Q2 2022 Redwood Trust Inc Earnings Call

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Good afternoon and welcome to the Redwood Trust, Inc. 2nd Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlin Moritz, Redwood's Senior Vice President of Investor Relations. Please go ahead ma'am.

Thank you operator. Hello everyone and thank you for joining us today for Redwood's second quarter, 2022 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer, Dash Robinson, President and Brooke Carillo, 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. Thank you. This concludes today's webinar.

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 port on Form 10K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in board looking statements.

On this call, we may also refer to both GAP 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 GAP. A reconciliation between GAP and non- GAAP financial measures are provided in our second quarter Redwood Review, which is available on our website at redwoodtrust.com.

Also note that the content of this conference call contains time-sensitive information that is only accurate as of today. Whether it was not in-tend and undertakes no obligation to update this information to reflect subsequent events or circumstances. To reflect subsequent events or circumstances.

Finally, today's call is being recorded and will be available on our website later today. I will now turn the call over to Chris for opening remarks.

Thank you, Kate, and thank you everyone for joining us here today for Redwood's second quarter earnings conference call.

I'll begin by making some brief comments about our second quarter results.

operating and investing environment and conclude with some commentary around our outlook continue priorities.

I'll then turn the call over to Dash who will go through the performance of our investments and businesses in more detail. And then Brooke will conclude with an overview of our financial results.

We'll then open the line for questions.

As many of you might suspect, the second quarter of 2022 failed to produce many bright spots for us, or an industry beleaguered by the impact of inflation, including record spikes in mortgage rates.

The ongoing repricing of rate-sensitive assets accelerated during the quarter, impacting the market values of even the safest mortgage-related investments.

Our positioning became decisively more conservative as the quarter progressed.

and we willingly seeded flashy volume headlines in favor of our time-tested approach to managing through market downturns. Through that lens, we prioritize pipeline turnover and strong liquidity knowing there were market forces at play beyond our control.

Before I get more into our positioning to recap earnings, our book value decline approximately 10% during the quarter to $10.78 per share at June 30th, primarily reflecting marketed dynamics in June that had a pronounced effect on the fair value of our investment portfolio. starting off by anosition in March 40th since July 4th 2020. It is of great importance pest to invest in regard to financial realized globally. it is capable of? by? dropping the net through commercial products there. Finally bringing funds from zad and Federal government bout the government live filled withuche infrastructure preocup to banking bitcoin to line up to negotiate of the secretary office market pin Rosa Vin them ? unterstützen<|hu|><|translate|> follow you.

It is worth highlighting that our overall decline in gap book value included $1.02 per share of investment portfolio fair value changes that almost exclusively reflect mark-to-market losses in our portfolio due to credit spread widening.

These assets remain on our balance sheet and we generally expect to hold them for the long term with the opportunity to recover these losses as markets stabilize.

Importantly, we observe very little deterioration and expected future cash flows during the quarter. As such, substantially all of the gap losses in our vessel portfolio segment were non-cash and are recoverable if marking conditions improve. Our portfolio's net discount to par now stands at approximately $3.35 per share. The end of the quarter is now $1.25 per share. The end of the quarter is now $1.25 per share.

As we stressed last quarter in our commentary, our Invest in Portfolio, unique in its composition, takes a long-term view on housing credit and is characterized by its demonstrated performance over many quarters, including notably low delinquencies, and continued declining LTVs.

The investments in our portfolio have continued to demonstrate solid performance into the third quarter and are delivering consistent cash flows. I'd also remind listeners that a number of our assets have experienced significant home price appreciation in recent years that are well in excess of our original underwriting and purchase assumptions. 5.

Without shying away from our second quarter results, we believe our team's intense focus and total commitment to Redwood stakeholders were exemplary during the quarter. A few examples of this are noteworthy. For instance, we actively managed our jumbo and single-family rental pipelines as interest rate volatility spiked, guiding residential production volumes lower for more rate-sensitive products, and adjusting our go-forward SFR pipeline as appropriate for higher rates.

Along with a proactive hedging discipline, this allowed us to significantly mitigate the impact of negative price action in the underlying securities. This manner adjusted margins for the quarter, while certainly impacted by volatility, outperformed most market yard sticks.

