PennyMac Mortgage Funding Belief (NYSE:PMT) Q3 2022 Outcomes Convention Name October 27, 2022 5:00 PM ET
Firm Members
Isaac Backyard – Investor Relations
David Spector – Chairman and Chief Govt Officer
Vandy Fartaj – Senior Managing Director and Chief Funding Officer
Dan Perotti – Senior Managing Director and Chief Monetary Officer
Convention Name Members
Isaac Backyard
Good afternoon and welcome to the Third Quarter Earnings Dialogue for PennyMac Mortgage Funding Belief.
The slides that accompany this dialogue can be found on PennyMac Mortgage Funding Belief’s web site at www.pennymac-reit.com.
Earlier than we start, let me remind you that our dialogue accommodates forward-looking statements which are topic to the dangers recognized on Slide 2 that might trigger our precise outcomes to vary materially.
Now I would prefer to introduce David Spector, PMT’s Chairman and Chief Govt Officer, who will focus on the Firm’s third quarter 2022 outcomes.
David Spector
Thanks, Isaac. In what was a difficult marketplace for most mortgage REITs within the third quarter, PMT reported web earnings of $1.5 million or $0.01 per frequent share. Sturdy efficiency from PMT’s curiosity rate-sensitive methods and general earnings, excluding market-driven honest worth modifications, was enough to offset the affect of continued credit score unfold widening and an elevated provision for tax expense. PMT paid a standard dividend of $0.47 per share. E-book worth per share decreased to $16.18 from $16.59 on the finish of the prior quarter.
Dan Perotti, Senior Managing Director and Chief Monetary Officer, will evaluation extra particulars of PMT’s monetary efficiency afterward on this dialogue.
Throughout the quarter, we repurchased 1 million shares of PMT’s frequent inventory for $13 million at a median value of $13.66, considerably under present ebook worth per share. And thru October 26, we repurchased a further 1.1 million shares for an approximate value of $13 million at $11.74 per share. PMT’s Board of Trustees additionally not too long ago permitted a rise to its share repurchase authorization from $400 million to $500 million.
One among PMT’s biggest strengths is its skill to organically generate investments by means of our high-quality mortgage manufacturing sourced from correspondent sellers throughout the nation. This quarter, $10 billion in UPB of typical correspondent manufacturing led to the creation of $178 million in high-quality mortgage servicing rights. With mortgage rates of interest presently round 7%, the latest third-party forecasts for originations have decreased meaningfully, indicating an annualized run fee of $1.7 trillion to $1.9 trillion in upcoming quarters.
We imagine mortgage REITs with diversified funding portfolios, environment friendly value constructions and robust threat administration practices akin to PMT are finest positioned to handle by means of the volatility offered by the present market. And with robust fundamentals underlying PMT’s funding portfolio, we stay optimistic for PMT’s long-term return potential. Though returns in PMT’s credit-sensitive methods have been impacted in latest intervals by wider market credit score spreads, our lender threat share investments encompass seasoned loans, with a weighted common present loan-to-value of 62%, benefiting from the robust residence value appreciation we’ve seen lately.
With delinquency charges at pre-COVID ranges and robust present unemployment knowledge, latest realized losses on our CRT investments have been restricted. In our curiosity rate-sensitive methods, the volatility of MSR values has declined as prepayment speeds have fallen considerably, and with greater short-term charges, we count on an elevated contribution from earnings on custodial balances and deposits within the coming quarters. Over the long run, we imagine the underlying efficiency of PMT’s MSR portfolio shall be robust, supported by PFSI’s industry-leading servicing capabilities, workflows and proprietary expertise.
Turning to correspondent manufacturing. Although we count on volumes to say no in future quarters given the lowered forecasts for originations, our clients are more and more promoting loans, servicing launched to secure capital companions like PennyMac as they search to handle profitability and improve liquidity. With a powerful capital base and constant dedication to the channel, we imagine PMT is nicely positioned to proceed main as we offer our companions the steadiness and help they should efficiently navigate the present difficult mortgage market.
Now I would like to show the decision over to Vandy Fartaj, Senior Managing Director and Chief Funding Officer, who will speak concerning the outlook for PMT and its third quarter funding efficiency.
