Q4 2020 Redwood Trust Inc Earnings Call
Good afternoon, and welcome to the Redwood Trust incorporated fourth quarter, 2000, and 'twenty financial results Conference call.
During managements presentation. Your line will be on a listen only mode.
At the conclusion of the prepared remarks, there will be a question and answer session.
I'll provide you with instructions to join the question queue after managements comments.
Today's conference is being recorded.
I'll now turn the call over to Lisa Hartman Redwood the senior Vice President of Investor Relations. Please go ahead ma'am.
Thank you Andrea and Hello, everyone and thank you for joining US with me on today's call our Crystal ball tell the Redwoods, Chief Executive Officer, Gosh, Robinson, Redwoods, President and Collin Cochrane Redwood Redwoods, Chief Financial Officer.
Before we begin I want to remind you that certain statements made during management's presentation with respect of future financial or business performance may constitute forward looking statements forward looking statements are based on current expectations forecasts and assumptions and involve risks and uncertainties that could cause actual results of <unk>.
For materially.
We encourage you to read the company's annual report on form 10-K, which provides the description of some of the factors that could have a material impact on the company's performance and could cause actual results to differ from those that may be expressed in forward looking statements of.
On this call. We may 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 for measures of financial performance prepared in accordance with GAAP.
A reconciliation between GAAP and non-GAAP financial measures is provided in our fourth quarter Redwood review available on our website.
Also note that the content of 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 to reflect 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 Crystal ball tell the Redwoods Chief Executive officer for opening remarks.
Well, thank you Lisa and thanks for all of you for joining the call today.
The other clubs it on the past year, it's hard to contextualize, what our country and it's been through the operating weeks of 'twenty 'twenty one.
And all of a 22 of them about.
Without question a lot of turmoil in Washington, and.
The economy still rocked by the coronavirus pandemic and Dallas generally populist revolt and the way I'm Wall Street. It's.
It's hard for any investor to navigate all of the to multiple and volatility.
So we feel all of the more fortunate that sort of emerged from such an unprecedented here and a renewed.
Additional strength.
It's motivated us to make 'twenty 'twenty, one and the best year and a couple of them.
That's true.
We exited the 'twenty 'twenty with momentum building across both of our platforms, including record lock volumes and the residential of London, and very strong originations and contribution for the business purpose lending.
GAAP earnings for the fourth quarter were 42 cents per share well in excess of of 14 cents per share dividend and our GAAP book value increased 50 cents per share from the third quarter to $9.91 for the fourth quarter.
Based on the trajectory of our operating businesses.
Vacations for sustainably higher net interest income throughout the year. We are confident that we can safely support and stable to growing dividend and 'twenty and 'twenty one.
The plan to announce our first quarter dividend and March.
Looking ahead of our strategic priorities for 'twenty and 'twenty. One include allocating ample capital for our residential consumer and business purpose lending platforms, doubling down and our technology and investments to scale our business and.
And to support and develop our team members.
Strategically speaking the COVID-19 pandemic as AUM and further validated our core investment thesis that's the bad for single family detached housing is growing significantly.
We expect much of that demand to be durable it's free.
Families choose to move away from dense urban areas and more people are able to work remotely out of the homes, regardless of cost of and each of the workplace.
This has already caused the ripple effects across both the residential and commercial property sectors, especially the major metropolitan areas.
That's why our primary focus for 'twenty and 'twenty, one will remain on our operating platforms.
Operating capital reallocate for these businesses.
Specced at the generate returns on equity North of 20 per cent post tax levels very difficult to come by and sourced from third party investments and today's depressed yield environment.
Most importantly, these businesses serve large and growing markets not covered by the government lending programs and that.
As such our position to generate scalable and repeatable sources for future earnings even in a lots of accommodative interest rate environment.
Since there are and within our taxable subsidiaries. The earnings generated can also be retained to provide a steady stream of internally sourced investment capital that can be deployed the further grow earnings and book value.
Turning to our investment portfolio, our portfolio remains a strategic element of our business model that supports of operating platforms and third party of investing activities.
Overall credit performance of the book remains strong.
As delinquencies have continued to decrease since their peak and the summer and strong home price appreciation that's kept the actual credit losses well.
This means that even if we read trace back the pretty good pre COVID-19, and valuations we continue to expect significant and further upside and these investments Cup.
Coupled with positive credit trends high prepayment speeds have begun to unlock additional value and most of our credit investments held at a discount to par.
And the channel the way Yogi Berra, I'll remind everybody the loans that prepay don't default.
All of the technology fraud speed and disruption are top of mind in 'twenty and 'twenty one across the Redwood enterprise the go.
And was not simply to grow volume or is the more securitizations.
For them to fundamentally change how the non agency sector operates for Magna and <unk>.
The details more speed and automation and do you think technology at the forefront of our planning process and the path.
Last several months, we have launched several new technology initiatives and through both organic and new venture investment strategies and just today. We are announcing the recent launch of art of U T Horizons and new venture investing strategy focused on early stage technology companies and business plans squarely focused on innovations.
And that can disrupt the mortgage finance landscape.
The amount of capital deployed for this new platform will likely be smaller at first however, the investments are designed to have an outsized impact and how our business operates.
Our strategy centers on creating new efficiencies across the mortgage value chain, and thereby making us more meaningful partner to the broad network of market constituents to whom we provide liquidity.
We expect to have a steady stream of new technology releases across our platforms that we're excited to share with you and some of which the ash will cover more detail on today's call.
Paramount to our success are our people and the core values by which we conduct our business.
Caring for our employees has never been as important as we continue to support our team members and the families through the impacts of COVID-19.
