Q1 2022 Redwood Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Redwood Trust, Inc. First quarter 2022 financial results conference call.
Today's conference is being recorded.
I would now turn the call or to Kaitlyn mauritz.
Redwood Senior Vice President of Investor Relations. Please.
Please go ahead ma'am.
Thank you operator, Hello, everyone and thank you for joining us today for Redwoods first quarter 2022 earnings conference call with me on today's call are Chris about de Redwoods, Chief Executive Officer Dash Robinson, Redwoods, President and Brookfield Redwoods, Chief Financial Officer.
Before we begin I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward looking statements.
Forward 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 other 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 between GAAP and non-GAAP financial measures are provided in our first quarter Redwood review, which is available on our website at Redwood trusts dotcom.
Also note that the content of this conference call contains time sensitive information that is only accurate as of today Redwood does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded it won't be available on our website later today.
Now the turn the call over to Chris for opening remarks.
Thanks, Kate and thanks to all of you for joining us today.
On our fourth quarter earnings call in February we approached our commentary with a cautious eye on changing market trends in the mortgage sector.
I did signal that's planned to raise rates.
Between Russia, and Ukraine was just beginning to be a headline.
Markets were reacting with fear over anticipated uncertainty and the volatility ahead.
As a point of reference markets, we're estimating 45 rate hikes this year back in February .
Many market observers are expecting nine rate hikes. Additionally.
Additionally, the 10 year Treasury rate has risen over 120 basis points since yearend and the spread between the two year and 10 years collapsed from 80 basis points to zero by the end of the first quarter.
Mortgage rates may soon eclipsed 6% the highest level in over a decade.
All of this is remarkably occurred in the span of just a few months.
In these markets there is truly nowhere to hide and it's times like these that help differentiate competitors in a way that can't be easily seen during periods of extreme fed accommodation.
That's why we're so pleased with our performance during the first quarter, which included GAAP earnings of 24 cents per diluted share representing an annualized Roe of 9%.
Book value of $12.01 per share effectively flat since year end.
This is despite fixed income markets turning in their worst performance in over 40 years.
We also paid a 23 cents per share quarterly dividend unchanged from the fourth quarter.
Generating strong cash flows and earnings to sustain or grow that dividend going forward.
All told the resiliency of our mortgage banking businesses, coupled with another quarter of very strong fundamental credit performance across our investment portfolio has a resulted in balanced financial results than otherwise lopsided quarter, the broader mortgage sector.
What does it become clear early in 2022 is that this will be a year of great transition for the industry.
In addition to the rise in benchmark rates, the fed which has effectively become the world's largest agency mortgage REIT has signaled that may begin aggressively paring back. It's two seven trillion of MBS holdings.
Advocating those dispositions will be an ongoing challenge for market participants, particularly those who benefited the most from our sides of accumulation of MBS over the past few years.
Yeah.
As a company with over 27 years of public company performance, we pride ourselves in our ability to perform across cycles restructured our business complementary diversified strategies to help manage against volatility while enabling us to continue providing solutions for our partners and durable returns for our shareholders.
For instance, our 2019 partnership corvette solidified our presence in the business purpose lending market and has to date far exceeded our expectations, both quantitative and qualitative.
Since we've created and business purpose lending helped turbocharge the modernization of our investment portfolio.
We are now a leader in both single family rental Enbridge lending with it the ability to offer our clients the breadth of product options after needs evolved spy.
Despite the rapid rise in interest rates, we have seen a continued uptick in demand for beef y'all borrowers and a desire for additional products that address the evolving needs.
This is why we're very excited today to announce the acquisition of Riverbend Monday.
Riverbend is a leading bridge lender that provides financing to experience real estate investors require residential and multifamily transitional properties.
The acquisition is a step forward and solidifying our market leading position reflects our conviction around the strength of our business purpose lending platform and its prospects for future growth.
Housing inventory remains at historic lows, most notably the inventory for turnkey housing stock, which eliminates the execution risk, making home moving ready for prospective homebuyers.
As a reminder, our bridge loans carry a short duration typically 12 to 18 months. They generate current income and they have conservative leverage points, all compelling trades for investors in today's market.
Following the closing of the acquisition River band will be integrated into core bus will add incremental scale geographic footprint and its quiet network to core versus existing platform.
Our team at Corvus has done a remarkable job scaling the business into the market leader. It is today and we remain committed to continuing to grow organically through product development and expansion of our client base in a market that is maturing but remains fundamentally fragmented.
Current macroeconomic backdrop provides an opportunity to lean in further to our BPL business and river Bend, an emerging leader in its own right represents an important step towards furthering these growth plans at a safe but enhanced pace.
Riverbend is led by a phenomenal team and we're excited to have joined the Redwood family.
Our dash go into more detail around the transaction, but I wanted to emphasize how it fits into our playbook and positioning of our platform for the long term through incremental scale best in class products and attractive investments for our portfolio all of which drive value for shareholders.
And turning to our investment portfolio. It was a big contributor to our book value stability in the quarter. Despite severe moves in many asset classes.
Ours repeating our portfolio is different.
As we have long emphasized our investment portfolio has been uniquely constructed over time with assets to take a view on housing credit fundamentals.
Sensitive to some of the whipsaw moves we see in the interest rate markets.