Vandy Fartaj
Thanks, David. Let’s start by speaking concerning the outlook for capital deployment at PMT. In latest intervals, fairness allotted to PMT’s credit-sensitive methods has decreased meaningfully on account of runoff of our lender threat share investments and the honest worth declines which have resulted from market credit score unfold widening. Although the way forward for new lender threat share transactions stays unsure, wider credit score spreads have created funding alternatives in GSE CRT with enticing anticipated returns.
Yr-to-date, PMT has invested roughly $185 million in floating-rate CRT bonds not too long ago issued by Fannie Mae and Freddie Mac. And we’ll proceed to deploy capital into the asset class opportunistically. On the identical time, fairness allotted to the curiosity rate-sensitive methods has elevated meaningfully given new investments in MSR and the honest worth good points which have resulted from considerably greater rates of interest.
Whereas PMT will proceed investing in MSR, we’ll accomplish that at a extra measured tempo as market volumes decline and as we glance to extra successfully handle capital allocation between curiosity rate-sensitive and credit-sensitive belongings. To that impact, for the fourth quarter, PMT will promote sure of its typical loans to PFSI for a sourcing payment much like the federal government loans it acquires by means of its correspondent manufacturing enterprise.
As David talked about, PMT’s Board of Trustees not too long ago permitted a rise to its share repurchase authorization from $400 million to $500 million. And we count on to stay lively deploying capital to purchase again shares, so long as PMT’s share value is nicely under ebook worth per share.
Let’s now check out our potential returns throughout the funding portfolio. On Slide 7 of our third quarter earnings presentation, we illustrate the run fee potential from PMT’s funding methods, which represents the typical annualized return and quarterly earnings potential that PMT expects over the following 4 quarters. In whole, we count on the quarterly run fee for PMT’s methods to common $0.41 per share or a ten% annualized return on frequent fairness. This run fee potential displays efficiency expectations within the present mortgage market.
In our credit-sensitive methods, the potential return from PMT’s organically created CRT investments elevated from final quarter, reflecting credit score spreads that continued to widen. Within the curiosity rate-sensitive methods, we count on barely decrease returns on account of greater financing prices and diminished recapture advantages. In correspondent manufacturing, the projected returns have elevated on account of an anticipated improve within the proportion of higher-margin supply strategies.
This evaluation excludes potential contributions from extra opportunistic investments and alternatives beneath exploration akin to new investments in PMT’s organically created GSE CRT or the introduction of recent merchandise. Going ahead, the dividend stage shall be pushed primarily by projections of PMT’s earnings potential and taxable earnings, with a bias in the direction of dividend stability.
Now let’s focus on the drivers of third quarter leads to our correspondent manufacturing section. Whole correspondent mortgage acquisition quantity was $22.4 billion within the third quarter. 46% or $10.2 billion had been typical loans and 54% or $12.2 billion had been authorities loans. Buy quantity was 90% of whole acquisitions, up from 82% final quarter.
Standard lock quantity within the third quarter was $10.6 billion, down barely from the prior quarter. PMT’s correspondent manufacturing section pretax earnings as a share of rate of interest lock commitments was 6 foundation factors, down from 9 foundation factors within the prior quarter. And the weighted common achievement payment fee was 18 foundation factors, down from 20 foundation factors within the prior quarter. Acquisition volumes in October are estimated to be $7.5 billion and locks are estimated to be $8 billion.
PMT’s curiosity rate-sensitive methods encompass our investments in MSRs sourced from our correspondent manufacturing and investments in Company MBS, non-Company senior MBS and rate of interest derivatives with offsetting rate of interest publicity. The honest worth of PMT’s MSR investments on the finish of the third quarter was $3.9 billion, up from $3.7 billion on the finish of the prior quarter. The rise displays each newly originated MSRs ensuing from typical manufacturing volumes and honest worth good points. The UPB of loans underlying PMT’s MSR investments additionally continued to develop as new manufacturing greater than offset runoff from prepayments.
Now I want to focus on PMT’s credit-sensitive methods, which primarily encompass investments in organically created CRT from PMT’s manufacturing, investments in non-agency subordinate bonds from non-public label securitization of PMT’s manufacturing and opportunistic investments in GSE CRT. The full UPB of loans underlying PMT’s organically created CRT investments as of September 30 was $25.3 billion, down 4% from June 30. The honest worth of our organically created CRT investments on the finish of the quarter was $1.2 billion, down from $1.3 billion at June 30 on account of honest worth decreases that resulted from market unfold widening and prepayments.
