Q2 2021 Redwood Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Redwood Trust, Inc, second quarter 'twenty.
2021 financial results conference call.
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. Thank you operator, Hello, everyone and thank you for joining US with me on today's call. Our Crystal Ball tell you Redwoods, Chief Executive Officer cash Rob.
In Redwoods, President and broke Carrillo 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 may constitute forward looking statements forward looking statements are based on current expectations forecasts and assumptions.
And that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and could cause actual results to differ from those that may be expressed in forward looking statements.
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.
The Asian between GAAP and non-GAAP financial measures is provided in our second quarter.
Iridium and the Investor presentation, both are available on our website at Redwood Trust Dot Com 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.
Now I'll turn the call over to Crystal ball, K Redwood Chief Executive officer for opening remarks.
Thank you Lisa and good afternoon, everyone.
We are closely monitoring the latest delta variant of the Corona virus entirely.
Higher organization has been energized to see the reopening of the economy.
Strength in the housing market and exceptional performance and growth in our business.
Strong operating income rising portfolio valuations drove exceptional financial results for the second quarter, including GAAP earnings of 66 cents per diluted share.
Well in excess of.
<unk> per share dividend from the second quarter.
This contributed to a 6.5% increase in our GAAP book value to $11.46 per share at June 30th.
The results we generated thus far in 2021 are reflective of a business that can expand profitably while successfully serving its mission of making quality housing accessible to.
All American households.
As you know this mission emphasizes borrowers whose needs are not well served by government loan programs or potentially not at all.
Our residential and business purpose lending teams together target the non agency mortgage market segment of the market that many recently ignored in large part due to the absence of federal reserve stimulus.
The non agency market represents the residential mortgage universe outside of government backed mortgage programs.
By targeting this market rather than a specific borrower profile as we had in the past our business is not tied to the direction of the homeownership rate.
Instead Redwood now offers a comprehensive product mix that serves both non agency consumers.
And housing investors alike.
And it's a big market.
Many have forecasted residential non agency origination volumes to significantly increase in 2021 from the 435 billion of originations in 2020.
And that's only beginning to reflect the potential from a regulatory pullback for non owner occupied loans.
And could provide a significant tailwind to our sector going forward.
Our results remained strong in the second quarter, despite market conditions that were significantly more challenging than they were in the first quarter right.
Rising interest rates reemerged in the residential lending space largely the result of uncertainty on whether the fed will alter its support for the agency mortgage market.
Something that sharp competitive forces that arose as a result, along with a corresponding decline in refinance activity triggered a contraction in margins across the industry.
Exaggerating the effects of strong competition were signs of pro cyclical and supply chain inflation with a shifting yield curve driving significant hedging and execution costs.
Those managing large mortgage pipelines, including for us.
Against this backdrop in the second quarter, we still locked close to $4 billion of jumbo loans at margins in the high end of our historical target range.
The business purpose lending market also became more crowded in the second quarter with new competitors using the rate.
<unk> with either way into the space, particularly for lower balance bridge parental loan products.
The shift out of apartment living and towards single family detached homes is a trend that has shown no sign of adding.
The recent reopening of most major metros.
This has led to a shortage of high quality homes with aggressive demand from both.
<unk> and consumers alike.
In many regions rent growth has been significantly outstripped by home price appreciation.
Delighting, the scarcity value of quality housing and the multiple constituencies focused on acquiring single family homes.
Leveraging a well earned reputation as a nimble and reliable lifecycle lender core vest our BPL platform.
<unk> Eclipse 500 million of fundings for the quarter on a balance of single family rental and bridge originations.
The sustained performance through this challenging backdrop showcased our strategic foundation and is the essence of what makes redwood unique from.
Mortgage banking businesses offer highly complementary products that drive durable.
<unk> earnings streams.
In our investment portfolio continues to offer significant upside as the economy recovers or.
Our credit discipline and ability to create our own assets remain key differentiators.
Our strategic foundation has facilitated returns that are significantly outpacing our growing dividends.
In the first half of 2021.
Approximately 70% of Redwood as adjusted revenue was driven by our mortgage banking operations with the remaining 30% from our investment portfolio.
We expect mortgage banking and by extension our taxable subsidiaries to continue to be a strong earnings driver going forward.
The revenue generated through mortgage banking is nearly double the percentage contribution of.
Recent years and highlights the ongoing shift in our business model as we adapt to changing market conditions.
It also supports continued expansion of book value over time and retain earnings acting as a zero cost Avenue for capital formation that has reduced our marginal need for funding and stands in contrast to others in this space manage their balance sheets.
Continuing to reinvest in our infrastructure, both organically and through partnerships or path to realizing transformative scale is clear.
Across our enterprise, we've cultivated a talented and inspired workforce, we have embraced technology to serve our customers more quickly than ever before.
1 Great example of this approach as last quarter's launch.
<unk> of our early stage investment platform <unk> horizons.
This is something dash will touch on in more detail.
As we look ahead, we continue to raise our game invest in our people and infrastructure and attack our markets with a service standard that continues to separate us from our competition.
We're excited by recent changes in the regulatory.
Okay that have made the non agency mortgage market more relevant than it's been in many years.
Our goal is to build a business that serves an important public mission can scale profitably and generates a very attractive return profile for our shareholders.
And with that I'll turn the call over to Dash Robinson Redwoods president to discuss our operating results.
Thank you, Chris our second quarter results reflect continued strategic progress and strong operating momentum while our comprehensive non agency market footprint benefited from ongoing strength in the housing and credit markets. We couple these macro tailwind.
On the homegrown ingredients, both new and familiar.
Our team's usual crisp execution was complemented.