The investments and our employee programs and stewardship of our culture and strategic priorities and we're proud of the work that we've done to engage develop and retain our work force over such a challenging year.
We stand behind our core values, including and earnest focus and diversity equity and inclusion and the.
The commitment to strong corporate citizenship, both socially and environmentally.
Our commitment to our larger communities and volunteerism and charitable giving of also remained and sharp focus for us, particularly as our share of humanity and it's been amplified by the COVID-19 pandemic.
We believe our strategy will enable us to scale, our business and take market share.
Grow durable and repeatable earnings and <unk>.
All of our mission to help make quality housing, where the rented or owned accessible for all Americans.
For the optimism on the horizon for 'twenty and 'twenty, one we're looking forward to the positive impact the redwood can make for our collective stakeholders, including our shareholders our employees and our communities.
That concludes my prepared remarks, and now Gonna call I'll turn the call over and the Dash Robinson, who will walk through our operating results and more detail.
Cash go ahead.
Thank you Chris.
With record performances from our operating businesses during the second half of 'twenty and 'twenty, we entered 2021 and a position of strength.
Our fourth quarter results reflect continued improvement and the broader credit markets, the depth and breadth of our competitive advantages and.
And the opportunities for our business to further build market share and growing segments of housing finance.
Our crisp execution during the quarter was supported by progress on key technology initiatives and increased efficiency and turning our capital.
Before getting into our results I will further discuss some of the key housing industry trends we are observing.
The themes, we saw and the third quarter have continued and tailwind for our operating businesses remained strong.
Secular trends driving single family housing demand do not appear to be abating.
Even with the promise of of vaccine consumers are embracing the flexibility of the work from home model the tailoring them from urban centers.
And creating a substantial pocket of fresh demand for housing.
The need for space and functionality to conduct business and private homes has driven higher home values and all price points and turn fueling the potential for expansion in both of the owner occupied and and Investor owned segments of the market.
Home price depreciation continues the pace as demand for single family homes is far outstripping supply.
Market observers estimate the U S housing stock and a total of $2 five trillion dollars and value in 2020 and.
Including $2 two trillion dollars from appreciation and existing homes nation.
Nationwide home prices were up over 10% and year on year and December.
And while the number of homes sold rose over 20 per cent inventory available for sales fell over 40 per cent.
Retail inventories and its tightest level ever and many top markets and on average stands at less than two months of supply.
It's more mortgage rates have remained at or near record lows. Even his 10 year treasury rates now stand at more than 25 basis points higher than in late December.
And while the pandemic continues to impact certain segments of the labor market and different ways. The personal savings rate at year end was up 90% from the end of 2019 as.
And as such a key outcome of fed stimulus has been meaningful upward pressure on bank deposit levels. The phenomenon that among other things has important ramifications for bank appetite for assets.
This data coupled with the demand trends, we are seeing for our products and the performance of our portfolio makes us optimistic about our immediate and long term opportunities for growth.
In many ways, we will measure our success in 'twenty and 'twenty, one by the velocity with which we enter 'twenty and 'twenty two.
We believe our competitive positioning and commitment to technology solutions and deep client base.
We'll allow our businesses to operate at a steadily increasing capacity as the year progresses.
Now I'll turn to some key metrics for the fourth quarter.
Sparkling results from a residential and BPL platforms, coupled with strong performance and our investment portfolio drove a 20% annualized return on equity for the quarter.
And our residential business, we recorded a record $3 $8 billion of locks with over 90 discrete sellers of 81% from the third quarter.
The loan purchase commitments those adjusted for potential pipeline fallout during the quarter were $2 5 billion more than double the amount and the third quarter.
The momentum has continued into 2021 as January locks totaled $1 $6 billion the.
And the vast majority of our locks continue to be select loans, which are reflecting some of the strongest credit metrics. We have seen since the great financial crisis, including average FICO and the high seven hundreds and debt ratios of 30% or lower.
These record volumes were well balanced by our multichannel distribution model during the quarter, we achieved strong execution on two securitizations backed by $669 million of loans in aggregate and.
Including the $345 million single Investor securitization placed with the insurance company.
We also sold over $800 million of loans during the fourth quarter and entered into agreements to sell for an additional $1 billion expected to settle in the coming weeks.
We believe that in 'twenty and 'twenty, one we will see a pronounced increase in consumer demand and for jumbo loans and that we were and the early stages of the historically significant refinancing wave.
With the rates remaining low and we are seeing our seller network continue to hire additional loan officers to support pent up demand and the jumbo pipeline and an increase and participation and our seller training sessions.
In December we officially launched the new seller of initiative Redwood rapid funding demand has exceeded our expectations and as of January 31, we had funded and you'll hear $120 million of loans through the program.
We are and the process of Onboarding several more sellers as we transitioned from the pilot phase into a more formal program for a broader set of our clients.
Additionally, we recently launched the pilot phase of the Redwood live and App based tool designed to give our sellers of visibility into the underwriting process with live status updates for each of their loans.
Also during the fourth quarter, we launched the new initiative to modernize our workflow on the capital markets desk.
Which will include an end to end solution for accessing reporting and analyzing standardized loan level data for our Sequoia Securitizations.
This platform will provide secure real time data and transparency on the underlying loan performance within our existing securitizations and of portal for potential investors during the marketing period.
And the coming months, we look forward to sharing more on these and other new programs, including the automation of certain portions of our underwriting process.
Turning to <unk>, our investment thesis for entering the business purpose lending segment continues to be supported by origination growth and clean credit performance corvettes.
<unk> continues to pose truly differentiated operating results fueled by growing consumer demand for single family homes for rent and institutional investor appetite for the asset class.
