Q3 2019 Earnings Call
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Caliber.
As these fires are concerned.
I read one third quarter market historic time for us.
Well, we made significant progress positioning the company in the future housing finance.
Looking back a few years ago.
He has a new strategy to leverage or housing credit competencies across the broad and evolving residential landscape.
As until not only the expansion of our consumer mortgage business, but also a commitment offering similar solutions for housing investors purchase residential real estate for business and go.
Since that time, we've demonstrated the skills and operations necessary to grow in this market.
They can tangible steps towards building a best in class, especially American ads platform.
Serves the liquidity needs of all homebuyers homeowners and investors alike.
Our expansion into the business purpose lighting space began organically so quickly evolved into a partnership with our five arches team in Irvine.
When opportunities we have seen through five arches validated the thesis underpinning our new strategy.
That is the rate at new home building in the United States is not keeping up with the pace of new household formation.
With our conviction strengthened we further solidified business purpose lending as a core strategy at Redwood I recently announcing a second new partner in core best.
To recap our announcement from a few weeks ago.
Our best as an industry, leading BPL originator with over 900 million of total assets at a profitable operating platform.
And extremely talented team to redwoods, the chair as our values of working with integrity and fostering deeper relationships with their customers and business partners.
Since their inception in 2014 corvettes is funded over 4 billion in loans, while developing industry with industry, leading technology that offers a seamless borrower experience.
Platform has generated attractive returns to date.
It's highly scalable mortgage banking business significantly contributing to the company's profitability.
I'm also recently completed its nine securitization of single family rental loans since it began issuing in 2015 more such transactions than any other issuers.
During this channel with our own market, leading Sequoia program further extends our lead into private label securitization market.
It also strengthens our position as a leading lender in a market who size, we estimate to be an excess of 100 billion.
Cash and column will provide more details about the near and long term benefits of this acquisition through property platform investment portfolio and their prepared remarks.
Moving on to this quarter's results.
non-GAAP core earnings of 37 cents per share continued to comfortably cover our quarterly dividend of 30 cents per share represented a two cents decline from the second quarter.
GAAP net income of 31 Centsper share was up slightly from the second quarter of our GAAP book value at September Thirtyth declined about half a percentage points from prior quarter.
Obviously, we spent ample time and third quarter focused on the core vest acquisition.
Long term funding needs and our portfolio optimization optimization goals and some of these priorities contributed to a softening of our near term results.
In particular, our GAAP results included 1.7 million of onetime charges associated with our acquisition of core best and not we excluded from our non-GAAP core earnings.
From an operating perspective, the third quarter demonstrated our ability to leverage and strength of our business model to navigate through continued market volatility, particularly with respect to interest rates low interest rates and faster prepayment speeds resulted in strong third quarter mortgage banking volumes, although both hedging and securitization execution we're challenging.
As margin softened due to investors uncertainty about prepays going forward.
Additionally, faster prepayment speeds negatively impacted portfolio investments, we hold at a premium resulting in a temporary reduction in our non-GAAP core economic net interest income line item.
Offsetting these effects was an improvement in the fair values for most of our subordinated investments as a result of structural de leveraging from prepayments. Additionally, mortgage banking margins for both securitization that whole loan executions improved later in the third quarter and into the fourth quarter as on the run lower coupon collateral and made its way through the system.
Both the backup in rates and the read by way of subsiding, a beds to help investors appetites for AAA rated RMBS considerably.
We ended up completing three profitable claim securitizations during the third quarter, including our 100 overall and continue to plan our normal course of deals in the fourth quarter and into 2020.
Overall demand for residential mortgage credit has continued to strengthen throughout 2019 and drive asset prices higher for credit securities.
Continue to take advantage by rotating out of non strategic investments, where our return expectations have been fully realize.
Substantial portfolio optimization and the core best acquisition now complete we've increased our investment portfolio sustainable earnings power going forward, we expect economic net interest income to grow meaningfully beginning with the fourth quarter 2019.
I think I'll have a lot to more to say in our full operating results and optimization efforts, so I'd like to transition back to our core consumer residential business.
Air remain committed to growing our expanded credit nonqualified residential mortgage loan products, leveraging our approach to credit speed to close and reliable execution, we delivered to our loan sellers third quarter marked a record quarter for Redwood choice purchases on strong quarter over quarter growth, we're very excited about the trajectory.
Non QM space, given housing finance reform initiatives by regulators over the course of this year.
Recently, the CFPB announcing in late July that they intend to let the so called QM patch expire.
As we laid out in a presentation, we published in May UQM patches their regulatory driven competitive advantage afforded to the public mortgage mortgage sector that resulted in an on level playing field for non QM mortgage lending.