And our outlook on housing credit remains strong given rising home equity loan unemployment record low housing inventory.
Until the Legion entry points, and we will continue to opportunistically add to our portfolio, where we see strong return potential.
Our residential business a foundational piece of redwoods core strategy established itself as a true leader in the space over three decades, that's product offerings speed to purchase securitization and distribution.
His leadership southern top of prudent risk management et cetera residential team apart both over time and particularly in the most recent quarter as we were able to quickly and efficiently distribute our fixed rate loan inventory as mortgage rates rose dramatically.
Because of our positioning we're able to continue to lock loans competitively throughout the quarter, while their step back from the market, resulting in a residential lock volume declining only 7% from the fourth quarter of last year versus industry of industry wide projections of a 25% or greater total decline for the period.
We did this while preserving our gross margins at levels near our long term historical range.
Suffers to say, we're extremely pleased with how our residential business performed relative to do what we suspect it was one of the worst quarters for the industry in many years.
As dash will touch on our ability to refresh and expand our offerings earlier. This month further demonstrates our leadership and ability to address the constant evolution of consumer needs.
I'll now transition to our W. Two horizons debenture that we launched in early 2021, which has become a crucial part of our overall investment strategy and.
In about 14 months, we've made 21 investments in 18 early stage Fintech and prop tech companies that have a direct access to our business and are innovating across multiple facets of today's housing market.
These investments have put redwood in a unique position to be a first call for many technologists looking to turn their innovations and a thriving business opportunities.
Already we are seeing the progress of this initiative, which has begun contributing to the bottom line well ahead of schedule.
At quarter end, we had $25 million of capital committed to our horizons investments in two of our smaller investments completed follow on raises at significantly higher valuations during the first quarter.
And in April another one of our early Horizons investments completed a new funding round is expected to result in a pretax gain on our investment thus far of approximately $10 million.
We expect to recognize that income as part of our second quarter GAAP earnings.
Before I hand, the call over to dash I'd like to reiterate that current markets offer important opportunities for us to further differentiate our business, particularly as we position redwood for new chapters of growth.
Well each of our business lines address different facets of the housing market taken together Redwood offers shareholders, a comprehensive and highly durable non agency strategy that cannot be easily replicated.
And with that I will turn it over to dash will take us through the operating businesses and our investment portfolio. Thanks.
Thanks, Chris and good afternoon, everyone.
As Chris mentioned in a quarter characterized by substantial volatility Redwood delivered solid financial results supported by disciplined risk management and uniquely diversified revenue drivers now further enhanced by the addition of riverbend to our franchise.
As Chris mentioned, we believe this is a great acquisition for our company and another step forward in solidifying our leadership position in V. P. L.
Founded in 2017 by principles with whom we've had a long working relationship Riverbend has established itself as a top financing provider to sponsors seeking to redevelop and sell both single and multifamily properties there.
Their product suite is highly complementary to <unk> unique mix of bridge in <unk> lending products.
Riverbend lens in 33 states with a particularly deep footprint in California, and the Pacific Northwest fertile territory for growth and BPL lending.
Platform originated $1 billion of loans over the 12 months ended March 31, with a loyal client base. We believe we can serve even more deeply with our full complement of loan products. We've ever been has historically originated for sale developing deep distribution channels and keeping a portion of their economics on the run and alignment with our whole loan buyers of value.
Distribution channel that we intend to utilize going forward.
Rick will comment in a moment on the acquisitions expected accretion to our earnings over the near to medium term, we look forward to working with the riverbend team and welcome welcoming them into our family of companies.
As Chris referenced momentum in demand for business purpose lending products has remained strong even with the move higher in benchmark rates.
<unk> delivered another quarter of record volumes in Q1 funding $920 million of loans up 25% compared to Q4.
The first quarter's funded volumes were split close to evenly across term and bridge products with an increase in multifamily across both asset types.
Across both single and multifamily we estimate a total addressable market for BPL of approximately $100 billion.
A powerful statement as to how many potential BPL borrowers remain underserved we.
We get asked frequently about competition in this space and while certainly the past few years have shown an increase in the number of market participants Horvath's continues to set itself apart with its product suite speed of service a deep client base, all strengthen with river bend coming onboard.
<unk> first quarter mortgage banking results reflect robust growth in origination fees offset by the impacts of spread widening since year end.
In keeping with volume trends fee revenue grew 25% during the quarter and we were able to distribute over $300 million in whole loans prior to much of the market volatility.
While continued spread widening through quarter end is estimated to impact execution on our <unk> loans in inventory. We believe the market has begun to find its footing, particularly for loan products with compelling credit attributes, including cross Collateralization.
And extension risk mitigated by maturity is more analogous to fixed rate MBS loans.
V P. L assets, both bridge loans in subordinate <unk> Securities remain a growing part of our portfolio capital allocation and contributed to the stability of our book value amidst the volatility briefly.
We frequently refer to our investment portfolio. Overall is one that is hard to replicate and this remains the case today, both in terms of credit quality and value stability in choppy markets.
70% of the investments in our portfolio organically created for which we control the credit process from day, one and upheld the securities for the long term.
These include the subordinate bonds issued off our residential NSF ourselves, whose loans have an average seasoning of over four years, but delinquencies now trending consistently around 2%.
Collective of their high quality underwriting and the substantial additional equity that is built up through amortization at home price appreciation.
