Q4 2019 Earnings Call
Good afternoon, and welcome to the Redwood Trust incorporated fourth quarter 29 change financial results Conference call.
During management's presentation your line will be in listen only mode.
At the conclusion of their prepared remarks, there will be a question answer session. I will provide you with the instructions to join into the question Q. After management's comments today's conference is being recorded.
I'll now turn the call over to lease the Hartman Radware Redwoods Senior Vice President and head of Investor Relations for opening remarks and instructions. Please go ahead.
Thank you.
Hello, everyone and thank you for participating in Red when it's one quarter 20, <unk> financial results call. Joining me on the call today, our Crystal blockade Redwoods, Chief Executive Officer, Gosh, Rob anything that would probably today I'm, calling cochran red with Chief Financial Officer.
Where we began I watch remind you that certain statements made during management's presentation with respect your future financial or business performance.
Constitute forward looking statements forward looking statements are based on current expectations forecasts and assumptions about involve risks and uncertainties that could cause casual.
Could cause actual results to differ materially.
We encourage you to read the Companys I know report on form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance.
Could cause actual results to differ from those that may be expressed any forward looking statements.
On this call. We will also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute.
<unk> financial performance prepared in accordance with game.
Alleviation between GAAP and non-GAAP financial measures as provided unveiled our fourth quarter earnings press release.
Redwood review and also available on our website <unk> Dot Com also note that the content. This conference call contains time sensitive information that is accurate only as of today. The company does not intend and undertakes no obligation to update this information.
Sure. It's like subsequent events or circumstances. Finally, today's call is being recorded and will be available on the company's website. Later today I will now turn the call over to Chris We're opening remarks intersections.
Thank you Lisa and good afternoon, everyone.
Fourth quarter 2019, murky strong tending to historic your redwoods.
Made significant progress towards our vision by executing on our strategic initiatives to expand our reach across all major ways housing finance.
We also scaled our platform to grow profitably.
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Hard work is beginning to pay off that's showing through our fourth quarter financial results, where we delivered solid earnings and sustained momentum across our business lines.
To recap.
GAAP and non-GAAP core earnings were 38 cents and 45 cents per share respectively for the fourth quarter.
And as a full year with GAAP earnings of $1.46 for sure.
Earnings of $1.58 per share, resulting in a core or we for 2019 of 11.6%.
Earnings benefited from a healthy balance of investment returns and income for mortgage banking operations.
We made 1.1 billion of investments that we believe will help us deliver increased returns to our shareholders in the coming quarters in years.
Definitely earnings for the full year benefited from our strategic portfolio optimization activities. As we noted gains from sales of worry building assets freed up capital for new investments.
In recognition of the longer run strategic progress. We've made today, we announced a 6.7% increase to our regular quarterly dividends to shareholders to 32 cents per share for the first quarter of 2020.
Our ability to raise our dividend despite the market volatility we ever experienced over the past year is significant and then it demonstrates the stability of our business model and the durability of a revenue streams.
During today's dividend raise we've increased our dividend 14% over the past two years.
We remain committed to delivering earnings there can continue to support a growing dividends to our shareholders as we move forward.
Reflecting on the brand we built over a quarter century now Redwood has developed a track record of innovative housing investment programs that address underserved markets, where the vast long term growth did not show.
All in part by two acquisitions 20, I'd seen not only enhanced our brands, but also set a new foundation for profitable growth.
Now leading participant in several distinct areas of housing credits.
And our consolidated portfolio because evolved to incorporate a diverse mix residential business purpose and multifamily investments.
As of the housing market, where we see the biggest opportunities for strong returns.
Now operate out of four principal locations and earnings power is squarely driven by organically created investments and the associated platforms that produce them.
We also closed two of the most highly regarded securitization issue issuance platforms in their entire pls market.
Putting this all together.
We're better positioned than ever to serve the public through our corporate mission, which is to help make quality housing accessible to all Americans, whether its rented or owned.
As we work towards increasing our relevance to the broader housing market.
We recently reorganized our business to facilitate continued growth through a more scalable infrastructure.
This will allow us to better manage the ever evolving opportunities and risks facing our business and to create better visibility into the earnings power of our operating platforms and the investments that create.
We now manage our business the four distinct segments or verticals, which aligned to our strategy, where we believe there is compelling runway to grow in expanding the housing market.
These verticals, including residential lending.
This purpose lending multifamily investments and third party residential investments.
Our new structure provides for a centralized strategic decision, making that drives the activities of these verticals.
Turn our businesses can operate and and the respective sectors, while benefiting from corporate risk oversight and traditional shared services.
Each of our verticals currently operates at a slightly different stage of maturity, creating what we view as a compelling mix of stable earnings generation and future upside.
And.
We believe the properties. This profile offers differentiated differentiated cash flows and return profiles that will contribute towards robust earnings for our shareholders.
Let's now turn to the recent economic environment, what it means for our business.
First reflecting on 2019, you expected it to be a record year for residential mortgage refinance activity, that's essentially what we got.
The federal reserve cap rates low after cutting three times in 2019, I may global trade tensions and signs of economic weakness.
Inflation, Meanwhile, remain low and the U.S. consumer balance sheet remains strong in part driven by an increase propensity to say.
Put downward pressure on benchmark interest rates.
As we had deeper into 2020 markets of once again become grip with fear as growing concerns have recovered 19 also known as the Corona virus and its potential impact in the global economy, no dominate market sentiment.
And just the past week, we've seen a steep drop in the equity markets along with a 10 year treasury yield hitting all time lows.
On a global scale, we've got all the ingredients for an interruption in economic activity supply chains have already been materially impacted.
