Q3 2021 Redwood Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Redwood Trust, Inc. Third quarter 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.
Please go ahead ma'am.
Operator, Hello, everyone and thank you for joining US with me on today's call our Crystal Ball Redwoods, Chief Executive Officer, Josh Robinson, Redwoods, President and Brent Carrillo Redwoods, 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.
Performance may constitute forward looking statements or looking statements are based on current expectations forecasts and assumptions 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 maybe 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 measures of financial performance prepared in accordance with GAAP.
A reconciliation between GAAP and non-GAAP financial measures are provided in our third quarter Redwood review 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.
And this information to reflect subsequent events or circumstances.
Finally, today's call is being recorded and will be available on the company's website. Later today I will now turn the call over to Crystal Ball tell you Redwoods, Chief Executive officer for opening remarks.
Thank you Lisa and good afternoon, everyone.
After a historic first half of the year our team continued on our path towards transformative growth.
But having communicated an ambitious second half of 2021 forecast our third quarter results still managed to exceed our expectations.
Tire organization has been energizing to see the durability of our business model as we produced strong financial results and risk adjusted portfolio returns.
Our GAAP earnings were <unk> 65 per diluted share for the third quarter.
GAAP book value increased four 7% in the quarter to $12 per share at September 30th.
This contributes to an overall year to date increase in our GAAP book value of 21%, despite having raised our dividend each quarter of the year thus far.
When combined our GAAP book value growth and dividends paid have resulted in a 27% economic return to shareholders year to date.
Operationally speaking, you'll hear more from dash and broke our third quarter results, but suffices to say it was a very strong quarter with several in house Records broken.
I'm, particularly proud of a series of strategic and innovative transactions across our firm that were both accretive to earnings and foundational for future operating progress.
This included the first private label MBS securitization to leverage blockchain technology completed in collaboration with liquid mortgage and early horizons investment partner.
We also completed our first ever bridge loan securitization through our BPL platform, which provides a meaningful new distribution alternative to us.
Next our investment portfolio team co sponsored the first ever securitization backed entirely by residential home equity investments and finally these deals were rounded out by six new venture investments by our D. G horizons in the third quarter.
I'm also pleased that after following strict health and safety protocols, we were able to successfully host our third investor day in September the first since the onset of the pandemic.
During the event, we affirmed our commitment to our corporate mission to make quality housing whether rented or owned accessible to all American households.
We also unveiled a much bolder strategic vision become a leading operator in strategic capital provider driving sustainable innovation and housing finance.
As we showed in New York are opportunities for transformative scale are clear and now attainable based on the strategic progress we've made in recent years.
Our vision is built upon an immense multi trillion dollar addressable market.
<unk> the traditional mortgage lending space.
Thanks to innovations and technology. There are now multiple ways for us to leverage our long developed and highly regarded expertise in housing credit.
We're already attacking antiquated processes in our markets with technology enabled solutions and over time, we plan to completely re imagine how the non agency housing finance market works.
Across the Redwood enterprise, we've cultivated a talented and engaged workforce that as you might expect believes in our mission and has inspired to innovate and help us realize our strategic vision and goals.
Thanks to a lot of hard work over the past year. Our platform is now beginning to command the attention of an industry, where the status quo is not only been accepted but also embraced by most.
Our role is not a typical one for reid much less one one of the longest tenured publicly traded Reits in the country.
That should not come as a surprise as we never defined our business by way of our federal tax election.
Those who do risk missing the growth potential of our platform, particularly as we continue to analyze our optimal long term corporate structure.
Rounding the bend towards the end of the year, we remain very optimistic about our business, but we are proceeding cautiously.
We see several macro or market risks ahead, COVID-19 variance rising inflation central bank tapering and federal debt ceiling strike to name a few.
More fundamentally recent trends in unemployment claims suggest that we're still in a recovery phase and the current economic situation as far from stable notwithstanding the consistent upward pressure on home prices have rents that we've all observed in recent quarters.
Our interest rate capital and broader risk management posture reflects this view.
While we generated strong earnings thus far this year, we've done so with record amounts of cash on hand, including $557 million at September 30.
Going forward, our stakeholders should expect that we will continue to work to fulfill our broadly conceived mission focus on the significant addressable market in front of us and run our business grounded in fundamentals and sound analysis.
All while nurturing a diverse and talented bench team members, who are engaged and aligned with our values.
Thank you again for joining us today I'll now turn the call over to Dash Robinson Redwoods President to discuss our operating results.
Thank you, Chris and good afternoon, everyone.
As Chris described the third quarter was another prolific one across our platform with increases in purchase and origination volumes complemented by innovative work across technology and capital markets.
Our teams are operating in a highly productive and sustainable level as the foundation, we have laid drives efficiency gains and demand for our products remains robust.