We estimate the patch exploration will level, the playing field for upwards of 185 billion of non QM loans produced annually by Fannie Mae Freddie Mac.
Contextualize this opportunity we purchased about 7 billion total residential loans in 2018, and successful and profitable year for our consumer mortgage banking business.
The success of our operating business has been directly complemented by the great work done within our investment portfolio.
Portfolio team continues to deploy capital at a record pace leveraging unique and durable relationships forged over several years key differentiator for Redwood has always been our ability to source and structure investments our competitors cannot easily duplicate.
Our collective suite of businesses mix that true than ever before that over 672 million of capital deployed through October thirtyth after including our acquisition of the core best investment portfolio.
As we grow our mortgage banking platforms, our portfolio activities and efficiency of our corporate functions will be key to profitably scaling our consolidated business maximizing the growth of earnings per share.
As we look ahead.
I did orient oriented strategies, such as ours are in high demand as the yield curve flattens and investors seek alternative ways to source real estate related assets.
Product sourcing capabilities in operating know how required to succeed however remain and scarce supply.
Our company possesses a unique ability to bridge the gap between the customize needs of non agency borrowers are BPL non QM traditional jumbo and the liquidity options available to them in the marketplace.
Already making the necessary investments in technology and infrastructure further automate or loan purchase process in anticipation of these opportunities.
With an eye towards integrating our consumer mortgage and BPL businesses over time cross our national correspondent network, our vision of becoming the preeminent and most profitable specialty finance operate in the mortgage industry can be realized.
And with that I'll hand, the call off to dash.
Thank you, Chris and good afternoon, everyone.
Before I touch on results for the third quarter I want to share more about our recent acquisition of core vest.
As a refresher our investment of $492 million completed earlier. This month included corvettes origination platform with an ascribe value of $130 million and over $900 million of related financial assets along with in place financing.
Corvette balance sheet is principally comprised of subordinate securities retained from the company's single family rental Securitizations.
So far loans held in pipeline slated for inclusion in upcoming Securitizations and short term bridge loans made to investors seeking to stabilize or sell their portfolios.
As Chris mentioned life to date, the platform has funded over $4 billion of loans, including $1.1 billion year to date through September Thirtyth.
Almost 70% of core best 2019 originations are comprised of single family rental loans volume that is fed by both organic borrower cultivation and natural lead generation through the bridge lending book.
As Chris noted the acquisition of core vast reflects our strong believes that this area of housing credit offer substantial opportunity for growth and accretive returns for our shareholders, which we estimate to be in the range of 15 to 20 cents annually on a per share basis over the course of the next 12 to 15 months.
Our forecasted earnings accretion as a function of projected returns on the acquired financial assets.
Forecasted operating income of the origination platform and flow of additional portfolio investments created to go forward originations.
Importantly, this forecast that accretion does not fully encapsulate the acquisition strategic rationale.
An overlap in our competencies, most notably reliability and speed to close for clients and season securitization platforms.
Is complemented by competitive advantages that we believe can bring unique value to core vest business.
These include our extensive mortgage banking network potentially fertile ground through which to expand product distribution at a compelling cost of debt and equity capital.
These are differentiators that we believe will drive additional value overtime.
In addition to strategic fit diversity and sustainability of revenue streams is important to emphasize in describing the value of the core best acquisition and of our business purpose lending efforts overall.
The expanded direct origination capability, we now possess can create both long term investments for our portfolio at attractive returns and a growing stream of fees and gain on sale from origination and securitization activities.
We intend to hold the core best bridge loans and subordinate SFR securities for investment in our portfolio and expect to generate at 12% to 15% return on equity on these investments taking into account associated in place financing.
Post acquisition over 15% of our investment portfolio is now allocated to BPL loans and securities a concentration that we expect will continue to grow organically overtime.
These expected returns on the financial assets do not include operating income generated by corvettes origination activities, which include loan origination fees and gain on sale net of operating expenses.
The near term, we expect to generate a low to mid teens core after tax return on capital allocated to the operating platform inclusive inclusive of both platform premium and working capital.
Forecast returns on working capital in isolation, a pure reflection over time of the businesses operating profitability.
Substantially higher and a strong complement to our residential mortgage banking revenues.
We believe having boasts the core vast and five arches platforms under the Redwood umbrella positions us to scale profitably in what we view as a deep and growing marketplace.
As we discussed on our call announcing the core best acquisition. The two platforms will not compete.
Assessing corvettes business model was five arches already part of the Redwood family, we were intrigued by the distinct get complimentary ways in which the two platforms approach the marketplace.
The reason, we find the BPL space compelling is what we believed to be a vast untapped cohort of housing investors. This financing needs are not being efficiently Matt.