We originated $448 million and BPL loans during the quarter up 71% from the third quarter of.
Almost 80% of this production was and single family rental loans for which demand from the securitization markets remains a highlight.
We completed two securitizations and the fourth quarter, including and innovative single Investor transaction placed with the leading insurance company or.
Our broadly distributed deal was backed by $274 million of <unk> loans and was particularly well received by the market.
Certificates of place with third party investors represented 91% of the capital structure with the weighted average yield of one point for 8%.
This was 20 basis point improvement upon the already strong execution of our previous issuance.
The single Investor securitization provides $200 million and financing for <unk> loans and includes the unique ramp up feature that enhances capital efficiency and reduces our reliance on traditional warehouse funding.
During the fourth quarter, we distributed $60 million of <unk> loans into the structure and expect to complete the ramp up later this month.
We intend to pursue similar deals in 'twenty, and 'twenty, one, which would accelerate our ability to grow the business with more efficient use of capital and reduced market risk.
Additionally, in the fourth quarter, we called one of our previously issued as of our Securitizations, which had $75 million of outstanding loans.
The majority of these loans have either been refinanced of re securitized and the call allowed us to recycle our capital at a significantly improved cost of funds.
Our BPL borrowers are encouraged by the resilience of tenant performance this past year and.
And continue to raise additional capital to expand their portfolios and.
Importantly, we continue to believe that there is a deep group of potential borrowers and many of which are seasoned real estate investors that remains unserved by these types of lending products.
The tailwind of that fueled our residential and BPL businesses have also positively impacted our investment portfolio.
During the quarter of the fair value of our Securities book increased approximately 3% supported by continued improvement and credit spreads and strength and underlying credit performance.
Overall, 90, plus day delinquencies and our securitized portfolios across the jumbo and S. O far are now below 2% and.
Additionally, elevated prepayment speeds are accelerating our ability to unlock the value of many of our subordinate bonds and the majority of which we have the right to call and specified dates for once the underlying pools pay down to a certain size.
These call rights are generally of par, reflecting a discount to our current estimate of the fair value of the underlying loans and.
In total the net discount and our securities portfolio as of year and was well in excess of $400 million.
And while expected losses will to an extent influence its full realization. This discount reflects substantial potential upside to book value.
All in all we remain very pleased with how our firm is positioned as we start the year of.
Against the favorable backdrop for our businesses. We are committed to the use of technology to facilitate the scale reduce customer acquisition costs and serve our growing client base more efficiently.
These high quality operating earnings are complemented by more proprietary deployment opportunities for our portfolio, which should help to drive net interest income higher through time.
And with that I'll turn the call over to Collin Cochrane Redwood CFO.
Thanks Dash and good afternoon, everyone.
As Chris and Dash discussed our fourth quarter earnings and book value benefited from strong results across our operating businesses and investment portfolio contributing to GAAP earnings of 42 per share for the quarter and generating a 7% economic return on book value for the quarter.
After the payment of our 14th dividend our book value increased to $9 91 per share representing a 5% increase for the quarter and was primarily driven by the strong earnings at our operating businesses.
As Chris mentioned these businesses are operated within our taxable subsidiary and giving us the optionality to retain and reinvest that income or distribute it through our dividend.
Focusing in on some of the operating results within the business our residential mortgage banking team achieved record lock volumes, while increasing gross margins relative to the prior quarter to generate $24 million of mortgage banking income.
Corvettes also saw large sequential volume growth and improved securitization execution during the quarter, which helped to generate $33 million of mortgage banking income.
And of similar dynamic to the third quarter, though to a lesser extent business purpose mortgage banking results included the benefit from spread tightening on the $286 million of SSR loan inventory it carried into the fourth quarter.
And our investment portfolio net interest income remained relatively stable as capital deployment and to new core vest and Sequoia investments was outpaced by pay downs, which of remain elevated due to higher prepayments fees.
As dash mentioned higher prepay speeds, along with tighter spreads continue to benefit our subordinate securities that we hold the discount and.
And we saw positive fair value changes across our portfolio.
Shifting to the tax side and the fourth quarter, we had REIT taxable income of <unk> <unk> per share and 37 per share of taxable income and our Trs.
Our fourth quarter REIT taxable income was negatively impacted by year and adjustments and we expect it will shift up and the first quarter of 2021 and continue growing as we deploy capital into our investment portfolio, which is generally held at the REIT.
Given our full year net taxable loss at the REIT. We currently expect all of our dividends paid and 2020 to be characterized as a return of capital for tax purposes.
Turning to our balance sheet, we ended the fourth quarter with unrestricted cash of $461 million.
After allocating incremental working capital to our mortgage banking operations during the fourth quarter and net of other corporate and risk capital. We estimate we had approximately $200 million of capital available for investment at December 31.
Our financing structure remains stable and the fourth quarter after a significant changes in prior quarters.
Overall, we saw non recourse leverage decreased slightly to one three times at the end of the year from one four times at the end of the third quarter the.
This decrease was primarily due to some effective deleveraging within our investment portfolio from higher levels of pay downs and fair value increases during the quarter.
Additionally, as we completed several securitizations near the end of the year, we hold the relatively low balance of loans and inventory, which helped to keep overall leverage down.
As we discussed we generally expect our overall leverage to increase as we continue to build inventory levels at our mortgage banking operations. We may also explore adding incremental margin non margin of leverage to our investment portfolio, which currently has less than one times direct leverage excluding our long term corporate and unsecured debt.
And of mortgage banking operations to support growing volumes, we increased our residential warehouse capacity for.
$600 million to $1 3 billion and maintained 1 billion of capacity for BPL operations with nearly 70% of this total capacity being non margin book.