Notwithstanding the recent uptick in benchmark rates excess capital in the markets is still in search of yield we remain the partner of choice for a whole loan and securities investors alike, and continue to expand our distribution channels accretively to our capital efficiency and bottom line.
Our third quarter results reflect continued execution of the strategic goals, we laid out at the beginning of the year.
As Chris referenced we are seeing meaningful progress in a number of the initiatives that we presented at our recent investor day, both organically and through new investments and partnerships already bearing fruit.
In this vein, we strive to innovate daily in addressing the issues facing the housing market, but also look to take advantage of our strategic positioning in the markets. We serve to continue to grow profitably and sustainably.
Our progress also underscores important realities about housing affordability and accessibility.
As we focused on at Investor Day.
Housing finance needs more creative solutions, driven by technology, a common sense approach to underwriting and most importantly leadership in bringing market constituents together in pursuit of common goals.
During the third quarter, we took important steps in this direction.
Our results reinforced this broader backdrop and the opportunity across our platforms to continue serving growing areas in housing.
And the recent path of home prices, coupled with the evolution in consumer demand and important trends and industry regulation has created ample room for other creative solutions to help consumers monetize equity in their homes.
Our third quarter results represent another step.
And the path towards transformative growth that we laid out at Investor day, with our core operating businesses, leading the way and notable strategic progress across the enterprise.
The durability and diversification of our business model, coupled with our crisp execution and technological innovation puts us in a unique position to drive change that benefits all stakeholders with this in mind. It is important to unpack the key drivers of profitability across our platforms.
Our residential business continued executing in the third quarter and we believe is well positioned heading into year end based on several market headwinds, including renewed inflation fears and meaningful rate volatility the team drove margins and volumes higher and once again broke new ground in our Sequoia securitization program.
We generated a record $4 $7 billion of lock volume during the quarter, making quick work of our prior record of $4 $6 billion to quarters earlier.
Overall locks were up 22% versus the second quarter, 59% of which were on purchase money loans, an important statement about the quality of our pipeline and our sellers given the benchmark rates during the quarter hit lows not seen since February.
The volume of choice locks remained steady versus the second quarter and now the current mortgage rates are approximately 30 basis points higher versus the lows of Q3.
It is a helpful reminder, that we have locked choice loans with over 100 different sellers. Thus far this year important groundwork that we believe will bear fruit as we head into next year.
The depth of our distribution channels was another highlight during the quarter as we sold $2 4 billion of loans alongside our securitization activities.
Our MBS issuance remained elevated in the third quarter with September a particularly crowded month.
As expected during any substantial uptick in supply we witness more noticeable priced hearing from investors across transactions differ.
The differentiation that we once again benefited from during the quarter.
Our third quarter issuance Sequoia 2021 dash six was $449 million in size and executed well inside competing transactions marketed during a similar period.
Time of securitization the loans underpinning the deal where on average just one month old compared to three to four months for our competitors are testament to our efficiency and turning inventory.
A key hallmark of the transaction was the first of its kind use of blockchain based technology within private label RMB us for enhanced remittance reporting for bond investors liquid mortgage an early partner through Redwood Horizons is acting as distributed ledger agent or DLA on the transaction, providing an added in more real time.
Mittens reporting option for investors, who choose to leverage it.
Liquid mortgage has integrated with Redwood sub servicer to receive payment information that will be published on the blockchain daily.
This is a significant first step towards applying technological advancements and transparency to an area of the mortgage industry that has historically been less advanced.
We are excited to be leading the market in this effort and expect to implement this enhanced functionality going forward.
In fact liquid mortgages also acting as DLA on our most recent Sequoia securitization, which closed in October and is backed by $407 million of jumbo residential loans.
Leveraging technology remains a major organizational focus and we continue to achieve milestones on our organic technology roadmap.
Rapid funding through which we provide accelerated settlement timelines for sellers recently eclipsed $1 billion in purchases since program inception, one year ago.
Our Redwood live App has also gained significant traction recently and we expect seller adoption to increase and allow us to continue growing wallet share with our seller base.
The third quarter was also another high point for core vest our business purpose lending platform.
The third quarter $639 million in fundings were the highest since late 2019 and reflected a consistent balanced between single family rental and bridge.
<unk> fundings totaled $394 million up 26% from the second quarter.
Production that positioned us to price an <unk> securitization in early October back by approximately $304 million in loans and core vast 19th securitization overall.
<unk> continues to deepen its operational mode and during the third quarter, we achieved a key capital markets milestone as well and completing our inaugural transaction backed by bridge loans.
<unk> has long been an industry, leading bridge lender and we expect structures like this to further drive our competitive advantage.
The transaction creates $300 million of financing capacity off of which we sold liabilities representing 90% of the capital structure procuring additional leverage on a nonrecourse non marginal basis at a cost of funds of less than two 5% on the issued bonds.
Importantly, the transaction was structured with a 30 month reinvestment period for loan payoffs a longest of its kind to date for this type of transaction, making it another important liquidity management tool for the business as we expand originations.