Many of these investors likely remain unaware that lending products are available to help them meet their financial objectives, whether it be in single family rental built around.
For bridge and term lending and single family of small balance multifamily.
While there was some overlap in approach the platforms. These unique means to access the market and develop fresh bar relationships.
This is evidenced by the relatively low incidence of bar overlap we observed between their respective books of business.
This is in part a testament to the depth of the market overall, especially given the maturity and size of each platform.
We are excited to move forward and begin realizing on a cumulative origination power of our business purpose lending platform.
Turning to our third quarter results the lower rates, we saw in the first half of the year generally persisted throughout third quarter, helping maintain residential loan purchase volume levels in our mortgage banking business, which totaled $1.5 billion.
During the quarter, we completed one select securitization of $376 million and two choice securitizations totaling $727 million and sold $470 million of whole loans to third parties.
The mix of selecting choice load lock volumes shifted meaningfully and third quarter choice purchase volumes were up 37%.
As Chris noted the third quarter was a record one for purchases of choice lives.
The third quarter represented our second full quarter of ownership of five arches.
We have made meaningful progress on our integration efforts and have begun to see improved profitability across the operating platform and strong returns generated from assets held at our investment portfolio.
Overall BPL originations for the third quarter totaled $162 million, a small decline from the second quarter, driven largely by fundings for a number of loans pushing into early October .
We anticipate improved run rates for the fourth quarter and five arches has already already originated an additional $140 million of loans in October .
We remain pleased with the attractive risk adjusted returns the five arches platform has contributed to our business and we see more opportunities to unlock value across the portfolio and the platform.
Through the end of the third quarter, we've deployed $68 million of capital into over $200 million of bridge loans originated by five arches generating core returns on capital of approximately 11% for our investment portfolio.
Optimizing this capital for our currently available financing terms, we estimate levered returns to increased to 12% to 15% overtime.
Additionally, we have begun financing five arches originated SFR loans, using our FHLB financing facility.
With an estimated return of 12% to 13%.
Our access to this low cost financing is an example of one of our key competitive advantages and ability to increase long term returns through optimizing how we use in place financing capacity.
Turning to our investment portfolio capital deployment activity increase from the second quarter as we continued to execute on unique third party investment opportunities combined with an increase on organically sourced investments.
Specifically, our $152 million of deployment included $61 million towards our second investment in Freddie Mac issued subordinate securities backed by re performing loans or Rpls.
An additional $21 million allocation to loans originated by five arches and $21 million into securities from our three Sequoia transactions.
Investments in Freddie Mac issued RPL Securities now comprised 11% of our total capital allocation and have represented a key strategic opportunity for our portfolio over the past several quarters.
Beginning in late 2016.
As a complement to selling nonperforming loans off of their balance sheet, Freddie Mac initiated securitization programs transferring credit risk on season single family mortgage loans.
It was underlying terms have been modified from though that origination.
The new structures Freddie Mac has typically retained risk on the senior portion of the capital structure through either security ownership or credit guarantee and has syndicated to subordinate securities to the private market.
The structure provides important note holders and attractive senior financing rate locked in for 10 years in contrast to alternative transactions in the marketplace in which financing rate step up after three to five years.
Central to the investment thesis in these securities is the view that borrowers will cure or any persistent delinquency history and continue paying steadily under the modified terms of their loan.
This improvement in performance can sometimes be linked to the assumption of servicing duties by a high touch servicer that specializes in working with borrowers to keep them correct.
Our estimated base case returns on these securities, which represent more than 20% of the transaction capital structure range between 10% to 13% on a loss adjusted basis.
Inclusive of the effects of leverage applied to the mezzanine charges.
The performance of our first Freddie RPL transaction continues to trend favorably as delinquencies typically representing borrowers that are one to two payments behind.
Have declined from 50% to 33% and less than one year. This decline in delinquencies has to date exceeded our originally modeled expectations.
Our capital raising activity in the third quarter was elevated given several opportunities we saw in the market.
We organically generated investable capital through continued portfolio optimization activities, which included sales of securities and a strategic new financing transaction, which netted a combined $248 million of capital for redeployment and in the process captured $25 million of realized gains.
Security sales were focused in subordinate CRT securities many of which we sold at substantial premiums to par value and mezzanine multifamily securities.
The recent debt facility structure is recourse to redwood.
As backed by a meaningful portion of our subordinate Sequoia securities. The structure is not mark to market and has a three year maturity with an option for two one year extensions the financing carries a coupon of 4.21% for the first three years.
Now to recap our financial results I'll turn it over to call.
Thanks Dash and good afternoon, everyone.
To summarize our financial results for the third quarter. Our GAAP earnings were 31 cents per share compared with 30 cents in the second quarter and core earnings were 37 cents per share compared with 39 cents in the second quarter.