In a residential business, for instance, margin declines during the second quarter, the less than half the underperformance of jumbo loans versus their benchmarks during the same period.

As we get deeper into the third quarter, most market participants remain uncertain around the economy, and we suspect they will stay tethered to Fed actions and the resulting path in interest rates.

In keeping, we'll continue to prioritize the path to consistent profitability, which will likely entail lower volume levels in the near term relative to our long-term strategic growth ambitions.

Looking ahead, while we continue to proceed cautiously in light of the market environment, the recent wave of market volatility has created significant opportunities for us to deploy capital at extraordinary returns.

The additional capital we raised in early June will be a significant factor in our ability to capitalize on these market dislocations.

In the second quarter, we also demonstrated our continued alignment with shareholders our decision to repurchase 3.7 million of our outstanding shares at a creative levels.

We have tremendous confidence in our team, our portfolio, and our liquidity, and we see an opportunity to express that constructively through additional share buybacks in the third quarter.

Just today we announced a new $125 million share repurchase program which allows us to buy shares of our common stock in the open market or through negotiated transactions.

As we always have, we will balance the attractiveness of near-term investment opportunities with our long-term strategy and what we believe to be in the best interest of our shareholders.

So in such a difficult period for our industry, what will our blueprint look like for the remainder of the year?

After 28 years as an industry leader and public company and a very long time, the answer should sound familiar.

Across our enterprise, we'll continue to maintain a patient, long-term investor mindset that stretches well beyond fiscal quarters. We'll aggressively manage risk.

and will work diligently to enhance our franchise while pursuing efficiencies.

Despite a difficult stretch for our industry, the housing market remains woefully undersupplied, creating a durable technical driver that supports investments and residential credit across a broad array of economic scenarios.

In this regard, Redwoods opportunities have never been greater as we work across multiple facets of housing finance, including residential, business purpose lending, fintech, and prop tech.

I will now turn the call over to Dash Robinson, Redwoods President, to speak in more detail about our investment portfolio in operating businesses.

Thank you, Chris.

I'll begin my commentary with our investment portfolio. We were active in deploying capital during the quarter, investing in both assets created by our operating businesses and those sourced from third parties.

excluding our share repurchase and the completion of the acquisition of River Bend lending. We deploy over $160 million into new investments during the quarter, primarily into Corvests, originated Bridglands and incremental growth in our Home Equity Investment portfolio or HII. In our Home Equity Investment portfolio or HII.

Strong fundamental performance from these two asset classes drove an attractive adjusted return on capital for our portfolio.

given our strong capital position.

We intend to continue assessing the market and making opportunistic investments where we see appropriate relative value.

While price action during the quarter drove unrealized fair value losses in our investment portfolio, underlying credit performance is strong, and the credit quality and seasoning of our portfolio remain points worth emphasizing.

Delinquencies in our book are at or near post-pandemic lows, and loan resolutions continue to yield favorable outcomes versus modeled expectations.

Even as home price appreciation begins to temper, our overall portfolio remains enhanced by record amounts of home equity and in the case of our single-family rental portfolio.

September , our overall portfolio remains enhanced by record amounts of home equity, and in the case of our single-family rental portfolio, substantial rent growth.

At June 30, 90-plus data delinquencies within our Jumbo, SFR, and Bridge portfolios stood at 1.7%, 2.4%, and 2.6% respectively, and we estimate current loan-to-values on loans underpinning our Jumbo and RPL securitizations to now be around 45%.

As expected, with the substantial backup and rates, prepayments within our consumer residential book slowed. And while we expect near-term call activity to be muted, continued paydowns bring us closer to unlocking the embedded value in this portion of the portfolio. As expected, we are indecent with the portfolio.

Prepayment speeds within our securitized SFR portfolio slowed modestly but remained elevated versus expectations, reflecting continued momentum in transactions for stabilized single-family real estate and bringing a handful of more seasoned capital transactions closer to callability.

Within residential mortgage banking, while historically challenging quarter for jumbo mortgage prices impacted results, our active hedging and discipline around distribution mitigated much of the price action, and leaves us today with historically light level inventory, and the opportunity to lean back in once market stabilized.

