Q1 2020 Earnings Call
Please standby.
Good morning, welcome to be Redwood Trust incorporated first quarter 2020.
This conference call during management's presentation your line will be getting listen only mode.
The conclusion of prepared remarks, there will be a question.
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Provide you with instructions to join the question Q.
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Today's conference is being recorded I will now turn the call Lisa Hartman.
Senior Vice President of Investor Relations. Please go ahead.
Thank you talked about Hello, everyone. Thank you for participating in Red Whats first quarter 2020 financial results call. Joining me on the call today, our Crystal ball to Redwoods, Chief Executive Officer Sounds Robinson Graduate course, Tonight, and calling Cochran Redwoods Chief Financial Officer.
Oh, it again I want to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward looking statements forward looking statements are based on current expectations forecasts and assumptions so involve risks and uncertainties that could cause actual results to differ materially.
We encourage you to read the company's annual report on form 10-K, which provides a description of some of the factors that could have a material impact on company's performance and could cause actual results to differ from those that made you expressed any forward looking statements.
On this called me also refer to both GAAP and non-GAAP financial measures non-GAAP financial measures provided should not be utilized in isolation or considered.
<unk> for measures of financial performance prepared in accordance with gap.
A reconciliation between GAAP and non-GAAP financial measures is provided in our first quarter.
Redwood review available on our website.
Also note that the content. This conference call contains time sensitive information that is accurate only as of today. The company just nine times undertakes no obligation to update this information, which reflects subsequent events or circumstances.
Finally, today's call is being recorded and will be available on the company's website later today, well now turn the call over to Chris opening remarks and introduction.
Thank you Lisa good morning, everyone.
Hi, Dan in the West Coast, we appreciate everybody sharing your warms heated and cool.
Hi, good entered the first quarter 2020 building on strong another gained over the past year.
January February were filled with optimism that opportunities for growth.
Leading record warm volumes their name is quickly shifted some surprises the noble chronic virus accelerated into a global pandemic ended March.
Significant dislocation in the financial markets quick quickly into resulting in one of the fastest market before the industry.
Instead of six weeks U.S. economy said over 30 million jobs Morgan experienced during the entire Greek gods repurchase 2007 2000.
More important than the economic impact we've lost more Americans to cope with my team and you did some entire Vietnam War.
We expect or you extend or sincerest gratitude to the nurses doctors first responders and others were protecting people's lives during out of central functions that substantially wish themselves.
Great financial crisis, there was a bubble in residential housing and mortgage credit rather than a public health pandemic, there's lots of work.
Yeah, we've been impacted justice severely in the current places in the small fraction of the time.
Like the overall strong credit quality underlying performance for the residential and business purpose mono church uncertainty related to the pandemic that's impacting the economy triggered a collapse and liquidity and you sector not explicitly supported by the federal government.
I'd be disclosed in April 2nd for balance sheet sustained heavy losses as a result.
And our April disclosure, we estimated that book value per share at March 31st would be between Charbonneau, three and 767.
If you excluded any potential decline in the value of in terms of oil search.
Actual book value results at March 31st were consistent with his prior estimate.
Book value at March 31st $6.32 for sure.
After giving effect to a 70 or so for sure and negative impacts and the noncash impairment associated with our be Peel off.
These declines were driven by widespread panic among market participants systematic repricing mortgage related assets for parents for large financial institutions.
Fortunately however.
Nearly two thirds of the declines in our investments.
I was in terms of sense for sure negative mark to market adjustments enough such that we may never balance sheet quarter on.
I would expect holds for the long term.
We can't be sure exactly where the economy goes from here, we believe our portfolio is well positioned to recover meaningful value from quarter at levels that market technicals upside or nation gets back to work.
Based on her observations of spread tightening in many areas of investment portfolio. Since you have to March you estimate or books I use the problem Cherry Creek start approximately 5% isn't it.
Well no playbook existed to manage the sheer speed at which the second on a downturn occurred you took necessary and timely auctions to preserve a franchise.
Our employees working remotely you the health of our strongest counterparties managed to significantly reduces your balance sheet a booster.
As a result, it made six or unrestricted cash balance was 552 million.
Our outstanding secured debt remains subject to margin calls, primarily one warehouse facilities used to aggregate residential and business purpose loans declined from 4.2 billion at December 31st to approximately 1.1 billion at March 31st pro forma basis. Several initiatives is well underway that expect what would your.
So.
One of the actions we took to preserve liquidity was due to lay the payment over 32 cents per share first quarter dividend, which was originally scheduled to be paid at March 30.
Well this was a difficult Susan the Mig we the Wizard world's best interest, we navigated through the onset of this crisis.
We're pleased there recently announced that the first quarter dividend is now scheduled to be paid so we've been cash today.
Given the current me sizing up or balance sheet evaluating or given in the second quarter will provide an update.
We've taken a continued to take married additional steps to address the various impacted this brendan.
Discuss a few here induction caliber walk in more detail shortly.
Hi, Greg alluded to earlier or priority shifted towards managing our liquidity going incredibly challenging period for the problem.