Operating momentum in the bridge business means we will likely use these types of structures and others like it going forward as third quarter fundings totaled $245 million, an increase of 14% from the second quarter.
As competition ramps up across the BPL market product development remains a key priority, we continue to expand our channels and BPL through a combination of direct lending and sourcing loans from third party originators to that end during the third quarter. We made key progress in our correspondent loan business and further capitalize on our strategic investment in Churchill R Tech.
<unk> initiatives also continued to advance in the quarter furthering this expansion we launched an initial release of a refresh client portal with strong initial feedback and remain focused on creating more efficiencies at the front end of the underwriting process.
The fourth quarter has traditionally been our most prolific for BPL originations and we feel confident about our capacity to manage higher volumes entering 2022.
Our investment portfolio remained in step with our operating progress and continued to generate strong returns with our securities book appreciating in value by approximately 2% during the third quarter and our bridge portfolio, helping to drive net interest income higher.
Brooke will discuss in more detail. We believe there remains significant value to be unlocked from our investments based on the remaining discount on the book coupled with continued execution of our call right strategy.
As Chris noted our portfolio team delivered its own first of its contraction during the third quarter co sponsoring a securitization backed entirely by residential home equity investments completed in partnership with point digital a fintech originator. The hallmark transaction is backed by a product that enables consumers to monetize equity in their homes without having to sell or.
Or incur additional debt.
Of the 34 trillion and total estimated U S home value that we mapped out at Investor Day, approximately 23 trillion is in home equity either backing existing that are held for cash by a growing cohort of zero LTV borrowers.
While point and others have made progress in unlocking a small portion of this value the opportunity demands additional product creativity and flexible capital.
In parallel with the securitization, we re upped our flow purchase arrangement with point, providing us with a continued acquisition source and the opportunity to explore adjacent products.
Point in liquid mortgage were too early Redwood horizons investments and are now part of a growing suite of portfolio companies that we believe will be a driver of long term value creation for redwood.
Horizons continued its strong investment pace during the third quarter completing six investments in total.
Go forward pipeline is highlighted by an array of technology solutions, including several opportunities in climate analytics are particularly busy areas firms attempt to evolve traditional methods of predicting how climate change impacts property valuation ensure ability and overall credit performance.
With the direct access to our firm wide ESG work, we expect to continue dedicating focus to this area.
With that I'll turn the call over to Brooke Carillo Redwoods CFO.
Thank you dash our efforts to drive scale in our current businesses, while executing on initiatives to elevate and Reimagined industries drove another strong quarter of financial results.
We reported GAAP earnings of 65 cents per diluted share representing a 27% annualized return on equity for the quarter, which significantly outpaced our dividend.
As a result book value increased 54 cents.
7% to $12 per share in the quarter.
We've had an outstanding 2021 today and I am pleased to have built on the momentum from the first half of the year.
We delivered our third consecutive dividend increase of 17% to 21 cents per share ahead of market expectations. We have consistently generated annualized economic return in excess of 20% over the last five quarters.
Our economic return spotlight as not only the evolution of our dividend, but more importantly, the expansion in our book value.
Our results reflect the operating leverage of the platform and the first nine months of the year transaction volumes in our mortgage banking businesses have already surpassed the average annual volumes over the past several years.
On a combined basis, our operating businesses generated an annualized after tax operating return of 31% in Q3 and utilized roughly $450 million of average capital or 30% of our total allocated capital that produced two thirds of our adjusted revenue for the quarter. As a reminder, these earnings can be retained in the business.
Driving the differential between the nearly 5% increase in book value and 2% increase contributed from the investment portfolio. This underscores our ability to create organic capital like we have been continuing to convey to the market.
Residential mortgage banking team generated a 26% after tax operating return on capital during the quarter.
Income from mortgage banking activities net like $12 million higher than the second quarter as loan purchase commitments of $3 3 billion increased 20% from the second quarter and our gross margins improved approximately 25 basis points, which is above the high end of our historical range.
Margin expansion was attributable to improved execution on securitization during the quarter and hedge outperformance enter a rising rate environment.
We saw continued strength from our business purpose mortgage banking operations, which delivered a 43% after tax operating return on capital spread.
Spreads continued to tighten in Q3, but the pace moderated resulting in a lower <unk>.
Increase in the price of loans in inventory at the beginning of the quarter relative to second quarters change.
From the BPL mortgage banking results benefited from a 22% increase in funding volume as well as strong execution on our securitization completed in the quarter.
Next I'll turn to the investment portfolio, which has been a consistent source of value creation in 2021.
Following the $95 million of investment fair value changes and Thats through the second quarter, we had another $26 million in Q3 from further improvement in credit performance and spread tightening, particularly in our third party re performing loan and retained corvette securities.
Additional positive fair value changes were realized through the first ever securitization of home equity investment.
