Q1 2021 Redwood Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Redwood Trust incorporated first quarter, 2020, one and financial results Conference call.
During managements presentation your lines will be on a listen on mode.
Conclusion of the prepared remarks, there'll be a question and answer session.
I'll provide you with instructions to join the question queue. After management's comments today's conference is being recorded.
I will now turn the call over to Lisa Hartman Redwood Senior Vice President of Investor Relations. Please go ahead ma'am.
And thank you Hello, everyone and thank you for joining US with me on today's call our Crystal ball J Redwoods, Chief Executive Officer, Gosh, Robinson, Redwoods, President and Collin Cochrane Redwood Chief Financial Officer before we begin I want to remind you that certain statements made during management's presentation with.
Respect to future financial or business performance and <unk>.
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 to differ materially.
We encourage you to read the company's annual report on form 10-K, which provides a description on 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 maybe expressed and forward looking statements. On this call. We may also refer to both GAAP and non-GAAP financial measures and 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 first quarter Redwood review available on our website Redwood Trust Dot com.
And so note that the content on 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 and to reflect subsequent events or circumstances.
Finally, today's call is being recorded and will be available unencumbered things website. Later this afternoon I'll now turn the call over to Crystal Ball can't Redwoods, Chief Executive Officer for opening remarks.
And.
Well, thank you Lisa and good afternoon, everyone.
As you probably assumed we were pleased with redwood and the trajectory thus far in 2020 one.
Were all within our ranks and strong, especially as we start to see conditions for a return to normality with many employees eager to rub elbows again, and the office and resume business travel.
Not quite there yet across the board, but it's nice to see the Sun shining on our people and our businesses, especially when I think about where things stood a year ago.
Driven by strong operating income and continued improvement and portfolio valuations and our GAAP earnings were <unk> 72 cents per diluted share for the first quarter as compared to 42 cents per diluted share and the fourth quarter.
Our GAAP book value per share increased almost 9% to $10.76 at March 31st as compared to $9 91 at December 31st.
GAAP earnings finished well in excess of our 16 cents per share first quarter dividend.
While the first quarter introduced the latest chapter of our strategic evolution through the launch of RWC Horizons.
Focus of our business hasn't changed.
Mission is to make quality housing accessible to all American households, while they're rented or owned.
We target borrowers whose needs are not well served by government loan programs, including borrowers are simply not eligible for them.
To us a roll on housing finance has never been more important as the second half of 2020 ushered in a dramatic new uptick and home price appreciation and ease.
And greater affordability challenges.
Simply put improving access to quality housing and tells a combination of consumer loan and rental solutions.
Through our leadership role on the private housing sector.
Turned much of our focus towards innovation to expedite the migration of more GSE eligible mortgages to our market.
This doesn't just require a low cost capital, which our industry seems to be a wash and these days.
It requires the speed automation and ease of execution necessary to facilitate sustainably high volumes.
These traits have not been commonplace and the west Commoditize non agency mortgage sector and part because it continues to be unsupported and Washington, and even viewed as a threat to many established market participants were unintended to change the status quo.
Recent regulatory changes and Washington, However, highlight the need for a new way of thinking and present, a big opportunity for the private sector.
For example, the CFPB QM rules, which are still somewhat fluid are likely to simplify and many many underwriting processes and meaningfully reduce the number of loans that require additional risk retention to securitize.
Additionally, changes to the P. S P. A between the U S Department of Treasury and the Gse's net.
And I will limit the acquisition of certain types of mortgages by Fannie and Freddie including loans for non owner occupied homes as well as loans with certain combinations of credit features including higher ltvs and debt to income ratios and lower credit scores.
With the GSE is to effectively manage compliance for these new limitations. The practical amount of these loans that the GSE and you can acquire will be well below their prescribed caps. This presents an opportunity for those who can acclimated to the more automated underwriting regimes and eventually needed to facilitate more of these loans moving to the private sector.
Our focus is squarely on addressing this need and we're working towards this goal and a number of innovative ways, including investments and homegrown technology and strategic partnerships.
For example, we have.
Changed several milestones and demonstrated significant progress and our technology roadmap and the first quarter, including through our newly launched venture investment strategy are to be T horizons.
And now completed three horizons investments with Dash will talk about and more detail during.
During the first phase of investing we were focused on seeding early to mid stage companies debt leverage automation and Digitization and blockchain to re imagine how alone is evaluated by an originator financed by a lender or securitized by and issuer.
And the business purpose lending market, we see opportunities to fund product development and the software space that can streamline property management workflows and that's.
This will reduce costs and increased visibility into revenue streams.
While these initial investments have not been material to our balance sheet, we believer embarking upon a path that can disrupt the mortgage finance landscape and significantly transform our business with innovative solutions that help all stakeholders. Most importantly borrowers.
With significant momentum on technology, and engaged and talented work force regulatory changes and strong competitive positioning it's and it's exciting to envision and the role of Redwood can play and the evolution of housing finance.
We believe and the long term durability of our earnings and our ability to deliver unique value to our shareholders. We also believe and the impact we have on our people and communities such as our new housing access benefits program that we just launched earlier today.
And I encourage all of you to check out the press release from this morning on our website and give us your feedback.
As always we balance the optimism.
[noise] against economic forces that affect our quarterly production volumes, including a recent dose of interest rate volatility and the past few months.
We can't control many of the market forces that affect our business day to day, but we can equip our people with the tools necessary to lead and redwood towards its full potential.
And with that I'll now turn the call over to Dash Robinson Redwoods President cash.
Thank you Chris.
It was and active and successful quarter across our business lines supported by continued tailwind and housing and strengthening and overall housing credit.
We believe the diversity and our business model remains responsive to the key trends and housing and supportive of the needs of owner occupants and investors alike.
After a year and flexible work arrangements and at home learning the evolution and demand for housing continues.