I'll close with our outlook, which is also detailed in the new 2021 financial outlook section of our fourth quarter of Redwood review.
We expect demand for single family housing to remain robust throughout 2021, which should benefit both of our operating platforms.
The we may experience, a rising rate environment, we expect most existing jumbo loans and we remain in the money and re Financeable and 2021.
And for 'twenty and 'twenty, one we will continue to focus on growth technological efficiency and increased profitability and our operating businesses, which should allow us to retain more capital within our taxable subsidiary and grow book value.
We also expect these activities to support incremental capital deployment and to our investment portfolio, which should drive higher net interest income and support of stable to growing dividend.
Looking forward, we have a range of our outlook to focus on our operating businesses, which we run out of our taxable subsidiary and our investment portfolio, which we generally hold it already with.
We think it's important to make this distinction as our operating businesses generate higher returns and have a steeper growth trajectory.
And with the ability to retain earnings from these operations over time, we expect the significant capital we have allocated to these platforms to be valued as a function of their forecast and earnings streams.
On that note at December 31, we had approximately $375 million of capital allocated to our operating businesses, including $215 million for residential mortgage banking and of $160 million for BPL mortgage banking.
And in 2021, we expect the after tax returns on this capital to exceed 20%.
We may allocate additional capital to each of these businesses to support growth and volumes throughout the year with similar return expectations.
Shifting to our investment portfolio at December 31, we had approximately $1 $1 billion of capital deployed here.
Which we expect and generate returns on capital and 2021 between 10% to 12% relative to our year and basis.
We expect net interest income to trend higher throughout 2021, as we deploy incremental capital and to largely proprietary portfolio of investments and returns consistent with or higher than our in place portfolio.
Additionally, and given current market conditions, we forecast the average cost of funds on our secured debt to continue improving throughout 2021.
To support our operating businesses and investment portfolio, we expect corporate operating expenses to be between 50% and $55 million for 2021 with variable compensation commensurate with company performance and.
And we expect long term unsecured debt service costs over 2021 to remain consistent with 2020 and approximately $40 million annually.
I'll note that while this outlook provides for strong returns in 2021, we expect that the return potential of the businesses will grow throughout the year as we deploy additional capital and continue to expand our operating platforms positioning the business to generate even higher overall returns in 2022.
And with that I will conclude our prepared remarks, operator, you can open the call for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Doug Harter of Credit Suisse. Please go ahead.
Thanks, I was hoping we could just talk a little bit more about.
The 'twenty 'twenty, one outlook for the mortgage banking businesses.
Yeah, obviously, saying and excess of 20% is kind of could be a wide range, but and you know I guess, if I look at the returns.
And in the fourth quarter.
And it looked like you generated $30 million.
And so on that equity base would be kind of north of the 30% return on equities zone, I guess, just kind of wanted to kind of drill down into that now.
Excess of 20% of a little bit more.
Sure.
Doug I'll kick it off and the dash can supplement but.
Youre right the Bureau.
Our views on the operating businesses have been meaningfully higher than 20%.
It's a balance we need the strike with forward guidance lot can happen over the course of the year as we saw last year.
But what we've seen and early on in Q1.
You gave US you know obviously plenty of confidence to go out with the north of 20% number I think of this operating environment is maintained or enhanced.
And there is a very good opportunity, we could do quite a bit better than that.
But we need to balance out.
And the number of factors and probably the most fundamental one is is the rollout of the vaccine.
And ultimately.
The recovery and the economy.
So right now the.
Operating environment remains strong.
But we wanted to we wanted to get a little bit more behind us and 2021 before we update that estimate.
No.
And.
And I'm sorry the.
Doug It's dash I was just going to add debt.
Just to piggyback on Chris's point some of the so youre absolutely right I mean, the returns on equity for that capital and the first quarter were in excess of 30% some of that.
And it does reflect some of the inventory balances we had carried into the fourth quarter, particularly around BPL, which will always do but those continue to be a little higher than we expect them to be in 2021 as we continue to.
The work out of the pipeline from the second half of the year.
And secondly, the fourth quarter also reflects what is you know, we're continuing improvement and credit spreads and so we were able to execute into that environment and our forecast we wanted to be careful not to assume obviously further further execution of tightening based on where we are today. So there are some there are some things we hope will certainly recur, but we wanted the fork.
Cash to reflect.
A durable sense of margin and volume.
As opposed to some of the things that helped contribute to the returns and the fourth quarter.
And that all makes sense.
And then I guess, just thinking about the ability to continue to deploy capital into the operating businesses.
At the the the 20% return obviously quite quite attractive.
I guess Uh huh.
How should we think about you know ability to kind of continue to grow and.
And be able to deploy more and more capital into those businesses.
Those types of returns.
Well right now.
Big component of those returns as capital turnover, so we've allocated and amount of capital for each one.
And total of around $275 million.
And you know.
And some sense to grow the the ROE and we want to we want to preserve that amount and not necessarily increase it on the loss.
We can do that accretively, but.
But right now we.
Been pretty successful.
And for the past few quarters. It goes higher ROE run rates and we're confident at this point that we can preserve that.
One thing that in addition, we're able to do organically is create investments as you know through our Pos issuances.
Most of that recently has been through core vest through our castle.
<unk> and bridge originations.
But as the residential support of deals ramp up hopefully, we'll also be putting.
A growing amount of capital to work there.
The multiple benefits for them that operating and capital at the businesses and then as we mentioned at the outset the.
And that it's tax.
And that 20% guidance was post tax.
All of those earnings we're able to redeploy if we so choose back into the businesses and I always think of that as the lowest cost of capital versus raising outside capital. So that's another accretive element to what we do.