The increase in GAAP earnings in the third quarter was primarily driven by an increased benefit investment fair value changes from spread tightening in our securities portfolio during the quarter.
Core earnings per share decreased in the third quarter, primarily due to lower mortgage banking results and economic net interest income, which are both negatively impacted by rate volatility.
These decreases were partially offset by higher realized gains.
Well elevated portfolio optimization activity benefited gains during the quarter growth and economic net interest income was dampened due to higher average balance of Undeployed capital as we positioned ourselves for the acquisition of corvette and continue to be selective and redeploying capital due to the overall credit spread environment.
Further economic net interest income continued to be impacted by rate volatility during the quarter, which resulted in increased hedging costs and higher prepayments.
Well faster prepayments helped improve fair values of our subordinate investments it negatively impacted portfolio investments held at a premium.
Our GAAP book value decreased during the third quarter to $15.92 per share, which along with our dividend contributed to 1.3% economic return for the quarter.
While GAAP earnings exceeded our dividend during the quarter book value decreased primarily due to an 11 cents per share decline in the value through it is hedging our long term debt, which were impacted by the decline in benchmark interest rates during the third quarter.
Additionally, while GAAP earnings benefited overall from spread tightening on our subordinate credit Securities. This benefit was partially offset by the negative impact of valuations from faster prepayments on our assets held at a premium, particularly our jumbo residential loans financed that the FHLB and our Io securities.
Turning to the balance sheet, our capital position, we ended the quarter with approximately $590 million available capital exclusive of the mouse set aside to repair upcoming exchangeable debt maturity.
This was a significant increase from the second quarter, primarily due to an increase in capital raising activities, which outpaced the capital we deployed during the quarter.
During the quarter, we issued $220 million common stock and free up $118 million of capital from sales of lower yielding securities and 130 million from the new long term secure financing facility that dash discussed.
Subsequent to quarter in our acquisition of corvette utilized approximately $490 million capital and after other optimization deployment activity. During the month, we estimate our current available capital to be approximately 100 million.
Looking forward through the ended the year, we expect to continue portfolio optimization activity to free up capital from new investment opportunities, including new BPL assets created by our expanded platform.
And while we believe this will be sufficient to fund our near term capital needs as usual, we'll evaluate the need for incremental capital in terms of what is the best interest for our shareholders.
In addition to our capital raising activities. We also issued 201 million of six year five in three quarter percent exchangeable debt, which is excluded from our available capital and will replace our current outstanding 201 million, 5.6% to 5% exchangeable notes due in November .
Looking at our capital structure Holistically, our recourse debt to equity leverage ratio was 2.7 times at the end of the third quarter.
Decrease from the second quarter is driven by our capital raising activities and the timing of capital deployment.
In the fourth quarter after deployment of capital, including for the corvettes acquisition, we expect our leverage to increase to around three and a half times within our long term target range of three to four times.
Turning to our 2019 financial outlook our results for the first nine months of the year, which included strong performance for our mortgage banking operations and elevated gains from portfolio optimization activities.
But it's on track to generate returns near the high end to the overall range. We initially provided in the beginning the year.
Breaking that down further for the remainder of the year and our investment portfolio, we expect to see economic net interest income improve and realized gains to moderate and in our residential mortgage banking business. We expect gross margins to normalize within our long term expected range and for volume to remained stable.
Now lets section under review this quarter. We included some supplemental commentary around economic net interest income.
As far as well we've experienced an overall decreasing he and I over the last two quarters. We expect this trend to reverse beginning in the fourth quarter and for Eni to grow.
Taking growth to continue into 2020.
This will occur as we deploy our available capital into accretive investments, including those acquired from core best.
As recent investment begin to realize their full earnings potential and as we continue to optimize our financing on several asset types.
Additionally, we could see meaningful benefit to Eni in prepayments normalized.
Finally for business purpose mortgage banking platform with the addition of corvettes, we expect to increase our capital allocation to this business to around 10% of our total capital and for the remainder of 2019, we expect to generate a core return on equity from the combined business purpose mortgage banking platforms at 12% to 14%.
Further details on our outlook are provided in our third quarter 2019 Redwood review.
And with that ill conclude our prepared remarks, operator, please open the call for unit.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question Q.
You May proceed star to if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please why we pull for questions.
First question is from Doug Harter Credit Suisse. Please go ahead Sir.
Thanks.
Can you talk about the impact of of higher prepayments on sort of your economic return. So if you were to net.
Book value changes in.
Earnings changes kind of how higher prepays kind of flow through and in fact you.
Oh sure Doug you know, there's a few different ways and one thing. We cited was words are pretty happy with the balance in our business, obviously on the mortgage banking side volumes.