This durability of our investment portfolio also applies to the recent backup in benchmark rates.
The expansion of our housing thesis in recent years, most notably notably into BPL assets and securities backed by re performing loans has meaningfully changed the convexity profile of our book and reduced underlying extension risk.
Our BPL investments consist of shorter duration predominantly floating rate bridge loans as well as securities backed by call protected cross collateralized FSFR loans with a five to 10 year term.
Our RPM securities predominantly our SLS T securities structured in partnership with Freddie Mac represent close to 30% of our portfolio is capital allocation and are backed by loans season, 15 years or more.
The Sos T Securities we own were originally underwritten to single digit prepayment speeds with actual performance significantly outperform the model expectations due to both natural housing turnover in credit curing of the underlying borrowers.
Due to their seasoning, our subordinate credit investments overall now represent a fixed percentage of their respective capital structures with stable credit profiles.
It will to sustain the potential slowdown in HPA as a result of the rapid increase in borrowing costs.
While certain parts of our investment portfolio naturally underperformed during the most notably CRT. This was partially offset by our interest only securities, including Sequoia Msr's that outperformed entered the interest rate backup.
The market for new issue Securitizations was challenged during the first quarter as credit spreads began to move in sympathy with benchmark rates, we often comment on the importance of having both well established securitization shelves and a deep network of whole loan buyers that values, our track record of quality underwriting.
The first quarter was no exception, but we completed one sequoia securitization early in the first quarter backed by approximately $700 million in loans, achieving attractive execution. The remainder of our distribution was in whole loan form.
The durable whole loan sale strategy requires end to end coordination across the business a hallmark of both our residential and BPL platforms.
Collectively during the first quarter, we sold over $2 billion in jumbo and FSFR loves to a broad array of institutional investors many of them repeat partners attuned to our high level of service.
This allowed us to come into the second quarter with lower loan inventory aided by our ability to process and fund loans more quickly than our peers.
Ultimately, our distribution and execution allowed us to successfully move risks, while others became weighed down by inventories struck at coupons well below prevailing market levels. We have already distributed the vast majority of this type of production, including through whole loan sale executions in April at levels, we estimate to be significantly accretive to securitization.
The speed of our execution remains a clear differentiator for both of our operating platforms, who often process loans three to five times more quickly than the competition.
This time decay increases market risk, which in this environment has in our view of course, many competitors to reevaluate risk appetite and product mix opening a window for us to continue gaining market share safely and profitably when the time is right.
As always we will evaluate the most efficient course of distribution and expect both securitization and whole loan sale to remain key parts of the equation.
This distribution balance a lot of our residential mortgage banking platform to log a productive quarter amidst unprecedented challenges in the consumer mortgage space overall.
As Chris articulated gross margins were maintained near our historical long term range on near consistent volumes versus Q4.
Purchase money loans in Q1 increased to 65% of locks versus 59% in the fourth quarter. The purchase money percentage has continued to increase into April consistent with the strategic rationale behind our rollout earlier this month of new expanded prime products to complement our core offerings.
These new offerings include a unique bank statement program with terms and underwriting criteria designed to meet the Cfpb's qualified mortgage definition among other things an important driver of securitization profitability.
Since the onset of the pandemic the number of self employed borrowers has increased substantially and we believe these new programs will translate into better pricing for our sellers and more affordable loans for borrowers.
With loan officers no longer able to rely on GSE refinance volumes in the industry, well underway and right size and capacity.
These new products is a key avenue to increasing our market share by providing additional options that loan officers can use to service their customers.
Reinforcing the unique diversity of our revenue drivers enterprise wide R. W. T Horizons, just completed an important quarter in its evolution, including the appointment of a full time Chief investment officer.
In addition to direct return on our investments a critical benchmark for horizon success as the impact of the underlying technology on our broader business.
Turning off of our momentum in leveraging its technology to but to put remittance information from Sequoia deals on blockchain. We were pleased to see liquid mortgage recently consummate a partnership with canopy. Another early horizon's investment to leverage blockchain and reducing redundancy in our loan due diligence process. We also recently completed a data sharing and licensing agreement.
With another portfolio company focused on providing analytics to the single family rental market.
This progress foreshadows real change to accepted practices and ways in which we use data to underwrite risk more nimbly.
While our WT horizons as only a year old and speaks for only a small percentage of the firm's capital we've established ourselves as a leading investor in the Fintech and prop tech areas validating our thesis that technology entrepreneurs value strategic thought leadership, not just capital and picking partners I will now turn the call over to Brook Carrillo Redwoods Chief Financial Officer.
Thank you guys. It's Chris highlighted we reported GAAP net income of $31 million.
20th firsthand per diluted share in the first quarter, representing a 9% overall annualized return on equity for the quarter and covering 23% dividend.
Notably our book value per share.
In less than a half a percent, it's about dollars and one cent leading to an economic return.
One 5%.
Our book value performance by the full quarter.
With the new we indicated through the end of January on our fourth quarter call, which is particularly notable given the historic volatility experienced during February and March.
Given our strong relative performance of our book value during the quarter I want to begin by highlighting the stability was attributable to the diverse characteristics and quality of the assets within the investment portfolio.
It turns on our investment portfolio held up relatively well, let me start by saying 10 cent per share decline quarter over quarter and investment fair value changes and other mark to market income that drive EPS.