<unk> by meaningful progress with our technology infrastructure.
Both organic and through new partnerships already bearing fruit.
In sum the final product was another quarter of significant outperformance.
As Chris referenced benchmark rates remained an area of acute focus for the markets.
The uptick in rates during the second quarter is almost fully.
Retraced.
Uncertainty around the level of government support for agency mortgages may very well moderate the amount of borrower refinance activity. We typically see in this kind of rally.
Against this backdrop it is important to unpack the key drivers of profitability across our platforms as Chris noted the markets. We serve continue to grow as.
The path of home prices evolution in consumer demand for housing and important regulatory trends are driving an expansion of non agencies true potential footprint.
And while we're not immune from moves in MBS prices versus benchmark rates, our diverse distribution channels and unique product mix allow us to benefit from different drivers of demand.
Case in point, while margins compressed elsewhere in the market during the second quarter, we enjoyed durability in our margins with sustained strength in volume.
Across both residential and business purpose lending.
In fact, an ebb and demand for agency mortgages represents another potential tailwind for our business.
Mortgage originators are still ramping up.
Cassidy to address the pent up demand from jumbo borrowers and as home price appreciation has increased nationwide.
Along with consumer preference for single family detached rental housing our suite of BPL offerings remains in high demand.
And our residential businesses geographic footprint continues to expand.
Homeowner equity is now.
Now at its highest levels on at least a decade, pushing more loan demand above the conforming loan limits and into redwood as addressable market as.
As we noted on our updated Investor supplement there are now 13 states in which we have locked more loans year to date, then on each of the 2 years prior to the pandemic.
Collectively locks in these states represent 35% of our year to.
To date volume trend, we continue to track with great interest.
Overall market observers now forecast single family home price depreciation for 2021 to be 14, and 16% for existing and new homes respectively.
Even if this moderate as expected into 2022, we expect the trend to continue of more locations across.
Across the country.
<unk> into non agency markets.
Another key driver is the regulatory environment.
Evolving rules are likely to meaningfully increase the qualified mortgage or QM cohort a significant boon for high quality expanded credit borrowers. Furthermore caps in place since earlier this year on GSE per.
Of non owner occupied loans could expand the non agency market by an estimated $25 billion to $35 billion per year.
And there is likely more of the non agency market can do to help address broader access to credit and the associated impact on first time homebuyers and low to moderate income borrowers overall.
Also critical.
To the equation is the availability of high quality rental housing, including single family detached and issues solved in part by an increase in custom built projects.
We discussed on prior calls housing supply has not kept up with demand and building material costs moderating remained high contributing to significant price escalation on.
Single family homes for rent can meet the demand for expanded space in desirable neighborhoods on a monthly payment that more consumers can afford.
Reflecting these supply demand dynamics single family rental occupancy rates remain at record highs with a weighted average of 95% for all U S single family rental homes and.
And single family rents have remained meaningfully more buoyant.
Home the family rents since early last year.
Our second quarter results reinforced this broader backdrop on.
Operating highlights for the quarter included reaching our second highest level of jumbo locks ever and our highest BPL volume since late 2019.
As Brook will elaborate on book value increased 6.5% driven by.
Multi asset appreciation through fair value changes in retained earnings from mortgage banking income earned at our taxable REIT subsidiary.
Collectively our platform distributed $3.6 billion of loans through direct loan sales in 4 securitizations.
Following a historic first quarter, our residential business registered a $3.9 billion of lock volume.
On a mix 'em too.
As anticipated purchase money loans were a key driver and represented a 60% share of the quarter's locked volume.
Despite the interest rate backdrop, and competitive pressures impacting GSE eligible production the business delivered margins at the high end of our historical target range of 75 to 100 basis points.
Selecting.
The diversity of our distribution channels and strength of our pipeline management amidst broader market volatility.
During the second quarter, we sold $1.8 billion of loans and completed 3 Sequoia Securitizations for $1.5 billion.
While we saw moves in rates during the quarter and a dramatic flattening of the yield curve. After the June fed meeting.
The end to end coordination and efficiency with which our teams function remain a true competitive advantage for.
The flexibility of our securitization program, coupled with whole on distribution facilitates further scale as.
As collectively they allow us to be in the market consistently.
During the second quarter, we were once again faster to market than the competition and distributing our pipeline.
Another encouraging metric was the contribution that Redwood choice, our expanded prime product made to volumes choice.
Joyce represented 15% of our locks in the second quarter up materially from 5% in Q1.
Choice represented as much as 40% of our locks pre pandemic, a reminder of how meaningful this channel can be.
In recent.
Line remarks, we continue to emphasize changes to the QM rules that we believe will be a key tailwind to choices re emergence.
If adopted safely the new rules focus on mortgage rate is the determinant of QM status will allow another sleeve of high quality borrowers to qualify more easily for competitive rates and.
An important step that underscores the true potential of the non agency.
Publicly it to serve it.
Deeper bench of consumers.
We are actively engaging with our seller base to bring this to fruition.
These macro trends also reflect meaningful talents for core vest our business purpose lending platform.
The second quarter was particularly productive and BPL as we advanced several key initiatives, most notably completing.
Mark <unk> investment and Churchill finance.
<unk> originated $527 million overall in the second quarter up 37% from Q1.
Our funding mix consisted of $312 million of single family rental loans and $215 million of bridge loans.
Production was up over 60%.
Our Swan and increase for the fourth consecutive quarter driven by increased usage by borrowers on lines of credit and several built for rent and multifamily loans coming on line for funding.
The origination mix from BPL on the second quarter reflects the strength of our multi product strategy, which resulted in high levels of repeat borrowers, including those that utilized.
From Q1 of our loan products.