Had been elevated, especially refi volume that said, we saw some really fast Prince starting in June and July .
Particularly the 2018 vintage.
Loans and that definitely impacted.
Your decision execution in the third quarter.
You know investors as we moved into some of the lower coupon products definitely getting a lot of comfort in that execution is strengthened a lot later in the third quarter in the fourth quarter.
You also had.
The impacts on our premium investments, which we noted I think all told you know perhaps in the neighborhood of three cents a share.
Overtake.
It was probably the net impact.
But again you know if you're in this if you're in the mortgage banking business, you've got to keep the the loans moving.
So we're pleased to have gotten off to three deals that we did.
I mentioned.
We have no plans to to alter the pace of activity going forward.
Great and then I think you mentioned that kind of the the level of execution profitability.
End of improved kind of schooling yields and still close will result in I guess just talk about how October looks from sort of a normal mortgage banking profitability standpoint.
Yes, so Doug as Dash, we did complete one deal.
In October and if you compare the execution of that transaction to to what we did in the in the third quarter. The execution on the Triple A.'s improved by about three years of a point in price.
Which was a function of a couple of things of course, where rates have gone, but also the Christmas point the ability to securitize.
Collateral, whose coupon was closer to current production coupon certainly helped.
The execution on that transaction.
It was quite strong on the AAA securities and actually the tightest, we'd seen in several years so the market.
Certainly bounce back here in October certainly somewhat driven by demand, but also the normalization of rates and lower securitizing versus where mortgages are trading generally.
Great. Thank you.
Okay.
The next question Stephen Laws Raymond James. Please go ahead Sir.
Thank you good afternoon.
Colin I guess kind of following up.
On your comments I appreciate the update it sounded like pro forma available capital at the end of October was was roughly around 100 million. So can you talk about.
Maybe a little more detail on any additional lower yielding securities you guys have identified that you'll look to sell down as other investment opportunities present themselves as well as you know optimization efforts you can make on financing.
Business purpose loans in some capacity that that might be more attractive than the current warehouse facilities you have in place.
Yeah.
You know on in terms of optimization I think we've made significant amount of progress this year, but I think there's still remains a little bit of work to do there.
We still have some some CRT a investment said I think.
You know, we're looking at as potential candidates for optimization and.
Potentially some multifamily.
Meds that we're looking at so I still think heading into the fourth quarter. I mentioned that you know there is a little bit more optimization that we expect to do but I do think we have made a significant amount of progress year to date. So we do see that that optimizations voted tapering down through through the ended the year.
And in terms of financing we did again make some good progress this year, putting add this or this quarter rather putting this new.
Term loan in place a in terms of some of the financing on our.
This is purpose loans, a think there's a little bit of though.
If we expect to do there through the ended the year appetite tighten up some of the terms and expect to see some improvement and then data also mentioned some work we've been doing to get SFR loans.
The the finance over on the FHLB. So we moved a small balance of loans over before the end of the third quarter and we're looking to get added substantial majority of the remaining SFR loans that we originated.
Through five arches over and financings club or at the end of year.
So I think those are really some of them the more immediate things that debt that we're looking at over that of course the next.
Couple of months here heading into year end.
Steven its dash, one thing I would add to that and we talked a bit about this on our call a couple of weeks ago announcing the acquisition we.
As you know we inherited.
Fair amount of financing and acquiring core best.
And there are from our perspective, some near term things, we can do to sort of normalize that structure and the how we typically.
Structure, those sorts of warehouses, which we which we hope in the relative near to medium term can be more of an immediate.
Impact to the returns on financing those assets I think calling cover the waterfront really well, probably but I just wanted to reinforce that point that we mentioned a couple of weeks scope is that some secondarily be very meaningful.
The appreciate the color from both W. And thanks for that are under on that.
So go in and Dash outs I was writing down as quickly as I could but I want to circle back did you say 15 to 20 cents accretive.
On core best or was it was that a 15% to 20% our OE versus low to mid teen are are we I didn't quite catch the 15 to 20 that that you mentioned I was writing something else down.
Sure Steve No problem, Yeah, there were a fair amount of numbers percentages in the script. The accretion was was 15 to 20 cents per share.
Per annum, which is based upon assumptions about.
What we've purchased of course that assumptions around the go forward profitability and then creation power of the platform.
Versus alternative uses.
Of capital the return profiles that we've stated our in the 12% to 15% range, which are certainly a big part of driving that accretion calculation that we talked about.
Great. Thanks for clarifying that.
Last question for me here, Chris could you maybe talk higher level G.S.C. reform specifically.
Colin mentioned and dashes, well up HLB financing, but I know one.