Our negative duration asset, namely, our MSR and Io Securities.
Natural hedge in providing book value protection is interest rate increased significantly in the quarter and prepayments.
Offsetting fair value declines from our Sequoia THAAD and seasons under allowance.
John Kerry and continued strength in overall credit performance offset generally by your spread and drove a 16% return on invested capital or the investment portfolio segment.
You have seen us resiliency would continue into the second quarter as we currently estimate our book value was down between.
Per cent to 1% in the month of April bringing the total year to date book value estimated change to be inside of one 5%.
Same with the investment portfolio, we deployed $128 million of capital with British pounds, representing about 50% of the total and home equity investment by actually being the balance.
We also made a $25 million commitment to an investment in people and serve the mission of providing quality workforce housing opportunities.
E Bay area urban community.
Delinquencies in the investment portfolio remain near post pandemic cloud portfolio LTV, it's happened with flower and home equity is that right.
Moving on to our operating results relative to the fourth quarter net interest income was up $3 million.
Experienced a full quarter benefit of the investment portfolio to play in that in Q4.
Typically branch in follow on investments in season mortgage servicing right.
We received $8 million and yield maintenance payments on Capitol Securities.
Loan prepayments increase.
Partially offset a $5 million decline on the corridor and accretion of our available for sale securities given that higher rate and slowing prepayments impacted the near to intermediate prospects are calling us to Caribbean.
In terms of our noninterest income and mortgage banking activity isn't that declined by $20 million collectively during the quarter as spreads widened for both securitization and whole loan sale execution and rate volatility increased throughout the quarter.
Relative to the fourth quarter G&A decreased by $4 million, driven by lower variable compensation commensurate with our GAAP earnings.
Led to a relatively durable efficiency ratio, despite lower volume quarter over quarter.
The residential mortgage banking segment generated a 10% return on capital during the quarter.
Unchanged from Q4 and similar thing.
Saw continued pressure on our gain on sale margins, because our pipeline was impacted by widening spreads and hedging costs significantly increased quarter over quarter.
However, our operational excellence and conservative approach allowed us to maintain a lower inventory of long thing would be typical otherwise.
Turning to our business purpose mortgage banking segment as Dash mentioned part of US had another record quarter for volume up 25% and capitalizing on the momentum from late last year.
While fee income from branch was higher in the quarter the single family rental pipeline with more heavily impacted by rate interest rate and spread volatility.
Despite the significantly lower contribution from BPL mortgage banking the bridge assets that are organically created from our platform are highly accretive to the investment portfolio generating a 17% annualized economic return.
Accordingly, we will continue to allocate more capital to bridge production and the addition of you've ever been to our platform enhances our ability to do that.
Following up on dashes commentary, we expect the platform to generate attractive returns for our shareholders.
Given we do not expect to close the acquisition until later in the second quarter to obtain necessary change of control approval, we expect I've ever been platform to contribute between 15 to 20 cents of earnings as a run rate by 2023.
Mid teens expected Roe.
Inclusive of the full consideration paid for the platform.
We maintained excellent and strengthen our capital and liquidity position during the quarter. We ended the quarter with over $400 million of unrestricted cash and $140 million of investable capital compared to $150 million at year end.
FX came down on the corner.
Two four to two one times on later residential mortgage banking inventory I mentioned previously.
Looking across our debt maturities, we renewed facilities, representing 2 billion of capacity in the first quarter with only 550 million really later this year and we maintain $2 3 billion of excess capacity in our loan warehouse facilities, which sufficiently addresses our financing needs.
We also have no corporate debt maturities upcoming in 2022.
We had a highly productive quarter as we renewed for a residential loan warehouse facilities and initiated two additional lines in business purpose lending, we renewed one facility amended to others and liquidity to finance our detailed production remains robust.
Just a theme across our financing activities that we saw favorable term carrying lower cost of funds, increasing advance rates or adding more product flexibility.
Throughout the quarter, we were able to seamlessly transfer $81 million of brakes bonds.
First fixed rate RTL securitization, bringing up incremental capital.
As we move through the second quarter in 2022 more broadly we remain on track with our long term goals and objectives, we laid out at our Investor Day last September .
Near term interest rate volatility is impacting the timeline given the significant repricing of all financial assets, it's transpired under the new rate regime.
Well of course, the environment is uncertain, we believe that our current capital and future earnings profile position us well to continue supporting business growth ahead.
Based on expectations for our current returns we're seeing in today's market that meet our risk tolerance.
We expect adjusted our Li for our business could range between 8% to 12% in the near to medium term.
Turning back to the 15% and blended return we spoke about at Investor day.
We continue to explore the potential of threat side from horizon other strategic investments and any subsequent M&A from our early outlet.
Looking ahead, we see potential growth in RV to come from the same tools they've utilized in the past, including capital efficiency and operating leverage as our mortgage banking business at scale.
Our investment portfolio utilizes a moderate one three turns of leverage today with opportunities to optimize in several key areas, including Brighton RPM.
Over 70% of our bridge portfolio is financed with warehouse debt.
We have the potential to improve through higher advance rate nonrecourse financing structures. In addition to these we see Aro <unk> potential from the fact that we have over $1 1 billion of floating rate asset nearly 40% of which are owned for cash.