Selling assets, you see up capital well selling assets, where we fundamentally believe me were terrible. So there is no longer attractive there's done or updated projections spend the prospectivity severe recession.
The quarter, we completed the sale of approximately 724 million Securities, which included the show most of our multifamily investments in a large portion of subordinate third party MBS securities.
We also made the decision to sell a refinance or 2.4 billion of assets financed with yet the joby.
Hey substantially older buildings.
As of today, we've reduced our borrowings under this facility from 2 billion in March two 230 million today and expect to pay down nearly all but one of your future.
That result of the actions we took in response to the crisis meaningfully reduce the size of their balance sheet.
Good luck for analysis of the towards suitable business in April you can see the corresponding reduction in their workflows surpassed me.
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These reductions took place where we work can be absorbed within the organization, where the potentially doesn't use.
Restructuring franchise remains strong.
We'd be preserved our capability to resume normal business activities once the economy begins to stabilize.
So you can imagine this crisis it doesn't look at pain across your workforce or shareholders or business partners.
Some of them as.
Well, we take time for our industry to recover from the economic for caused by the crisis, we're cautiously optimistic that both redwood in the broader economy can begin to turn the page in the coming days weeks launch.
Meanwhile, we continue to run the business under the continuity plans, we implemented on March six two.
No actually all of our employees are working remotely we're maintaining our remote working Paul's used to be consistent actions taken statements made by workers at state and local government officials.
A couple state and local guidelines of our officers to reopen.
Do show only when we're confident that you have the protocols and practices in place it drives the health and wellbeing of employees.
Looking ahead.
What do we expect the post crisis World that would love to Edwards.
You can start with what we know you know that the fed took lessons learned from Alaska crisis and quickly moved to support the federally guaranteed mortgage market <unk> Agency MBS purchase program is driven agency conforming mortgage rates back to record lows.
Become a median turned positive for the residential mortgage market.
Many agencies eligible borrowers to refinance to hormones reduce the monthly payments and free up cash to spend another person collateral damage.
Well the private residential lending markets did not receive this type of government support.
Spec mortgage rates for each project products that we correlate the traditional benchmark, which over time.
Benchmarks are significantly lower than before the prices began expected to continue converging towards zero until the economy begins to grow them.
We also know their traditional sources of funding for mortgage Aggregators, maybe one warehouse facilities you need to be reimagine the potential for another health crisis.
The business of aggregating structuring and distributing exposure the mortgage loans, it's always required financing through comedy scale diversification is return thresholds of whole loan and securities investors in the past the quality of the assets for parents drove the structure and the pricing of these facilities going forward, we'll need to assume the prospect of them.
Other ways of called the 19 impacts or another hope and on it because all being shut down of many or most of the significant performance should the U.S. economy and the associated market effects.
And with our lending counterparties to recast of borrowing facilities from these factors in our isn't necessary stuff to be growing loan origination acquisition volumes.
In fact, we've already made meaningful progress from closing Marginable warehouse facilities.
Thirtyth equals two new non marginal where else facilities to provide financing business, but this launch of residential whole loans previously financed marginable systems.
From a product perspective, we continue to believe in housing said it.
Reforms undertaken since the great financial crisis, coupled with disciplined among monks both originators and investors have created a cohort with high quality residential and business purpose loan products that you continue to perform all through this crisis substantial improvements exhibited by the type of mortgage sector in recent years should accelerate our markets recover.
Relative to the last crisis. We also believed that the strength of our underwriting knowledge of the ones, we've originated or flow through a conduits has the potential to differentiate our platform going forward.
Well there remains significant challenges, we must manage before fully turned the page on this crisis. We continue to monitor trends in borrower couple of clustered month will darrens closely as was the financial health loan Servicers.
On helpful and boots for torque stemming from housing officials in Washington, that's perpetuated the market panic and diluted otherwise unified efforts and the Federal Reserve Congress Treasury and other stakeholders to support consumers through this helping them.
One area that has already been impacted as the home purchase market.
Growers are experiencing significantly tighter credit terms due to uncertainty amongst lenders, whether there will be reliable liquidity under the originated loans.
It is often so the biggest challenges can present the greatest opportunities.
Franchise remains intact and our focus will be emerging from this crisis with enhanced business model that is capable of delivering meaningful value to our shareholders well taking into account. The likelihood is a prolonged recession impossible to surgeons with cold and my team in coming months apostrophe will remain defensive in how we structure a manager on the significant risks.
So we believe we will find the best path forward.
Competition across our business lines expected to be significantly reduced the need for our sourcing in structuring capabilities, especially the tighter underwriting criteria bags will remain strong.
That concludes my prepared remarks, I'll now turn the call under its dash read this present.
Thank you, Chris and good morning, everyone.
It's Chris described earlier the impact from corporate 19 resulted in record market volatility late in the first quarter extreme dislocations in the financial markets and seemingly overnight and evaporation of liquidity.
He's event substantially impacted our operating results, including a GAAP loss of $8 in 28 cents per share.
In a moment I'll provide some additional detail or how market conditions impacted our business over the past 16 weeks.