During a period when most competitors were challenged to move risk, the team distributed $1.2 billion of whole loans, all through loan sales and at levels significantly accretive to securization, where execution continues to be hindered by the overhang of lower coupon pipelines.

We purchased 1.1 billion dollars of loans during the quarter and locked 1 billion dollars of loans compared to 2.6 billion in Q1.

Over 80% of which were for purchase money transactions.

This quarter over quarter decline in volume reflected our view of the market, and we believe managed our mortgage banking results to a more favorable outcome than benchmark performance would imply, given that during the quarter we estimate jumbo spreads underperformed agency mortgages by approximately 100 basis points in spread.

While we are not immune to this price action, we entered Q3 with an unallocated pipeline of $751 million, down 44% from March 31st, 2022, in which carried an average coupon above 5%.

As many peers continue their retrenchment, our current risk position provides ample dry powder to assertively lean back in when conditions warrant.

This could manifest itself in several ways, including impacts from certain depositories' repositioning around risk-rated asset challenges, or other market participants finally forced to part with lower coupon inventory.

The recent pullback has also left Redwood as one of the strongest hands focused on responsibly underwritten expanded prime loans.

an area in which we are continuing to make inroads with loan buyers prioritizing the quality of their partners.

Spreadwinding also impacted our business purpose mortgage banking results.

But the diversity of our products we, particularly the ability to manufacture short duration floating rate bris lens

allowed us to continue serving borrowers of a creatively during the second quarter. of a creatively during the second quarter.

We were excited to begin July with the close of our previously announced acquisition of Riverbend, a leading bridge lender with a broad origination footprint.

As we mentioned at the time of the initial announcement, we view this acquisition as highly complementary to our existing CoreVest platform.

and are excited to welcome the riverbent team into the family. The early a month in, we are already seeing the benefits of their client reach, including as a logical audience for Corvass core products.

As this acquisition did not close until the beginning of the third quarter, Riverbenz results are not included in the performance metrics I will now cover.

Volumes in business purpose lending were flat versus Q1 with a continued trend towards increased bridge production which represented 60% of the quarter's $923 million of fundings.

SFR production decline quarter over quarter as spreads widened and benchmark rates rose, causing many bars to odd for shorter duration loans with more prepayment flexibility. SFR production decline quarter over quarter as spreads widened and benchmark rates rose, causing many bars to odd for shorter duration loans. SFR production decline quarter over quarter as spreads widened and benchmark rates rose, causing many bars to odd for shorter duration loans.

We remain very constructive on our bridge production mix, and no small part due to the quality of our sponsors and consistency and demand as rates of reset hire. And consistency and demand as rates of reset hire.

As noted, Bridgillon's represented a meaningful amount of our capital deployment in Q2, and our bridge book overall delivered a high teens cash return during the quarter.

Core Vast successfully issued two securizations back by $564 million of loans during the quarter, creating important additional capacity for the Ford Pipeline.

We priced the $250 million bridge securization in May, placing unrated bonds at a blended deal of 5.64%.

Similar to our first deal, the structure includes a 24 month revolving period that will allow us to replenish prepayments with what are now meaningfully higher coupon loans going for it.

Our $550 million of total bridge securitization capacity is an important subset of the $2.8 billion of total financial capacity for business-purpose lending loans. $2.8 billion of total financial capacity for business-purpose lending loans.

Business purpose lending capped off the quarter in late June by completing a $313 million capital securization backed by SFARLAND.

The deal price wider than our prior issuance in Q4 2021, but we were able to issue bonds accretively down the capital structure that many other issues in the market were not. And that many other issues in the market were not.

We were also able to recapture some of the spread widening through a new pricing methodology that gives us credit for expected prepayments on the underlying portfolio. No small achievement in a challenging market.

I'll round out my comments with an update on RWT Horizons.

We made three new investments during the quarter, bringing our total number of portfolio companies to 21.

We have invested roughly $25 million of capital into the venture that thus far, and are pleased to see continued maturation of our investments, as well as growing strategic partnerships between Redwood and our horizons portfolio companies.

Several portfolio companies are in the process of raising additional growth capital, and we are evaluating the opportunity to invest incrementally.