With attractively priced fixed rate debt in a rising rate environment provides an earnings tailwind for our business.
Furthermore, another first quarter gains there I mean potential upside of roughly $2 15 per share in our portfolio.
Value upside from discount securities as underlying performance continues to improve.
And with that I'd like to turn it back to the operator to open the call for Q&A.
Thank you.
I would now be conducting a question and answer session.
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One moment, please while the floor for questions.
Yes.
Yes.
Our first question from Bose, George with K B W. Please go ahead.
Hey, guys good afternoon.
Actually the first question just can you talk about where coupons are on.
Yeah.
The loans that corvette.
And then just how you kind of manage the risk with the big move up in.
In rates and spread widening relatively quickly this year.
Sure Hey, Bose its Chris.
I think dash and I will tag team this as far as the move up.
We were really deliberate to start the year and getting out ahead as best we could of what seemed like a.
Big rise was coming in rates and obviously that that occurred.
We moved our first securitization of the very front of the deal calendar for the year in residential.
I will turn out to be a very good decision because deals are progressively priced worse since right up through today.
And we really were very intentional and leveraging our whole loan distribution.
Think about securitization one of the reasons why we only did one during the quarter was because you need to go through an accumulation process and basically bulk up to get to a critical mass with our whole loan channels were able to move risks more quickly and stay as close as we could to current coupon. So that was really the story.
In the first quarter.
And.
Potentially others approached it differently, but I think we.
We had about as good of an outcome as we could open it's positioned us really well going forward, even though we still expect a fair amount of volatility.
On the coupon side Bose.
So it does vary by you know by product in an overlay but.
For Jumbo I would say coupons are probably in the <unk>.
Sort of mid fives, maybe a bit higher right now depending on the specific product.
And for bridge there is still.
In the higher single digits.
The vast majority of our of our bridge book is floating rate.
And so depending on the path of LIBOR those those rates would continue to tick up and then for the term single family rental the five and 10 year product, it's higher fives potentially touching 6%.
We've had a bit of a net rally here the past few days, but that's the general.
The Zip codes, where coupons are right now.
Okay, Great. That's helpful. Thanks, and then just given the continuing volatility in the second quarter.
Can you just talk about similar.
Similarly, managing risk is.
Is it sort of the same kind of playbook in terms of.
No more cash sales et cetera.
Yeah, I think for now it's going to be a similar playbook.
One thing I'll say is because we were able to protect book value. So effectively in the first quarter, it's positioned us essentially to get a little bit more aggressive.
We will see I think we like most are looking and hoping for some stabilization.
With respect to rates, but but we'll take whatever comes our way and.
We continue to lock loans each day.
And.
As the market sort of corrects.
We plan to stay out ahead of it so I think it's going to be a similar approach.
But I also do think we're through the worst of it.
The market is correcting to two fed policy faster than ever.
And so I think that we get through another fed meeting soon and hopefully we start to see some good opportunities to widen further.
Okay, great, Thanks, and good job protecting book value this quarter.
Thanks <unk>.
Thank you our.
Next question is from Don <unk> with Wells Fargo. Please go ahead.
Yes.
On your BPL mortgage banking I know it sounds like.
It looks like the margins were impacted by spread widening out of inventory can you talk about the near term.
Profitability of that segment.
And then also can you talk about the gain on sale margin expectations near term for the residential mortgage banking.
Sure for.
<unk>, you're right a lot of the story in the first quarter was it was just the move in spreads.
We're able to get a couple of large whole loan sales off that levels that we felt were accretive.
To securitization at that time and before the increased volatility set out and but spreads did continue to widen throughout the quarter, but we've you know we've adapted as Chris said, we're very nimble with our pricing and our rate sheets and we think.
Where we're currently pricing, particularly in the <unk> book the risk is certainly responsive to <unk>.
Where we sit today, we are at really.
Really all time wise from a spread perspective, particularly at the top of the capital structure for securitization and that's why we're continuing to.
Make sure we remain balanced between securitization and whole loan sale. You know there is some real scarcity value in our mind to.
On the <unk> side, the quality of that product no. One really else is producing it and scale and so that's a lot of the reason why we've had really good success working with our partners. In addition to the traditional securitization route.
The other big thing about V. P. L margins is just really the emergence of bridge over the past few quarters.
We had another record quarter for bridge.
There continues to be real macro demand and tailwind for that product from our sponsor group Chris touched on it.
Those are those are great for fee generation and carry little to no actual duration and we continue to innovate on ways to finance those going forward, which will be accretive to NII and ultimately margins as well. So just the balance of bridge and the depth and of course, you know Onboarding River bend and the ability to.
Add another 1 billion plus a year of potentially of production to the mix.
It's really exciting for us so we positioned ourselves accordingly from a product mix perspective and of course as Chris said, just the nimbleness of being able to re price the risk as frequently as we're able to.
On the jumbo side.
We were really pleased with where margins.
It came in in Q1, essentially at the low end of our historical range, we do see them.
Going forward consistently there this quarter you know a lot of it will be.
Be indexed again to just the strength of our whole loan distribution, but the other point is you know when you look at securitization execution in jumbo it real.
Really as sort of a tale of two cities. There is still a lot of our competition that is trying to flush out the lower coupon mortgages.