Separately during the quarter, we settled call rights on two Sequoia securitization acquiring $66 million of season jumbo loans at par, which had a small benefit to book value.
Portfolio net interest income increased by roughly $9 million driven by lower interest expense on bridge loan financing.
The increase discount accretion income on our available for sale securities the.
The increase in accretion was driven by expectations for certain of our retained with Voya securities to be called over the next several quarters benefiting our cash flow forecast an effective yields for those investments, but it is important to note that there is no impact book value from these changes look.
<unk> ahead net of our third quarter gain there remains potential upside of roughly $3 per share and our portfolio through a combination of accretable market discount and call rights that we control.
We estimate $1 2 billion of loans can become callable across capital in Sequoia through the end of 2022.
Should current market conditions persist. These callable loans can generally be sold or re securitized well above their par value.
REIT taxable income increased to <unk> 14 per share from 11 in the second quarter due to higher net interest income.
Taxable REIT subsidiaries earned <unk> 32 per share in Q3 up from 27 in Q2.
Recognize a lower income tax provision compared to the second quarter from the release of the valuation allowance on a portion of our deferred tax assets, partially offset by an increase in state taxes.
Our balance sheet and funding profile remain in excellent shape with unrestricted cash of $557 million, which equates to over 75% of our outstanding margin about that we also have investable capital of $350 million to deploy into new investments.
During the quarter, we added $350 million of financing capacity to support growth of our operating platform. We also completed the Brent securitization and a new $100 million non margin both term financing collateralized by retaining capital securities in our investment portfolio.
Each of those which contributed roughly.
The 20 basis point reduction in the cost of funds of our business purpose lending segment.
Our recourse leverage was unchanged at two two times as we incurred additional warehouse borrowing to finance higher loan inventory, while relocating certain financings into nonrecourse debt and experiencing appreciation of our equity base.
One central tenet of our strategic plan is to continue enhancing our capital and operating efficiencies.
During the third quarter, we maintained cost per loan for our residential mortgage banking operations of 28 basis points compared with our historical average of 35 basis points. During 2013 to 2019, our business purpose mortgage banking operations also delivered improved efficiencies with a lower net cost to originate relative to the second quarter.
Even with higher general and administrative expenses on the quarter due to increased variable compensation tied to our strong year to date financial performance.
Various efficiency ratios, such as pre tax margin or operating expense as a percentage of GAAP net income demonstrate very positive trend lines in our efficiency gains.
And finally, we are embedding sustainability across our operations and investments strategy, we are committed to transparency and further integrating ESG into our financial reporting going forward. We recently provided a comprehensive ESG review at our Investor Day event in September, including new disclosure of human capital metrics and programs and in <unk>.
All of our key priorities and top commitments over the near to intermediate term.
As Dash mentioned, we are analyzing opportunities within horizons, which will aid our evaluation of various environmental and social impacts and risks within the portfolio.
This has the potential to further evolve our risk management policies and build our rational resilience and 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 one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Bose George with <unk>. Please proceed with your question.
Hey, everyone. This is actually Mike Smith on for Bose, just a couple of policy questions around the mortgage bank.
First is there anything in either the two bills that could negatively impact the housing market or the demand for BPL capital, maybe changes to operating profits real estate capital gains depreciation things like that.
We're obviously looking at that Mike Thanks for the question.
I think our preliminary sense is that it probably will not have.
A huge impact on those things and obviously, we'll have to see how those how those evolve but at the moment, we're not we're not anticipating.
Any material impacts, yes, there is a contemplate any corporate tax change, which could impact our tax rate effective for our Trs it.
Thanks.
We expect it to be a small impact I mean do have deferred tax assets there that could have a small benefit.
It's something that we're still monitoring at this time.
Great. That's helpful. And then a lot of nonbank lenders have rate raise their conforming loan limits ahead of the FHFA announcement later in November.
It had any impact on <unk> volumes, and then just as a follow up to that could a larger than expected increase in the conforming loan limits have any impact on your your jumbo guide for 2022.
Yes.
Thanks for the question.
At this point, we're not we're not giving any specific guidance forward guidance on volumes for 2022, but we do expect a very significant increase in conforming loan limits.
Anywhere between 15% and 20% for many metros.
Possibly higher.
For us those are very much statistically driven and we worked with.
Loan limits for many many years, we don't expect it to significantly impact our business.
Really a reflection of the growth in the housing market.
Something that I think the entire market has been grappling with affordability and.
Just accessibility for homes.
So overall.
We're certainly expecting a very large increase in planning for that but at this point, we haven't had or experienced any meaningful effect on volumes.
Great. Thanks for the detail and thanks for taking my questions.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good afternoon.
Dash, maybe I want to start with with choice one of the slides from the Investor day, a month ago that I thought was interesting was how underserved the $6 60 to 720 FICO bracket is versus the amount of volume that was done in that in that FICO range.