Even as we gain momentum with vaccinations.
Your expectation at least in the medium term for hybrid work arrangements is keeping both prospective homebuyers and tenants looking for homes that combined added space functionality and privacy.
This is evident and the record velocity that we're seeing and both new and existing home sales and continued strength and single family rents.
Leading third party data shows new single family home sales and the first quarter were up approximately 37% year over year.
With existing home sales up approximately 15% and the same period.
The median home sales price rose, 11% year over year and homes that require a nonconforming mortgage are showing similar trends, particularly and growing secondary and metro areas.
And in a similar vein and demand for single family homes for rent continues to deepen.
Rising prices and further deferred the home buying decision for many consumers, while others still prefer to rent given the associated flexibility.
Either way quality rental homes are an attractive alternative for many demographics, who are in search of more space and established neighborhoods.
And in many parts of the country. This type of housing stock is in short supply Aki.
Occupancy rates also continued to be at record highs with a weighted average of 93% and the top 20 metros.
Importantly sources of equity capital continued to recognize this imbalance as an opportunity to contribute to the creation of quality affordable rental housing.
And a new sleeve of borrowers and allowing our existing ones to keep growing.
The macro data while encouraging also underscores an important reality about housing affordability and accessibility.
And by the pandemic.
Housing finance needs more creative solutions, driven by technology, and a common sense approach to underwriting that the private markets are equipped to provide their durability and diversification of our business model puts us in pole position to continue affecting beneficial change.
Turning to our results our team's crisp execution resulted in a combined after tax net operating contribution of $51 million for residential and BPL and mortgage banking.
This was driven by record residential loan purchase commitments continued momentum and business purpose lending and execution of three securitizations exceeding $1 billion and issuance across redwood residential and core vest.
Turning to our residential business lock volumes and the first quarter rose, 22% to $4 $6 billion and as mortgage rates rose during the quarter, but much less precipitously, then benchmark interest rates.
And I do a sustained uptick and refinance volume as which represented 62% of our total locks for the quarter.
Despite the interest rate volatility margins well exceeded those in recent quarters. This was largely driven by strength and the securitization markets, particularly in the first half of the quarter and the positioning of our pipeline as the curve steepened and more than mortgage rates rose.
The moving rates during the quarter underscores and a critical barrier to entry and the non agency market, namely the importance of end to end coordination and efficiency across the operation.
We were able to place one of our two securitizations during the quarter via a reverse inquiry and settled $1.4 billion of whole loan sales.
Key to this work is the speed with which we're able to buy a loans from our sellers, which requires a well calibrated process internally and with our third party vendors.
So you can transit in the system have led to uneven outcomes across the industry and it's been an area of outperformance for our team.
And as an example, the loans underlying our most recent securitization and had an average age of approximately 45 days less than half of the loans brought to market by others. During the same time period.
We expect to engage with more reverse inquiry interest and our securitizations throughout the remainder of the year.
Given the efficiency and connecting our bonds directly with where demand is most sizable and durable.
The flexibility of our securitization program, coupled with whole on distribution facilitates added scale and collectively they allow us to be and the market consistently.
Overall, the productivity level of our securitization program has never been higher and the second quarter is already off to a strong start with the recent closing of our third transaction of 2021.
This one backed by $361 million and jumbo loans.
The ability to enhance our processes over time will ensure that we maintain our competitive advantage to that and leveraging technology remains a major organizational emphasis during the first quarter. We achieved several milestones on our technology road map, including the on boarding of the majority of our Sequoia securitizations onto DBO one Ah.
Third party solution for accessing reporting and analyzing standardized loan level data for our Sequoia Securitizations.
And keeping with our commitment to serve our sellers more quickly. We recently launched rapid funding plus which includes additional customized funding solutions.
This was an important enhancement to our original rapid funding program rolled out last year, which was successful and facilitating $274 million of purchases from an initial group of participating sellers.
In addition, Redwood live is now available for certain sellers through Apple's App store.
Approved users can log in and access dashboards containing various metrics for the loan pipeline they have locked with redwood.
Rapid funding and Redwood live are cut from the same cloth organic efforts to make doing business with redwood, even more efficient and user friendly with real time access to data that eases decision, making as we roll. These out further we are excited about their potential to reduce customer acquisition costs and increase customer retention.
To that and elsewhere and our tech stack, we are exploring other applications with key partners to widen our competitive moat.
Earlier this month through Redwood Horizons, we completed and investment and liquid mortgage and earlier stage firm focused on providing life of loan infrastructure to digitize truck documentation.
Dilatate payments and record additional information on blockchain while.
While there is much to do for the industry to coalesce around how blockchain can evolve our ecosystem.
Our initial work has focused on solutions and the post close environment that we believe could have tangible benefits in the near to medium term.
Turning to core best strategic progress continue to pace during the first quarter as we completed work on and innovative securitization structure and made key investments and product development.
Overall, we originated $386 million of business purpose loans during the quarter.
Comprised of $253 million of single family rental loans and $133 million of bridge loans, while so far our loan production was down from a seasonally strong fourth quarter and.
And bridge fundings rose, 33% driven by increased usage and lines of credit and initial fundings on several recently completed build for rent and financings.
Our origination mix for the first quarter reflected the strength of our multi product strategy.
Which drives high rates of repeat borrowers, including those that utilize more than one of our loan products and all 71% on originations and the first quarter were from repeat customers and the near to medium term pipeline remains robust with a good mix of new loans and refinance opportunities.
During the first quarter, we completed the ramp up of castle, 2020 Dash P. One a privately placed debt so far securitization funded with a leading insurance company.
We are pleased with the efficiency of the execution and expect to pursue others of its type to complement traditional broadly marketed securitizations.
On the follow we recently priced our first broadly syndicated securitization of 2021 expected to close later this week.