Which obviously have a very very different convexity profile than the current coupon.
Production that we're able to flow and we talked in the prepared remarks about how efficient we've been it really clearing out the lower coupon and so when you think about securitization and jumbo or whole loan sale for that matter. It's important to recognize that the product that we have is a very different cash flow profile for investors, whether it's triple as or whole loan buyers.
And that is a very helpful buttress for margins, particularly given what rates have done so quickly.
Got it and then I have a quick accounting clarification Brook.
Or what's your thought on your residential loan portfolio.
Because your fair value of the loans.
What liabilities do you also fair value is it only if it's securitize.
Coil, where your fair value of the loans and the debt.
So that leaves loans that arent securitized, you would fair value, but there's no offset from the debt financings do I have that right.
Yeah, the vast majority of our president of securitization.
You bet.
Under the PSC election, and then just in terms of the impact of fair value and you know all of that.
And the hedge box our benefit is also captured within the mortgage banking.
You know as well.
Okay. Thank you.
Thank you.
Question is from Steve Delaney with JMP Securities. Please go ahead.
Hey, Thanks for the question and congratulations folks on just.
An amazing performance.
What was a crazy market.
Across the entire mortgage universe, so perhaps props to the balance sheet props to you guys.
A lot of things have been covered river bend and I'm curious about the bridge.
I think a great addition, obviously.
The floating rates.
And.
And those products generally you're you know you're not.
Well I guess it depends on your securitization and whether you do gain on sale, but obviously the commercial mortgage Reits you know on those floating rates. They don't do any mark to market when they financed with Clo's may.
Maybe that's a question I think it's shown right for you guys on on when you think about bridge going forward, but it was really going to ask dashes. Yeah. You. Obviously have your your your kind of your resi bridge Youre renovate resale product.
You've probably got some small multifamily, but does river bend also move into other small balance commercial property types as well given their geographic breadth et cetera.
Yes, it's a great question, Steven and general, what's what's really exciting about.
The acquisition, obviously, besides the people and the cultural fit is is really two things number one the products that riverbend is in and the geographies where their deepest are areas, where we are just not as steep and so sort of the first order accretive to US is just the products that they have very.
Very little overlap in product type and borrower frankly to two core best current footprint geographically, they're just deeper in areas that.
And that we think are really attractive the second order effect, which frankly is not included in some of the accretion numbers that broke articulated is being able to serve that client base more deeply the riverbed and brings to us.
They are doing some smaller ticket.
Transitional multi yeah, we would expect as a combined enterprise that would continue to grow there.
A ton of demand there from borrowers in some really attractive opportunities.
But there's you know there's other stuff as well as you know corvette Bridgeport platform is very unique in terms of the products that it focuses on versus.
Maybe the rest of the traditional lending community built for rent lines of credit things like that just just products that serve different needs for sponsors and so pushing those products out to the riverbed network. In addition to the single family rental we think it's going to be particularly accretive and exciting. So did you I guess the question is yes, we would expect more small balance multifamily.
Elsewhere in commercial you know probably not but you know that's an area that that riverbend already is there then we would expect them to do more of now is Steve I'd also add these are great portfolio assets.
Yeah, that's what I was thinking from a risk management standpoint, yeah.
Yep. So these these are a big reason these BPL investments are a big reason why our book has been so resilient with a huge run up in rates.
So you know that.
That's you know riverbend is a great home on distribution platform today, but having the opportunity to.
To put more of those assets on our balance sheet is pretty attractive.
And I mean.
Just to my initial comment about Cielo is I mean.
<unk> been selling a lot of that product on the bridge part product, but you know do you.
Do you envision that if you were to do that at scale on your balance sheet do you envision that that would ultimately.
Involve a non recourse securitization structure around that on the financing side.
Yeah, it's a very good point Dave.
So we you know we have.
She did most of our outbreaks land today at the end of that $1 2 billion or loans on balance sheet. It did do our first securitization back on that.
For fourth quarter in October and it's certainly been a highly accretive.
Financing that we continue to have a vulcan they tend to place Martha plenty maintenance and originating and increasing questions about.
Nick.
And one thing I would note to you know 30% of what they have been.
When it's needed and 30% of what we did two in the first quarter was on the multifamily side Theres a lot of you know.
Type of nonrecourse, that's instructions there that represented some of that capital optimization that we referenced in our prepared remarks, so kind of we do sir.
Let's circle back to your point, we do fair value all that bring fun, but they do sit at the REIT and have been at as Chris mentioned that a very nice eiley and aircrafts.
Great. Thanks, Thank you all for your comments.
Thank you Steve.
Thank you.
Next question is from Doug Harter with Credit Suisse. Please go ahead.
Thanks.
Just talk about the competitive dynamic in the various origination mortgage banking businesses kind of you know how.
<unk> might have fared in the more volatile period, and whether that puts you in a better competitive position or the same competitive position kind of going forward.
Well I would say overall, we expect to be in a much better competitive position, particularly in residential you know what's what's happening in residential is there was a lot of.
You know new issuers are many of them originators.
Originators.
Who entered the space you know very recently and obviously.
This type of volatility in such a rapid rise in rates you know the outcomes for the sector in the first quarter.
We're very very challenging.
So we would expect.
Some degree of Shakeout candidly.
And we see it every cycle.
We've been in the business for many many years.