It has been rewarding to see more synergies emerge through Horizons, including Liquid Mortgages' role as distributed ledger agent on our most recent CAFL deal, a first for that asset class. It wasn't until a recording of this video that it was finally Sarah Shed balbino-ing

Horizons remains highly selective in its approach to new investments and as always we are focused on early stage ventures with meaningful strategic relevance to our business.

We're optimistic that current market conditions are coinciding well with where Horizons is in its own evolution.

as the network effect provides us access to situations we may not have seen as recently as six months ago.

With that, I'll turn the call over to Brooke Carrillo, Redwoods Chief Financial Officer, to go into more detail on our second quarter financial results.

Thank you, Dash. On the quarter, we recorded a gap loss of 85 cents per deluded share, and our book value was $10.78 per share, a decline of approximately 10% from March 31st. A decline of approximately 10% from March 31st.

Additionally, we paid a 23 cent per share dividend, which was unchanged on the quarter. As Chris mentioned, our gap book value includes a negative $1.2 per share of investment fair value changes and change and other comprehensive income on AFS securities that almost exclusively reflect unrealized losses in our investment portfolio.

After this quarter's volatility, we only as a separate attractive forward return expectations, which are now roughly 150 basis points higher than the first quarter to a mid-teen field on the investment portfolio.

Turning to the drivers of our results relative to the first quarter, net interest income was down approximately $12.6 million primarily due to a decline in non-cash accretion income on our AFS securities and lower yield maintenance received on capital securities relative to elevated levels in Q1 2022. We signaled both expected trends last quarter given they are byproducts of higher rates.

It's important to note that changes in accretion of our <expletive> security impacts our quarterly run rate of GapNet interest income, but not book value per share. Given our capital deployment reference is quarter, we see a larger portfolio size and incremental net interest spread expansion of our bridge assets as positive tailwinds for net interest income going forward.

In terms of non-interest income, our mortgage banking activities net contributed a negative 25 cents to earnings as historical levels of spread widening and interest rate volatility impact and distribution efforts and profitability in both segments.

Despite headline performance for our residential mortgage banking business, we mitigated market conditions with our operational advantages and our loan distribution franchise, which allowed us to move essentially all of our whole loan risk prior to June when the more severe volatility and spread widening occurred on the quarter. As Dash mentioned, the light inventory of loans that we have carried into the third quarter represents a healthy risk position today and should benefit our relative margin performance going forward.

The loss on business-purpose lending activities was primarily attributable to securitization execution for SFR term loans, as long as graduation assets underperformed and credits for SFR securitization widened by approximately 60 basis points during the quarter. Importantly, our cash origination fees nearly covered our operating expenses in the segment. And the investments we are creating from this quarter's originations are expected to generate a 15 to 18% return, which drives positive portfolio earnings going forward.

After quarter end, we closed the previously announced acquisition of River Bend on July 1st for an initial cash purchase price of approximately $44 million data closing. The purchase accountine related to the transaction, as well as River Bend's consolidated financial statements and results will be included in Redwood's third quarter financial statements.

On the expense front, we remain highly focused on cost management and have seen continued progress on our goals of further cost efficiencies.

General and administrative expenses were 8% lower on the quarter and over 20% lower year over year. While others in the industry are faced with significant headcount management that ballooned over the last two years, we have remained nimble and aren't forced to dramatically scale up or down depending on volumes. In fact, our headcount today, including the addition of Riverbend employees, is on par with where we ended in 2019.

Looking ahead to the remainder of the year, we are prudently maintaining our operating platforms presence in the marketplace. We are committed to both efficiency and preserving a franchise that can emerge from this time period, immediately ready to capitalize on the many opportunities we're beginning to see.

We believe our efforts to manage the cost and contingent risk of our financing instruments will continue to serve us well going forward. Throughout the first half of the year, we have extended or initiated approximately $3.8 billion in financing facilities, 60% of which are non-marginal and are non-recourse. The overall level of secure debt in the investment portfolio remains relatively low at 1.4 times, creating avenues to generate more capital at potentially accretive levels.

We are mindful of our intermediate term financing materities, including our convertible debt maturing over a year from now. We have a number of tools to address this maturity, including cash on hand, 450 million of unencumbered assets, and other portfolio financing optimizations to fix that we decide not to refinance this maturing debt. We have a number of tools to address this maturity.