Great. Thank you.
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, good afternoon, and very nice quarter.
Chris or dash of I guess, the start can you talk about the single investor of Securitizations, and and maybe how the the pricing and advanced rate of those compares to the more traditional securitization in may.
And maybe some comments on the ramp up feature for that so far deal how much capacity remains and is that something you can increase or expect to do continually on future deals.
Sure, Steve and thanks for the question.
I would say in general of the advance rates.
And and pricing are.
Our in line.
On the jumbo the jumbo single.
Single Investor securitization, we that was a fully distributed deal.
For the P&I bonds and that essentially.
Priced probably right on top of where we would of issued a.
Irregular Sequoia transaction of course, we had the benefit of prepay pre placing of the whole the whole structure upfront.
Which obviously has a meaningful benefit to market risk. So so very comparable.
Proceeds and effective cost of funds there versus the Sequoia deal.
The the single Investor deal for for BPL was a little bit different.
The advance rate was comparable.
Pricing might've been a little bit wider than than where we should do a careful securitization today, but when it was strong. It was it was much more in line, but what it allows us to do is basically and around the traditional warehouse financing completely. So if you think about.
For the typical process, we originate loans.
Put them on warehouse lines, and then securitize them.
Within a couple of months once we have critical mass and while those loans carry pretty well on warehouse lines.
And they carry much more efficiently and a structure like this and so what this allows us to do is break basically ramp up a securitization from day, one and the execution that we get on any given loan that we pledged to that facility is pretty close to what the ultimate securitization outcome will be which is obviously usually attractive because we use the less capital during the ramp up peer.
And we get a better return on that capital because theres more free cash flow to our position.
And most importantly, we we mitigate the market risk associated with.
Associated with carrying and inventory.
So it's been.
It is almost full at this point like I said, we expect to complete it.
At the end of this month, and we certainly will be looking to replicate that structure and some shape or form throughout the year.
I appreciate that.
Thinking about the the <unk>.
Called FSFR securitization that was called.
Can you talk and I think 600 million of calls likely this year and the and the review, but can you talk a little bit more about that and and will we see.
Well that drive the call gains and and realized gains and I know you guys had in excess of $50 million of those I guess and 2003, four and five and again in 2012 are we looking at something like that or is it simply.
The more about getting optimal leverage back into our structure and the accretion that would come from that and then redeploying the the excess capital and can you maybe give us a little more color around what we should expect the impact of be from the the securitization calls this year.
Yes, I think it's I think it's all of the above frankly.
The reason, we touched on just the net discount and the book overall.
It reflects the fact that these calls come further into the money, we would naturally expect assuming credit performance and the market conditions remain consistent with where they are today.
Theres that accretion, which we would expect to accelerate.
In terms of just what our current book value might reflect today.
And then secondly, there is the upside once we have access to those loans.
The current value of those loans is north of par and some cases well north of par.
And so and we think about calling of jumbo securitization being able to turn those loans.
And to a fresh securitization at a premium execution number one obviously captures those gains but to your point those structures have inherently deleveraged significantly and so are our effective borrowing rate would go down meaningfully or if we were able to re securitize those loans and package of them or frankly, just sell them outright.
The third parties, and which would be obviously of 100% financing.
And what's particularly interesting about the business purpose loans as the direct lender not only does the call allow us to.
And do some of the financial work that I was just describing but it also provides an opportunity to work directly with those borrowers who may be looking to refinance which would obviously be a fresh set of originations for us on top of some of the financial improvement that we would have for being able to recapitalize. The structure. So it really is all of the above and <unk> and we're excited about it obviously it will depend upon.
PON prepayment speeds and the.
And the ongoing performance of the collateral, but it's an area. We're very focused on this year and very excited about.
I remember the big gains and <unk> 305, well so.
And look forward to watching the get the calls come through how do we capital redeployed and I'm sure Chris Us too.
Yeah, Yeah, Chris one question I got asked about the dividend and certainly understand the ability which is unique among a few of you that have material Trs income.
To retain and grow book value and redeploy it and Oh.
Tract of returns here, but can you give us any.
And then when you're with the board.
Is there a target on the dividend of a certain yield or of the.
The multiple of maybe the S&P yield or how do you think about framing the dividend and then the the reinvestment opportunities you have with the capital that you retain as I think about putting and estimate out for for the coming quarters.
Well good question, Steven and that's why.
Why.
Little bit just to just to clarify that debt this quarter. The actual the dividend will be declared later in March historically, we've done it closer to the 10-K filing but.
And I think going forward it'll be a little bit later.
Far as the the direction it goes.
It's obviously set by the board, but but we're looking at.
<unk>.
From a trajectory perspective, the direction of free cash flow.
And the business is generating a lot of cash flow of cash pays dividends and income doesn't pay dividends.
And even though the operating subsidiaries of our taxable.
If we believe that that cash is best used.
To distribute that's something that's a tool and our tool kit and and I think you know what I would expect is that it's going to continue to do some combination of of.
<unk> taxable income, which we expect to grow and.
And 2021 as well as cash thrown off from from these operating.
Obsidian areas. So overall, we feel very confident where the dividend and there is today and.
I think our goal is to see and continue to go up.
Right now we are.
Or not at a point, where we can give additional guidance.
Great I appreciate the comments and.
Look forward to staying in touch.
Yeah.
The next question comes from Bose George of K VW. Please go ahead.
Hello, Good afternoon.
This is the first.
And just thinking about and operating numbers for the quarter.
Okay.
And.
And since we pulled that out is that kind of the way to work towards the number.