Transaction was very well received by the marketplace and on a blended basis, we achieved all time tights on credit spreads.
As competition ramps up across the BPL market product development remains a key priority.
Last week marked important progress on this front as we announced a strategic investment and Churchill finance, a vertically integrated real estate Finance company.
Churchill focuses on the origination aggregation and asset management of a variety of real estate credit products, including residential and multifamily loans, we expect the partnership to help grow and diversify corvette sourcing channels with a particular emphasis on smaller balance single family rental and bridge loans partnerships like Churchill will deepen our market penetration and products we do.
And we'll remain in high demand by housing investors.
Technology is central to core best competitive advantage, especially as we expand our product reach.
And there are several key initiatives, well underway, including a revamped client portal, which we which will be rolled out later in 2020, one and enhancements to our data warehouse and additional automation with respect to capital markets processes to quick and our speed to market.
Core vast marketing position remains a core strength and as we expand our leadership position with a combination of organic growth initiatives and strategic partnerships. We are uniquely positioned with a deep multi product offering technology driven processes and a best in class securitization platform and remain excited about the opportunities ahead.
As Chris mentioned earlier, the first quarter also marked the formal arrival of Redwood Horizons venture investment strategy focused on early and mid stage companies, driving innovation and financial and real estate technology and digital infrastructure.
We believe these technologies have the potential to significantly disrupt the mortgage industry and the near and medium term we.
We also believe the access to data provided by these platforms will help inform our strategy as we expand our leadership position and the market.
The blockchain and investment I mentioned earlier was preceded by two investments sourced through Corvus borrower and network, which we first announced in March rent room and rent butter are each focused on automating various processes from landlords, including tenant decisioning and rental collection fees.
These investments reflect and opportunity to help grow these businesses through deepening their connection to landlords and for us to benefit in addition to the potential investment upside.
From their data access and growing network effect.
Our overall investment portfolio continued to perform well and the first quarter as credit performance strengthen spreads tightened and total book value growth and.
The low yield environment, we're deploying capital and the broader markets remains challenging the.
Our competitive advantage of having two best in class operating platform is producing high quality assets is of particular importance we.
We deployed $73 million net of financing into new investments during the quarter, primarily new issue corvette, that's the far securities and newly originated bridge loans.
Delinquencies and our portfolio have fallen continuously since last summer and new forbearance requests are de Minimis, our asset management teams across the enterprise continue their sterling work combined 90, plus delinquencies across our so quiet on corvette securitization platforms now stand below 2% and 90 plus day bridge delinquencies are bill.
On a three 5% significant outperformance versus the marketplace.
Market values also improved across the portfolio and.
Most notably for certain re performing loan and multifamily bonds and secondary market prices rose.
Total portfolio returns rose slightly driven by a combination of improved credit and faster prepayment speeds on securities we hold at a discount to face value.
Higher prepayments speeds, let us to exercise our first series of so quite of call options and several years. Since January we have completed calls on three sequoia transactions totaling $75 million and loans and planned to call several others throughout the remainder of the year.
Colin will elaborate further on this opportunity and his prepared remarks.
While the first quarter's results exceeded expectations, our focus remains on sustainably growing and diversifying our business.
Benchmark interest rates have moderately falling since quarter end, but as the economy proceeds and finding its footing and the prospects for additional federal spending come into clearer focus we are prepared for the markets to respond accordingly.
And while increased competition has return we remain confident that our agility commitment to technology and deep relationships will buttress, our leading market position.
With that I'll turn the call over to Collin Cochrane Redwood CFO.
Thanks Dash and good afternoon, everyone and.
As Chris and Dash discussed our first quarter earnings and book value benefited from strong results across our operating businesses and investment portfolio contributing to GAAP earnings of 78 cents per share for the quarter and generating a 10% economic return on book value for the quarter.
After the payment of our 16 cent dividend, which we increased by 14% and the first quarter, our book value increased 9% during the quarter to $10.76 per share.
And a significant amount of our earnings this quarter were generated from our mortgage banking operations, which are conducted within our taxable subsidiary, giving us some flexibility to retain a portion of that income to continue to reinvest in our business and organically grow book value, while maintaining an attractive dividend for shareholders.
Focusing in on some of the operating results within the business as Dash mentioned, our residential mortgage banking team achieved exceptionally strong returns on another quarter of record lock volumes combined with a meaningful increase in margins.
Well that's describe some of the unique factors contributing to the expansion and margins during the quarter moving forward, we generally expect margins to normalize back towards levels that still achieve that 20% plus return on capital.
And corvettes mortgage banking income normalized during the quarter, while continuing to generate very strong operating returns on capital of nearly 30% driven in part by marginal tightening on securitization execution.
As a reminder, fourth quarter results benefited from significant spread tightening on our larger balance of loans held in inventory at the beginning of that quarter.
And our investment portfolio net interest income increased modestly in the quarter due to higher yield maintenance income associated with S. F. Our securities and reduced leverage on our bridge loan portfolio.
During the quarter capital allocated to our investment portfolio increased as deployment and to new investments and positive fair value changes were partially offset by sales and paydowns, which remained elevated.
These higher prepay speeds, along with strengthening credit performance contributed to spread tightening across our portfolio and.
And as hitting our subordinate securities that we hold at a discount and driving fair value increases.
These same dynamics also created the opportunity for us to complete calls on three Sequoia transactions through the first four months of the year.
As a reminder, we control the call rates from many of the securities and our investment portfolio, including for Redwood sponsored Sequoia Securitizations corvette sponsored FSFR Securitizations and certain Freddie Mac sponsored RPM securitizations.
Most of these call rights are exercisable at par once underlying portfolios pay down to a pre determined size and in addition to the discount embedded in the securities at current market conditions. The underlying loans generally can be sold or re securitized above their par value, creating further upside to valuation and returns.