One proposal might open that back up again.
You know allow you guys too to have maybe more access there and then secondly.
You know comments around possibly a new qualifying mortgage definition and maybe what's your what's the latest as you're hearing around.
Those issues than anything else that you'd like to highlight on potential Jesse reform.
Oh, Thank you Stephen I hope you're doing well.
There is there's obviously a lot going on the FCC actually just repeat something today requesting.
Feedback from the market.
On reggae be too this retention and some of the issues. The gating issues that have that as you know prohibited or or been an impasse for the private label sector to do more public transactions that we've been pretty active on that front, we publish some pretty.
You know meaningful content I think in August .
On ways ways to do that lessons learned from the 144, a market and so forth. So thats one thing that that is very current.
Yeah, I think on the QM patch fronts.
We have a we've had some recent statements from from the director I'm sure reaffirming the intent to allow that to expire I think the private sector needs to step up into its part we certainly plan to do ours were working.
Quite a bit internally with automation efforts and technology to try and try as best as we tend to make the transition as payments upon as possible for originators.
That said you know, we feel very strongly about a level playing field.
I like it certainly in the interest of taxpayers, we do feel like being able to compete on the same front, we'll we'll definitely move a significant amount of these loans on the wafer tax preparers into the private sector.
So we're excited about that we've also been.
Someone vocal on a risk retention and some of the issues there from a practical perspective.
One loan Oneninety alone.
In a QM securitization triggers full risk retention.
As we have advocated things such as asset specific risk retention and some other alternatives that that will.
Start to blunt this binary trigger effect when alone goes from QM to Nonqm.
We are you did provide some thoughts on the UQM definition.
And our perspective, we still believe that credit metrics matter or we don't want to move fully to the market market based metrics are definitions for UQM versus non QM I think where we've emphasized is wherever that definition lives rather its 43, d. I or 50, VTI a big challenge in the market is.
Is the drop off and wherever it occurs whether it's 43 to 40 450 to 51 or some other metric we're looking for ways to make that drop off less acute.
So there's a lot going on.
There's there's going to be some some more announcements here in the coming months, but we definitely are pressing forward and are certainly working to step up in absorbed as much of this is volume as we can.
Great.
Well between the two acquisitions this year and upcoming reform proposals certainly seems like next year will be quite an exciting year. Appreciate your are you taking my questions.
Thanks, Steve.
Next question some Steve Delaney G.M.P. Securities. Please go ahead.
Thanks, Hey, folks and look first a before questions just sending prayers.
To your fat you your families and all your communities to get safely through these fires. It's just a terrible thing and it seems to happen repeatedly so we're thinking about you.
On on core best I mean, obviously it could take us after a quarter. So you guys will you won't have to listen to assess corvettes questions, but for now we need to did you ever mentioned.
Publicly what's your head count was a core best I recall five arches was like 90 people or something but do you have a figure you can share and poor best we can get a sense for how large it platform is.
Sure it's about 100 hundred empties.
About 100 and was I correct on top of purchase it it nani or was that two <unk> I don't know why had that in my mind.
That was about the number one we.
Completed our.
Platform in March its a little over 100, now just with additions across the platform.
Okay.
Facilitate more growth so the after you count at each at each platform is actually pretty close.
Okay, Great that's helpful No.
Third quarter, you guys had consolidated operating expenses of 25 million Collin I think it was down a million from from 26, Yeah, Corbis, obviously didn't close until fourth quarter.
Back to your you know thank you for them.
The 15 to 20 cents.
But just as far as the overhead to the operation ignoring all revenues do you have a sense for on either on a quarterly or an annual basis, what core best specifically would add to the gionee load on on a quarterly basis.
Yeah, I think on a quarterly basis, we're looking at the out at five to 6 million of expenses as as probably reasonable run rate.
Okay, Great. That's very helpful. Thank you call it.
Dash in your remarks.
What I took it to mean you talked about your the loans coming at a core bets on your balance sheet, you're looking for 12% to 15% return on equity.
But did you mentioned you know without fees and gain on sales and I understand you guys are trying to run. This is like a it's part of Redwood, but it's a standalone business that you know needs to stand on its own two feet and it sounds you're leaving these origination fees and any gain on sale you know in core best to help offset expenses.
This is is that what I heard you say.
Yes, yes, the I appreciate that questions do because it brings up an important point about just a CAGR as.
We look at you know the value creation of of these platforms Holistically you know the actual operating metrics.
You know revenue less expense and the value of the of the loans and securities created you know the [noise].
Some of this is a function of just the geography of where the business is set.
Core vessel like five arch.
That operating platform is that our Trs because of assumptions that it does day today and the origination sure.