All 67% of total originations in the second quarter were from repeat customers and the pipeline remains strong with a consistent mix of new loans and refinance opportunities.
As if our production remains strong in the second quarter with fundings up 23% from Q1.
As we discussed.
More than last call the pipeline remains robust and execution has benefited from increasingly constructive securitization markets.
We completed our first broadly syndicated corvette securitization of the year and April achieving all time tights on credit spreads with a deep bench of investors.
That record proved short lift last weeks follow.
On our transaction once again price at all time tights, including a spread of 57 basis points on the AAA rated securities.
As we've seen many times before this type of execution inevitably breeds additional competition, which we view as an opportunity for <unk> to continue differentiating itself as the BPM market lender of choice.
We have high.
High expectations for our forthcoming refresh client portal, especially its new user interface, which will make it even easier for our clients to upload documents and track progress of their loans.
Additionally, we continue to press our advantage as a nimble lifecycle lender refining our product suite to continue serving the end to end needs of a deepening cohort of sophisticated.
Housing investors.
Highlighting this progress is our partnership with Churchill, which we expect will diversify our sourcing channels with a particular emphasis on smaller balance single family rental on bridge loans.
We have now closed our first purchase of bridge loans and <unk> loans from Churchill and see an attractive near term pipeline to complement our direct lending.
<unk> products.
From periods of increased competition. It is important to reinforce the value of an institutional platform like core vest in a market that in many ways is still developing.
We have now completed optional calls on to pour vest securitization refinancing many of the underlying loans, but the platform made 5 or more years ago.
Many borrowers.
Have now been with the platform for at least that long as core value continues to support their growth and evolution.
That's sort of track record matters and has immense intangible value on the field of play.
Our newest initiative, our WT horizons is doing its part in keeping pace with our enterprise wide progress.
Since formally launching horizons earlier.
This year, we have completed 5 investments and are assessing an exciting pipeline of new opportunities.
Most recently our direct investments include liquid mortgage.
Our platform focused on leveraging blockchain technology to bring efficiencies to the non agency market and a tech enabled residential construction management firm.
At this early stage.
Age, it's exciting to witness tangible progress with our new partners.
Liquid mortgage recently procured a key patent covering the vast majority of its business plan a big step on our collective efforts to apply blockchain technology to the non agency ecosystem.
Rent room and rent butter also both had productive quarters and are meeting or exceeding their planned product development and rollout.
It was critically these partnerships reflect the intellectual collaboration that drive true Alpha for all parties involved.
We are engaging directly with liquid mortgage and developing the work streams required to safely put mortgages on blockchain and.
And together are working to engage other key stakeholders across the industry.
Per rent room, and rent butter 2 investments sourced through.
<unk> <unk> network.
We are facilitating synergies with our broader client base.
We're thrilled to be working shoulder to shoulder with those standing on the frontier of innovation in our markets.
With that I'll turn the call over to book Carrillo Redwood CFO.
Thank you cash and PV.
As we noted our second quarter.
Quarter 2021 results reflect the durability of our model and continued strength across our entire platform. We reported GAAP book value per share of $11 on 46% at June 30.
6.5% increase relative to the prior quarter end.
The primary drivers of the 7 day increase in book value per share per GAAP earnings.
<unk> of 90 million or <unk> 77 per basic share, partially offset by our quarterly dividend of <unk> 18 per share.
We are pleased to have maintained a strong momentum for the first quarter generating a total economic return on book value of 19% for the first half of 2021 or.
Our economic return spotlights on.
<unk> our growth in book value, but also with our growth on our dividend, which we raised by another 13% in the second quarter.
We saw particularly strong results this quarter from our business purpose mortgage banking operations, which delivered a 52% after tax operating return on capital, but the net operating contribution of $20 million.
Which is up 80% from Q1 on a 37 per cent increase in origination volume.
Income from residential mortgage banking operations decreased from historic first quarter levels, while still delivering an after tax operating return on 17%.
Even if loan purchase commitments were down 22% Q2.
Still marked our second highest volume on record.
Dash with point gross margins remained at the high end of our historical target range. Despite a challenging macro backdrop at the impacted securitization execution and increased hedging costs relative to the first quarter.
Turning to the investment portfolio, we had $49 million of positive.
Investment fair value changes, primarily from our RP all assets, given further spread tightening and improved credit performance this quarter, which I'll expand upon shortly.
Net interest income increased approximately 20% or nearly $5 million from the first quarter of 2021 due to higher average balance of loans in inventories.
Our operating businesses.
Your yield maintenance income from S F. Our securities growth and on a bridge loan portfolio and a decline in interest expense from our investment portfolio.
Shifting to the tax side, we had REIT taxable income of 11 cents per share versus 9 cents in the first quarter, primarily on higher net interest income.
Our taxable REIT subsidiaries earned <unk> 27 per share in Q2 down from 47 in Q1. The decrease was primarily driven by lower mortgage banking income, partially offset by lower operating expenses and resulted in a $5 million lower tax provision for the quarter.
On a combined basis, our operating businesses generate.
An annualized after tax return of over 28 per cent in Q2.
<unk> $483 million of average capital as a reminder, these earnings can either be reinvested back into our operating businesses are paid on the dividend the REIT.
This quarter, we continued our focus on higher margin businesses that produce strategic assets for our investment.
Generated Leo.
Specifically, we deployed $45 million of capital to bridge loans during the quarter and $15 million to S. F. Our security then called zone.
Year to date, we've net reduced the size of our third party investment portfolio through opportunistic sales.
Working capital from our mortgage banking businesses represented less than 30% of our allocated.