However, I wanted to emphasize early in my remarks, the cumulative progress of our recent efforts.
As Chris noted as of May 620, 20, or unrestricted cash position totaled $552 million.
Pro forma for pending asset sales on two recently completed financing transactions that I will describe in more detail our unrestricted cash as a percentage of margin, but that that has to say secured debts subject to traditional mark to market rightskill by the lender.
Totaled 54%.
Our work here is not done and we expect this ratio to increase overtime as we complete hole on sales we have entered into an additional financing arrangements currently in process that will further reduce marketable though.
Now for some additional commentary on the markets that are related actions.
During the late stages of the first quarter as overall market volatility spiked their emerged as substantial technical divergence in mortgage assets family between the government backed out ourselves that benefited from stimulus efforts.
The non agency sector, which to date has received.
As such the second half of March witness steep declines in non agency prices driving significant margin call activity market wide across securities repo and whole and warehouse arrangements.
We began positioning for the potential dislocation prior to the substantial spikes in volatility.
By lifting certain of our hedges and building cash.
These activities continued throughout March as we identified several opportunities to de risk the balance sheet and build valuable liquidity in the process.
Our most significant balance sheet management decision was to begin selling the residential whole loans, we had pronounce that our facility with the federal home loan bank of Chicago.
This decision was taken Burke due to our portfolio strategy ongoing revisions to the terms offered by the FHLBC.
Since our most recent update on this topic in our 8-K dated April 2nd 2020, as Chris noted we have continued to successfully execute on these dispositions.
In preparation for the potential long term economic impacts of the pandemic. We also began to sell portions of our securities portfolio, including bombs finance for short term repo Duff.
Sales of these securities were concentrated mainly in the mezzanine securities for multifamily transactions issued by Freddie Mac and certain subordinate residential securities.
Pro forma for these security sales through April 30 of the 2020. These disposition activities have reduced our short term securities repo borrowings to $373 million down from $1.2 billion at December 31st 29 team.
Additionally, as we noted in our previous disclosure from early April we remove substantially our hedges due to observe deterioration in correlation between hedge values and asset prices.
The cumulative impact disease activity resulted in losses of $3, an eight cents per share during the first quarter on hedges, we terminated at assets, we either sold during the first quarter or intended to subsequently so.
As such nearly two thirds of our investment losses were $5.36 per share were related to negative investment fair value changes on assets. We continue to hold at the end of the first quarter and generally tend to hold for the longer term.
Well mark to market losses impacted essentially all facets of our portfolio there were particularly acute in the more subordinate securities. We know across part Prime Jumbo single family rental re performing loan securitizations.
This portion of our portfolio has always had embedded accretion value.
Most cases as potential upside is now substantially more pronounced.
Market technicals have improved various degrees across the capital structure since quarter on driving the estimated GAAP book value increased a crystal.
Our operating platforms got off to a strong start during the first quarter with <unk> residential and business Burqas lending seeing increased volumes is generally a robust market for the first seven to eight weeks of the year.
As markets began dislocated and marks however profitability was negatively impacted.
And our residential lending business, we purchased $2.7 billion of jumbo loans during the first quarter. The majority of the first 60 days.
From a distribution perspective, we were fortunate to be in the market early during the first quarter completing three so like securitizations in total for $1.6 billion.
It's only $1.1 billion of selecting choice hole logs to third parties.
Our first use of course Securitizations repriced ahead of the market volatility and saw strong execution.
While the third transactions executed at a less advantageous level.
Nonetheless, we priced our most recent transaction in advance of the peak volatility in our ability to do so allowed us to use proceeds to further retire marketable warehouse stuff.
Subsequent to completing this third transaction liquidity in the non agency loans base, including for Prime Jumbo dissipated considerably.
Across the market aggregation of non agency collateral largely ceased including by some of the industry's largest buyers.
Retail production it quickly became subject to stringent credit overlays for bar credit score and other loan features.
Against this backdrop later in March we became more selective in our loan purchases and to give some significantly reduced our volumes.
Focusing efforts to acquire distribute loans, while seeking to minimize market for us.
In support of his work, we recently procured a non mark to market warehouse facility that will fabs existing loans and portfolio and also providing ample room for new production.
Similar to residential lending a BPL business started the year with substantial momentum and for the quarter our platform originated $486 million of SFR virtual items.
As in residential lending the vast majority of this activity occurred in January and February.
We priced one SFR securitization for the quarter in early March just prior to the onset of increased volatility where the transaction closing just after many of the shelter in place orders had commenced.
Subsequently, we began to slow the pace of fundings considerably in part driven by the fundamental challenges to origination workstreams caused by the pandemic.
Including procurement of appraisals and other related requisites.
Earnings in our BPL segment were also impacted by our decision to impair all the goodwill associated with our acquisitions and 29 Kim.
This represented an $89 million charge or 78 cents per share.
Leaving us at March 31st 2020 was $69 million of intangibles related to these acquisitions.
There are many factors several of them technical.