So even just five years ago can you talk about what you are looking at to get more uptake there and the opportunity that's ahead with that product.
Sure. Thanks Steven.
Like that slide a lot too because we think it tells a pretty powerful story about the opportunity.
Choice was about 10% of our locks this quarter I would say that our flow volume and choice was up about 25% quarter on quarter from Q2.
Which I think is a helpful thing to note because it reflects the fact that.
From our perspective the adoption.
It is beginning to pick up like I said in my prepared remarks, we have locked choice loans with over 100 sellers at this point.
There is still.
From a residual perspective, certainly some things that no loan officers have been focused on obviously non owner occupied loans have been a big story as well in terms of the suspension of those caps and we think we think the adoption is going well. It's just it just is going to take some time.
Clearly rates.
<unk> ticked up here and we expect choice adoption and demands continue to go up.
We're ready for it which is the most important part.
Given how many sellers, we've locked loans with at this point.
We're optimistic about the prospects and like I said the increase in flow purchases for choice quarter on quarter or something that we are pretty pleased with.
Great and then Brook I wanted to touch on financing costs you guys have.
Done a great job growing interest income almost 20%.
Right at 20% from <unk>.
A year ago and your interest expense is roughly flat.
<unk> been able to lower that and I think you talked at the Investor day about about finding ways to term loans faster.
How much more room is there to increase the efficiency of financing and really expand that NIM from a net interest income standpoint.
Yes, it's a good question.
So.
Thank you Sir.
We had guided last quarter that specifically.
We thought there was some room, particularly in.
Great asset class within our retail business.
And we did execute our first securitization of that.
Of that asset class this year or in this quarter, particularly.
Definitely improved our terms both on cost and advance rate basis.
In addition to that we are focused on are our warehouse lines and our other facilities and that in aggregate lowering our cost of funds, particularly for BPL by 20 basis points. Since you mentioned it had about $2 5 million dollar improvement in our overall NIM on the corner.
And we continue to find.
And explore innovative financing structures across our business, but in general looking across our recourse debt with us.
Thank you 8% cost of funds.
We feel pretty good about where our financing and Jonathan to the health of the capital markets more broadly and then Scott you want to add anything.
I would just say that.
The benefit of the bridge securitization that Brooke articulated.
That closed late in the third quarter. So there will be some incremental benefit there.
As well, we do expect to use structures like that more and more going forward that deal has a pretty unique feature that allows us over a 30 month period to replenish so it's efficient in and of itself but.
As the business evolves, we expect to use more of that going forward for the fourth quarter that particular structure and we'll have more of an impact because we close until late in Q3.
Great and Chris I'll save the hard question for you but.
A lot of things going on and a lot of ways you guys have been able to move the needle whether it's.
The call gains or lowering financing costs, you've now got the hei that was talked about.
List another half a dozen things but.
When you sit back and think about what the big opportunities are in the next 12 months.
If you were to take that one year timeframe, which is kind of how we look at the stock you know what are the things you're most excited about that you think can be accomplished in the next 12 months.
Well I think.
Across the platforms, we've got great momentum.
We we spoke about our plan in September at our Investor Day, and we're very focused on executing that plan. When you look at Rajeev Dash mentioned choice.
When we think about our operating margins and how much more efficient we are now than we were even a year ago.
We plan to carry that momentum into the next year, which should hopefully continue to result in durable margins.
With <unk>, that's a very exciting evolution of our business, that's a purely non agency space where.
We can really I think.
Learned a lot of expertise from a structuring standpoint and from a scaling standpoint.
To these originators, particularly points.
And.
We layer in BPL, which continues to be a significant area of growth for us a best in class platform.
Both bridge and I, so far volumes have been very strong closings have been strong.
Unlike the residential business, where the fourth quarter, you typically see some some seasonally slow <unk>.
<unk> across the industry.
And BPL its a big quarter, it's a big quarter for us where the team. So we plan to carry that momentum into next year and really execute on the plan as I said that we that we laid out but.
But we're going to continue to innovate we're going to continue to to be first movers in our markets our.
Horizons will continue to to grow and be a big bigger part of what we do.
So we've got a lot in store for 2022.
Great I appreciate all of your comments this evening and look forward to watching the continued execution in the future.
Thank you.
Our next question comes from the line of Eric Hagen with <unk>.
Please proceed with your question.
Hey, good afternoon.
The increase in net interest income from investments.
The resi investment of almost $9 million quarter over quarter is there a way to tease that apart what drove the increase he may have said it in your opening remarks Brooke but.
What was one time and what's a good depiction of the yield in the portfolio at this point.
Sure.
The various components of NIM.
With that.
$12 million increased by nine in which Youre talking about.
Hi.
$5 million of that was related to <unk> just in terms of the higher discount accretion income on our available for sale securities.
And those were all.
Those were all to play out.
Related to our competition.