Kt capital, but produced approximately 65 per cent of our adjusted revenue for the second quarter as Chris mentioned, the proportion of adjusted revenue from our mortgage banking operations have been growing in recent years and has facilitated returns that are significantly outpacing our growing dividend.
Total portfolio returns rose by a combination of improved credit.
And faster prepayments fees on securities, we hold on to discount to face value.
Higher prepayment speeds continue to benefit these portfolios and allow us to accelerate our call options within Sequoia in Florida Securities.
We settled the call rights on 3 Sequoia securitization and 1 castle securitization during the second quarter acquiring $83 million of.
On the loans and $45 million of seasoned <unk> loans, all at par, which benefited book value by 5 cents per share.
Estimate about 250 million to $300 million unexpected call activity across castle in Sequoia through the remainder of the year and we estimate at current market conditions, the underlying loans can generally.
Susan you sold or re securitized well above their par value, creating further potential upside to earnings and book value of approximately 6 to 8 cents per share for 2021.
Furthermore, we project another 2 billion of loans that can become callable by the end of 2024 with the majority of those currently expected to occur by the end of 2020.
And that could potentially add another 63 to 65 cents per share on average to book value depending on execution.
Net delinquencies in our portfolio continue to improve with new forbearance request near zero.
Specifically choice on RP, all securities experienced improved 90 day delinquencies during the quarter.
With select remaining flat from Q1 on absolute low levels of 80 basis points.
It's worth noting the improved delinquency trends with our RPM securities portfolio experiencing 60 day delinquencies now below pre COVID-19 levels and voluntary prepayment speeds continue to well exceed our original modeled expectations.
Ltvs.
2 in this portfolio are low and continue to improve or a whole stable and average coupons are in excess of our current mortgage rates, which should provide options to help cure distressed borrowers and keep actual losses flow.
At quarter end, our balance sheet and funding profile. We're in excellent shape following several liability and capital management actions taken during the quarter.
We added over $750 million of financing capacity to support growth of our operating platforms, including the refinance of a $242 million bridge loan financing, which contributed to a roughly 100 basis point cost of funds improvement for our overall investment portfolio.
Importantly, the second quarter marked another record for Redwood with combined.
T V's, a $3.3 billion of residential whole loan sales and securitization underscoring our ability to source and distribute inside.
Our recourse leverage was marginally higher at 2.2 times at the end of the second quarter as we incurred additional warehouse borrowings to finance higher loan inventories at June 30th our unrestricted cash was 421 million.
Which is over half the size of our outstanding marginal debt and at quarter end, our investable capital was $175 million, not including $100 million of incremental capital generated from a secured term financing we closed in early July.
I'll close with an update on our 2020, 1 financial outlook, we continue to see upside potential.
Buying a book value from here, both from anticipated call activity in our investment portfolio and through our ability to grow and retain earnings at our taxable REIT subsidiary. We encourage you to review the supplemental quarterly materials, we published earlier today, which provide more detailed and refresh guidance for the remainder of the year to highlight some of the key inputs that support our financial narrative.
On a.
Confidence on our ability to achieve our guidance is grounded in a sustainable trends, we're seeing across our businesses.
As Christian Dash have outlines the key themes that will drive our performance include increasing our wallet share using technology to drive efficiency allocating more capital to our higher ROE operating platform.
Continuing to create value through the investment portfolio and using partnerships M&A and other growth strategies to further our footprint in our target markets.
As we look ahead, we remain on track to keep pace with robust volume we've seen through the first half of the year anticipating another $6 billion to $8 billion of jumbo locks.
And approximately $1 billion of BPL.
Marrow donations for the second half of the year, which would nearly double the volume of that business year over year.
For perspective, the second half volumes on the residential front approach our full year volume just a couple of years ago.
We've demonstrated our ability to successfully grow not only our origination volume, but also on market share and we believe we can continue to do that across.
All original platform and in each of their underlying channel small changes in market share. It can have a meaningful impact to our overall profitability and scale and that's what we're planning to do over time.
For the remainder of the year, we anticipate generating an adjusted return on allocated capital between 20% to 25% from our mortgage banking operations and 10 to 12 per cent for the investment.
Portfolio.
As credit spreads have tightened up fairly significantly and fair values have been increased is forward yield on the investment portfolio, which is in line with our forecast at the beginning of the year reflects improvements in our financing costs and capital optimization.
And finally in terms of the potential sources of book value upside we began the year.
Across our per $144 million of net accretable discount in our portfolio.
And even after growing book value of $1.55 per share or roughly $175 million since that time.
We have approximately $2.60 per share or 300 million of remaining discount on the portfolio that we have the potential to recognize overtime.
With that I'd like to turn it back to the operator to open the call for Q&A.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your line is on the question to you.
Press Star 2 if you would like to remove your question from a true.
For parts of the funds using speaker equipment, it may be necessary to pick up your handset before pressing the star T. Our first question comes from the line of Stephen laws with Raymond James. Please proceed with your question.
Hi, good afternoon, congratulations on a very nice quarter.
You guys did a great job of covering the.
Opportunities for expansion and Chris I like the way you phrased you transform reach scale.
But the company is starting to achieve book, but maybe Dan if you could take 1 through these so I think you covered a number on your prepared remarks, but you know when I look at it.
Opportunities for her we expansion between rapid funding Churchill horizons.
It's about choice going 515, you know historically <unk> 40 per cent of volumes there.
And then you kind of you on.
Do financing facility as well as a lower cost financing facility.
What are you most excited about you know when you think about the zoro expanse.
Expansion opportunities, which 1 or 2 do you think will have the biggest.
Just going back to maybe the next 12 or 18 months.
Yeah.
Well, it's a great question Steven.