Especially those that rely on Chinese manufacturing.
Thus far at least the impact in the U.S. economy has been negligible.
The extent to correct grown a virus outbreak does extend to the U.S. in a material way, we would expect various debt markets to respond differently at least initially.
For example, the corporate bond markets are likely to be directly impacted followed by the CRT markets.
I'll cover at 19 does raise questions about the right risk premiums for residential credit.
Like some past downturns, we would not expect housing or even the consumer to lead the way.
The ultimate impact the residential credit would likely depend on the severity and duration of any broad domestic outbreak if it were to occur.
Regardless of where things had from here, we continue to run our business on the foundation of a strong risk culture, utilizing moderate leverage and disciplined underwriting, enabling us to generate attractive returns through various economic scenarios. Additionally, we would highlight the diversity of our revenue revenue streams, which can help to offset some of the negative negative.
Economic forces associated with the virus.
For instance, the 30 year conforming mortgage rate continues to fall in step with benchmarks and once again, a three year lows not to mention within striking distance of all time lows.
This continued to provide ample fuel for refinance activity for a mortgage banking business and helps to lower consumers debt service lower rates have also contributed to increased borrowing purchased spending power something that should otherwise brewery home purchase demand amongst millennials, who are now entering their prime and by years.
But in keeping with recent trends and housing buying power as a moot point when there is nothing to buy.
The low rate environment has extended the now decade long run and housing but is also a mass and worrisome trends to continue to garner our close attention.
Most notably the supply of quality affordable homes in the United States badly lags new household formation.
While this imbalance is greatly supported rising home prices, it's made access to desirable housing more challenging for many especially low to moderate income families. Many of whom our would be first time homebuyers.
And expedient solution, making the rounds in Washington is to relaxed underwriting standards and make it easier to offer loans lower down payments to borrowers that higher debt to income ratios are.
Well, we are we support expanding homeownership opportunities for all Americans, who desire to own their own homes lowering underwriting standards have disastrous consequences, leading up to the 2008 financial crisis and John.
Additionally, the solutions ignore the fundamental problem and housing not enough homes.
Redwood our approach to residential lending remains unchanged, we emphasize purchasing say well structured loans the borrowers can reliably afford but more importantly, we're championing solutions in our business lines that offer more high quality and accessible housing for consumers.
For instance, our business purpose lending initiatives focused not only on stabilized rentals, but also bridge lending for homes are renovated upgraded and brought up the current building codes for getting resolved or rented to consumers.
We are actively expanding the bridge business to include more robust construction slash redevelopment opportunities, including market, leading financing programs for bill direct communities urban infill development and modular home development to name a few.
These strategies all complement our consumer residential lending business and expand upon our mission.
As we look toward the regulatory front.
All eyes are now in the FHLB say, where its new director is focused on taking the jesse's out of conservatorship, reducing their footprint across the housing sector and leveling the playing field for private capital to participate in a larger part of the market.
We see this regulatory shift as a major opportunity for residential lending business and the catalyst for us to invest in our platform to support high a lot higher levels of growth and profitability.
We're now flying recent technological innovations reimagine the entire non agency loan production and distribution work stream.
At this time technology to assist loan sellers and originating conventional loans that can be seamlessly sold exists only in the agency originations space.
We want to make that a reality in the private sector.
We see an equally compelling runway in our business purpose lending segment, which is now nearly 30% of our equity allocation.
What are the largest originators that business purpose residential loans with a combined platform capable of building on the 2.4 billion of loans originated originated by core vest and five arches in 2019.
As I mentioned earlier, we also have the largest and most highly regarded SFR securitization platform in housing market.
This will help accelerate our strategy to grow profitably as we organically generate assets with attractive risk adjusted returns.
Our multi invest our multifamily investing fits squarely within our corporate mission and is quickly emerged as a strategic and commentary facet of our overall housing finance strategy.
Befittingly, we now designate multifamily investing as a core business that redwood that over $475 million of capital invested since 2017.
We currently originate small balance multifamily loans, both term enbridge and our business purpose lending segment. However capital deployment in traditional multifamily has been almost exclusively done through programs offered by Freddie Mac.
Today, we remain one of the few investors and newly issued Freddie Mac multifamily B pieces that has not also a multifamily operator or direct lender.
Given recent changes implemented by the average if they were now exploring ways to expand how we provide liquidity to this rapidly growing market.
Oh.
Hey, most of our investing activities to be driven from our residential DPL and multifamily verticals going forward, we continue to dedicate meaningful resources to other third party investment activities.
Over quarter century, our role as an active investor and liquidity provider has been and will remain highly relevant to the mortgage capital markets.
Before I hand, it over to dash I'd like to close by saying we are proud of the progress we made over the past two years, we will continue to push our platforms ahead driven towards next phase of growth.
Our strategic priorities for 2020 will be focused on channeling regulatory changes and technological innovations to significantly advance our overall relevance to the housing market.
Hi to confront key issues facing housing finance and drive the industry forward with actionable initiatives, we recognize that the needs of consumers have changed and the award of a home has as much to do with comfort proximity to work in lifestyle as it does with pride of ownership.
As we move forward, we're committed to generating solid risk adjusted returns there can sustainably grow our dividends over time for our shareholders.
And with that ill hand, the call off to dash.
Thank you, Chris and good afternoon, everyone.
Our fourth quarter results demonstrate the strength of our business model the diversity of our revenue streams.
And our ability to react to shifts in the market to take advantage of opportunities to invest capital, where we see the best risk adjusted returns.
As Chris discussed over the past two years, we have substantially expanded our role and housing finance.