Sorry, Bose you were little static and could you repeat that please.
Yes, just in terms of I was trying to get to and operating number for the quarter.
And I was wondering you guys had $23 million of investment gains.
And if I remove that is that it kind of a way to think about what the operating number would have been for the quarter.
Yes, I think.
And in the past.
Bose we have.
Just the the GAAP earnings to back out the investment fair value changes and also some of the amortization of the purchase intangibles. So those are kind of of the two items that and the past we've we've put to the side when thinking about.
Kind of the core earnings potential of the company.
Something we're continuing to look at in terms of how to express that but.
Those making those adjustments as what we have historically done.
Okay, and about $5 about $5 million on the purchased intangibles and and you see the investment fair value changes on the face of the income statement, there about $23 million.
Okay, great. Thanks, and then in terms of asset value of recovery, that's kind of remaining.
Can you update us the know how much is left.
Assets continue to recover.
Yeah Bose it's dash.
We if you look back two to 12 months to 31 of 19.
It's about a dollar of share at this point of.
Of potential recovery.
If we were and are retrace.
All of the remaining unrealized losses back to to year end 2019.
And I think the bigger point, though is what I was articulating and the script, which is the.
And even retracing back to the end of 2019 is far from the end of the movie.
And in terms of unlocking value and the portfolio like we talked about with the calls and just.
Even the the more <unk>.
Accelerate the deleveraging of our positions and what that means for for valuations.
Conjunction with what's been continued strong credit performance. So so it's about a dollar of share to get back to year and 19, but we think there's a fair amount beyond that as well per hour per our prior comments.
Okay. That's helpful. And then just in terms of the debt potential recovery is there.
The way for us to think about with the discounts are and those securitizations and.
And I couldn't think of that.
The scenarios of.
How big those recoveries could be.
Yes.
The average discounts.
And with our subordinate bonds range.
From.
From 50 to 61 of the dollar to true up from there. So it is of it it is a bit of a range.
In terms of how to think about that but.
If the the $600 million of calls and potential calls for the year is one place to start.
Probably the more.
That's probably the area, where we see the more immediate acceleration of the potential accretion and then some of the embedded discount.
Could come over the next year or two.
As those structures themselves continue to delever and as our call options or ability to do other things with the underlying collateral.
And further into the money so there's a number of different scenarios.
Obviously, but it's not something that we expect.
To be fully realized this year, but we expect this to potentially be a busy year for doing so.
Okay, Okay, great. Thanks.
Well.
I'd add to that.
The discount and the book overall is well north of the dollar of share. So I think that's why gas and emphasizing that and this and this market environment.
You've seen how quickly spreads and retraced, but as importantly.
And if the economy starts to recover.
And all signs are pointing towards the major suck.
The secondary stimulus.
There is a lot there that that would really turbocharge the.
Performance of our of our overall book and so we stopped thinking about and in terms of recovery and more in terms of the original investment thesis.
Thinking about our RP all book is a good example.
One of them, if not our largest holdings and.
And that book and particular stance to do much much better with.
And with a big broad based economic recovery.
There's a lot to be optima.
The mystic about from our perspective, and the book, but.
As we've talked about.
A lot can happen and a year and were.
And just taking the one quarter at a time.
Okay and it makes sense thanks a lot.
The next question comes from Eric Hagen of BTG. Please go ahead.
Hi, guys, a couple of as well a couple of on the production side can you talk about your expectation for re ramping redwood choice of little bit more meaningfully and.
Including talking through the industry's capacity and general to address.
The expanded prime market right now and then.
Another one on the production side can you can you talk about.
Expectations for pull for pull through rates are getting loans to close and whether you think and.
And might be able to turn your pipeline of little bit more quickly if you see improvement on the pull through of side.
Thanks.
Yeah Eric.
<unk> thanks for the questions sure.
No.
Yeah.
We're off and we're obviously separated so we're playing.
Keep away here, but.
Well I'll kick it I'll kick it off and ask and supplement the choice of something that we're very focused on.
When you think about.
Just the the way of the business runs and industry capacity, usually the easiest loans go to the front of the line and those are clearly select borrowers who had the strongest credit profiles of the the easiest underwrite the the highest qualified so that that continues to be most of the story and the non.
Non agency space currently, but certainly from a purchase market perspective, the choice business as a core strategic.
Piece of what we do and so we're very focused with our seller network and our partners.
And getting that business rebuilt the business and then.
The 25% to 40%.
The last year and reach.
And quarters of of our overall production so when we think about.
Where where our volumes can go.
Haven't even really accounted for the addition of choice. So that's definitely going to be a story and in 2021.
As far as the.
The the.
Turning over the portfolio and the pull through.
Logs.
You know I'd say two thirds.
Has been refis of closer to 50 per cent of the actual purchases have been.
Purchase versus refi, so so as far as what we're pulling through.
And we're pulling through more of the purchase loans because they need to close for somebody is buying a house so.
That's been part of the story and I think I think with the Refis.
Thanks to all of the automation efforts that are underway.
To get these through the.
And the value chain faster.
A lot of it is some of it is near term wins rapid funding and certainly one of those.
Some of it's more intermediate term through automating due diligence and some of the other piece.
Pieces of the food chain.
I think there's gonna be wins.
The more immediate wins, and then theres going to be longer term.
Patients and that sort of speaks to.
Some of the some of the discussion we had about startups and some venture investing that we alluded to at the outset of the call.
Okay.
Thanks for that color you.
You guys have typically hedged your long term subordinated debt, but I think you took off that hedge last year. When you look at the forward curve is there a desire to put that hedge back on.
Not at the momentum.
And Eric overall.
Yes, Paul.