Our anti securities and so going forward, we expect that to be.
A similar magnitude as I mentioned in the prepared remarks, we are running the securities to call rather than maturity for.
Near term and medium term cost or when can we have a high visibility around them.
Really just bring our GAAP yield more in line with our expected.
And economic yield over the rest of that stack.
Anticipated life of debt securities and so.
We will see that at.
That leads to in terms of being run rate for the next number of quarters.
<unk> as I mentioned, we have $1 2 billion.
Let's call it expected for.
2022, and sales continued to see that accretion realized.
It might be a little bit higher.
Heading into the beginning of next year when a lot of our call activity is concentrated and then trailing off as we head into 2023 that you can anticipate as kind of run rate and then.
And then same with the lower cost of funds.
Our commentary there part of that is related to an E mail side then raffi.
And the rest of it is really related to.
Hi.
Higher loan and inventory to head into the quarter, which is reflective of volume.
And just.
Just given our projections heading not necessarily for the fourth quarter, but heading into 2022 islands.
That is run rate as well.
The other thing that impacted revenue specifically in terms of the NIM this quarter with such outperformance.
Well.
Will vary with market.
Got it that's helpful.
Can you share how the profile of loans that youre sourcing from Churchill are different from our corvus horses organically.
Sure I can take that.
Like we've talked a bit about before.
Okay.
That particular channel at least for now has been focused on some of the smaller balance types of loans within bridge or single family rental.
As you know our core products that.
We originate directly through four vest on the single family rental side tend to be a little bit larger in nature across collateralized five and 10 year.
Charities.
Our bridge suite of products is very differentiated includes build to rent cross collateralized lines of credit for larger sponsors.
That particular acquisition channel. It certainly may evolve the market is very vibrant as you know and and things are really evolving.
But we're focused there on generally smaller balance bridge loans backed by maybe one to two homes and then single family rental loans, which tend to be 30 year maturity, so a little bit of a different structure than what we typically produce directly through <unk>.
There's great capital markets demand for those and those have been really nice complements to our core direct production.
How's us to acquire those frankly more efficiently.
Where we can outsource some of the fulfillment still do all the underwriting of course, but it's been a good complementary channel so far.
Got it that's helpful. Thanks, a lot I appreciate it.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question Hi.
Hi, everyone. Congrats on a strong third quarter and also a great analyst day back in September.
Dash I guess this goes to you.
When you look at your two primary platforms in the loan products that you now have available.
Is there in the sort of in the non agency world.
Are there any non attractive opportunities out there in terms of other specialty loan products that you guys have not tackled yet.
Youre kind of existing platform, but just different products.
It's a great question, Steve I think its.
At some level, it's probably more variations.
On the banking team focused on.
Multifamily has been an increasing focus of core verse footprint, both shorter term and more stabilized type loans, we expect.
That is driven by increased client penetration, we become much more efficient.
About how we can finance some of those loans.
So those are things, we're very very focused on.
With ready on the consumer side I think it gets back to Steven's question continuing to drive.
Opportunities and expanded prime and.
In choice.
Figuring out what products are out there I would I would touch as well on the home equity investment piece as well and thats much earlier stage for us, but clearly the the partnership with <unk> and the ability to securitize those as efficiently as we as we did.
Plus just the massive addressable market, we feel some variations on that theme will be a part of the picture, but again thats thats earlier days.
Yes, and I am sure. There is reverse mortgages have been so controversial over the years, but if you can come up with.
Better mousetrap for that you really will you really will have something I think.
And I guess just talking in addition to the products.
Do you think about and for now I want to focus more on the <unk> platform.
Think about your seller base and would it had been and I know I'm dating myself, but I can remember when it was roughly a 175 sellers I'm sure.
It's broader than that now but.
We're seeing these newly public Reza.
Our residential agency originators theyre struggling with Refis down and several have started talking about doing more non agency products and I'm just curious in general.
What the opportunities are with your seller base on the resi side and if any of these fairly large.
Sure.
Agency originators could be a source of loans as they as they look to originate, especially the wholesale channel. They look to do more non agency business to fill the void.
Yeah.
Yes, Steve it's.
I think we mentioned we mentioned in our materials.
We're purchase heavy on the resi side, which is a very good place to be heading into.
The market that we're in so we're not overly reliant on refi business.
Our seller base isn't isn't is actually a little smaller.
We've called the base, a little bit versus where we were pre COVID-19.
Very focused on quality.
Relationships there I do think that is.
As things transition in the market turns.
More of these agency originators will try to move to non agency, that's very logical evolution I think we're talking to all the right people there.
Okay.
We're a great outlet for them.
And there is still.
On the non owner occupied business continues to evolve and there is some big announcements last quarter I.
I think that.
That volume will slow down and pls, but not go away because frankly there is some of these larger agency originators have now established issuer.
Issuance platforms.