In relation to the three <unk> deals we've call through April we acquired $75 million of jumbo loans onto our balance sheet.
Related to these calls we expect to record GAAP realized gains of $7 million associated with the underlying securities. The majority of which will not flow through book value and a net book value benefit of approximately $2 million versus our December 31, fair values, which is inclusive of estimated lump premium.
Inclusion of these recent calls we estimate over $600 million and loans underlying our securities could be callable in 2021.
Shifting to the tax side, we had REIT taxable income of <unk> <unk> per share and the first quarter and 47 cents per share of taxable income and our Trs again, driven by income from our mortgage banking operations.
Turning to our balance sheet, we ended the first quarter with unrestricted cash and $426 million.
And after allocating additional working capital to our mortgage banking operations during the first quarter to support growing loan volumes and net of other corporate and risk capital. We estimate we had approximately $225 million of capital available for investment and March 31.
During the quarter, our overall leverage increased as expected and was in line with increased inventory levels at our mortgage banking operations at the end of the first quarter or.
Our non recourse leverage ratio increased to one nine times at March 31 from one three times at the end of 2020 and total leverage our invest investment portfolio remained consistent from the prior quarter and around zero point and nine times.
Looking forward, we expect to add a modest amount of incremental leverage to the investment portfolio as we refinance certain term facilities that have de levered and become pre payable beginning in the second quarter and May also explore adding non mark from a leverage to some assets that are currently unencumbered such as securities retained from recent corvette Securitizations we.
These refinancings to lower our borrowing costs, given current market rates and new financings will generate incremental capital that can be redeployed into the business.
Moving to our outlook, we remain broadly on track with the 2021 outlook, we provided on our fourth quarter 2020 Redwood review.
While returns from our operating businesses, well exceeded 20% and the first quarter. We expect these returns to normalized during the remainder of the year, particularly for residential mortgage banking as our capital allocation now reflects a more steady state pipeline and levels of loan inventory on balance sheet.
For our investment portfolio returns for the quarter were in line with our outlook and strengthening credit across our portfolio generally provided for incremental improvements to our forward return expectations.
Cash flow expectations generally improved across the portfolio and inclusive of our previously reported 5% fair value increase and our securities portfolio. During the quarter. We now estimate go forward returns relative to our March 31, GAAP basis to be between 10% and 11% inclusive of potential upside from potential borrowings.
And the second half of the year.
Given the strong performance and the first quarter, we saw operating expenses, including variable compensation expense increase in line with the growth and net income.
Looking for general and administrative expenses will continue to trend in sync with the overall business returns and we continue to expect long term unsecured debt service costs over 2021 to remain consistent.
For the remainder of 2021, we will continue to focus on growth technological efficiency and profitability and our operating businesses and.
Income retained from these businesses should drive further growth and our book value. While increased production will continue to create new and attractive investments for our portfolio driving higher net interest income over time, supporting and stable and attractive dividend.
And with that I'll conclude our prepared remarks, operator, please open the call for Q&A.
We will now begin the question and answer session.
Question and you May Press Star then one on your Touchtone phone.
Speakerphone, please pick up your handset before pressing the keys withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Doug Harter with Credit Suisse. Please go ahead.
Oh, Thanks, I just wanted to follow up on.
Your comment color on about the the normalization congrats on.
And so spreads.
Can you talk.
And about kind of what you've seen in April is that expectation of normalization something you've already seen or is that just.
Kind of that's where it's been over time, and therefore do you expect it to get there.
Hey, Doug it's dash I can I can take that thanks for the question and.
Chris can weigh in as well as some thoughts.
So firstly, what I want to do is applaud the team for a great effort.
And great results and the quarter.
The Q1 margins.
It reflected as I mentioned, both strong securitization execution, but also.
As you know some outperformance overall with mortgages versus what what benchmark rates benchmark rates did.
During the quarter.
A lot of the normalization that we talked about we have begun to see.
In April.
And some of that is a function of just overall supply and the market. Obviously as you know benchmark rates have rallied.
And since since quarter end, but.
We are seeing.
A heightened level of competing supply on the market.
Which obviously will.
It will ebb and flow as we go through so a lot of what we're seeing on what Colin talked about we're currently navigating and working through.
Feel very good about the earnings power of the business.
Vis vis the forecast that we laid out last quarter.
And from a margin perspective that normalization and just to put a slightly finer point on it and we see as <unk>.
Margins more consistent with where they were in Q3 and Q4 of last year.
And sort of pricing out some of the.
Some of the things that drove significant outperformance and the first quarter.
Okay.
Very helpful and then.
And then just could you talk about the outlook for volumes and and jumbo and.
And now that you know given given the moving rates that you referenced.
Yeah, Hey, Doug.
No.
And.
You know in hindsight.
You know the recovery and 2020.
After after COVID-19 hit and the first quarter. It was it was pretty linear and there was there was good line of sight.
And rates were a little bit less volatile.
And things have backed up and and we certainly expect volumes.
And the short term to normalize a bit.
Versus where they were and the first quarter, which which is at record levels for us.
But you know theres a lot of moving parts with the economy and you know rates had sold off quite a bit rates have since no settled in here.
And at least with the 10 year.
We've got a lot of moving forces with economic stimulus.
And then recovery and jobs and so you know when we look at the macros were very optimistic about the trajectory of volumes, it's hard on a quarter to quarter basis too handicap.
Which is why we like to kind of stick to our longer term plan and talking about the outlook, but I will say you know one differentiator for US. That's that's certainly been clear the last couple of quarters. As you know the teams are operating and different gear and we're just moving quicker.
Processing loans faster.
Both on the residential and and BPL side, So we're optimistic that.
We're going to continue to be able to compete and take share.
A year, but I'd.
And I'd say and the second quarter coming off of that debt rate sell off and you referenced.
We do expect volumes to normalize a bit.
Great. Thank you.