The drive an impairment analysis. It is important to reinforce the significant strategic value, we see in our BPL business going forward, including near term prospects to continue money to top quality sponsors in the market and Youview is ripe with opportunity.
The lately, we have made substantial progress in recasting, how we finance or BPL activities, including the recent completion of a 500 million dollar non mark to market facility.
Thats SFR and bridge loans.
The facility currently finance is a significant portion of our BPL portfolio, but also includes headroom to finance go forward BPL originations, particularly valuable feature given what we view as attractive near term lending opportunities within this market.
Additionally, we are currently progressing work on the other data regimens, including enough so far securitization.
Completed will provide non recourse non mark to market financing on the substantial remainder of our BPL portfolio.
Well, we believe our recent activities firmwide have significantly strengthened our balance sheet and ability to withstand further market dislocation. There have also impacted our current mix of investments.
Certainly as we continue to refine the appropriate amount of breast capital to coupon and given our recast liability mix and the potential for further volatility and as the broader investment landscape hopefully comes into clear focus.
We believe our current cash position the largest and the company's history affords us the ability to explore any number of capital deployment opportunities.
Given that we're still in the midst of this pandemics. It is difficult at this point to define the exact contours of these opportunities.
That said, we believe the operating flexibility the from puts us in a position to capitalize on what the market will there be it through our operating platforms when they open market.
As such overtime, we expect our capital allocation that's to continue to evolve and based on where we see the best relative value. Although it's been close to our main competencies and housing credit as well.
Well quarterly as well as always drive our go forward strategy.
In the meantime, we remain focused on managing our existing portfolio, including leveraging our internal service or oversight and mode administration teams.
While predicting credit performance is a fluid exercise in the middle of a crisis that helps to reinforce the core underwriting metrics of the loans in our portfolio that underpin our sheet securities many of which are detailed in the Redwood review.
For Jumbo loans. These include average like as of mid seven hundreds or higher and substantial bar down payments that origination.
For BPL, you need to focus on sponsor equity experience on liquidity.
Well underwritten Catholic coverage metrics and loan structures are appropriately aligned incentives.
And with that I'll turn the call over to college public CFO.
Thanks Dash and good morning, everyone.
As Chris and Das discussed our first quarter earnings and book value were significantly impacted by the tends to make which ultimately led to substantial losses on our investments and an $8.28 loss per share for the quarter.
The majority of these losses were driven by negative fair value changes on our investments.
Operating businesses were also impacted as profitability was negatively impacted due to less favorable executes on securitizations, we completed in March and lower marks on the remaining loan inventories we held at quarter end.
A residential mortgage banking operations had a net loss of 19 million for the quarter and our business purpose mortgage banking operations had a net loss of 12 waiting for the quarter, excluding the impairment of goodwill.
At that discussed we believe our business purpose platform continues to have a meaningful and let's say in strategic value.
Reforming our GAAP assessment, we determined it was necessary to impair the platforms and tangible value.
And recorded impairment charge of 89 million effectively writing off all of our goodwill associated with a segment.
And it changed from prior quarters, we did not disclose non-GAAP core earnings for the first quarter as we determine that this measure as we've historically calculated it does not appropriately reflect the economic impact of dependent I kind of results.
As financial markets stabilize we will evaluate whether core earnings or other non-GAAP measures can be relevant and evaluating our operating performance in future periods.
Our losses for the first quarter contributed to nine dollar and 66 cents per share decreased in our book value at $6.32 per share at March 31st.
This decrease was primarily driven by negative fair value changes our investments that ran through both our income statement and our balance sheet to comprehensive income.
Shifting to the tax side, our Retaxable income for the first quarter was 33 cents per share.
Compared to our first quarter dividend of 32 cents per share.
Although we experienced losses on investments held at every for tax purposes. These can only use the allstate capital gains and do not reduce the taxable income in our circumstance.
We ended the quarter with an available right in a while of approximately 27 million.
Looking forward this will provide us with some flexibility around our dividend.
It's Chris discussed we have taken and continue to take more important actions to reposition the business and our balance sheet for the current environment.
Given the significant that somebody changes we felt it was important to provide investors with the forward looking view of our capital and funding positions and the Redwood review. We included both current company update and pro forma financial information that provides insight into what we expect our balance sheet and capital position to look like inclusive of April activity and the settlement of certain.
These transactions.
Continuing to build on the progress we've made to date, our pro forma basis and accounting for the payment of our dividend. We expect our cash balance increased nearly 600 million in a marketable debt to decrease of 1.1 billion.
The vast mentioned, we're making progress on additional transactions that will further reduce some marginal debt.
Using our March 31st pro forma total reports that 2.6 billion and our tangible book value at March 31st we estimate or recourse leverage ratio would be four times on a pro forma basis.
Well this amount is near the high end of our historical part of your range is driven by what would be is depressed prices on many of our assets.
Relative to before the pandemic, our new funding structure will have significantly small exposure remarkable debt.
That's just got split this new capital structure in place, we believe will be in a solid position to handle for the near term market volatility as the broader investment landscape comes into clear focus be well positioned pursuing opportunities.