I think the number of issuers will decline significantly over the course of the next few quarters certainly over the next year.
Which would really help us from a competitive standpoint, and Rajiv and P. P O.
Still a very nascent.
Nascent space.
We started out as the leader in the space and we continue.
To be in with the acquisition of River Bend to some extent where were just expanding our footprint and I think a lot of people are attracted to the space, but there's just so much to do we think it's $100 billion annual.
Nation market across products and so there's just significant upside there and in the loans.
It took a lot of skill and strong relationships to do well and those relationships have proven to be very durable from a client perspective.
So we feel very very good about the competitive landscape and if anything. These these difficult periods really help us and.
Just solidifying our place in and we certainly expect that to play out over the course of the year.
Thanks.
Thank you.
Next question is from Stephen laws with Raymond James. Please go ahead.
Hi, good afternoon. Thanks.
Question on the potential securitization call gains can you talk talk about the current environment and you know I don't know if it's prepayments slowing so maybe some deals or paying down more slowly or if it's it's the market to look at kind of refinancing some assets, but can you talk about the outlook for securitization call games, and maybe timing on how we should think about those.
Rolling into the numbers.
Yeah, It's a good question.
We still have we put out updated.
The amount of activity that means that we could see we still have a.
Our $2 billion of additional land.
Hey, Kevin Carnival that we're modeling in that.
Two years.
Just given that we've seen consistently higher prepayments and then you know kind of environment that we're more broadly into I think was pushed out from them.
Timing for when we can realize as positive about 600 million.
A million.
Of loans that we think will become callable for America, there's still a really healthy to pencil in terms of value outside of a $30.
And when we look at the weighted average coupons in our underlying there's near term calls are still.
Yes competitive with I only see current coupon today so.
We're just monitoring the opportunity a little bit more cautiously than we have an alarm.
And so that you know we did have about a $5 million decline in our net interest income from the accretion on those calls.
At some point if they continue to see.
Decline.
The next one or two.
So the timing of that thing.
Great. Thanks, Brooks I'm, Chris kind of looking bigger picture, we covered most of my questions on the BPL side, but as we think about the residential side I know Dash mentioned some bank statement loans.
And in past calls I think we've talked about kind of the expanded credit or near Prime and maybe some home equity.
<unk> just given the home price appreciation, but you can can you take to talk about some other products.
Do you guys, maybe think theres, an opportunity on or what youre seeing on the you know the residential side of the business instead of the BPL side.
Sure well.
Certainly we've been very interested in home equity and it's something we've talked about in past quarters. I think we'll have a better update when we talk again in.
In the summer, but that's an area where we're the portfolio has been very focused we did we did just relaunch.
You know, our our product suites sort of to the market in April on the residential side, we refresh choice and then Youre right. We did we did launch a bank statement product one of the interesting things there as.
We're focused on on QM.
And loans that meet the standard.
We've spent a lot of time with various stakeholders to make sure that those are structured appropriately.
With the right number of months of verification and things that we need to to securitize those well because we think that in QM product will really boost the liquidity of the space and how those execute in the pls markets, which should benefit everybody.
We also have been focused on hybrids and arms.
Just really expanding the playbook and being responsive to the market. So.
So I think we were really in a good position in resi and we're getting great response rate from our seller network.
Tremendous interest in training and learning about the products and I think the what the market really needs and in residential is is just some rate stability at this point when you look at the TBA markets certainly when you look at CRT and then obviously prime jumbo.
It's just hard for investors to know what the right prices to pay for bonds.
And as long as that dynamics in place.
Some of these rollouts will take take time.
But the interest is there and we certainly feel like we're leading in the space.
So I think we're gonna have a lot of really interesting and potentially surprising.
<unk> positive results from these rollouts to talk about in the coming months, but we're still we're still in a in a you know the market is stolen.
What were you know it just really needs some guidance from the side and just to know where that current coupon should should be as it is at five and a half is at six is.
Is it higher.
So those those questions will be answered in the coming weeks and months.
But I think were you know what.
We're investing in now is just just the products and the infrastructure to really continue to take share and that's that's one thing that we're very proud of in the first quarter is when you look at you know our lock activity was very similar to the fourth quarter, where the market declines we expect to be very very significant so hopefully that keeps up and.
We can continue to grow the business.
Helpful color, Thanks, Chris I appreciate it.
Thanks Steven.
Thank you.
Next question is from Eric Hagen with <unk>. Please go ahead.
Hey, Thanks, guys I'm jumping on a little late here. Thanks for squeezing me in a.
A couple here and the corvette that's F. Our portfolio can you say how much rental increase is embedded in the value of the assets just roughly.
And then do you guys see a risk that forgive me if you addressed this already but.
Do you see a risk that lenders adjust haircuts are margins on warehouse loans.
Do you guys feel like there's enough supply of capital out there.
And leverage across the system is stable enough where it is.
That really isn't an issue right now.
Thanks.
Thanks, Eric.
Take care of our question and let broke address your question on the warehouse piece.
In terms of how we I mean.
To move it to the front of the funnel you know when we actually size and underwrite.
If our loans.
We are pretty conservative about how we think about rents we tend not to think about rental increases as part of the underwriting or loan sizing.
Picture and so you know when we when we sized loans.