On the Pls side, which continue to present opportunities for us. So it's there's a lot that's happened over the last few months in the mortgage space.
I think the fourth quarter is a good quarter to take stock of of these evolutions will have greater clarity with the direction of the FHFA.
We'll get on November <unk>.
More clarity on loan limit increases and we will do some planning for 2022.
Great well. Thank you all for your comments I appreciate it.
Thank you.
Yes.
Yes.
Yes.
Yes.
Operator are you are taking the next question.
Yes.
Sorry, I was on mute. Our next question comes from the line of Ryan Carr with Jefferies. Please proceed with your question.
Hi, Good afternoon, guys. Congratulations on another great quarter, and thanks again for the excellent analyst day last month.
So in terms of what Youre seeing you on the rates side, just curious to hear your perspective on.
Potential outlook on <unk> volumes, and how that might be impacting potential burnouts scenario going into the fourth quarter.
Well, obviously rates have been volatile.
Today was a very volatile day.
In the markets.
And one thing we tried to consistently say is.
When rates are volatile our hedging cost typically go up candidly so from that standpoint.
Particularly on the resi business, which is which is much more sensitive to to the right market then the BPL.
We're actively managing our pipeline and our exposure.
Overall, I think seasonally on the resi side as I mentioned, it's typically.
Lower volume quarter for the industry.
I think that's that will be the case.
This year again it was the case in Q4 of last year.
And.
I think we're.
As well positioned as we can be.
Our book is turning over I think faster than than anywhere else in the industry at this point on the resi side you look at the.
Average loan age of our book.
It's well inside many of our competitors.
Across the landscape. So we're from a current coupon perspective.
We're well positioned we.
We can reprice every day and.
We'll be we'll be in a good spot.
To finish the year strong.
On the BPL side as I mentioned.
It's a very busy quarter.
And we.
We have an offer at any specific guidance, but.
We're off to a strong start there.
And again seasonally when you look at past years.
We've gotten a lot done as we close out the year.
I think overall.
We're mostly focused on finishing out the year strong and it's been an extremely good year a lot of hard work by the team.
So that's the near term focus and we will start to set our sights on 2022.
Yes.
Thanks for that color and then quickly on the horizon.
<unk> portfolio.
Any material updates in terms of fair value changes at this point that youre seeing.
No no material update just given the seasoning of RDR.
Any early in their life.
With that so.
Yes.
Awesome. Thank you very much for taking my questions and congrats again on the great quarter.
Thank you.
Okay.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Hello. Good afternoon. Thanks for taking my questions I just wanted to follow up on.
Your capital base.
The amount of available capital Jumbo.
I believe its $350 million.
And we really doubled quarter over quarter is there anything in particular that you're seeing on the return to redeploy that capital or would your expectations are.
For putting that capital to use.
Okay.
Thanks for the question Kevin Yes.
That obviously was.
Partly a result of some of the.
Accretive financing transactions, we did during the quarter.
Which we were which we were pleased with.
I think consistent with prior quarters is a lot of it is making sure that the operating businesses have the right.
The right depth of operating capital to continue to grow making.
Making sure we're running those businesses with the right margin of error so to speak.
Terms of risk capital and obviously capital required.
To fund more loans hopefully through the pipelines.
So that's probably job one frankly Brooke also referenced the increased volumes recently and bridge, which do represent sort of chunkier opportunities to put money to work as well, which is obviously highly strategic given given corvettes footprint there.
Currently.
We have we have seen a slightly more opportunities in the third party space here more recently, we will see where credit spreads go but it is heading into the year.
Historically, it has been valuable for us to keep excess capital on hand to be able to react to the extent that.
Spreads create an opportunity to put more capital to work. So I think we're pleased with the position here very late October heading into the end of the year. If there are things to do.
We will be ready to capitalize on them and then as always we're looking at some opportunities off the screens.
Sort of more customized partnership based investments.
Which will hopefully be in a position to talk more about early next year.
Okay.
Tom.
And then.
In regards to your securities portfolio seems pretty compelling that you have about $270 million of.
Discount to par value potential recapture I guess over time, the portfolio, where we can recapture.
<unk>.
Can you give.
Give us some specific examples of like the largest portfolios that have that are sitting in a discount to par and then what your cost basis may be on the specific portfolios.
Sure so about $174 million of our Accretable discount is actually in a re performing loan.
Portfolio, which is about $517 million in terms of fair value on our balance sheet.
End of the quarter.
And about 90%.
Our TL securities are actually on the entire sub stack.
With about $2 billion of underlying collateral Larry on the call right.
And so that is where the vast majority.
Of that discount line, which gives us more visibility around.
And how and when we can potentially call those deals.
And I think I mentioned this back at Investor day, but that's not included in that.
68 cents per share of premium from potential calls that we and that we put out to the market. So that would be in addition to.
I don't have that broken I think it's that high 70.
The dollar value of securities today.
Great.
Yes 77.