Our next question comes from Bose, George with <unk>.
Please go ahead.
Good afternoon and separately.
And to ask Christmas about the increase in operating expenses.
And I to the increase in revenues.
And how should we think about modeling that number going forward.
Okay.
Yeah, I mean, I can kick it off.
You know it was somewhat of a recovery and and expenses.
Our variable compensation spent expenses were up quite a bit because earnings where we're quite a bit higher.
Our non compensation expenses were actually flat or even a little bit down.
I think that sort of speaks to the scale and the efficiencies that we're operating and and I'll, let dash and Collin weigh in on the projection, but I think the way to think about it as somewhat vis vis profit share, which as you know.
As as <unk>.
Our earnings go up for a profit go up we expect that variable compensation line to be somewhat tethered to that so.
So I think we started at a low point and 2020 and and you know we had a big surge and earnings which had a lot to do with that accrual.
Okay, great Yeah that makes sense and.
And this person.
Over to him.
Operating earnings.
And you've got cables and so it looks like does that work out to around like 36 cents of operating earnings.
And does that the main thing there is growth.
And it's pulling out the mark to market investment gains.
Those on page 10 that is.
Mortgage banking.
And I just want to make sure I'm looking at the right when you're referring to yes, because mark to markets are on the investment portfolio and on the mortgage banking. We're just backing out that this is the amortization of purchased intangibles.
For for the business purpose.
No.
Mortgage banking operations there.
Okay.
And look through the whole review, but do you guys get some sort of operating and looks like yet or is that something that you know.
So that's something that's when it looked like on the future.
It's something we continue to consider we don't have a consolidated operating metric, we do think that.
The GAAP metric is important and that it provides visibility and into.
The value of the portfolio and book value, which is obviously important to investors and then within each of the businesses. We have presented and non-GAAP measure. So in the review on the pages you referenced from both mortgage banking and the investment portfolio. We have provided more of an operating adjusted type metric.
That does back out some income to try to get to more of a normalized.
Core and adjusted type earnings metric for those parts of the business.
Okay, great. Thanks, and then once you close it.
Just just to add to that real quick one thing. We're focused on is trying to boost transparency around the relationship between the trajectory of the dividend and our operating results.
Our mortgage banking platforms through off over $50 million of of what we internally see as free cash and when you and that was and the first quarter and when you when you translate that against a $19 million dividend.
Clearly you.
You know when we think about the dividend and the and the direction of the dividend. It's it's no longer just a read centric metric for us.
So one thing we're trying to figure out is how to how to be more transparent around how the operating platforms factor into that calculation.
Okay, no that makes sense, thanks, and then.
And just repeat the numbers you gave for the earnings of the Trs versus.
Well on.
On my prepared remarks, I talked about.
REIT taxable income.
And the Trs taxable income if you give me a minute I'll find that here and it's.
<unk> 47 per share.
And our rat excuse me taxable income at our Trs and nine cents at the REIT.
Great excellent.
Okay.
Next question comes from Steve Delaney with JMP Securities. Please go ahead.
Good afternoon, everybody and congratulations on a really good start to 2021.
So quite calls.
It's nice to see some of that realized is there anything unique on.
And these assume where some of the older transactions, but 75 million of loans of 7 million gain let's call it 9%.
Was this.
And <unk>.
Would you expect that additional calls relative to the 600 million figure would do you expect them in that ballpark are what type of a range could you share for us as to where they may be and I understand that market conditions will have something to do with that.
Sure. Thanks, Steve It's dash I appreciate the question on Hey, Hey Dash.
In terms of in terms of the impact to two.
To both earnings and book value the number I would probably focus more on.
Is the $2 million or so call it two and a half two and three quarters points on the $75 million of ones that we call. The $7 million is largely a function of the fact that those securities for.
For the most part are at <unk>.
So there's there's a technical realized earnings outcome, there, but obviously you know it gets back right back out of book value because it's already expressed.
And I see okay that was already carried as a on a mark to market basis.
Yeah. So you said that you are seeing incremental cash.
Two and a half million work that was cash revenue to you.
Yeah, and that's the Alpha that's kind of the opposite Okay got it.
A little bit of pull to par and there and then and then there's the loan premium and what I would say on in terms of uniqueness of the ones I mean honestly.
And theres going to be some distribution around this but we would expect generally for.
So more of the season pools.
And you get called or some of the more recent vintage higher G. Wag portfolios to get called speeds continue to be relatively high for both our select and choice programs coming on so.
And we'll see how that shakes out.
I think one thing I would emphasize is that the numbers that Colin was articulating.
I think to your point pending market conditions.
Those will likely evolve as we call more of these transactions because.
And I know, it's the ultimate execution it.
It could be a whole loan sale or it could be some sort of securitization and will likely want to get to critical mass there.
Before making that decision. So there's certainly some potential upside and the number as well looking forward as we as we gather more of these loans through additional call. So I wouldn't say anything unique about these pools and particular other than they were a more seasoned and were.
And we're sort of stopping short of giving any guidance going forward because as the pieces come together there will be more to see in terms of how these ultimately execute.
Great. Thank you for that.
And switching over to the Btls, just under $400 million, obviously, the bulk of that and the AR and the.
And the single family rental.
Product versus the <unk>.
Versus the bridge.
The debt.
Should we assume from modeling purposes that debt to bridge loans youre going to sell on a whole loan basis and the the single.
Family rental.
But.
Properties that sugar and continue to securitize as opposed to.
You have sold from loans on there.
On the jumbo side as whole loans as well as doing the SMT Securitizations shall we just from a modeling or strategy standpoint should we just assume debt.
Rental loans.
The rental loans come in and you're going to securitize, those and the corvette steels and the bridge loans will likely be sold off on.
Is.
For upfront gain on sale.
The best way to think about it.
Well on on that so far loans I would say.