One last topic I want to touch on is servicing advance obligations.
This is garnered a lot oppressive weight and since we own servicing rights and had very servicing obligations in relation to Sequoia Securitizations, we sponsored we thought to be helpful that scope out our exposure there.
And overall, we believe our exposure is very manageable with the servicing obligations associated with 11 billion of underline there's no loan principal.
And we estimate that for each 10% of delinquencies you'd have to advance approximately 6 million per month.
April Thirtyth the delinquency rate on bonds was just over 3%.
Now three quarters of these on top of 120 days stopped the best structure that limits, how long were required to make advances.
These bigger referred to the mortgage servicing advance obligation section of the Red wouldn't you for further information on this topic.
I will close or their outlook.
Given the uncertainty surrounding the future economic impact and pandemic, we won't be issuing any earnings guidance at this time.
What we do know now is that are in place investment portfolios are to bases that should provide attractive returns going forward and by themselves generate positive cash flow over our total current expense load, which it's Chris discuss they've reduced to align with an expected slowdown in originations.
As it begins to gain more clarity on the operating environment and the pace of recovery from the pandemic will be better able to assess the new baseline for operating platforms and evaluate the opportunities begin redeploying and appropriate portion of our substantial cash position to generate incremental earnings.
And with that I'll conclude our prepared remarks, operator, please open the call for Capex.
Thank you.
And then answer session will be conducted electronically.
Good question. Please press star one on your telephone keypad.
If you already speakerphone. Please make sure your mute function is turned off to allow the signal to reach our equipment I guess not start I wonder if he would like to ask a question. We'll go first to Doug Harter with credit Suisse. Please go ahead.
Oh, thanks understanding that it's still a fluid situation biggest can can you think or help us understand as you look at the unrealized loss you know that on the assets you retained how much of that might be expected credit losses, and how much of that would kind of increased.
Sorry.
It means that we're kinda so play slumped onto the securities.
Yeah, Hey, Doug.
We're not in a position to do that with a sufficient level of specificity, mostly because we're still modeling out kind of how how this recession will play out in how extensive it will become that said.
I'd say the significantly.
Vast portion of the higher discount rates liquidity driven.
We haven't you haven't observed mark good credit deterioration in our book today by in any material level. So you know women's is.
Right.
You know obviously there are some some deterioration, but it's it's been minimal overall and certainly not reflective of the significant decline in price of these assets.
Great and then I guess do you have any.
Historical information deployments to kind of you know how do you know some of the business purpose loans might perform in a period of stress you know when again, just if you could just remind us kind of what the loan to value is and you know kind of how how those underlying assets might.
Performance, you know kind of.
Expectations around you know kind of home price declines for the type of vessels.
Sure Doug its dafs thanks for the question.
In terms of the underwriting parameters you know for those sorts of products, we do think.
Going into you know the potential cycle here that it would be the underwriting rigor and little structures of those loans.
Our definitely a positive you know what average or the average upfront equity is over 30 points. So average LTV across the bridge so far book.
I was in the high Sixtys, a huge structural benefit across pretty much the entire SFR book at a good chunk of the bridge book is also cross Collateralization of these loans yeah. As you know the majority of yeah. So far we do have the vast majority.
Our on multiple home portfolios, where we get the benefit of cross rental streams as wells as well as cross collateralized.
Equity.
In the annoying homes are a good chunk of our bridge portfolio. It similarly structure, a where we had the benefit of cross collateralization across the portfolio, where a sponsor maybe.
Rehabilitating for sale around I would mention that a good percentage of the bridge book our sponsors do you have.
The the investment strategy of stabilizing and ultimately renting out a good portion of our asked if our business in general represents terming out our bridge bars and so there's a visit there's always been a lifecycle continuity.
To the business, which we think well actually really help us.
Going forward, because we have more privy to the borrower frankly.
Relative left less strategy to rely on a disposition of it asset.
Versus the stabilization. So we think those are both good strength on the SFR loans, our average debt service coverage underwritten de SCR is between one three and one for you know so we have.
You know received I would say at this point pretty meaningful feedback from from our largest sponsors in terms of April rents and even into May and frankly in some of it is geographic specific but.
For the most part sponsors have seen you know a rental collection rates on par where there maybe a couple percentage points below.
Where they have been before the crisis in fact, many of our sponsors have actually reported an increase of lease outs for to be for their single family portfolios.
Anecdotally with certain tenants looking to move out of multi into single family.
And so you know we're still early innings here potentially into presses point, we don't want to necessarily overly prognosticate.
The next couple of quarters will play out you know we do expect.
You know the workload and managing the wants to go up that's to be expected. These views and these are high touch assets at some level to begin with in terms of just relationships with the borrowers have adopted those relationships but.
You know today, we've we've been we've been pleased with what we've seen and again the loan structures and as I mentioned in my remarks.
The sponsorship liquidity liquidity of the sponsor yeah. The required a generally that we that we get all their equity in upfront.
You know, we think is really really important as well as the concentration of being Hawaii strategy to term out a lot of these portfolios.
Thank you.