We now to operating platforms deeply ingrained in both the consumer and business purpose mortgage loan market.
Furthermore, we have meaningfully deepened our presence in the multifamily sector and as Chris mentioned are exploring additional ways to provide liquidity in this area.
This progress has evolved our operating approach and capital allocations in a way we believe will drive shareholder returns for the long term.
We now have for business segments, with the operational and investing wherewithal to run in a coordinated but independent fashion and be measured as such.
Before I get into our results for the quarter I want to start by providing a deeper dive into these segments.
Our new verticals align to how we are running the company and provide better transparency into the value creation of our overall operations.
We measure ourselves on a holistic results of these business lines, including earnings from both our operating activities and the financial assets. These activities create.
Our residential lending segment is comprised of our residential mortgage banking operations and investments created from these activities, including residential loans financed with the federal home loan bank debt investments retained from our residential whole loan purchase and securitization activities.
Our business purpose like lending segment includes our origination investing activities across PPL, where the continued focus on single family rental and single family bridge loans small balance multifamily loans.
Other related products.
Our multifamily investment segment includes multifamily securities and loans, we have acquired as well as other multifamily investment sourced through our various operating partners.
And finally, our third party residential investment segment includes residential investment source predominantly through partnerships and traditional purchases of residential securities issued by others, including re performing loans Securities CRT Securities and other third party RMBS.
You can find more details about these new segments in the new segment overview and capital allocation detailed sections of the Redwood review.
Turning to our results I'm going to start with our business purpose lending segment, which had a fantastic quarter highlighted by our acquisition of core vest and strong overall performance from core best and five branches.
Nearly 30% of our equity capital is now allocated to our BPL business and the segment contributed $24 million and core earnings during the fourth quarter equating to a 23% core return on average equity.
We saw significant increase in volume at a higher earnings contribution across both mortgage banking activities and our BPL portfolio.
Overall, BPL originations in the fourth quarter totaled $750 million, including $457 million from costs and $293 million from five arches.
The mix of total BPL originations included $435 million from SFR loans and $315 million from bridge loans.
Note that Corbus origination numbers include only loans originated by the platform since we closed the acquisition in mid October of last year.
Going forward, we'll be reporting one BPL origination number overall in keeping with our progress and unifying the platforms into one cohesive operation.
I'll provide more detail on these efforts in a moment.
On a standalone basis corvettes contributed $21 million of core earnings and slightly less than one full quarter of operations as part of Redwood.
We estimate core vast is being eight cents accretive and earnings per diluted share for the fourth quarter.
The appendix of the Redwood review contains more detailed information on core best fourth quarter performance.
In addition to robust origination volumes and strong execution in November on Redwoods first SFR securitization and Corbus Tempt overall was an earnings driver for the segment.
At $395 million the transaction was the largest securitization for the capital shelf its five year history.
It was up by strong investor demand.
The securitization close less than 30 days following the completion of the acquisition representing an important early wins.
We have achieved other key milestones as well, notably the recent restructuring of our BPL warehouse facilities, including those utilized by both core less than five arches, which should have a meaningful benefit to net interest income going forward.
Furthermore, the first quarter of BPL is already off to a strong start.
In January segment segment originated $264 million of loans.
We also made further progress on financing the business recently closing a long term secured debt transaction totaling $104 million and borrowings.
The transaction generated $24 million of proceeds above amounts used to repay bought repo borrowings previously encumbering these assets.
The new debt is collateralized by most of our retained subordinate and interest only SFR securities and it's similar to a transaction that we completed in the third quarter for a large portion of our Sequoia subordinated securities.
But that is now mark to market with a fixed interest rate of 4.21% for the first three years.
Continued product development remains a hallmark of our BPL strategy.
In addition to our core SFR and Briggs lot offerings, we continue to grow and develop other products that support related housing investment activities, including built around financing and as Chris mentioned loans that support modular home development.
We began the process of combining the five arches on core best platforms under unified leadership structure, combining the substantial talent from both businesses to position for profitable future growth.
Once fully integrated we believe no computing platform will possess the same breadth of financing products and depth of expertise to deliver all inclusive and customized solutions to residential real estate investors.
Our unified platform will also allow us to apply our technology advantage to a full suite of products and in the process remove redundant external costs and the day to day operation of the business.
Moving onto our other operating segments.
Residential lending deliver $20 million a core earnings in the fourth quarter by meaningfully higher lock volumes versus the third quarter and improve securitization execution.
During the fourth quarter benchmark rates remain relatively low and were stable versus the third quarter, a boon to our production volumes and securitization execution.
We had a record quarter of loan purchase commitment volumes of $2.4 billion up 42% from the third quarter.
[noise] cumulatively for the quarter purchases were comprised of 62% select and 38% choice.
Volumes overall were supported by the purchase of a season bulk pool of jumbo loans, which was subsequently securitizing, our first Sequoia securitization of 2020.
In the spirit of celebrating milestones that it's worth noting that during the fourth quarter, our cumulative choice purchases exceeded $6 billion since inception of the program in early 2016.
The diversity of our distribution channels between whole loan securitization continues to benefit our results.
We are seeing increased demand from Holland buyers for both select and choice production.
During the quarter, we sold $843 million of select whole loans to third parties completed to select securitizations totaling $776 million and sold $581 million of choice whole loans to third parties.
We saw improved securitization execution in the quarter as elevated investor concerns over prepayment risk we saw the third quarter subsided, resulting in fourth quarter gross margins in line with our long term target range.
This momentum has continued into the first quarter of 2020 with year to date loan purchase commitments commitment volumes totaling $1.8 billion. We have completed two sequoia securitizations year to date at slightly better on execution versus our last transaction in 2000 my team.