Phones, and so you know those fees and the gain on sale associated with securitizing SFR loans in the bar points associated with the rate with origination similar to five arches those geographically will be.
At the Trs and of course, the long term investments will go to the read on a more tax advantage basis, but similar to my remarks on five arches, you know with core vast we look at and measure performance Holistically as it relates to the assets created in the operating.
Metrics, you know with those those to go hand in hand, and so some of it is just split geographically based on our tax structure, frankly, but when we assess performance and and measure ourselves, it's holistic with assets and on the operating metrics together.
Okay. That's helpful and when you said you mentioned gain on sale tied to the Securitizations.
At one point I can't remember, whether it was five arches or or core best somebody was selling off their bridge, but is is it.
Current situation are you essentially retaining all production and then not selling anything off on a whole loan basis, but.
You retain it and then you choose to securitize, it or put it with FHLB or whatever is that.
Just I guess, what I'm, saying is everything that they're producing coming to redwood or you actually trying to sell some of it away.
That is predominantly the case Oh guy.
With the five archers were to the point, we're retaining essentially 100% of what that platform produces there they're a couple of exceptions, but there's no front foot effort there to sell loans with third parties with core about there's a small is a small part of their production which is.
Okay smaller balance SFR product, which to date platform has been selling.
Yeah, that's partly what I was alluding to as a product that could potentially be very logical to marry up with our mortgage banking network and so the options are sort of open to us at this point, we haven't concluded exactly yet the right outcome air we could certainly keep them and securitize them along with a more regular way SFR loans, but for the for the most part of the intention.
Is to retain though is always like we've talked up for some of the mortgage banking, it's important to keep the muscle memory open you know to be able to sell these loans to counterparties, depending on risk return, where the markets pricing risk et cetera.
Okay well. Thank you. Thank you all for your comments and I look forward to senior in a couple of weeks.
You too thanks.
We have a question from Bose George KBW. Please go ahead Sir.
Yes, good afternoon.
Just going back to your 2019 guidance. If you did you narrow that down to a core are are we range or was it really just on the line items I can't remember.
Yeah, I mean, we've typically expressed that our guidance in terms of components, where we allocate our capital between.
The businesses and so that's the format in which we've laid it out and that's what we updated things.
Relative to in the fourth quarter. So we broke that down between our investment portfolio, our residential mortgage banking business and then we gave an update on the business purpose a component of mortgage banking inclusive of core best and so that's what we've laid out in the Redwood review.
And then next so it was I was trying to think that 15 to 20 cents accretion eat it should we think of that really on top of the core earnings number that you guys and up within 2019 and did 15 to 20 cents over that is that kind of the right way to think about it.
Yeah going forward, Yeah, we offer EPS guidance as a firm in the past and Havent. The past few years, but we felt like since we just completed this acquisition, we felt like we needed to do something more holistic and so I think you know will will.
Think about how to incorporate you know that guidance into next quarter's review, where we refresh our annual guidance, but for now that's that's sort of in addition to what we've come in the morning.
Okay. Thanks, and then in terms of the dividend you guys had talked in the past it but increasing the dividend closer to core earnings up beyond just curious now you have obviously more earnings that the Trs through the acquisition.
Just updated thoughts on you know how do you view that.
Yeah, I mean, what we're trying to do and what we spent a little bit more time. This quarter are talking about economic net interest income.
Because we put a lot of a puzzle pieces together, we think to drive that that those durable sustainable cash flows.
We've been optimizing and those are those are one time, you know realize gains per se, but but I think what weve, where we've done is we really extended or runway I'm in a line of sites in how we get the core and the consistency of core we feel like we've put a portfolio together that that will will be a little bit more transmitter.
And and how we generate cash flows ultimately of course. The goal is to have those consistent durable cash flows that will enable us to raise the dividend. So that's something we're focused on.
Okay, great. Thanks.
We have a question from Matthew Howlett incident Nomura. Please go ahead Sir.
Everyone. Thanks for taking my question.
Well, just if I Miss it but did you give an origination guidance number four core of asset and or just single family rental combined this is from just one combined.
For 2020.
Hey, Matt its data, we didnt that we'll have more to say on that when we get you know quarter behind US here you know I would I was sort of point you to the current run rate of production, which we've talked about it certainly see room for growth we haven't at this point, but enough okay.
Good morning.
Just help me think of its creation process of big or the retained interest.
That you would take down in terms of subordinate tranches, and then remind me a little bit of like the collateral I mean these are pre payment penalty loans are they not in the coupons or let maybe six plus percent.
Yes.
So taking those in reverse yes. These these loans typically have five to 10 year.
Terms, either 30 year had or semi O period, and yes, certainly one of the compelling things about them as they it from a commercial real estate like perspective, they tend to have.