Well go next to Stephen laws with Raymond James.
Hi, good morning.
Great to hear from everybody I Hope I hope all or are doing well in these times and all of their bodies spread out, but oh bones. Good.
Quick start maybe.
How to think about.
You know where the portfolio good maybe near term I know, you're still undergoing a number of actions and looking especially to focus on the non marginable financing.
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And your continued to take action last few weeks, how do we think about additional sales from here are there certain assets you targeted as it is it really bar on the other side, where it's about a change in the financing type kind of how do we think about her our portfolio.
Model.
In the near term, obviously before we start thinking about focus on Portland.
Hey, Steven.
Good morning, and venture the question.
Yeah, It's a big question overall.
No we start with the.
The 550 of cash which is dash mentioned is the most of the company's ever held and I personally described are pretty high multiples to that and in during pandemic times. So we have a lot of optionality and how we move forward I think we moved away from.
If that heavy selling of assets or dispositions and we're much more focused on go forward strategy and with our cash position with these non marginable duct facilities as well as our ability to to securitize. We're we're in the midst of.
Rethinking how we.
Good our businesses.
You know, how we evolve them to do you work optimally in this type of environment.
I think the opportunities you on the under beat the all side, it's a little bit more straightforward because you know frankly, we're not competing directly with banks and that sector. We are in effective leader in that space, So our pricing power in or our ability to structure rounds.
Some of the near term economic realities is frankly quite a bit easier.
And then there's some of the consumer products. So there you know we see a lot of attractive opportunities and our are working right now to to to.
Get that business moving.
In and get things are starting to normalize or they're going to Reggie side, we're starting to see a lot of distressed opportunities. There's still a lot of engagement with the fed with respect to TALF or pls, which would be a big positive.
We're seeing a lot of orphan assets sitting on warehouse lines jumbo assets.
That or potentially a good opportunities from a pricing perspective, and we're also starting the process of the day to day business or most of you know buying loans and distributing so we got a lot in the works and I think.
You know someone remarks.
They are in there right up you know Q1 was was essentially a kitchen sink.
Quarter and worked hard to be in a position to try and turned the page here and ER and the position.
Yes, great, particularly the health of their think sounds a ball question.
I'll follow up question for me on the FHLB kind of a few a few smaller questions when.
When should we expect that line to reach the ROE I know I believe I read in the review that that's a is expected later this quarter urea and I think you owned 43 million at that they'll be thoughtful in the balance sheet I haven't had a chance to look in the update but I don't know how quickly do they we purchase that I assume it's 43.
In a cash coming in.
And then or is there any reason you would say a member of that they Tobey I believe in number of years ago, maybe origination program or pipeline was put in place, but it's some general comments on FHLB relationship where that goes from here.
And if you'll sell that stock and get the 40 to one of the cash thanks.
Sure.
As far as the stock goes they're substantially all of that you will get back on there is a small piece I think around $5 million that is the agreed upon as a longer term holding that that may not come back for five years, but the rest of the stock sort of builds with the size of the facility.
And as we pay that down I think we're down to $230 million or show of advances, we're able to to pull that stock back as well as are our cash.
Overall, we expect to have that substantially paid down in the coming days, frankly, whether or not it goes to zero as far as the B a long term relationship really hasn't made any determinations there.
I would call out.
A number of bankston, Counterparties, who helped us.
Wind down that facility.
There is a very panic driven time and.
No, we needed column and strength and and collaboration and you know the outreach and the support we got from your strongest span Counterparties was really impressive and probably the point at which we would you will turn the corner here. So it was really great to see and and B b cells of the out.
That's we're extremely constructive.
We ended up a building a lot of cash as seen on the balance sheet from where those have been financed or where they were sold so it was a very very positive outcome for us.
Great appreciate the time, thanks for taking my questions.
Thank you.
Next to Matthew.
Good morning, everyone. Thank you show for taking my question.
Before I get to sort of questions I've just on towels, that's interesting comments not develop a surprise I left out.
Not even see any any kind of update where the conversations are going live taco, allowing.
Every other acid in the White House I had they left out non agency space.
That's a great question [laughter], we're still trying to figure it out.
No I think that.
No. It wasn't included in the last.
Tell program and perhaps one of the reasons was rather you provided at that point or was the driver of the crisis.
I think when they reinstituted the TALF program, they just dusted off the manual and.
Because residue wasn't in it than no. It wasn't it now I think initially you know when they added CMBS.
We assume that that was sort of debt.
Through you know additional meetings and conversations we believe that they are strongly looking at Pos at this point and I think it will be a great thing because it would it would really accelerates.
A return to normalcy in the sector I'm, just having confidence in financing liquidity available if nothing else from a messaging standpoint, I think would go a long way so.
We're waiting and standing by to the extent we'd be helpful.
For those guys, but but I'm more optimistic on the prospect and when I was a month ago.
Great Great <unk>.
Yeah. The question I guess, just you went over in detail in terms of what you sold why you sold stuff.
Well, Mike books from one is going to remember Redwood. So we've been very conservative on them under evaluation deals could I get it said quotes.