And continue to sell more whole loan pools into a strengthening bid for mortgage credit.
[noise], while the current top of interest rates is likely to produce a near term lift to our purchase volumes. We remain focused on evolving our residential lending business to be operationally responsive to a larger have sustained opportunity to grow our footprint.
Through exploration of UQM patch or other regulatory changes.
As Chris noted the strategy centers around technological advancements designed to enable increased scale and efficiency of our platform. Most importantly by reducing the time it takes to purchase loans from our origination partners.
We plan to transform our correspondent loan acquisition platform to be more component based allowing us to implement the best technologies as they become available rather than through the all are non systems that remain the standard in the industry today.
Our multifamily strategy continues to evolve as well.
As Chris as Chris previously mentioned multifamily is emerging as an increasingly key facet of our housing finance strategy.
Over the past year, we have strengthened our strategic partnerships and expanded our access to rental housing credit.
These activities included new investments in multifamily BPC pieces and joint venture participation at a whole on funding that purchase a short term floating rate light renovation multifamily loans from Freddie Mac.
In the fourth quarter, we deployed $11 million into our first new issue Freddie Mac multifamily bps in January the first $500 million of loans in our joint venture Farberware securitized, creating $36 million of subordinate securities for our balance sheet.
Pricing on the securitization was tighter than our initially modeled expectations.
While much of the sector remains efficiently finance through activities of the Gses, We believe originators will increasingly value alternative outlets for loan products that fall slightly outside the GRC credit box.
There may also be an opportunities that should the gses focus changed due to mandate slash, scoring changes from the FHLB and a potential exit from conservatorship.
Under leadership resources already on our platform. We are hard at work on this initiative, which we view as a natural extension of our last several years of involvement in this market.
Look forward to keeping our stakeholders apprised of our progress.
Capital allocation to third party investments was reduced slightly from the third quarter driven largely by continue disposition of agency CRT bonds and other third party securities as part of our portfolio optimization activities.
Securities in this segment helped drive our increase in book value quarter on quarter highlighted by continued strong performance of the to re performing loan investments, we made with Freddie Mac.
More season of these two investments, which we made in late 2018.
Continues to exceed modeled expectations as delinquencies have fallen 30% since closing.
Albeit with less track record to analyze our more recent investment is trending slightly ahead of modeled expectations as well.
Notably, we have $154 million of capital deployed across re performing loans securities representing almost half of the capital currently allocated to the SEC.
With that I'll now turn the call over to call.
Thanks Dash and good afternoon, everyone.
Summarizing our financial results for the fourth quarter, our GAAP earnings were 38 cents per share compared with 31 cents in the third quarter and core earnings were 45 cents per share compared to 37 cents in the third quarter.
Acquisition important at in October contributed strong overall results for the quarter as its origination platform helped drive strong mortgage banking income in capital deployed into business purpose loan investments helped drive higher net interest income.
Our results were also bolstered by strong performance from our residential mortgage banking platform, which saw increased volume and strong margins during the quarter.
Our overall corporate investment portfolio saw improved returns from rotating out of lower yielding third party CRT and multifamily mezzanine securities into higher yielding assets the business purpose lending.
While the majority of our strategic optimization activities are completed during the first nine month for the year strong demand for residential mortgage credit continued into the fourth quarter presenting additional opportunities for us to take gains.
In the quarter can get at 150 million of capital for deployment and captured $23 million realized gains.
These increases in revenues were accompanied with an increase in operating expenses, which beginning this quarter and broke out into two line items general and administrative expenses and other expenses.
Other expenses, primarily consists of acquisition related items, such as intangible amortization.
The increase in overall expenses was from both the incremental operating expenses consolidated from the corvette platform.
And from higher variable compensation costs, which are reflective our improved full year results.
For the full year GAAP earnings were $1.46 cents per share and core earnings were $1.58 cents per share.
Both our GAAP and core results benefited from higher investment returns in 2019, as you grow kt capital into higher yielding investments in multifamily RPL and NPL assets, including through the core best acquisition.
In addition to helping increased investment income on our investment portfolio increased pace of portfolio optimization during the year resulted in elevated or gains.
Our 2019 results also benefited from increased income from business purpose mortgage banking as we ramped up our activity of five arches and further visit volume for acquisition of core best.
While residential mortgage banking income decreased overall lower margins, we ran that business with less capital during 2019, which contributed to better overall, our lease from those operations.
Looking for a moment on the composition of our earnings as I previously mentioned 2019 was a bit year for portfolio optimization.
Spreads paid on many of our assets, we are opportunistic and making sales locking in meaningful gains that drove strong total returns for our investments.
The capital from the sales was deployed into higher yielding assets and we expect to see growth in our core net interest income in 2020 as a result of this process.
Looking forward, we expect our pace of sales to normalize beginning in the first quarter and given current conditions is seeking decrease in 2020 as proportion of overall earnings.
Additionally, as we continue to deploy our available capital we expect core investment income to comprise more significant portion of the total return from our investments contributing to greater sustainable earnings which supports or dividends.
Our fourth quarter results contributed to an increase in book value, a six cents per share and economic return at 2.3% for the quarter.
Included in our change in GAAP book value was 11 cents per share associated with acquisition related items. These included eight cents per share from the onetime impact of equity based purchase consideration for core bet and three cents per share of expense related intangible amortization associated with both the corvette in five artist acquisitions.
Excluding these acquisition related items, our non-GAAP book value increased 17 cents per share and our economic return on book value was 3% during the fourth quarter.
Shifting to the tax side, our total taxable income increased to 66 cents per share for the fourth quarter driven by increases in taxable income that both our Trs and RV.