Our $215 million convertible debt issuance in June was responsible for roughly half of the increase in leverage on the quarter to 2.5 times from 2.1 times on March 31. We view the capital raise as opportunistic, providing us additional dry powder to deploy, including within our own capital structure that we believe will be accretive to earnings per share through time. We ended the quarter with approximately $412 million of unrestricted cash and unpledged funds.

and nearly $200 million of investable capital, which gives effect to the consideration paid for the Riverbend acquisition.

Two final highlights for the quarter, the first of which relates to RWT horizons. As we mentioned on our last earnings call, we saw our first material gain on one of our early investments in Q2, our mounting to $10 million per tax.

The second was that our 33 million of share repurchases on the quarter contributed to a positive 10 cents benefit to our book value for share.

Given current trading levels, we view share repurchases as a potentially powerful tool, as return on equity is quite competitive with alternatives we see in the broader landscape. These are strong buying opportunities, not only with a mean reversion to today's book value, but also accounting for the drivers of the $3.35 per share of embedded upside to book value from here.

And with that operator, we will now open the call for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask the question, please first star one on your telephone keypad. A confirmation tone will indicate your line is in the question cube.

You may first start to, if you would like to remove your question from the cue.

for participants using speaker equipment and maybe necessary to pick up your handset before a person to start a Keith.

One moment please while we poll for questions.

And our first question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Good afternoon. I guess first Chris and Dash, I think you guys both touched on it, but around the...

business purpose loans both the bridge and SFR. Can you talk a little more, quantify kind of how you've moved pricing given the change in the rate environment and where securitization markets are and how you think about, you know, return on capital there. You know, an interest rate sensitivity or rate sensitivity of those borrowers between bridge and kind of stabilized SFR.

Chair or seated, Ms. Dash, I'll take that. It's a great question. It does speak to the power of the platform in terms of core vestibility to...

to offer both of those products pretty seamlessly to borrowers because you know there has been a decision tree for our sponsors here over the past you know a few months with benchmarks higher and and some of the differences in prepaid flexibility in those products and we have as expected.

You know seen over the past couple quarters a trend, you know more towards bridge Where bridge loans may be used for portfolios that could qualify for single-family rental? You know just because of some of the prepaid flexibility but on your questions on rates This for context, you know our funded pipeline right now

is probably about 100 basis points or so above the portfolio we securitized in late June . So that portfolio is in the low sixes, our current rates. And we've rallied here obviously since the end of the quarter, but rates are still in the mid six percent range with some distribution around that, depending on leverage and things of that nature. Bridge has been also moved higher, probably on the order of 100 plus basis points as well, but not a bit more.

One of the things with bridges, you know, Stephen, is that book is over 80% floating rate. So particularly now with another hike from yesterday, the effect of coupons in that book are 8% plus and many into the nines at this point. So that's sort of where we sit. And we really like the financing capacity. We've got there, you know, we talked about.

Just the overall bridge ecosystem, the preponderance of that financing remains non-recourse. of that financing remains non-recourse.

we were very happy to get the $250 million RTL deal done, which is that those are fixed rate issuances. And our average cost of funds for our securitized few securitizations is below 4% fixed. So if rates continue to tick off, particularly the short end, those will be very accretive sources of financing for us. Thanks for that color, Dash. And Brooke, I know you touched on it, and Chris as well, prepared remarks around the stock buyback versus.

opportunity to deploy capital and no investments. But maybe touch on how you evaluate other parts of the capital stack you could consider repurchasing or possibly buying. The capital stack you could consider repurchasing or possibly buying.

Spoiler cappal bonds that maybe in the market that you think are mispriced or maybe just how you think about the capital allocation across the various opportunities

Hey Steven, I'll start and Brooke can chime in.

You know, the stock buyback and just where the stocks traded, both on an absolute level, relative to book, and certainly in a historical basis, just versus our historical trading range. And again, we're a 28 year old company, so we've got a lot of trading history. That opportunity doesn't come across very often. And so we were the most active, we'd been in a long time in Q2, and obviously the stock is gonna move. And you know, we'll evaluate it as it does.