Candidly we are on.
In some fashion, we're excited obviously about all of them.
Some of these opportunities for expansion are certainly nearer term.
Probably categorize those as.
The existing businesses we have.
At scale continuing to realize the operating leverage both residential and <unk> I think we've seen that.
Over the past several quarters, obviously, we're seeing durability and expansion of margins.
Both of those businesses.
More efficiency in terms of our cost to originate on.
Cost to produce and so those are all real tangible benefits that we see over the next several quarters from.
From an operating leverage perspective debt.
Think our nearer term.
Medium to long term things like horizons and charge all of which are newer.
We expect will take some time to come online.
We will be meaningful contributors Churchill is is a really nice complement frankly to what's already a pretty deep bench of products that we have through core to us. It allows us on a pretty cost efficient way to access parts of the market that we could access directly on our well through a partnership like that frankly allows us to do it a bit more accretively.
<unk> perspective, and horizons as Chris I'm sure can elaborate on that that's really where so much of the alpha really lies.
As it relates to our enterprise wide efforts because at its essence horizons is trying to link us up and really penetrate us with.
Entrepreneurs and others on the market and trying to advance.
From a business that can really revolutionize rather than just sort of evolution is some of our businesses on how we how we work.
So like I said that will take a bit longer to come online and ultimately we expect horizons to not only produce good investments in their own right.
But also really evolve how we how efficiently we work within our core businesses today.
Alright, thanks for that color.
And Brook, maybe on the net interest income it was a pretty strong quarter I think I read in the review of the deck that a lot of that was due to some high loan balance is ahead of transactions. So how should we think about that moving sequentially I know there was a.
Securitization just after the end of the quarter.
C&I I pull back a little bit because of that securitization versus $30 million number kind of a good run rate given the lower financing costs have been put in place.
So there'll always be a little bit of.
His around quarter end, depending on inventories, although I would say just in terms of net interest income going forward. It was a $5 million of.
Quarter over quarter.
That will be driven.
By our financing costs as you correctly pointed out that we made some good advancements this past quarter and refinancing some of our higher cost facilities.
And coupled with the securitization execution, which is just continuing to be phenomenal the dash mentioned on the BPL.
<unk>, Inc.
We continue to see a.
Room, there to to further support NIM going forward, even without higher inventories potentially on balance sheet around quarter end. So for instance, the 100 basis points.
Financing cost improvement that we mentioned on just the investment portfolio that could add about 2 cents per quarter.
To NIM going forward from that from that deal alone.
And those are the kinds of things that will continue to focus on to to keep R&M fairly stable going forward.
Great appreciate that color lastly, Chris.
Business has been extremely strong book value is really really grown recovered from post.
Post Covid and the outlook is positive.
Whether it's it's macro or something specific to jumbo or BPL. What what are you. What do you view as the biggest risks to the business model and your current ROE.
Outlook as you sit here today on multiple landscape.
Good question Stephen.
I think I think right now.
Now.
The company is executing at a really high level and so I don't I don't worry about internally us being able to execute so much as we've got a delta variance with COVID-19.
You know rates were quite volatile in the second quarter.
There was a fed meeting today and Theres talk about tapering.
I think we proved that we can manage through those but nonetheless, they present challenges when you're running.
We're running a mortgage pipeline, there's a lot of competitors entering the space the BPL market.
It is a very attractive market.
We are.
Breed, but as we mentioned in our prepared remarks.
Some are attempting to buy their way and be a rate sheet. So all of those things are natural evolutions and when you see.
When you see us and others.
Performing the way we are you expect more competition, but.
Overall, I think if the economy.
To recover.
And.
Our business is execute we're in a really good position here.
I think it's a good growth story so.
No.
Brook mentioned, we released.
<unk> forecast for the second half of the.
Best to encourage everybody to checkout.
But right now we're well positioned.
Great. Thanks, and I also want to thank you guys for adding the ESG bullets on the beginning of your press release up to that is helpful and an increasingly important topic. So thanks for that as well take care.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Hello, Good afternoon.
Could you just talk about you know.
Some of the what you're seeing in the residential banking sector and some of the increased competition that you're referring to.
And how that compares to the competitive framework.
From where youre seeing in the BPL segment.
And maybe.
We can tag team this 1 on resi.
I think the competitive forces aren't quite the same as in BPL.
We got off to a good head start about a year ago post COVID-19.
And right now we're seeing.
A lot of competition in the securitization markets I think issuance activity is as robust as it's been.
Since the great financial crisis.
A lot of issuers, a lot of serial issuers as well as new issuers on monitoring the space and so you've seen pressure on AAA spreads.
And in specialty pass throughs.
But I think that 1 thing that differentiates us on resi is our whole on distribution.
It was very very strong and in fact, I think we sold more whole loans in the second quarter, then than we may have in the history of the company.
So that that distribution to us has been.
Very good and durable and I think.
On the resi side.
It's more a matter of managing the pipeline and managing rate volatility.
Dealing with tapering and things that impacts not only the price of mortgages in rates, but also our hedges. So that's an ongoing battle in the mortgage business, but that's something we're we're pretty good at.
Or is that you want to cover BPL sure. Thank you Chris.
Yes on <unk>.
It's a slightly different landscape.
As always been the case with core vest on every loan we do we compete.
It's just a different group of folks that we compete with depending on the type of loan that we do and what we're observing as the market has heated up.
And from a capital flow perspective, as more and more equity capital has come into the space and we've seen a lot of smaller lenders emerge slash re emerge and.
With a focus on products that frankly have a lower operational barrier to entry debt.
Lot of what we focus on.
We feel really really good.
Strategic mode.