Focusing specifically on re taxable income for the full year 2019, we generated dollar and 28 cents per share, which exceeded our dividends of $1.20 cents per share as a result, we expect to utilize approximately $10 million Marie and allow for 2019, leaving US 28 million carry forward.
Additionally for the full year 2019, we generated 27 cents per share taxable income at our Trs, which were able to retain for reinvestment in our business.
Turning to the balance sheet, our capital position during the fourth quarter, we completed 634 million to capital generated 150 million in capital from sales and lower yielding securities and ended the quarter with 260 million of capital available for investment.
The bulk of our capital deployment during the quarter was driven by the core best acquisition and as a reminder, that told the transaction consideration was 492 million net of in place financing.
As as you noted the appendix ever Redwood review have the section on the court that acquisition that provides additional detail on a purchase price allocation and corvette standalone results for the quarter.
In addition to the acquisition, we deployed an incremental 62 million towards BPL investments, including 41 million in Briggs on investments and 21 million and FFR securities from our corporate sponsored securitization and also like 54 million towards third party investments and $21 million towards multifamily investments and b pieces and mezzanine securities.
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As presented the capital allocation section of our Redwood review, we manage our capital out of corporate level and don't included in that equity allocated to our segments until the plate.
Our average capital balance remained high during the fourth quarter as we had a significant amount of available capital coming out of the third quarter in anticipation of the corvettes acquisition as well as the repayment of our 201 million of exchangeable notes that came due in November.
Looking at our capital structure Holistically, a recourse leverage ratio was 3.1 times at ended the fourth quarter, increasing slightly from the third quarter as we deployed capital including through the Corvex acquisition.
Looking forward, we expect our leverage to increase closer to the midpoint of our three to four times target range as we deploy our access capital.
As we've discussed before our leverage will vary quarter to quarter, depending on the amount of loans and carrying inventory and our balance of available capital.
With the growth of our business purpose lending operations. This will create some additional variability.
And while its can create noise on this metric we focus most closely on the leverage we employ on our long term investments.
And in that regard our debt structure remains a significant differentiator between us and our peers.
To help present this our Redwood review includes any leverage section, which details how over 60% of our long term investments are financed with long term debt with a weighted average remaining term bottles for years. Additionally, a portion of our short term debt is term financing we used to finance our business purpose bridge loans, which are themselves short term in nature.
Turning to our 2020 outlook, we plan to give a more detailed outlook at our Investor day in a few weeks and otherwise be providing commentary on our outlook through our earnings calls going forward.
As such we encourage you to attend our Investor day or follow the webcast, which will be made available on our webcast.
As Chris discussed earlier, we're looking to build off our results in 2019 to continue delivering strong risk adjusted returns to our investors in 2020 and beyond.
We believe the business is currently positioned to build on 11.6% core R&D, we delivered in 2019 with meaningful upside over the long term as we continue to develop and grow our business purpose lending and multifamily businesses and as our residential lending businesses position to capitalize on potential GST reform.
Directionally, we expect acquisition and origination volumes to grow at a residential and business purpose lending segments contributing to growth in our mortgage banking income.
We believe this growth can occur while maintaining capital allocation Cds mortgage banking platforms relatively stable.
We will continue to deploy our available capital dynamically into investments at our business segments, depending on where we see the best risk adjusted returns.
As we become fully deployed we expect our core net interest income to continue increasing and at the pace of portfolio optimization slows, we expect lower core realized gains.
But the addition of corvette and true ups are variable compensation for improved results in the fourth quarter, our general administrative expenses had a bit of noise in them.
Looking forward. We currently expect our quarterly run rate of total consolidated general and administrative expenses being a range of 36 to 38 million.
With growth in our mortgage banking businesses, we do expect to see some variability in our total operating expenses as loan origination costs, including commissions will move in tandem with our origination volumes.
And with that I will conclude our prepared remarks, operator, please open the call for today.
Certainly at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
For Mason, China will indicate your line is when the question can you May press star too if you would like to remove your questions on the Q.
For those using speaker equipment, and maybe necessary to pick up your handset this more pressing the star Keith.
One moment, please while they pose your question.
Just first question is from Stephen laws of Raymond James. Please go ahead.
Hi, good afternoon, and congratulations on a nice close the year Uno a dividend increase to start 2020.
Crystal I guess first.
The obvious with where rates have gone can you talk about volumes and expectations this year or or how you guys have moved loan pricing kind of given that the 50, but declined and long term rates and.
You know how you view volumes in the the jumbo business the sure.
Oh sure. Thanks for the question.
Steven and.
I'd say is it's obviously our volumes are up considerably.
They are up in the fourth quarter, they're up again this far in the first quarter.
Rates have a lot to do that.
Another factor that has a lot to do with it is just sheer capacity constraints of the money center banks I think.
We're seeing some some competitors focus more on margins right now than volume and as a results. It's really allowed us to step in and be very competitive.
For the time being I would expect that to continue because.
Rates don't see the showing any signs of slowing down.
Aspect too.
Rallying so we feel pretty strongly about the trajectory of our residential business. All the same we've got a lot of strategic work to do there this year.
We're going to be investing in technology and positioning the firm to be able to look a lot more like an agency execution with respect to the private sector. So theres a lot to do there, but we see a lot of opportunity in that business going forward.
Great and you know staying on the I guess, the jumbo Nonqm business can you talk about the Q and patch DSC reform any any updates or changes there from from your comments three months ago on the on the same call a believe I asked as well, but can you can you talk about the opportunity there and.
