an update on book value in July to date?

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

Crispin Love: Great. Thank you. Appreciate you taking my questions.

David Spector: Thank you.

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

Eric Hagen: Thank you, guys. Feels like a lot of attention, a lot more of a concerted effort around finally making reforms to title insurance. Got 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 refi at some point?

David Spector: I don't. I think that it's gonna help on the purchase side, obviously. But 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 drag down the cost is a good thing. It's about $400 a loan. But I think that I'm not expecting to really accelerate the prepayment speeds on the low interest rate homes.

Eric Hagen: Gotcha. Thank you, guys.

David Spector: Thank you.

Operator: And everyone, at this time, there are no further questions. I would like to turn the conference back to David Spector for closing remarks.

David Spector: Well, thank you, operator, and 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 and reach out to Isaac and the team. Again, thank you for the time, and I look forward to speaking to all of you in the future.

Operator: And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. We do encourage investors with additional questions to contact our Investor Relations team by email or phone. Thank you.

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