But we wanted to make sure we've reserved opportunistic capital to take advantage of that opportunity. Because again, on a relative basis, this doesn't happen very often over the course of 28 years. As far as other investments, certainly there's opportunities in the convertible space. We've been an active issuer there most recently last June . That's something we're always looking at. bullets go viral

It's not as much float. There's not as many opportunities as there is in the equity markets, but we pay close attention to it. And we've always got a level for our own cooking. You know, we retain, that's why we retain most of the support and security that we issue, certainly in Caffle and Sequoia. So that's definitely on the list as well. You know, I'd say right now, you know, it was a difficult quarter for the market, but it always breeds opportunities. And we're finally seeing.

We're fortunate to have really strong liquidity right now and we can be aggressive with our markets. So there's a lot of great opportunities and I don't think we necessarily need to pick one at this point. There's many that are attractive.

Great, thanks, Teres.

Our next question comes from the line of Bose George with KBW, please proceed with your question.

Hey everyone, good afternoon. First I just wanted to ask about your liquidity obviously is quite high. You know, just curious how you know, how you know, sort of investment with we know wanting to maintain a level of liquidity even for the market is. So, you know, how much of that you know, could we deploy in. So, you know, could we deploy in.

You know, we talked about it in terms of investment capacity. I'll let Brooke brief you on the numbers. But at high level, I think that sentiment is correct. We feel very good about our liquidity at this point. And importantly, I'm not sure that everybody else does. We really planned well here. And we spoke about in our scripts being really mindful with our pipeline management.

And whenever you have large pipelines in this environment where rates are going up, the amount of liquidity capital you need to reserve against those goes up. So we are very deliberate in keeping our pipelines for fixed rate collateral much lower than they typically run. That business is turning a corner as well, so we hope to get more aggressive in our mortgage banking businesses.

But as far as liquidity goes, you're right, we feel like we've got very strong liquidity. I'll let Brooke touch on some of the specifics, but it's a good place to enter the third quarter.

Thanks.

Yeah, and both are just add to that, you know, we, we just close the, um, the mix of our deployment on the quarter and it was really spread fairly evenly between the organic assets we're creating on the bridge side, the dash mentioned and prepare remarks are amid the high teens forward return. Uh, we really like the profile and as, as you've seen for our volumes of quarter demand has been resilient there. Um, third party opportunity is our beginning to look more attractive to us to just given them out of locations we've seen in the market.

and then throw in the strategic M&A. We announce this order and the buyback. We have a number of opportunities in the kind of 12 to 18% are we range? So that's why you've seen our deployment go up and consequently we're also reserving liquidity for those opportunities that we've been patient with respect to the last month or so of the quarter. And so we're sitting on 200 million of investment capital and not holding aside.

what we think we need in terms of this market, just elevated risk-based capital and working capital for our business. So, plenty of liquidity to take advantage of those opportunities and then more importantly, if you think we have some room from a leverage perspective too, we did see leverage to cup a bit this quarter, but we're still about 30% below, where others in the industry are and low for ourselves on a historical basis. And particularly given a lot of the evolution we made with respect to the composition of that leverage, being non-marginable.

and or non-reports. I think we feel like we have some room there in the financing capacity to do it to fund a lot of growth that we are going forward. We are going forward. We are going forward. We are going forward. We are going forward. We are going forward. We are going forward.

Okay thanks and then I didn't know if you said this but can I get your book value here according to date.

Yeah, we didn't disclose it, but we are up about approximately 2% from the border.

Okay, great. And if you want another quick one, just on the riverbend acquisition, was there any good oil created?

Yeah, we will be disclosing it, both in the third quarter that acquisition didn't close until the first July . So we're going through the purchase of county now. And so we'll have an update on Goodwill and intangibles when we announce that quarter.

So more to come on that front, but I think just, you know, given...

Given the market, we feel pretty good about both the structure and the overall value of this deal both for ourselves and our new partners from Riverbend and think it's very reflective of where markets are today.

Okay, great. Thanks for watching.

Our next question comes from the line of Don Fendetti with Wells Fargo. Please proceed with your question.

Hi, Brooke, can you talk a little bit about what you did with the...

proceeds from the convertible. And also, I guess, if Mark the market comes back, what's the logic of doing the convert? Because you may have raised above or below the value of that scenario.

Well as far as the logic of the deal goes...