Okay, and it would seem with higher home prices higher home prices that you'd be able to quickly recapture that discount.
Do you have an estimate.
Obviously your portfolio has done very well.
Is there anything in particular that.
It accelerated the recapture of that discount.
In general I have to say speeds have picked up on that cohort.
We're running around five to seven CPR and a mid single digits to now the mid.
Mid teen.
And so.
Steady prepays will help accelerate those.
Which is driven by nice HVA combined with.
Solid fundamental performance, we saw another one 2% increase and an improvement in the amount of 90 day delinquencies, we had an excellent board entire portfolio as well.
So any.
90 day delinquencies kind of.
Thanks to around mid teens.
Think of it and they're back down to.
Single high single digits around 10.
So as the economy.
However, we expect to continue to recover that volume the other thing I would add Kevin just quickly is that our the call rights. So to come in two different flavors as you know some of them have to do with pool factors in and how quickly the pools amortize away, which to Brooks point, obviously those have been coming into the money much more quickly with HPA and speeds.
The re performing loan <unk>.
Securities that we own are more time based.
The first of the two larger investments we have actually becomes callable.
Towards the end of next year, there's a slight call premium associated with that but it may still be accretive to us to call that as Brook said those numbers in the <unk> part of the portfolio are not included in the 68 cents, but theyre more time based and we can make an assessment at that time based on other execution alternatives, whether it makes sense.
Okay do you anticipate.
Exploration of various forbearance and foreclosure moratoriums to potentially impact the recoverability of.
That discount.
And do you anticipate that those.
Theres more turnarounds expiring also to impact potential opportunities as we go into the new year.
It's possible I think more of the impact.
We'll probably be in the re performing loan book, our forbearance numbers in Sequoia are diminished or de Minimis at this point.
Clearly we're in a very different situation than 10, or 12 years ago from a supply perspective, and just the overhangs in the market and some of the execution challenges that created over a couple of years clearly we're in a much different situation fundamentally I mean, the exploration may.
May speed up a little bit some of the resolutions but.
Those re performing loan investments are on conforming loans loans that used to be pulled into Freddie securities and then were repurchased out so.
So there are pretty strict guidelines by the servicer for loss mitigation and things like that those loans are subject to the cares Act.
So we're not pricing in any particular major impact of the exploration in the <unk>.
Metals of those portfolios continue to to improve prepay speeds or higher.
And then we modeled and that's probably more where we're focused on this point and assessing the future cash flow.
Okay.
Thanks for taking my questions.
Our next question comes from the line of Doug Here with Credit Suisse. Please proceed with your question.
Thanks.
Just thinking about the amount of capital you need for the BPL.
Mortgage banking business. The fact that you can have done a securitization with the.
The reinvestment period does that does that reduce ultimately reduce the amount of capital you need for that business and therefore improve the returns.
The short answer is yes.
Apples to apples, yes. It will we certainly expect to continue allocating more capital in that direction based on hopefully growth of the business.
But for context, the 90%.
Of liabilities that we sold are on average about 10% to 15% higher from an advance rate perspective.
And the non marginal bilateral warehouse lines that we've usually use to finance.
Bridge loans and obviously the securitization is essentially match funded nonrecourse and non marketable so so very attractive on a couple of fronts, but yes at the margin.
There is an ROE pickup there and additional capital freed up.
Got it and then just as you think about I know one of the goals has been turning over the.
Kind of the.
Originations quicker to kind of maximize or minimize the amount of capital there I guess, where would you say you are in that process.
Is there more room for improvement.
I'd say, we've made great progress.
A couple of data points in our most recent securitization.
The first one that we use blockchain on the average loan age at time of securitization was one month.
Compared to three to four months for the rest of the industry from an overall funding turnaround time perspective, we touched on rapid funding, but even outside of funding we're probably around two weeks at this point to fund our sellers, which compares very very favorably to the competition, so even with record volumes record locks we've.
To grind in our timelines, which really is a testament to the team and frankly the relationships.
That are required to do that work more quickly that's a huge intangible which we've talked about before but is worth emphasizing particularly against the backdrop of what Chris was referring to with rates.
A great hedge to that obviously is speed.
And the ability to fund so quickly and then.
And then securitize or sell is a very big part of that.
Yes, I'd just add.
That overall the <unk>.
Plan is to continue growing these businesses as dash mentioned, which means allocating more capital but doing it.
Profitably not not because we're slowing down or.
Sure.
Just not funding quickly enough I think the efficiencies in the operating margins in the businesses reflect.
Great progress, especially this year.
So hopefully if we're if we're growing those businesses and allocating more capital. It's because the rois are extremely strong and it's the best the best marginal use of our money.
Great. Thank you guys.
There are no further questions in the queue I'd like to hand, the call back over to management for closing comments.
Okay. Thank you everybody for participating in our call and we look forward to talking to you again next quarter.
Okay.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.