Both from a borrower penetration perspective, as well as operationally with our core <unk> and bridge products just want to say, we don't compete there.
But there is a smaller cohort of lenders that can do that well.
I think the smaller balance products.
Some of the more traditional.
Bridge loans backed by a single house or where single family rental loans backed by much smaller portfolios. There is a really really strong bid on the market for those loans, which is obviously a tailwind for us.
But also has allowed other people to come on line somewhat quickly here this year.
And get into those products.
That frankly don't require as much operating.
About this channel expertise our chops as a lot of lot of the products that we traditionally focus on so that's the landscape we can manage because at the end of the day speed to leverage for these borrowers reliability product flexibility is going to win the day and we feel very good about those trades on our business, but the competition is definitely there as you.
Operations to be given the market dynamics.
Yeah.
Okay, and then a follow up on the on them from already mortgage side.
You lay out a pretty strong argument that the non agency market should continue to grow.
But it seems like the lock volumes can be a little bit softer in the back half of the year than the first half of the year now the first half was obviously.
You'd expect strong.
Do you expect that slowdown to be transitory before you start to see structural growth in the non agency market going out to 2022 or 2023.
Yes.
It's hard to project quarter to quarter in resi.
As you know and so.
We have limited visibility into the direction of rates.
Things that impact week to week or month to month, but the macro forces and <unk> are very strong in non agency I should say.
There's still a fair amount of refi business to be had but also with these regulatory changes you have seen the emergence of the non owner occupied.
Pi.
On strategy.
Strategy and we started to see non owner occupied securitizations on that product is in very high demand in the private sector people really like the convexity profile.
And that has the capability to significantly.
Expand.
Absolute size of the non agency space.
There is definitely an emphasis.
Washington on affordability, which probably means there's a good chance that the rules don't change.
And these these opportunities.
Remained strong in the private sector. So I think there's a lot of good macros.
And certainly how we are positioned in the market and what we built over the course of many years and the relationships that our team has built Mike.
Like I said it allowed us to move very quickly.
When the Covid crisis past and I think it continues to be a big advantage.
1 thing I would add Kevin to that.
Is it.
Think about on you've identified the statements we've made about home price trends and what that means for markets across the country evolving in the non agency markets that is really a multi year view about.
The growth trajectory for the business.
Certain zip codes or MSA or msas.
Move to requiring more non.
Non agency product to facilitate home purchasing that inherently is going to take a period of time, it's not going to happen all at once.
Obviously purchase purchases need to occur in those markets.
For that to occur. So that's that's an immediate opportunity for us but over the long term is really a multi year.
View and pretty powerful statement.
If you think about how big the footprint and evolve into.
Okay. Thank you for taking my question.
Our next question comes from the line of Bose George with K VW. Please proceed with your question.
Hey, good afternoon.
First can you just talk about the execution difference between.
We think whole loan sales and securitizations on the jumbo loans.
Sure.
They're pretty close to each other right now bodes particularly as.
The long end of the curve is balanced a bit off of its low in yields when we were staring at a.
On a $1.15 tenure probably.
The answer would have been securitization would have been slightly better just given the total return on total yield challenges.
Your whole on sales, but now that we've backed off of that I would say they are pretty close to parity right now.
Okay, great. Thanks, and then actually just switching to your guidance, which said thanks for that but on your <unk> guidance in the back half of the year.
It looks like it's around $500 million per quarter, which is a little below the 527 you did this quarter.
Do we think about that sort of the longer term outlook is up.
The guidance on the back half of the year just reflects the fact that <unk> was had a bump up relative to <unk> or just curious on you should think about debt.
Yes.
This reflected on the fact, we mentioned net BPL originations.
Perfect.
And so we're coming on.
The highest and best.
Second quarter 2019 for that business.
He set up the guidance do you want to make sure that.
Our forecast is grounded in our ability to deliver on those results.
No.
In a $2 billion on detail originations for the year as I mentioned weighted.
Will that volume on the business year over year, and there's been additional capital.
Actor and other competitive dynamics, coupled with the fact that the strategic partnerships.
So I think channel that we have.
Finally net.
To complement what our business has been able to produce organically.
Which is that.
And phenomenon. So I think we're just trying to set ourselves up for on.
The reality of what we're seeing on the market right now, but understanding new products.
Others have been products that we've been originating for years in sales are.
Footprint on the French market, while our volumes have been growing.
And our ability to deliver on that.
Okay that makes sense, thanks, and then actually.
Q1 regulatory question, just given the change at the FHFA.
Curious on your thoughts about whether that 7% cap on.
Second an investment properties whether.
It could be any change to that.
Hey, Bose, we don't have any.
Any insight info here by any spanning means, but we do sort of subscribe to the notion that.
Number 1 I think the private sector. Thus far has picked up that business relatively efficiently.
So questions about the.
City of private markets 2 to absorb.
On that supply at least at least a quarter or 2 and I think we've met that challenge as an industry, but I also think.
The investor products and and.
Other other.
The assets of the Gse's scope of business.
That arent necessarily fully aligned with the mission I'm not so sure that those those necessarily come back quickly.
Anything.
Subsidizing those mortgage rates just continues to impact the affordability of homes.
First time homebuyers or others.
So it's not it's not obvious to me that those caps are lifted anytime soon.
Ed.
We are going to go through a transition with a new director of the FHFA on a new regime. So we'll have to just wait and see what happens.
Okay, great that makes sense.
For <unk>.
Our next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Thanks.
Hoping you could talk about that $2.60 per share.
<unk> book value gains.
What kind of what is required.
What type of what is needed on the underlying collateral for that ultimately would be recognized and you know I guess, how should we think about.
Timing for that.