And they both channels are open and we actually did sell a block of FSFR loans last year, which would have securitize, a little bit less efficiently than.
Some of the core <unk> loans that work that we're currently producing so both channels are open and we certainly have been securitizing the preponderance of what we.
<unk> been originating and so far but.
Clearly if executions and move there is very robust whole loan demand for these but as you know the ability to keep the subordinate pieces and deploy capital there is.
That's the long term, it's a long run and economic benefit over the long term exactly but but both channels are definitely open there.
On bridge, we've been keeping them at the REIT.
Oh, okay.
And really that many bridge loans, we're looking very carefully at some of the structured executions.
And that are sort of re emerging here and the first half of the year for securitizing and bridge loans and understanding what those structures could look like for for some of the products that we originate which are a little bit different and what a lot of other market participants are doing so for now they're all go into the REIT, but potentially more to come there when we look at structured executions somewhat analogous to.
What we're doing with us so far.
Great and it sounds like the Churchill product.
Platform that debt Corvus has.
Your intuition is exactly right I think I think we've average the shelf and the brand.
And obviously, that's a that's a transaction we're usually excited about because they've got some really interesting adjacencies to to core veg business, but you are right. Those products may have different terms to them different prepay protect.
Protections as well so our base case would be those.
Could go on sale.
And they would execute on into our structure away from our traditional capital deals that's right yeah and.
It's out there with the little velocity shelf that's out there that has been pretty active so well listen guys. Thanks for the comments and.
The mission thing and and and what you're trying to do I don't want get too sappy here, you know and so.
And like the old man, but we've all but everybody on this call has been busy with a lot of agency originators and the last few months and you think about it and.
It's in terms of the business model and everything they add a hell of a lot of capacity and technology and throughput.
But basically there's not a lot of creativity because the playbook is written by FHFA, the government and the G. O C. So the consumer and the housing market really doesn't get anything different from many of those.
And lenders and move.
So I appreciate what Youre doing and I think you are on to something and I think investors will resonate with that thanks have a good night.
Thanks, Steve I appreciate that.
Thank you Steve.
Okay.
Our next question will come from Stephen laws with Raymond James. Please go ahead.
Hi, good afternoon.
Got it from the guys in front of me knocked out my number questions from calls and and volume. So I appreciate the color there.
Can you talk a little bit Chris about you know what.
What's your what are the two or three things you're watching most closely and D. C of the many issues that they've got.
To look at what impact spread what do you think the most what maybe is something youre watching you don't think the market is watching closely enough debt.
You know it was an opportunity or concern as you go forward.
Okay.
Good question. Thanks, Steven.
We're watching a lot of the stuff that you probably read about obviously there was an announcement that the QM rule. The formal implementation has been been officially delayed until I think October 2022.
There's a few things to Peel back there are one and which is a that doesn't really speak to the GSE.
On patch exploration.
So the patch is set to expire.
And if the rule reverts back to the old rule, the 2013 rule.
And that would be a very very big deal for us.
Because it would it would level that playing field and all participants would need to comply with the in place appendix Q and <unk>.
Necessarily.
Implying that that would happen, but given given the stakes that's something that we're watching very closely and.
There's a lot of.
You know agency protection is out there that that are fighting very hard to to sort.
Move things along.
We're sort of <unk>.
Ignostic, we think that the the rule change.
That was supposed to go on place.
Could make a lot of sense, but we also don't we're not we're not so doom and gloom on on taking another look on at the at.
The old rule as well so that's something we're focused on.
I think we're we're definitely focused on the.
And the FHFA Supreme Court issue, and and whether or not there could be a change.
And leadership there.
We're focused on the investor caps, there's definitely been a lot of confusion and the market around.
How are you.
You know agency sellers and comply with those caps and.
And as I mentioned at the beginning of the call.
To manage to a 7% cap and I think you'd probably need to come and well under that because it's a trailing metric and very hard to to keep tabs on almost like a like a covenant.
So I think that's something that we've seen and immediate effect on and the market that we're trying to.
<unk> be a solution provider for I do think though that the initiatives, we're focused on around automation and delivering and non agency experience that looks and feels a lot more like.
The automated underwriting.
Regime on the agency side.
And the Holy Grail to us and that's what we're focused on that's a big driver of Horizons and some of the strategic partnerships that we've we've been.
Engaging and and.
And I would remind everybody that.
Both both the residential business and the BPL business encompass non agency, so that's really where.
We have we have the two different flags, but it's really meant to cover the entire non agency space and the business will continue to be focused on on that segment, because we believe in it and we expect it to grow.
Great and thinking about kind of a bigger picture on the BPL and if you look at the bridge loan or new supply coming on and is there any hesitancy among.
And people to start new projects, just giving input cost or supply chain getting.
Materials, they need to do their products and you got any feedback like that or is it still pretty much full speed ahead given the.
Demand for single family rental housing.
Yes.
I'll kick it over to dash, but at a high level debt market is absolutely growing.
We are.
Our business continues to be very strong and and there's a lot of demand.
You know for bridge loans and Perm loans.
Some of the issues around costs lumber costs and product you've correctly noted are really supply chain issues.
And you've seen a lot.
Price increases, but we do we question whether or not.
You know those those are here for the long run are there transitory.
Because we've seen a lot of.
Of supply chain disruption and via COVID-19, So as the economy starts to open up <unk>.
Probably some of that that gets addressed but at a high level.
Seen great demand for our products.
You know more and more.
Focus is geared towards that sector and it'll continue to be a major focus area of ours.
Yes, Chris said, it well and input costs is something we obviously look at.
And a very closely on certain of our borrowers.
That have more.
On a higher percentage of some of the processes internalized within their own businesses and so some are more or less immune to some of the challenges that you are net.
Youre talking about Stephen but I think the overriding theme as theirs and addressable need and the market.
It's not a spec strategy where.