At the moment.
And we feel fine absolute yields are very manageable and and frankly there's.
There's other aspects of our debt stack.
We're more focused on <unk>.
Refinancing, but it's it's it's something that's out there and we'll keep looking at it.
Great. Thank you guys so much.
The next question comes from Steve Delaney of JMP Securities. Please go ahead.
Thanks, Hi, everybody so congrats.
And the progress ramping up your of your platforms.
Just wondering you know I guess the agency 30 year agencies about 280, what's kind of the range the tight range for your coupon on your select product and as we sit here today.
Yeah.
Hey, Steve two.
Two and three quarters to the three.
The occasionally inside of that but it's pretty similar.
So obviously, just obviously of high quality borrower and.
And.
It also tells me that leads me to the second question is you know we.
We always watch the primary secondary spread.
And the agency side, just to try to get a sense and that really affects more of the originators and gain on sale margin, but it's a it's an interesting thing and were probably.
You know, it's pretty attractive now maybe 20 basis points wider I'm just curious if you look at execution. So if you're if you're there you know.
Under 3%.
But on the other side when you look at execution on your Sequoia stuff.
How are you matching up in terms of <unk>.
And to your loan and coupons versus the bulk of that RMB S debt stack.
Okay.
First of all.
And the historical level of Triple A's.
Yeah, I mean, the triple A's have.
Come all the way back we can't speak about.
Any particular deal and the market currently, but but certainly and the neighborhood of above the one back of.
Of the current coupon TBA.
<unk> is around where the triple as had been executing and early 2021 kind of across the pls space for for Super Prime Jumbo.
The primary and secondary is still pretty attractive.
But it's definitely the do.
And the non agency space has attracted a lot of.
Capital probably for them.
Syed and definitely from other sectors just as as.
You know people kind of roll down the risk for of a bit of a roll up I should say and.
Well look for yield and frankly so.
Still.
And.
We are definitely glad to be on the issuer side.
And so that's where I was gone for some of the market but.
Yeah Yeah.
So it's definitely it's definitely you know we feel like we're on the right side of that currently but it also.
And it has us focused on choice and hasn't focused on.
Kind of the next round of borrowers to serve.
And if I understood you know pick the pick the low hanging fruit for sure and then so that kind of Rolls me right into my question about the whole loan sales.
And I know before Covid I mean, there was always the big bid there and the banks were buyers et cetera kind of your thought process. You don't have unlimited capital obviously in terms of warehouse securitization, but.
Your gain on sale opportunity whole loans today kind of relative to securitization and maybe kind of with the whole loan.
Profit opportunity looks like the sale of Chi.
It looks like today versus.
Maybe late 'twenty.
19 before Covid.
Yeah, Steve it's dash and its great question and I.
I would say.
I would say the executions as recently as of few weeks ago were on par with each other and securitization is probably a little bit through whole loan sale at this point.
But they're both they're both quite strong and I think from the the depository and like I was mentioning and my prepared remarks.
Just the amount of deposits and the the net interest margin pressure of that Depositaries are feeling are really.
Driving momentum and the conversations we're having with partners and where we're selling a lot of loans were selling a lot of loans to folks that we've worked with a lot and the past as well as some.
And some new faces as well, which is obviously.
And a very exciting because we feel like Theres a lot more to do there.
When you combine the quality of the paper that we're able to produce.
With just the need to put that capital to work.
There is a lot to do there and when you combine that of course with deposit growth plus the fact that.
These the the PFS and the CIO that these at these places are also dealing with just substantial runoff and all parts of the book, but just for context, Chris referenced the two and three quarters ish current coupon on.
On our select production I mean for context, if you look at the total universe of select loans that are outstanding right now the.
<unk> is around 4%.
And obviously those have been paying down pretty significantly so when you combine the.
The deposit growth with what we've seen in the past year with just the natural runoff and accelerated run off and the book.
There is an incredible unlocking of demand there, which we've been able to take some advantage of.
Understood. Thank you both for the comments I appreciate it.
Thanks to the net.
Question comes from Ryan Carr of Jefferies. Please go ahead.
Hi, Good afternoon, guys and thanks for taking my questions congratulations on the great quarter.
The first question for me you highlighted and throughout the call a lot of the secular trends and help the broader mortgage market.
But curious of your thoughts on which trends specifically are influencing jumbo locked record volumes and both the third and fourth quarter and the setup, given given where rates are and the amount of money or amount of mortgages and the money for refinance its pretty compelling for the first quarter. The curious to hear your thoughts on really how the market and <unk>.
And this time for Canada.
And.
Sure I can start and dash and supplement first of all you know as I alluded the way.
And the way the business usually recovers as you start with the easiest.
The loans to refinance and and that's always.
The conforming loans, the Fannie and Freddie loans in particular.
And jumbo, even though the credit profiles are strong or stronger.
Jumbo loans are almost by definition not.
And not conforming each one is a little bit different.
And so it's a little harder to underwrite and therefore.
These loans typically lag a bit from a refinancing perspective, Theres limited industry capacity, there's a limited number of loan officers to the process. The refis so shall we.
The last year and in July.
And it took some lessons learned from the last crisis and wanted to make sure we run a position to take.
And for that when we saw the opening and and we were fortunate enough to do that and be there and be ready to serve our sellers and.
And and strong partner so so.
That's what's going on and jumbo and the good news is as you know the the agency.
The refinance cycle.
You could call it middle innings, and you know you might call it.
And even a little later than that depending on what happens with with the the yield curve.
It could have a long way to go for a jumbo is definitely and the early innings as dash mentioned.
Most of jumbo loans.
In existence today are well north of that two and three quarters.