So in answer I'd say its more of a thing and I think we played back to the passport quicker.
Alright, that's only fair value changes.
$265 million and that's been driven by the same trends that would.
Necessitated to continue to realize more of that $300 million, which is just strong credit performance on our deal we mentioned in our prepared commentary some of them Mr.
The statistics around our.
60, and 90 day delinquency trends that we see across our RPM and residential portfolios itself on the BPL side.
And then you know elevated prepayment speeds continue to be a real tailwind for us too and I would just net fair value changes as a percent of our net accretable discount in the past few quarters had been running kind of 10 to 20.
20%, so we might expect that to moderate just given how strong the HCA has been how strong.
On the strength, we've seen in terms of elevated prepayments on but it would really just be a continuation of those trends that we've been seen on.
To continue to capture that that net discount to par value and I think we can point to.
<unk> S. L. S T on a re performing loan portfolio for instance, on we've seen voluntary prepayments in the low to mid teens, which is really well in excess of our modeled expectation. So that has accelerated the timing relative to what we had originally anticipated when we entered some of these trade.
And on the on the residential side you know our gross WAC, even on selective around 4%. So we've made a lot of commentary on on our purchase mix this quarter, but there's plenty of room to run given what's happened in the rates market in terms of a pickup in refis that would.
You know continue to do I think faster than modeled prepayment speeds.
Kids and continued credit spread tightening, but helped accelerate that recognition of the discount.
Investment fair value changes overtime, and we noted on in our Investor presentation that.
On <unk> 66 per cent of those securities we actually on the call rights around so I'm on.
The thing.
Help us to accelerate.
At a discount.
Alright, Thank you Brook.
Okay.
Our next question comes from the line of Eric Hagen with V. G. R. G. Please proceed with your question.
Hey, Thanks, good afternoon.
Lots of capital getting attracted to single family rental.
Bridge lending.
And H peers of course, then significant already like you guys noted can you talk about just the ability to target the same credit profile that you've been they've typically been able to see show up of core best and if you feel like it's getting more challenging to do that just given the increased competition and then 1 more on the corvette side of the.
A business purpose on.
Just curious how you guys think about locking in some more durable financing for the bridge portfolio.
Particularly through through securitization, whether there's enough critical mass to become a programmatic issuer there potentially.
Thanks, Eric It's Josh I'll take those in sequence.
You bring up a great point.
On overall credit quality.
Clearly whenever competition enters this space and sort of what I was articulating.
And to an earlier question.
You clearly are seeing.
A cohort of lenders focus on the stuff thats easier to do potentially.
On a stretch credit standards, we're working as we always do really hard to stick to our knitting and I think what allows us to do that effectively you know as the overall sophistication.
Of the borrowers that we serve but also the fact that we've got many cases, a multi year head start versus competitors in terms of the book.
That we have.
I referenced in the prepared remarks, the fact that we've now called <unk>.
<unk> Securitizations, we have a lot of borrowers that have been with us for 5 plus years at this point and that really matters and obviously structure on efficiency on any given loan is.
Our business, but.
But you know for our borrowers whose portfolios have grown over the years that they've been with us.
As financing needs are becoming more and more eclectic so to speak as they get into different strategies.
You know that reliability that we've provided over the years ultimately really does win the day.
And the fact that not only are we at.
Tracking new customers, but have an existing book of business, which we've been very effective.
Our continuing to serve I think as a mitigate to what you are correctly pointing out.
Clearly, we're very focused on not only the evolution of credit standards in this space, but also structure.
What types of loans are being offered what sorts of term.
Versus ours.
Traditional loans. These are all things we focus a lot on.
And I think again the moat is just the duration of the borrower relationships and the flexibility of our products that that will continue to lean on to make sure we stick to our knitting.
As it relates to your question on bridge.
As we've discussed before we were always looking at the market.
For Whatsapp.
So I would say the team is broke referenced did get a lot on over the past couple of months.
Terms of further optimizing the cost of funds and the structure for how we finance the bridge book.
That was a driver behind the 100 bps of blended cost of funds improvement for the investment portfolio, but.
Whats out look at everything we're certainly aware of competitors of ours getting deals done and it's something we're always going to monitor very closely.
Thanks for the comments.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Good afternoon, everyone and thanks for.
For taking my question I'm spending some time looking at your RPM Securities today.
And it looks like it's about 2 billion debt your investment of about just under 500 million maybe referenced is about 200 billion of total loans.
<unk>.
Obviously, we know what <unk> Saar, but can you comment on.
We like how you acquired those securities was it kind of just open market now and then or is there any large structured transaction debt.
Some of those subordinate securities on your books. Thank you.
Thanks, Steve for the question.
It's mostly the latter.
We.
Our Freddie Mac over the years has had a couple of programs through which they have.
Syndicated credit risk at least.
On re performing loans that they have bought out from their securities onto their balance sheet.
S O S T.
Is the is the acronym for right the 2 large.
Largest RP all investments we have these are investments we put on the books in late 2018, and 19, respectively. So they've got some seasoning from our perspective on the underlying loans. As you know are extremely season. Many of them 14.15, plus at this point so.
The attractive piece of those investments was to your point, we were able.
To put really chunky amounts of capital to work in 1 fell swoop at attractive returns and as Brook referenced.
Underlying performance there.
You know here has.
As.
Been better than what we had originally modeled.
But also does come with a very attractive term financing at the top.
That's garen.
By Friday.
So on it it's essentially term funded debt at a very attractive rate, which.
It takes it takes a headache or 2 off of our plate as it relates to having to manage how that book is finance over the years. So it's very attractive for a number of reasons.
Now recall that your multifamily investments you had.