And you are sort of taking a view on demand at the backend and like we know and these markets, particularly on the southeast and southwest parts of the Midwest that there is a there's a discrete.
Shortage and housing, particularly high quality rental housing that is affordable and and that's what you're seeing these operators address and that's why they are still able to raise equity capital incrementally to do these projects because they know there is there's good support from a demand perspective from what Theyre doing.
Great Chris and thank you for the comments this evening take care.
Thank you.
Next question will come from Eric Hagen with BTG. Please go ahead.
Thanks, a lot of good questions here, but.
I wanted to follow up on the.
And the healthy level of origination volume and and earnings and core best I guess the question is what conditions need to be present, I guess, either on the loan level or and the capital markets to support more volume there.
And as you guys have your eye on doing that and do you think you have the capital you need or does the current capital mix makes sense to support that growth and.
And the second one.
Thank you noted you had some some debt which becomes pre payable. This summer can you give some color around what that debt is and the terms that you think you could refi it up.
Thanks.
Sure Eric Thanks for the questions.
And order.
And in terms of BPL volume as you know we think conditions currently are very ripe for.
For those volumes to continue to grow.
We're doing a lot to continue to enhance our speed to market, we're already the market leader and.
And speed of.
And getting up and down on loans from the kickoff Calder to funding and Thats a competitive advantage of that.
The core Vestas had for a number of years and so I think the macro conditions are really here you've got like I was describing earlier, you've got a really empirical supply demand imbalance and a very natural and growing support level.
For demand for these homes.
Youre seeing more equity capital flow into the space.
The quote unquote top end of the market in terms of larger global investors.
Earmarking more capital, but also globally.
Just more and more and more and more equity capital from from sources of all types continues to flow in.
I think equity cost of capital is probably adjusted here a little bit as it relates to where cap rates are on single family homes for rent and so.
And the levels are still very constructive versus where.
One can purchase homes and rent them out and and the associated cap rates.
And so I think the conditions are really here to continue to grow and we expect to see that growth.
From a capital allocation perspective, yeah, I would say consistent with what we've talked about on prior quarters from a use of available capital perspective.
Flowing more capital over to our operating businesses, which we did in Q1 for residential to support more volume is something where we're very prepared to do obviously the core vas business produces more long term financial assets for the REIT, which we which we love to hold and so we would expect incremental deployment there organically though.
And we do have the ability to to generate capital above the 225 that we that we had free a quarter and we obviously have as Colin described the ability to retain earnings at the Trs, which we expect to continue to be powerful and there are some other financings or refinancings and the and the portfolio that we think will allow us to organically raised capital here.
And over the next few months, so we're keeping an eye on all the all the market opportunities, obviously, but that's how we see it right now.
In terms of your question on cost of capital. There's a couple of financings on on the on the bridge side, which we have the ability to restructure or repay here and the next few months and.
And we actually just stood up and additional bridge line at more accommodative terms.
And here, which we expect to use along with others. So that would be a cost of funds reduction, which we will have more to say about when some of those restructurings are finished as.
As well as the ability to unlock some capital because some of those structures have de levered and there'll be an opportunity to put a higher level of non marketable debt against some of those portfolios.
Great. Thanks for that color I appreciate it.
Our next question will come from Kevin Barker with Piper Sandler. Please go ahead.
Thanks.
And to follow up on the operating expense.
The comments you made on.
The $34 6 million and compensation expense.
On which you attributed mostly to variable expense is that directly related to residential.
Residential mortgage banking during the quarter or is this a culmination.
And.
Income and that was generated over the previous quarters like how should we how should we set a framework for for that operating expenses.
Hey, Kevin.
Essentially resets so.
The accrual for the quarter and the first quarter of the year is the most inefficient accrual and the fourth is obviously the most efficient.
Because we're trying to to make.
Actions around what what that what that accrual is going to be over the course of the year and and we lean into it each quarter.
So.
Obviously, we had very strong results and the first quarter and and I think as it and.
And a general sense when that occurs that accrual is going to look higher.
Certainly if our if our annual.
And forecast changes over the course of the next few quarters.
And that'll that'll come up go up or down accordingly, but but it's a it's a 2021.
Salt spaced accrual.
Okay.
And is it fair to say that it's somewhat forward looking as well.
Or just off the base and their first quarter.
It's okay.
It takes into account our full year projections that its not attempting to cover the year and in a quarter.
But it's taking actual results from the first quarter and and.
We did just.
File our proxy a few weeks ago, which give some insight into how we look at compensation, but and a general sense, it's definitely aligned with shareholders and you know as as.
Earnings per share improve.
That line is somewhat tethered.
Okay.
And then going back to.
Some of the normalization comments you made.
And I believe you indicated last quarter, you can continue to generate 20%.
Plus returns within BPL and.
And then the jumbo Securitizations could.
Could you.
You generated I believe over 60% returns on equity and the first quarter, specifically around the residential and mining segment.
When you refer to normalization are you continuing to expect to generate those 20% plus returns.
Yeah, Hey, Kevin and staff strict great question, yes, so the margins that I was articulating.
On an earlier answer.
<unk>.
To the extent margins normalize back to where they were in Q3 and Q4.
Seven eight to a 100 basis points or so call it yes.
Yes that that would be the driver of a 20 plus percent after tax return for residential so that those numbers are consistent and obviously the 64% was outperformance this quarter for the reasons we've talked about.
Okay and then.
On a lot of the leverage that was that increase this quarter was driven by.
Capital allocated to mortgage banking operations can you help us understand the move there and.
And why that capital was allocated there versus and.
Maybe the investment portfolio or other places.
It was largely responsive to volumes, Kevin and so.
We obviously allocated more working capital over to residential this quarter because of the volumes that we saw.
And you know that working capital sits beneath and his credit enhancement for our warehouse facilities, which is really the moving business part of the part of the enterprise where loans are coming on and off and so.