Any insight you have into how you see that playing out as we get close to the lower or pass the January expiration date of the QM patch.
Yes, good question.
We have had some developments there I think the CFPB. He is committed or is hoping to get something up I made some proposed rulemaking.
There was an indication.
The director that's.
There are strongly looking at moving away from VTI is as the de facto constraining metric something in favor of a market base metric.
We were given assurances that node determination had been made and I really do think they're very interested in what the market has to say.
I think that when it comes to the change whatever it is.
We'll adapt very quickly.
I think the important thing is is the focus on leveling the playing field is still very much front and center for not only the CFPB, but also the advantage of fade. That's the most important piece for us.
It sounds like there could be somewhat of a delay into 2021, but.
It was reiterated that this this is going to happen. So we feel very good about that.
Overall, you know as I mentioned in my comments, we'd still like to see a borrower credit metric.
Thats really tethered to the specific underwrite, there's there's issues with with market based metrics I think they work well in coordination with other factors and we'll have to wait and see how all of the appendix Q.
Potentially changes.
But in of itself, we would prefer to see something that continues to link.
You know the QM designation to to the borrower underwriting.
Great. Thanks for those comments Chris.
Yes, I think you mentioned in your prepared remarks 264 million of BPL volume in January and please correct me if I'm wrong I was writing a lot down and I think that splits pretty consistent with a $750 million volume and for Q is is this kind of a good run rate 3 billion on the on the BPL volume or how should we think about annual volume.
And that business line.
Yeah, I would say.
Directionally.
We we would say we expect the business to continue to build on.
The 2.4 billion cumulatively that the two platforms did last year the business over the past several years has displayed some some positive seasonality effects in December as investors.
Seek to get transactions done before year end, and so that certainly buoyed our December volumes, which which obviously drove Q4 overall.
And there was a little bit of benefit from that in January as well.
So in general we remain very optimistic on continuing to build.
On the 2.4 billion cumulatively, we did last year, largely because we feel like we can go.
Deeper existing products, but also as Chris and I, both alluded to are continuing to really see some positive momentum in additional products that complements sort of the core SFR and bridge.
Production that we see you know so that's what I would say there I mean from a from an interest rate perspective, the the origination volumes in this space are certainly.
At least we've seen no less sensitive to.
Interest rates much more driven by other motivations.
For investors and things of that nature, but you know for all the reasons. We've said, we're we're very optimistic continue to grow on last year, but there are some seasonality effects for a quarter by quarter, we're not unless I'm measuring more measuring over the long term measured in years.
Great. Thanks, and then lastly.
Core about I think each of the last two quarters, you've deployed about 150 million to capital into new investments.
Bleep that the review said $260 million available at year end.
I think some has been put to work, but you can can you talk about your capital needs and to leverage is kind of under the midpoint of the target of the target range.
You know I know, you've you've got a little bit of portfolio optimization I guess, the could still be Dod that can you talk about capital needs. How you think about.
That as we look at 2020.
Hey, Steven this is calling.
I can speak to that real quick.
Right now I think.
We feel like we're in a pretty good position on capital we did talk about that.
We did see the opportunity to optimize.
Some of our assets in the fourth quarter as as we continue to see spreads.
Tighten said, so that did leave us with some capital heading here into the first quarter. So.
You know, we feel like for the time Dean.
We're in a good place and that gives us a little bit of runway to Keith.
Working forward on initiatives, we have here in the near term and we'll see how things develop over the Nash.
Yes.
Yeah, Steve I'd also add that.
Starting to pass we try to be very disciplined with our capital raising our needs and what that excess capital number.
We had enough to run the business and deploy in normal course.
So obviously, there's been opportunities to raise to raise money over the past few months and.
That's a big reason why we haven't.
Okay, great. Thanks, a lot for the comments and appreciate the upturn and ask questions.
The next question is from Steve Delaney of JMP Securities. Please go ahead.
Thanks, everyone and congrats on the strong start with core best This week as you can imagine the questions. We're getting from investors all have to do with rebounds.
An increase expectations for refill five volume I'm, just curious for your business, obviously, you're not an agency MBS investor having to deal with the CPR increases, but when you look at your business. How do you feel about assume there's pluses and minuses with revise right I mean, you've got the origination business.
But you're also an investor could you just comment briefly broadly on sort of how you see the pluses and minuses on high high Rifai environment working out for Redwood. Thanks.
Sure I think the overall, we think it's a plus you know our residential lending group I'm looking at our volumes and our margins both have been very strong as I mentioned, there's some capacity constraints in the system, which has really helped to bolster our volumes right.
Recently very opportunistic there we obviously on the flip side have some investments to manage we have some LLS and Io style securities.
Not too much we don't hold a lot of servicing.
But those become more difficult to manage our home loan bank portfolio becomes more difficult to manage.
As you know that's predominantly season jumbo loans and a lot of those.
Had sort of inherent price caps with based on their convexity profiles. So effectively managing there is a is necessary, but also challenging and these environments. So I do think that there are some pluses and minuses, but but the good news for US is we've got a I think a fairly diverse revenue stream.
And.
Right now the pluses had been outweighing the minuses.
That's helpful. Chris Thanks, and just a quick follow up my last question you mentioned construction loans construction slashed development, obviously with a specific.
Property types and balls I'm just curious if you if is that a new team at Red would that you brought in and logistically kinda like with the Resi Bridge I mean, how do you handle that logistically from just and you know inspection disbursement and all of that.
Yes, Steve that they can see the reference the construction was really the effort that's already embedded in our in our combined BPL business, Okay got it.
It's not sort of.
It's not ground up.
Large multifamily like like.
Like maybe you're referencing it really is more.