The current coupon.
And so I think from that perspective, we're focused on market share we're focused on.
Being the best partner, we can to our loan sellers that.
The originate the loans and.
And I think the you know there there's a lot to do and in 'twenty and 'twenty one.
I also think that some of the some things that could prove to be secular and.
You know people transitioning for multifamily to single family part of that story is definitely more space bigger homes.
Of which tend to start to bleed into jumbo.
And when you look at home sales some of the higher priced homes have shown the strongest.
Price appreciation and so demand for jumbo loans, there hasn't been increasing as well.
So I think when you when you factor that in and then and then you actually factor and the vaccine and any broad based economic recovery and we really like.
And the market dynamic at the moment and there's clearly a lot of volatility out there and we're by no way by no means through the <unk>.
Through the world of out of the woods with respect to the the virus, but what.
But we do think of in the early innings of of the the refinance pushing jumbo.
Got it thanks, and it's very helpful. And then last question for me.
And you highlighted continuously over the past few quarters as well as on the calling of some of the investments you've made and technology, specifically across core vest and rapid funding and can you maybe highlight how that's different from your competitors across the non QM BPL and alike and and.
And really what you're focusing on technology wise and into 2021.
Sure Ryan its dash thanks for the question.
We view.
We view investment and technology is naturally a partnership between.
Efforts will undertake internally more organic work.
And which rapid funding and Redwood alive.
<unk> are good examples of and then partnerships.
For the others vendors or other companies newer companies are more established ones that can help.
And you bring us to the forefront in terms of serving our customers most seamlessly and I think our suite of businesses is unique because we are a mix of.
And our clients of our mix of originators as well as his direct borrowers and our core vest.
And our core best business, but the underlying theme is how we can make the process less redundant more seamless and more transparent to our clients and rapid funding is a good example of where we can provide liquidity and more quickly.
To the right group of sellers.
The the Redwood live.
Initiative, which I touched on is a great example of one where we will be where and pilot on and application that we can roll out to our sellers.
To give them real time insight into where the alone.
Sits and the process.
One of the areas that we feel that we have really outperformed here of the past few quarters is being able to process loans more quickly than our competitors and particularly if you are an originator and a non bank originator and particular the ability to reliably purchase of those loans, when we say, we will and <unk>.
It's critical to liquidity management for them and just the transparency of of where alone sits in the queue.
It's just so important.
For them to understand what kind of partner, we are frankly, and and how reliably. We can we can show up and so it's ultimately it is like I said, making sure that we can serve our clients more quickly and efficiently and take as much friction as possible out of the system.
And I think that is different because when we think about the suite of clients. We serve like I said between borrowers and originators.
And as a real broad array of needs there.
In terms of what they what they're looking for and so those of the areas of focus that we have.
And I think that I think it is unique in that regard because of because of where we're focused.
Thanks, guys very much for answering my questions and congrats again and the great quarter.
The next the next question comes from Kevin Barker of Piper Sandler. Please go ahead hi, good.
Good afternoon.
So.
And went around the the return on equity that you're seeing and the operating businesses, especially going into 'twenty and 'twenty one.
Does that presume that youre going to see a little bit of a pick up and leverage and.
And second how much capital do you think could remix into the operating businesses just given the strong returns that you're seeing there.
I would assume that your leverage would remain low and it seems like you've been keeping recourse leverage relatively low and more conservative just given the economic uncertainty, but just the loved to hear your color on leverage and equity allocation.
Yes, I can definitely touch on the leverage.
Kevin.
Thanks Carl.
And then the Chris can maybe follow up.
I did mention and in my prepared remarks, we did see leverage remain pretty low this quarter and and that was somewhat of a function of the fact that.
We had cleared through a lot of the inventory through some of the securitization is close to the end of the quarter. So that that won't always be the case, we generally do you expect that our inventory of loans for.
For the operating businesses will trend higher over time and that the those are typically held with higher amounts of leverage so that will influence our overall leverage.
For for the company. So that's something we've been talking about for a couple of quarters now I think this quarter. It just happened that.
We could get some of these transactions done closer to the end of the quarter, which clear things out and we do have a pretty large pipeline in front of us. So we do expect that to trend higher just in terms of the amounts of inventory bounce around in any given quarter and but generally trend higher and I also mentioned the <unk>.
Net portfolio.
It has pretty low direct leverage on it and.
And that has also been turning down a little bit as we've seen some deleveraging there. So I think there is some potential as we do some.
You know look into refinancing some of our debt over 'twenty and 'twenty, one that we can layer in a little bit more incremental leverage and into that part of the business as well.
Okay, and then as far as the the equity allocation of that shifts and your expectations for it.
I'm, assuming that it's going to grow considerably and the operating businesses.
And you've seen quite a bit and move up and the and the residential lending.
Could you just provide a little bit of color of how much more growth you could see as far as capital allocation within those respective operating businesses.
Yes.
It's kind of like steering the ship.
Volumes are a big factor.
How much how much of loans, we hold and inventory how quickly we're turning the capital over.
What we don't want to do we're focused on an accretive profitable growth and so so.
And we'll want to allocate more capital when we can deploy it accretively as we're able to currently.
And so right now I think when we think about our volumes.
We feel like the the amount we have is a good risk adjusted capital balance for the foreseeable future the.
And that the operating environment continues to remain attractive and.
And we're able to to be more competitive and source more volume that that wood.
Definitely and necessitate a bigger capital allocation and and that would be a good a good issued of half because of that capital is very accretive to us currently but for right now I think the amounts we disclosed are for that you read about and the review of what we expect to fuel of the business for the foreseeable future.
Thank you.
Right.
This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.
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