Remind me again, so just skew held onto more at a higher quality, maybe some somewhere the subordinated securities that.
You felt has longer.
Upside.
Then them, we're sort of more liquid up and quality stuff that you sold to sort of de lever is that sort of how do we think about.
With a portfolio away and what you sold versus what you retained.
Yeah, you know first of all we have always been I think you know to the letter of the rule with respect to valuing assets and.
Good side, where they can be sold pandemic no pandemic, Oh, I don't know that it's always Oh, we benefited us, but but no doubt friends more transparency.
Continues to apply so we've taken some heavy heavy price adjustments on assets that frankly, you know their model expectations.
As we haven't changed so we do we do think that be book nothing that is higher quality than it was based on on the assets that we sold.
And we do expect by and large or assets to perform.
They were well underwritten and well nobody nobody Ah I think model. This type of pandemic I do think that anecdotally. The performance we've seen in the last month or two gives us some confidence that that's.
We'll be happy with the ultimate outcome, but I'd say overall, you know whether it's our MSR, Mark which I think I think our multiple was at one eight which was below JP in wells.
We then you know across the board just as transparent as we've been possibly be in and you know that that hurts with respect to our first quarter results, but hopefully provides us a good some you know basis for building for the future.
Got it goes a long long history of value in this stuff last question did you did you know so you're in the market with a CLIA deal I just remember he says breaking through each as intense or the first jumbo non issue was pretty low my transactions type. It just goes to be announced that it had been the market with 60 a deal in.
But at the levels is keen to get there.
Hey, Matt its das nodes to clarify my remarks, what I was alluding to is were we're exploring a securitization.
On the SFR side, it's early days and we'll have to reserve comment until the deals completed but it was on the SFR side not that's correct.
Let me ask it this way to do you think that and we're AAA starting now you see the market equates to get the the best in class shelf here do you think you know they think that you could you in the market sometime in the near future with the cyclicality.
We don't have any immediate plans, but as far as the thought process you laid out certainly right now what's what's going on in the non agency spaces is I think there's still a fair amount of cleanup.
There's there's loans that are trading at discounts to clean up warehouse lines and and.
Just get them through the system. We're start we're slowly starting to see opportunities to know where no new products will start to make sense and no TALF as I said would accelerate that but overall you know whether it's a securitization of.
Slightly seasons are more distressed price assets or something on the of the new issue variety on our new collateral will be focused on both and no. I think it's you know the one thing I do think is different this time around is.
The last crisis, obviously, the underwriting standards had significantly deteriorated.
In addition, due to the extreme leverage with Ltvs borrowers had very little equity in their homes.
This time around that wasn't the case and Ah you know the loss experience on on the jumbo side.
Well, whether it be forbearance shore or delinquencies, you're still going to to roll through the process and emerge with where the borrower that Scott is strong down payment or potentially has participated in multiple years of H.P.A.
So overall I think that each well to a faster recovery and you saw after the last crisis and you're right.
We did we did complete the for a securitization I think in 2010.
After that crisis.
Yeah, I remember it very well thanks, a lot guys.
Thanks.
Well go next to Kevin Barker with Piper Sandler.
Thank you.
You know in regards to the you know $5.30 a fair value changes on your assets and decline in book value. You know when you think about various investments currently on your balance sheet.
And the potential for recovery of value over time.
Are there any particular assets it stand out where you think would see them as you're talking near term appreciation in your view.
Just given what the market looks like in how it's being cleaned up per your comments on the not easy market.
Hey, Kevin its dash.
Lets say a couple of things first of all since the end of the quarter.
You know we have seen various parts of the Caf stack definitely from up.
Yeah, that's a big driver behind that book value of the estimated book value. We just talked about at month end for April.
So you we've definitely seen more constructive levels not a ton of trading volume, but I would say constructive.
Friends in the secondary market, you know more up the capital structure more in the investment grade part of the capital structure that some of that from a technical perspective.
Has been sort of we doubt that into the more subordinate parts of the structure, where we own but in many many cases.
You know we have not yet seen even.
Including the book value estimate we just provided.
You know as much market value moved back up you know where the more deeper subordinate securities. We owe you know, particularly in Sequoia.
In the core about Securitizations and I'm a bit more of the spoken to re performing loan investments that we have.
Again, the Christmas point, we have not seen any empirical at this point credit deterioration there we've seen the April and starting to see the may.
Remits come and so if you looked at the balance sheet today.
There's a lot of potential positive credit convexity in those deeper subs.
I don't think we've seen even yet as of this morning, I was that notwithstanding some of the technical improvement further up in the capital structure. So those are the areas.
What I was referencing in my remarks, where we see based on where we have these currently mark so the most substantial upside.
And again given that outlook when you think about the various asset classes.
Are there any particular assets, where you feel more constructed on the recovery of value just given where the down she says day.
Well I think if you look through to the underlying borrowers quality, which is what I was sort of referencing in my remarks [noise].
I would say no particular areas that we continue to like largely because of.