Strong prepayment protection the vast majority of what Corvel Securitizes has yield maintenance typically.
Up through six months prior to the maturity of alone or there's a declining points structure, but the yield maintenance is much more common you know, there's certainly some loans with rates at 6%, but with rates having declined as much as they have the average coupon is in the vives at this point that we'll obviously move around with rates.
From a securitization perspective, you know promote in terms of retention, we we estimate retaining all in 6% to 8% plus.
Of the securitization that would include.
The subordinate credit securities.
As well as potentially somebody interest only securities that are part of the structure. So at a high level not unlike sequoia.
Although the thickness of what were of what we're retaining which is part of the attractiveness. Obviously at those return targets is significantly higher than what we're typically retaining honestly transaction and even to an extent choice.
Yeah, and then it might not was my next question the Redwood practically amended the jumbo market image or any.
These structures are coming out of Germany is there anything just relatively more attractive about investing in the this the securitizations versus what you've done traditionally in the jumbo space.
Yeah, I mean, I think I think gosh I hit the nail in my head in the sense that we can just put more capital to work at similar or better returns I right like if I could miss market to where the jumbo space was 10 or 15 years ago.
Right.
You know and so we think about our role in the in the markets is especially finance company.
We're really meant to be involved here and take some of the lessons, we've learned and experience regain from from jumbo and apply them here.
Got it [laughter] <unk>. The next question, let me you guys in the growing to choice program, while you're just curious securitizing and you have that bucket, where you show sort of the third party issuance that you take it doesn't sort of flat for a while as we start to see these non QM conduit to come out these banks, even do prime jumbo them.
Willing will rate would be investing in third party.
Non QM deals or anything that comes out from the bag given.
Did you see reform I know in the past Redwood had to stand pretty aggressive it with some of the Big Bend shelf just curious how you're viewing third party deals today with some of the originations you're creating.
Bill that we.
We've shied away, but really because we haven't like the value proposition. So the razor President said you know we've been doing a lot of optimization because asset prices or have gotten so high thats been great for for gains, but not so great for putting capital to work. It's one of the reasons why we've progressed, where they've gotten more organic and are focused on onshore.
During the raw material to create the deals rather than the deals themselves that said you know if there is a significant increase in supply that should have a countering effect on on pricing. So we're always open and looking at third party opportunities we see in the market in and you can certainly see would that supply growth.
Going up the opportunities become a more attractive.
Great. Thanks, it in a lot of questions on even in Washington, Chris a lot and then there was a comment on maybe later reads active regain access to captive reinsurance I know yet your your FHLB why doesnt expire until 2026, so just curious what what you're hearing on that front.
Sure and I, probably should have addressed this earlier this season, I apologize, but or there's a lot going on some of which is not ready for prime time, so to speak but I can say that the new regime at the average it varies very aware of it.
I've made them personally aware that's been QM patch expiration set for January 2021 is right on top of the stated expiration of the grandfathered captives and January 2021, So we've been very clear that removing that lineup.
Accordingly for the folks in the private sector that they need to step up to assume some of this business from the Geo cities.
Im not going to be helpful. I think I think the real evidence of the solution a resides in safety and soundness for the system first and foremost and ensuring that you know the infrastructure is taking into account or whether its captives or other forms of members.
And I think if if there can be something that that is compelling and and ensures you know the safety and soundness of the system. Hopefully you know the regulators receptive, but at this point candidly I think that the epic FHLB captive issue is a little bit.
Behind a the QM patch and some of the you know the GRC privatization initiatives are moving them from conservatorship. Those issues are our I think first and foremost, but this is quickly being some I.
I think more greater notoriety with in Washington, and we're certainly advocating for solution.
Great. Thanks, Chris Thanks for that.
We have a follow on question from Bose George KBW. Please go ahead Sir.
Great. Thanks, if I just wanted to follow up on the question about the Matts question just on the yield of deep portfolio. How does it vary between deep the PPL and this SFR loans and also I thought the like the coupon at least on the existing a breach portfolio I thought it was quite a bit higher so just.
Yeah, I wanted some color on that.
Sure.
I was just to clarify your first question is is returns on the BPL versus square or they know the asset for just a single stats. So far this single family.
The investor investors stuff, you're doing there as well.
Yeah. So the <unk> Yeah. My response to not in terms of the coupons was specific to two SFR loans okay.
The average coupon for you know for bridge is about 8%.
And that doesn't include the borrower points at the platform as origination, but those loans or two to 300 basis points higher and coupon than us apart. Okay. Great. Yeah, just wanted to confirm that thanks, you're right.
Yeah.
There are no further questions at this time. This concludes todays teleconference. Thank you for joining and have a pleasant day.
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