Guaranteed arrangement with Freddie Mac, but that it slipped my mind, so given that attractive term financing theres really no. It doesn't sound like there's any call right.
Angle or play on these <unk> as it is on some of your seasoned S. M. T N C. A F L deals.
Just because of the way you've kind of locked it up.
Yes.
Actually there is there is some optionality within the structures that we originally entered into.
It's not as immediate as with Sequoia and core best just because of how the cost structure and some of the lockout and lockout periods and some of the premiums required to call the transactions, but it's a big part of the story.
Okay.
That's probably less immediate for 2021.
More potentially a year or 2 down the road based on how those transactions are structured.
Okay, that's great to know my last thing.
Bank competition I can remember you know gosh 3.3 years ago 4 years ago. The banks were just.
First Republic.
Instead, we're just going at J P. Morgan Crazy over Prime Jumbos, and it was really hard for you guys to compete at some times how is that today dash in terms of their footprint in the marketplace versus yourself and others.
You know bank demand as always.
He's been.
You know a 2 sided coin for us because obviously we compete.
To head with the wells and the chases those those channels are obviously meaningful competitors to us in the market, but bank demand has also been a significant part of our business from a distribution perspective.
On a whole loan sales.
Has been a really important part of the equation for years.
I think year to date I think we've actually sold more whole loans year to day 2021 that we have on any other full calendar year in.
And it speaks to your point you know these are obviously very high credit quality products. There is net interest income.
Challenges.
Depository.
There are very real participant in the market and that there are competitors, but.
They are also partners in helping us on our business Steve.
Add to that.
We do a lot of rate surveys and we're very very aware and conscious of where banks are pricing mortgages.
We have enough visibility to to understand where liquidity wise and I would say the team the team right now is.
Moving risk so quickly.
It's really enabled us to be very competitive more competitive than we've been in the past.
We don't have the <unk>.
Vantages of our bank with the deposit base, but we've mitigated that by turning our capital faster.
Processing loans faster and.
Maintaining that service standard along the way so I'd say right now.
We're more competitive with the banks than we probably ever been.
But as Dan said, we look at that.
We look at them as competitors, but we also look to them as as clients. So.
So it is kind of somewhat of a symbiotic relationship.
Got it well. Thank you for the comments and we look forward to you positioned the company and a fantastic place.
And we look forward to the second half of the year. Thanks.
Thank you Steve.
Our next question comes from the line of Ryan Carr with Jefferies. Please proceed with your question Hi.
Hi, Good afternoon, guys and congratulations on the great quarter first question is on the outlook on the resi side.
Your guide.
At the high end implies a similar run rate in terms of volumes for the back half of the year.
To that in your view is refi and then just given again given where rates are today would you expect that to be more in the third quarter heavier fourth quarter, whereas your view of that and then finally within that.
HPA is insignificant at this point any thoughts on the foreclosure moratorium exploration on how that'll impact for the balance of the year.
On your first question Ryan.
Our second quarter results were about 60%.
Purchase on our.
Obviously, we're.
It's hard to predict where rates will go but.
I think what underscores that is.
A really solid footing purchase money market and so we're not that that forecast is probably based on.
On a consistent mix with what we've seen here over.
Over the past few months it is not a view that.
With the rally in benchmark rates refinances will will uptick massively versus where they've been that's probably upside to the forecast frankly, but the forecast really reflects the current mix debt.
Debt.
We've been trending towards here in the past few months.
As it relates to the foreclosure moratorium.
Obviously, we're tracking that very very closely.
From our perspective, it's something that differs materially.
Honestly from where we were.
10 to 12 years ago in terms of just the state of the housing market. Obviously there is.
Part of borrowers that.
It has been.
<unk>.
Part of this moratorium, but from our perspective, if you just look at where equity is in housing.
Overall, we remain optimistic that however that ultimately plays out it will be an orderly.
Situation in terms of.
Co apply for the housing market help borrowers can come back online and.
And begin to re perform again.
So it's something we track very very closely and we do think the macro trends.
Obviously differ materially from when we were having a conversation like this back in 2008.2009.
Okay.
Thank you and then real quick within that.
In your deck and on the call. Several channel you mentioned, increasing your wallet share.
Particularly on both sides of the business and I'm curious to hear your thoughts on how some of the new investments and horizons and initiatives and technology are driving.
On those those kinds of synergies going forward and increasing.
Increasing your opportunities in those areas.
Yes, I'm glad you asked about horizons because internally.
We've been very excited about it.
And it's really it's really starting to gain traction.
In addition to the capital that we've deployed on Horizons, which.
Immediately hasn't been too significant.
The deal flow has been very significant.
<unk>.
And with every deal we look at.
Our network is building.
And that's a space that we had kind of been on the outside looking in for a number of years and just given our proximity to.
The valley in the network that we have we're starting to see especially on the prop tech side a lot of opportunities.
Last day or so.
Series, a series B just interesting.
Opportunities.
And I think that as as debt platform grows.
We always wanted.
On it it to have a strong connection to our business and whether it's technology or.
Or something else something that could be transformative to <unk>.
<unk> business or resi business and so over time some of the investments that we've disclosed to the extent.
Startups turn into stable businesses, there's definitely an opportunity to expand.
And some really interesting areas of.
Whether it's finance or prop tech.
So it's again, it's early days and I think per Eison as a as a medium to long term story, but it's.
It's very much a focus here and and like I said Theres a lot going on behind the scenes a lot more than just the capital that we've been deploying.
Thanks, very much and congrats again on a great quarter.
Thank you Kieran.
Ladies and gentlemen, this concludes today's.
<unk> Q&A session and this does end the call. Thank you everyone for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.