The outlook for our present investments in organically created CRT stays favorable, as David talked about, with a present weighted common loan-to-value ratio of 62%. The 60-plus-day delinquency fee underlying these organically created GSE CRT investments continued to enhance and declined to 1.14% at September 30 from 1.31% at June 30. PMT additionally bought $59 million in floating-rate CRT bonds not too long ago issued by Fannie Mae and Freddie Mac through the quarter. We are going to proceed to judge investments throughout the mortgage panorama and be prudent within the deployment of capital given present market situations.
Now I want to flip the decision over to Dan, who will evaluation our quarterly monetary outcomes.
Dan Perotti
Thanks, Vandy. PMT reviews outcomes by means of 4 segments: credit-sensitive methods, which contributed $3.7 million in pretax loss; curiosity rate-sensitive methods, which contributed $103.5 million in pretax earnings; correspondent manufacturing, which contributed $6.1 million in pretax earnings; and the company section, which had a pretax lack of $15.5 million.
The losses on PMT’s organically created CRT investments this quarter totaled $1.4 million. This quantity included $14.2 million in market-driven honest worth losses, reflecting the affect of wider credit score spreads. Losses on PMT’s organically created CRT investments additionally included $18.8 million in realized good points and carry, $0.2 million of web realized losses acknowledged through the interval, $7 million in curiosity earnings on money deposits and $12.7 million of financing bills.
PMT’s curiosity rate-sensitive methods contributed earnings of $103.5 million within the quarter. MSR honest worth elevated $163 million through the quarter, pushed by greater mortgage charges, leading to expectations for decrease prepayment exercise sooner or later. These honest worth good points mixed with comparable efficiency from the rate of interest hedges held in PMT’s taxable REIT subsidiary, leading to a provision for tax expense of $78 million. The online honest worth of Company MBS and rate of interest hedges declined by $100 million, primarily pushed by greater rates of interest.
PMT’s correspondent manufacturing section contributed $6.1 million of pretax earnings for the quarter. PMT’s company section contains curiosity earnings from money and short-term investments, administration charges and company bills. The section’s contribution for the quarter was a pretax lack of $15.5 million.
Excluding market-driven worth modifications and the associated tax affect, PMT reported $46.5 million of web earnings throughout its methods.
Now we have maintained robust financing constructions associated to our CRT investments. Our first three CRT transactions, representing 7% of those whole honest worth, are presently financed by securities repurchase agreements, whereas the rest or 93% of the full honest worth is presently financed by secured time period notes. Importantly, these time period notes collateralized by our CRT transactions don’t comprise mark-to-market or margin name provisions. This has served us terribly nicely, as we aren’t obligated to submit collateral for almost all of our CRT investments if honest values decline.
The maturity of our CRT time period notes initially due this month had been prolonged by two years to October 2024. All different CRT time period notes comprise the choice to increase the maturity for 2 years at PMT’s discretion, besides $233 million of notes due in December of this yr. According to our long-standing threat and liquidity administration disciplines, we’ve ample reserves to settle these time period notes. And it’s presently our expectation to finance the underlying investments using securities repurchase agreements whereas sustaining reserves for potential margin calls.
Lastly, although not carried out till September of 2023, I would prefer to briefly converse concerning the new eligibility requirements not too long ago launched by the FHFA. Eligibility necessities are assessed at PennyMac Corp. or PMC, an entirely owned subsidiary of PennyMac Mortgage Funding Belief. As you possibly can see on Slide 14 of our presentation, on a professional forma foundation, PMC is in extra of all potential capital liquidity and leverage necessities not too long ago launched.
And with that, I am going to flip the dialogue again over to David for some closing remarks.
David Spector
Thanks, Dan. PMT delivered web earnings in what was a difficult atmosphere within the third quarter. I stay assured within the skill of this seasoned and skilled administration staff to navigate efficiently by means of this evolving mortgage atmosphere and that PMT will present enticing risk-adjusted returns for its shareholders over the long run.
We encourage buyers with any questions to succeed in out to our investor relations staff by e-mail or telephone.
Thanks.
Query-and-Reply Session
Operator
This concludes PennyMac Mortgage Funding Belief’s third quarter earnings dialogue. For any questions, please go to our web site at www.pennymac-reit.com or name our investor relations division at (818) 224-7028. Thanks.