Development and things like that the majority of but what we do that's pure construction R&D is built around communities, which we're seeing more and more of an inquiry best has been a market leader now for for two or three years the discipline around managing those construction draws on that progress is is really analogous to how we would manage.
Any non fully just first alone.
We have third party vendors and internal teams that verify expenditures and progress on the pick on the on the projects and no additional money goes out the door until there's at least those two sets of eyes to validate expenditures and actual progress on the ground.
And then additionally, [noise].
Particularly with the build around.
One of the structural things that we like to use is really sort of a phased approach. So if the sponsor has.
Larger project that they would like to complete we tend to finance a certain portion of the construction, we'd like to see it stabilized Andorra termed out before going on to other parts of the project, which is that helpful way to to mitigate the larger exposures to larger projects that are in place. So good to your point, there's a backend logistical analysis.
We always do and then on the front end in the structure of alone there's ways to manage where the cumulative exposure over time based on the progress of a specific project, but it's much more driven by the single family built around where we've seen a lot of momentum over the past few quarters.
Thanks for that clarity dash appreciate it.
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The next question is from that how that as Nomura. Please go ahead.
Hey, guys. Congrats thanks for taking my question first.
He mentioned in the review that you're putting these purposes prepares loans on the FHLB line, you're rolling it out tier correspondent sellers. So just naturally is this just get them. It seems like an obvious question, but the would've given they are we usually make this is just getting tend to make a bigger portion of the total capital allocation at the company could just kind of go over that and what you're seeing.
So far with offering it to two your sellers it and how that's looking on the FHLB life.
Sure. So a couple of clarify things there Matt.
The single family rental loans that we have been putting at the FHLB or more of the five to 10 year product.
That is consistent with what we've been securitizing, we're looking at other types of analogous products that could fit as well on the floor, but that is that is largely what we're doing a there Ben yes, you're correct. We have we have seen an evolution.
The loan portfolio at the FHLB interferes is pointing out now that or is actively involved and BPL.
As we are we have the opportunity frankly, you originate loans.
With with better convexity profiles.
In this interest rate environment than a lot of the jumbo loans that we have and so the run off.
And jumbo loans that we've seen at the FHLB has been essentially exclusively replaced with a couple of smaller exceptions.
Newly originated SFR loans like the type I was describing a break the effort the effort through our Denver operations is a bit more linked.
Just some of the smaller balance what we call single property SFR loans that corvettes produces some of its not the preponderance of of their production.
Well, we produced a little bit of it through Corvallis than has historically sold that whole loan and the strategy. There is to really use our rescue lending operation to expand our distribution for that product a lot of our sellers already making those types of loans and selling them to our competitors.
So we've been closely coordinated and trying to develop a program.
Ought to complement our direct lending effort, a core vast and centrally be able to accumulate more of those loans more efficiently either for follow on sale like we're doing today or potentially securitization.
Got it great isn't all that no the FHLB, there's been a request for comedy.
Two I know you guys have sort of this book a little longer access to it but any thoughts on how would impact deal if they allow.
And to get back into Mousy, you could do renew.
And we knew your membership or possibly increase it.
Yeah.
The average if they I think on Monday put out the requests for input.
It was 15 pages Oh with four pages. The comments. So I think our first a new jerk reaction is is this is a big win.
If you recall this was settled business under the watt regime, a debit today and where you had been but even by way of opening this issue up that sort of to me indicates that.
This isn't settled within the wasn't happy today and I think we obviously had been working fairly hard behind the scenes on this and again I think what we have as an example of the on level playing field.
You've now got a 50% of of mortgages being originated through or purchased by non depository institutions.
Who do not have access at this point.
So I think you know treasury started the process by advocating for modernization of the membership.
And I think what what the big.
Hurdles have been had been around a mission and safety and soundness and I think the some of the mission work to be relatively easily done you should have a strong nexus to the mission to the banks and you should be affiliated with with residential lending somehow I'm. So if you're not I think that's.
That's probably a.
The reason for not having.
Taxes to membership on the safety and soundness side, it's a little bit more complicated.
Just based on how are you know captives and insurance had works and versus bags banks have effectively you know in FDIC, backstopped, which can be utilized by the homebase system. The event of the defaults.
That doesn't currently exist for captives.
We actually have a solution that you know with others have has been developed that we think addresses the main thrust of these safety and soundness concerns Oh. So we do plan on submitting response to the Arfive and laying out the solution I think it's.
Some of establish now in Washington, and we're actually very hopeful at this point that something can be done and again at the end of the day I.
I think along with the Q on patch. The the spirit is can we do something safe and sound at levels. The playing field with respect to this access to two home loan bank liquidity.
So we think that would be very good thing for us another other.
Doctors in the residential housing market.
It's nice to hear that from you guys have given you are leading voice and for the group and in Washington, and on that note a leveling the playing field in the securitization exit was strong for key you said, it's really been even a little bit better if I heard you are right in the in.
Beginning of this year.
When you look at.
You know securitization exit versus agency exit <unk> are you getting volume in on your jumbo or Europe, where your choice because loans execution is superior to that of the diseases G fees higher insurance products for hearing or gone investor loans in Russia, where it is on prime jumbo or.
Or choice type product, but.
Are you seeing better execution, because that's what you're getting flow or do the GRC still have an unfair advantage on a lot of that product, yes, I mean, I know the regulators, but looking at.
Well, we still have an unfair advantage if nothing else by way of them not happening to comply with the QM.
Rules and demonstrating the borrowers are though did pay and also for that matter to cure.