You know, I think, you know, we're thinking about

you know the stock and the business over the long run and it's a lumpy deployment business and sometimes you need to be opportunistic about when you raise capital there's market conditions there's factors that we're aware of that the markets not aware of with respect to portfolio opportunities and so we spent a lot of time thinking about

You know, we're to strike that. And ultimately, you know, I think, I don't think too much time went by before the market sold off significantly. And, you know, I think it kind of validated, you know, the timing, but the deployment opportunities, well north of the 775 coupon for those converts are very, very vast right now. You know, there's great opportunities across the spectrum.

We think there's great M&A opportunities that we're seeing today. There's definitely great deployment opportunities through our traditional channels, both in Resy and BPL. We've created a lot of great bridge assets this year. As Das mentioned, those are floaters and keep going up in coupon. To convert, we felt great about the opportunities to deploy that accretively.

We'll continue to evaluate the options there, but we're still looking at a stock that's well below book. I've noticed across the spectrum that that still looks pretty attractive based on where others may be trading. We're very confident that we'll get that capital deployed as we typically do in an accretive manner.

Okay and Dash what is your or Chris as you look at the housing market what are your thoughts in terms of HPA and also rent as you think about your business purpose, business just given the moving rates and the current environment.

Sure, I'll start with HPA and Dash and I like the tag team, Resian BPL, so I'll let him chime in as well. HPA is slowing, but the technical driving housing haven't changed. There's still a major supply issue. We spent a lot of time in Washington focused on access to housing, which is the centerpiece of our mission. That includes lower cost homes, as well as high cost homes and areas that we do a lot of business in.

So, you know, credit wise, if you look at our book and you look at our delinquency trends today versus even a year ago, you know, we'll publish more of that with a 10Q, but everything has looked better or flat.

And so I think that's a reflection of strong HPA to date, but also

underwriting assumptions relative to where current LTVs are today. I think the go forward, we're obviously going to see a slowdown in home price appreciation. That's a given when mortgage rates go up and purchasing power goes down. But I also think that we're pretty confident that we're not staring down the barrel of what we saw in the great financial crisis. We're just in a fundamentally

that are positioned in terms of underwriting, in terms of consumer debt profiles, just really robust with respect to borrowers and their ability to pay. So if you ask, do you want to cover rents? you want to cover rents.

Yeah, absolutely. Thanks, Chris. Just quickly as it relates to rents, obviously, Don, as you know, we've seen double-digit year-on-year rent increases here. And while we don't necessarily expect that particular number to continue, we certainly see room for continued rent growth. Just as a reminder, we underwrite our business purpose loans. We tend not to trend rents. We don't price in rent increases necessarily. So we do have cushion in our underwriting. A couple things as mortgage rates have gone up.

at some level that does create or enhance the support level for Rens, particularly as Chris referenced.

for a big cohort of consumers, accessibility from an ownership perspective is certainly harder than it is today than it was.

three to six months ago. And so that is a natural support for rents. And then also just specifically to our sponsor cohort that Corvass serves, a lot of times, what we believe is that in many cases, we are lending against below market rents today. In many cases, our sponsors, in the interest of keeping their portfolios rented, we'll can, many times increase rents at a slower pace than with the market maybe, just to ensure consistent cash flow.

things of that nature. So even as rents continue to trend up, we expect they will. It's important to note that from an underwriting perspective we remain conservative and in many cases our sponsors, you know, favor casual inconsistency versus.

necessarily marking a rent to market you know at every opportunity so that's our that's our general view there.

Thank you.

Our next question comes from the line of Rick Shane with JP Morgan. Please proceed with your question.

Hey guys, thanks for taking my question this afternoon. Look, we certainly understand the mark to market on the investment portfolio. But when we look at the resi banking business and the business purpose banking, over half of your overhead, and I'm excluding loan acquisition costs, but G&A is in those two businesses.

When we think about those two businesses for the remainder of the year as you're pulling back on volume and the markets remain volatile, what do you need to do to be able to at least break even in those businesses? Is there an opportunity to reduce GNA costs or are you gonna need a rebound in the market either in terms of volume or margin to see not have that be such a tremendous drag?

Sure. Hey Rick, great to hear your voice.

We, you know, starting with Rezzi.