Obviously, the increases that we've seen have been necessarily been tailwind to value, but they're not part of the base underwriting process.
For us in that.
The portfolio has performed really really well.
Yeah.
It doesn't need to see the rent increases that we've seen in the past few years to have hung in there you know our average LTV is still on the high <unk>.
So it's clearly part of how a lot of our sponsors think about things.
You know, particularly with higher rates, just making sure that that math.
Still pencils for the combination of home price depreciation and rental growth and just what's going on with it.
With cap rates in general and single family rental, but from our perspective as a lender.
As you know, we're underwriting to get paid back right and we don't tend to price and rent increases.
You know into that analysis for.
For the <unk> box and then.
Mark do you want to yeah.
Right.
That's a great question I think you know we had a lot of good anecdotal evidence around that.
First quarter, because we did have a $2 billion facilities that we renewed.
And so I think it's probably a combination of yes, we do feel good about liquidity in the system from a financing provider.
I think also just spread but specifically probably speak to the strength of our capital base, especially in the RV performance during this time and our ability to.
Yes.
Alright that and the way that we have had we think have significantly protected us in an environment like today. So we still have sitting with.
About a third of higher.
Financing is committed we have a significant amount of 100% on this basis.
Direct lending side finance with my non margin above that.
It's continuing appetite that we see from our financing provider.
And in general over 80% of our debt either nine months involve term non recourse.
And we have considerable excess capacity today, it's at about $2 3 billion.
I think as we sit today, we just feel really good about the position.
But as it relates to how our debt structure and overall, our leverage continues to be very.
Very well and has trended downward as I mentioned in our prepared remarks.
That's helpful. Thank you guys very much.
Yes.
Thanks, Eric.
Yes.
Our next question is from Kevin Barker with Piper Sandler. Please go ahead.
Good afternoon, and thanks for taking my questions I just wanted to follow up on the $10 million pre tax gain that you're recognizing.
From an investment and our W. T Horizons, you give additional color on like what your cost basis was on that investment was at an exit of a business and then see if there's any other investments that you see out there that that could be monetized.
Sure.
No I don't think that we have or will provide cost basis detail at this time.
Can say as.
It was one investment.
And it was a $10 million approximate $10 million pre tax gain the total allocation of the total deployment for horizons at quarter end for all of the investments was $25 million.
So I can confirm it was it was a single investment.
Of the total.
That was a in other.
Asian round.
So it was not a monetization.
But you know, we we didn't expect necessarily to start seeing these types of.
You know round. This quickly so that's been a very positive development. It really validated the investment thesis frankly on why we started with horizons.
As a reminder, it's sort of a dual benefit.
We expect to make money on these investments certainly but raso.
Supporting with capital.
Acknowledges that have an ability to disrupt our sector.
The first sector is going to be disrupted if we wanted to be the disruptor.
And the person supporting those initiatives and so we've been very picky.
And very selective about the partners that we work with but they all do have an excess to what we do and we think that the frankly the return potential here is very significant and there's great potential option value.
Growing this portfolio as part of our broader investment strategy.
Okay, and then maybe a follow up on one of those investment strategies like with mortgage you did a securitization on the block chain late last year.
Can you just provide any color are you looking to do further securitizations on the blockchain with liquid.
And then also is there any third party interest in potentially.
Executing securitizations on the blockchain with liquid.
Okay.
Yeah, So Kevin it's dash, we have done since the first.
<unk>, we work with liquid water, John we've put all subsequent sequela deals on there.
So we have a number of them I think close to half dozen at this point.
The debt leverage that technology for remittance information, we do we are working as well as you might imagine in parallel for the corvette Securitizations to leverage the same technology, we think that'll be an exciting development for that part of the market.
And the second answer your question, Yeah, definitely you know a big part of the value add for the partnership as well.
When we sort of put a stake in the ground and do something other people certainly take notice and we've been certainly actively working with with liquid.
Help them engage others from our perspective, the more adoption.
For stuff like this the better as we've talked before.
Having the remittance information on blockchain really is just step one.
I talked in my script about the partnership with canopy, which we think will meaningfully evolve how does how do diligence works for whole loans. So we're still in the really early innings here and yes from our perspective.
It's about the ecosystem and the more we can help other people adopt in.
We think the better things will be.
Are you seeing additional demand from investors for.
This type of delivery mechanism.
Just given the performance that you've seen from the Sequoia platform.
Yes.
We are we've gotten a ton of interest the liquid mortgage.
Platform is just you know.
It's a pioneering platform and I think the intrigue about.
How transformational.
We can be to the securitization space is really excited.
So coy investors in particular, well, we get a lot of feedback and interest.
People like yourselves, just curious about what the next round will look like.
And in quarters like the first quarter, that's not going to be the headline the headline has been the rapid rise in rates and.
The associated bond math with fixed income investments. So that's certainly on investors' minds, but but folks that have been with the platform for many years know our bonds no redwood.
They're really looking past that and thinking about how how these innovations are going to impact the shelf and those are really great conversations to have and I would say the excitement level around what what liquor.
Liquid could do has never been higher frankly.
Alright. Thank.
Thank you for taking my questions have a good evening.
Thanks, Kevin.
Thank you ladies and gentlemen, there are no further questions at this time.
This concludes today's teleconference.
You may disconnect your lines at this time, thank you for your participation.