You know, which involves risk retention. So if it redwoods required to old lifetime risk retention on a choice deal for instance, we need to price in that cost of capital into every mortgage that we buy we need to price in the legal exposure to the extent their non QM loans. So those are definitely still clear.
Sure.
Vantages, that's the Geo cities have today by way of the QM patch.
That said, we have been competitive and certain aspects of loans that are GFC eligible you mentioned investor loans and I'm certainly some higher degree I loans and some other products that's been a pretty consistent theme over the past a year or so.
Some of that has to do it the way the gsvs price those products in relation to other products.
So it's hard to say whats sustainable at this point, but I I still think that the main driver and what's really made us.
More competitive recently, there's just been the rate volatility and how consumers have responded to to lower rates.
Right is that well congrats and actual results. Thank you.
Okay.
The next question is from George So since KBW. Please go ahead.
Hey, guys. Good afternoon suppose. Thank you first just on Corbin stem the accretion there obviously was very attractive be eight cents that you noted.
Earlier, when you did the the called the time of the acquisition you guys had mentioned.
That you thought they'd be 15 to 20 cents accretion obviously the run rate seems to be a lot stronger here. So you know just any thoughts on how should we think more in terms of what you guys did this quarter in terms of the accretion from that deal.
Yeah, I would think I would say there was little bit along the lines of.
In responding to Steven earlier, there there were probably it was a fantastic quarter for BPL overall, and and and we're thrilled with that that said there were a couple.
Of items in there, which are worth mentioning I mentioned, the December seasonality, which certainly drove drove volumes higher but because of how our acquisition was structured. We also you know guards NPL from the loans that we acquired as part of the acquisition, which we then securitized that none of the loans.
That we that were originated by corvette since we acquired them went into that 2019 transaction. So we did have.
You know some incremental revenue.
From there as well Q1 is as started off very very strong, but like I said earlier, where we're trying to measure this over the long term, but for some of those reasons.
Would not draw line through the eight cents quarter to quarter, but we still are extremely optimistic on you know the accretive value of of the acquisition overtime.
Okay that makes sense. Thanks, and then actually calling had mentioned that the realized gains should be more normalized.
Next year relative to the levels. This year, yeah, I mean, given obviously the recently big number. This year. So is there any you know weighed for us to think about would normalize means I mean could it be like half the level of this year or any any color there.
Yes, I think gains are always a little bit hard to predict add just given the nature of how they occur and how we were always on you know when we do have sales those are optimistic sorry opportunistic in nature, given given where the market that any point in time me I think we can't.
Hey, Directionally, we do expect them.
To be lower how much lower.
Yeah, we didn't give a range and I didn't give a range of my commentary, but I do expect that they'd probably be meaningfully lower we do expect that to be replayed two large extent by.
An increase in an income.
And from the net interest income and from from our investments as Weve rotated into the higher yielding investments.
So overall, we think about the business you know my commentary noted we you know we're looking to build off the overall our lease that we achieved this year. So we do think even though with you know lower gains that the rest of the business and how we're redeploying the capital is going to.
Essentially make up for those off schemes and allow us to be able to build off the overall our lease okay. Great. That's helpful. Thanks, and then he just wanted to follow up on Steve Delaney earlier question, just on you know on rates and sort of the.
The pluses and minuses you know just in terms of the book value side of it can you just update us and where you think book value is quarter to date.
You know probably it probably down modestly maybe a few cents.
No just thinking about hedging costs.
Retraced a lot of the spread.
The spread movements since the beginning of the year. So I think you're probably the biggest effect on on.
On the book is been just movements in interest rates. So I would I would anticipate small decline there, but not anything overly material at this point I'd also say.
You know as of today, we're in the most volatile moment that we've seen and probably a year from a market perspective, and so if there was anything ever a time, where the the rest of the quarter could be more impactful than the first part. It's it's probably the first quarter. This year. So I think what the pay attention to what happens with the krona virus and.
And do the at the macro outlook.
And perhaps you know at our Investor Day, we may have a better or more.
A better response, that's more indicative of the full quarter.
Okay. Thanks, Gail just let me just throwing one more I just wanted to touch on the comments you made on B on the multifamily segment potential ways you might increase your role there and then I think you referred to at this changes made by the FHLB. There can you just elaborate on that a little too.
Sure goes its dash.
Recently last year, the the cops within which Fannie and Freddie operate in a war.
Were restructured a bit as you may know I'm. Most importantly, they now include effectively all the products that.
Thats, the G.S., he's doing including including affordable and sort of mentioned mission rich products, which have to be at least 37.5% of of total production. So you know we have a very very close relationship you know with the GRC strictly Freddie Mac in multifamily and we.
They are intended to deepen that relationship and really what we're saying as you know if there are opportunities in the market to provide liquidity and alternative liquidity source, that's sort of complements had a gsvs may run their business going forward.
Given how large the multifamily market is this is a market thats approaching 400 billion in production.
Ran out there's there's a lot of opportunity there to be an adjacent player frankly, depending on how how all that shakes out. So so that is it's a little bit early days like I said in my remarks, we look forward updating folks overtime, but when you think about all the competencies we have across Redwood now from a crew.
Thats structuring and and overall operations perspective. This is something we feel just a natural extension can complement and bad very nicely with the businesses were already running.
Yep makes sense, thanks, a lot guys.
[noise], we have reached the end of the question and answer session I'll now turn the call as it turned over to Chris Thanks for closing remarks.
Thank you very much and thank you to everyone who participated on our call today, we appreciated and lastly, once again, we'd like to remind you that our investor day.
One of the grades wonders of the World is on March 24th in New York City, a if you're interested in attending please reach out to at least a hartman or head of Investor relations via phone or our website. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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