And warehouse lines require haircuts and we have other risk capital on top of our explicit haircuts when you add those together.
And those will still be higher leverage than the rest of the firm and so when and when warehouse balances go up you should you would see an uptick and and.
And overall leverage.
For the balance sheet, but those numbers will obviously move around obviously volumes.
Continuing to go up we would expect more incremental leverage and that part of the book, but.
Again those are on assets that we don't expect to be holding for very long there it'll be sold or securitized, but that's the essence of the of the lift and leverage and Q1.
Okay.
And then leverage similar to your average leverage or was that.
So could you just help us understand that just given the temporary or transitory nature of the capital allocated there.
Yeah It was it.
And there was a little higher at the end of the quarter, then I would say the average, particularly and the second half of the quarter as I was mentioning and my prepared remarks getting these loans through the processes with a third party review firms and.
And getting them settled as a really big deal and so we saw some increased momentum there and.
And the second half of the quarter and so on average our warehouse utilization probably ticked up throughout the quarter for those reasons and we would expect that.
To continue at least over the next.
On a month or so and then obviously, depending on where volumes go from here and we'll we'll see that evolve.
And it's also it's also always worth.
<unk> that the the nature of our debt has changed dramatically over the course of the last few quarters and we're using a lot of.
And nonrecourse debt and certainly a lot of non margin a whole recourse debt.
And when we look at our leverage still well under <unk> on a on a recourse basis.
We're in a very.
Very comfortable spot cash.
Cash obviously.
Continues to you know, we're holding a significant amount of cash well over $400 million I think at the end of the quarter.
So that that money is somewhat fungible and if if we want to leg into too rosy.
And we have the option to do that were not at a point with with cash where and when.
The balances are so small that where we need to make really tough choices on on.
And where we put it within the businesses, we've got some flexibility today that we're taking advantage of.
Okay. Thank you for taking my questions.
Thanks.
And if you have a question sorry, and then one.
Our next question will come from Ryan Carr with Jefferies. Please go ahead.
Hi, guys. Good afternoon, and congratulations on the great quarter. Thank you for taking my questions. Most of them have been really asked and answered.
Few quick ones here, but curious to get your thoughts on the outlook for the jumbo market for the balance of the year. You know you continue to lock record volume.
On seemingly every quarter and over the past nine months and.
And just in the context of rising rates and significant HPA curious to hear your thoughts and where it could go for the balance of the year and really how your recent investments position us to take advantage of that.
Yeah, Hey, I'll kick off and discussion color commentary.
We'll probably put out some material.
At some point and the second quarter honing in on on the size of the jumbo market and the and the macro trajectories.
I think it's you know we always have to strike this delicate balance where we want to be cautious about near term volumes. You know I said earlier you know.
If if the quarter ended today, we would expect.
Q2 volume not to exceed exceed the first quarter Theres a lot of circumstantial reasons for that but as far as the bigger picture goes the jumbo market is still highly refinancing will.
It is not as long and the truth is the agency spaces from a refinance perspective and as home prices continue to go up you know home prices as Dash mentioned are at essentially record highs on an average basis every day more more conforming loans are turning into high balance conforming loans are turning and a jumbo.
Loans and when you look at homebuilding and this country.
A lot of the homebuilding and skewing towards larger homes that will require a jumbo mortgages. So theres just a lot about the non agency space that we like you.
You couple that with with what we're doing on the investor side and.
And you come up with a really balanced strategy that really covers on the entire country versus.
Discreetly jumbo, which is somewhat leveraged high cost areas and the coasts.
So we've really taken care to to make sure that were represented across.
Across the United States, and and we're focused on access and affordability.
But really really happy.
Happy and excited about.
What we can do and jumbo this year and I think as we as we get some more data behind us and get through the quarter, we'll probably update projections, but certainly youre already starting to see some upward revisions of some of the trade groups you know.
I think the.
There is a very acute selloff in rates earlier in the first quarter and and <unk>.
People expect to refinance activity to cool and since picked back up and.
And again, there there's just a lot of stimulus.
That looks to be heading heading the way of the economy and so all of that I think you know and we think about the credit environment, and where we're at and and any any cycle. There's there's still a lot to like about.
The market and we're very optimistic about the year.
We're optimistic about the next few years for all the reasons, we've been talking about.
Thanks, very much and then real quick on on Horizon, you made a lot of very exciting strategic investments during the quarter that you announced over the past few weeks and.
Touching on horizons, and thinking about that over the long term.
Probably no near term effect on the financials, but any any thoughts are or the initial opinions on where and when that could be material.
And as you continue to invest.
That's a really good question, you're right horizons is not a material piece of our balance sheet today, and and we wanted to emphasize that because we didn't we didn't want to imply that there was there were some missing piece to the models so to speak.
As far as near term earnings are forecast go.
But when we think about transforming the company.
And disrupting the sector and and really.
And you know taking redwood to the next level horizons as just an essential piece of that and I think it's a higher beta strategy.
And I think we're going to be.
And focused on a lot of different up and coming businesses all.
And all with some nexus to housing and and you know our work streams.
But the energy it's brought to the firm and the relationships.
And and the excitement I think is quite profound.
Technologists Theyre very energized.
And it's it's been very refreshing to be working with some of.
These principles of our real estate startups and real estate data focused startups, especially.
And so so I think it's been so far I'm very positive.
We expect it to be a needle mover at some point, we don't expect that to happen and the next few quarters.
But but I do think if you're a long term shareholder and and Youre thinking about.
How redwood can can shift the curve so to speak on <unk>.
<unk> and doing more upstream is gonna be a big part of that story.
Alright, well, thanks, guys very much for answering my questions and congrats again on the great quarter.
Thank you.
Yeah.
And.
Ladies and gentlemen, this concludes our question and answer session.
And the conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.