Like I said the underwriting strength certainly in square you know those are still 750, plus FICO borrowers with you know with great Lcvs.
Some of those bars intermittently here may have you know some some free cash flow interruption, depending upon your personal employment outlook. When you think about the equity in the homes and particularly think about Sequoia the seasoning.
In that portfolio and the implied LTV is you know the reserves at these borrowers had when we underwrote them.
Disease, that's the cohort of borrowers that from our perspective should be best able to withstand.
Yeah, the impacts of of this pandemic whatever those contours might be and so from a fundamental underwriting perspective as you know those those loans have always been a straight.
And those features you know from our perspective, a hopefully outperform and here versus other areas and then also frankly with a single family rental.
You know in many ways, notwithstanding where we sit today versus you know 12 months ago. The housing thesis that underpin that strategy is still very much the case.
And when you go back to some remarks I made in response to Doug's question. You know we've seen the rents really continue to come and.
Stress, they're from credit perspective good.
Are you able to provide edition or do you feel comfortable providing additional liquidity to a lot of those investors.
In order to get them to the other side, especially given you know the renovation work that needs to happen that might be on pause right now for line is fixing for funds.
Yeah. Great question, you know it. It's the answer is obviously, it's going to be a bar specific analysis and I would tell you anecdotally that.
It would drop the last six days a week you know we have been you know in some modicum very modest you know continuing to fun. Those construction draws across you know a good chunk of of the projects. You know it you know they think you know you know we have a very very robust process that goes into Anna.
<unk>, whether it's appropriate to.
Two needed construction draw requests yeah, we're obviously required to ensure and verify that the money's have been outweighed by the sponsor.
Oh, and we have ways to verify on site through our own work or through that of our vendors that the work has actually been completed would it would eyes on the project and so.
Nope frankly, you know with a good chunk of our book work is actually ongoing you know if you've got a lot of geography either.
<unk> geography is where where are where above is in that in a poke a business. You know work is continuing and.
You know for projects that we view is progressing we're we're happy to meet those jobs because they represent progress towards an outcome like in many cases stabilization and rental like I was alluding to earlier so.
There will be bars, you know that potentially a lot to pause or pivot their strategy and will will react accordingly, but it really isn't it depends and as you can you can imagine that that has been in <unk> they'll continue to be a bar by bar or else. This project by project.
I think could your mind is what the the out the average L.T.V. on that particular is on Preconstruction and pro forma basis.
Yeah, it's in the high sixties or so on.
Sort of as his basis and then it it dressed as a low to mid sixties on it and after a pair of basis.
Thank you very much.
Thanks.
Okay next coupons charge.
Yeah.
Hi, everyone and she wanted to ask just about the Dayton day operations on the Jumbo businesses you guys walking loans you know just curious what's going on there just operationally.
I hear those.
I'd say, we're yeah, I I think the entire entire sector at the pause button for a period of time and.
The you know you show Wells Fargo actually have to correspond to a channel and and as well as others you know for us.
We have then transacting as recently as this week.
And I'd say, it's I'm much more on an assignment basis. Then you know the full assembly line running but you know what we're working towards is to safely kind of get back to business and and the the two faster to that or or one just making sure that.
We've got the right facilities in place.
We've got the right you know underwriting standards in place and we've got the right distribution in place. So you know once those all come together I think you'll see volumes really started to pick up.
I do think that you know math plays a factor as well as far as new scaling that business and you know where mortgage rates are today, you know, obviously jumbo somewhat detailed there from from agencies for for some of the reason you guys. All know about you know as as bad.
As that relationship should have we read correlates you'll start to see you know more and more jumbo borrowers in the money.
And you know, there's gonna be A.A.A. Wi Fi major <unk> opportunity here just a question is one.
I'd say it's.
No. We we were taking it day by day, we don't plan to have any type of big Bang, but we will start to lean in here and get back to business.
Okay. Thanks makes sense and then just in terms of the portfolio sort of run off how much cash as being.
You know generated as the portfolio sort of on a monthly basis. For example, and then in terms of catch that's coming in now you know you sort of looking well that <unk> the portfolio essentially it's you at some of these businesses take a little while to get wrapped up again.
But it was on your first question there are.
A good chunk of our security and there's you know are sort of locked out in that school. The case, but you know monthly in clothes or so it's better to be on the 10 to 15 million range you know from from a free cash flow perspective.
As it relates to deal averaging it it's sorta depends upon the structure in which.
You know the assets or how you know our our barring facilities on the whole on side do very but in terms of how those structures work in terms of how the caches divvied up.
But certainly you know majority that principle on the whole on book as it comes down to the extent those loans or finance.
Certainly pay down the allocated data at least in some cases potentially do you live or the structure overall, it's sort of depends upon habits.
It didn't facility worse.
<unk>, Okay, <unk> think that.
I have no other questions about this time I'd like to turn it back turn excuse me hour per cent trust for any additional are closing remarks.
Thank you. Thank you everybody it's been turning it's this morning.
I keep thinking like you can have a great game.
Okay Conference. Thank you all for your participation.
Okay.
Yeah.
[music].
Ah.