PennyMac Mortgage Investment Trust (NYSE: PMT) has demonstrated its ability to adapt and thrive in the dynamic mortgage market, leveraging its diversified investment strategies and strong industry partnerships to deliver consistent performance. With a focus on credit-sensitive and interest rate-sensitive assets, PMT has navigated the recent market volatility with resilience, showcasing the strength of its business model.

Financials

In the latest quarter, PMT reported net income to common shareholders of $15 million, or $0.17 per diluted common share. The company's annualized return on common equity was 4%, and book value per share stood at $15.89 as of June 30, 2023. For the full year 2023, PMT reported annual net income of $199.7 million, annual revenue of $1.46 billion, annual operating cash flow of $1.34 billion, and annual free cash flow of $1.33 billion.

Credit-Sensitive Strategies

The company's credit-sensitive strategies contributed $16 million in pretax income during the second quarter, including $11 million from its organically created credit risk transfer (CRT) investments. The outlook for these CRT investments remains favorable, with a low underlying current weighted average loan-to-value ratio of below 50% and a 60-day delinquency rate of 1.11% as of June 30, 2023.

Interest Rate-Sensitive Strategies

PMT's interest rate-sensitive strategies, led by its mortgage servicing rights (MSR) portfolio, contributed $17 million of pretax income. The fair value of the company's MSR investment increased by $46 million due to slightly higher mortgage rates at the quarter-end. However, these fair value gains were more than offset by changes in the fair value of mortgage-backed securities (MBS), interest rate hedges, and related income tax effects during the quarter.

Correspondent Production

In the Correspondent Production segment, pretax income was down slightly from the previous quarter as lower margins offset the impact of higher volumes. Profitability in this segment has benefited from the release of reserves related to representations and warranties provided at the time of securitization, as the high volumes of loans produced from 2020 to 2022 passed the three-year window for violations with minimal repurchase-related losses. The company expects a contribution from the release of these reserves to decline to more normalized levels over the next several quarters.

Total correspondent loan acquisition volume was $23 billion in the second quarter, up 24% from the prior quarter, driven by an increase in the size of the mortgage origination market. Conventional loans acquired for PMT's accounts totaled $2.2 billion, up 26% from the prior quarter. In the third quarter, the company expects to retain a higher percentage of total conventional correspondent production, increasing from 18% in the second quarter to 30% to 50%.

Liquidity

PMT's capital position remains strong, with the company fully reserved for the repayment of the $210 million in exchangeable senior notes due in October 2024. In the second quarter, the company issued $217 million of new 5-year exchangeable senior notes with a coupon of 8.5% and $355 million in 5.5-year Fannie Mae MSR term notes at SOFR plus 275 basis points. After the quarter-end, PMT redeemed $305 million of similar term notes due in 2027 with a coupon of SOFR plus 419 basis points. These successful financing activities further solidify the company's capital position and illustrate its deep access to capital and liquidity across various types of transactions and investors.

Outlook

Looking ahead, PMT is well-positioned to capitalize on the evolving mortgage landscape. The company's management team sees opportunities in the private label securitization market, particularly in the investor and second-home loan segments, where PMT can leverage its synergistic relationship with its affiliate, PennyMac Financial Services, Inc. (PFSI), to create and retain investments that meet the company's return targets.

Additionally, PMT's increased retention of conventional correspondent production is expected to drive growth in its MSR portfolio, a key driver of the company's interest rate-sensitive strategies. The company's access to PFSI's origination platform and its ability to securitize and retain subordinate tranches of certain loan types further enhance PMT's investment opportunities.

Conclusion

The company's diversified investment strategies, strong industry partnerships, and prudent capital management have positioned PMT to navigate the current market environment and capitalize on emerging opportunities. As the mortgage industry continues to evolve, PMT remains committed to delivering consistent performance and value to its shareholders.