You know, what happened in the second quarter, I would say, is quite idiosyncratic.

We had a very, very acute rise in mortgage rates that really sort of shocked the system. And what ended up happening was there was a lot of lock loans across the sector at really low rates. And as is usually the case, when boroughs have locked a rate that's lower than where mortgage rates have had at the pull-through sort of goes up to close to 100%. And so the industry got really long.

collateral that very quickly aged. And so the PLS markets found themselves really long supply with a major supply overhang of PLS markets.

coupons that were aged and weren't nearly reflective of current coupons, which are you know in the triple-A PLS market today are probably four and a half, mortgage rates are five and a half, six and a half. 5 and a half, six and a half.

And so that supply overhang has continued to need to work its way through the system. And that made it really, really difficult to manage pipelines in the second quarter for everybody. And I'm sure you'll see that play out through our in season. But that dynamic is not a normal one for our business. And volumes at a billion dollars for a quarter is not normal for us. That was very deliberate. So a gradual return of a-

We need to be marginally higher than where we were. And we need those margins to stabilize. And the good news is, as we've started to see that, as recently as a deal in the market, the price today, a bank you're familiar with. The demand there was the best we'd seen in quite some time. And we're really starting to see the tone shift in the market. There was a great industry conference that structured finance association that puts on that happened in July .

extremely well-appended, great sentiment there. So we're turning the corner here with some optimism headed into the fall. I'll add dash comment on the BPL, PLS space and rates, but I think there's a similar dynamic of play there as well. But I think there's a similar dynamic of play there as well.

Yeah, thanks, Chris. On BPR, I would say.

Similarly, very unique quarter, just from a spread-widing perspective, certainly, in the single family rental space. We are certainly seeing an improvement in tone for demand not only for securitizations, but also whole loan buyers for Corvass products. And from a business diversity perspective, I'd also just point back to what I mentioned to Steven's question. The ability for our BPL platform to pivot from a product perspective.

you know, to serve the bar regardless of appetite or product type and interest rate environment. You know, we're only, we're that much stronger now with Riverbend and the full product-wise and geographically. For BPL, one metric out of several we look at quite closely is our net cost to originate, which basically, you know, measures GNA of that particular segment versus fees earned. So nothing to do with GAN on sale, just actual cash fees earned. We are basically flat.

in Q2 and BPL, which I think is really important when you think about where the market is and just the ability for that business to...

You know, continue to sustain margins as even in tough times. So if you net out the market, we were really pleased with the performance. Like I said, we've reset coupons, 150-bips higher across SFR and bridge and those things are all helpful. So similar market dynamics as with Chris referenced and because obviously in BPL we're a direct originator. There's important economics we capture, which makes the overall cost structure now.

we went into a risk off environment. So even if you didn't have a disequilibrium, you would have had pricing pressure. So when we think about, if that's the right way to characterize it,

help us understand where we are right now in terms of each one of those three dynamics.

Well, again, we'll tag team this. One thing I'd note is our poll through wasn't reflective of the industry. So one of the things we've tried to convey was...

While others were sort of bulking up with their pipelines early in the year and consequently locking mortgage rates that turned out to be much lower than they are today, we had a different posture. It's important to note that our volumes were down deliberately. We control our rate sheet and we're very aware of where the market is and if we want to dial up volumes we can do that at any time.

We didn't feel like that was appropriate in the second quarter, but we're starting to see signs that we like to focus on to be more aggressive in the third quarter. But I think the dynamic that ultimately is going to stabilize the market is the path of interest rates. And, you know, what you've seen with equities recently is there's a growing belief that there's some clarity in what the Fed needs to do from this point forward.

I think the market's starting to sense that there could be some finality to the hiking regime in the coming months or quarters. The markets are very forward looking. So that breeds confidence and helps to stabilize the rate markets. And that's ultimately what we need to see. We talked a lot about it. We wrote a lot about which we'll see our GNA and obviously our operating expenses are lower. Quarter over quarter.

The, you know, ultimately though, you know, we serve an incredibly important function in the non-agency mortgage markets and our customers, which are loan sellers, hundreds of loan sellers, originators, loan purchasers, bond investors, anslery businesses, you know, along the way. You know, we are a major liquidity provider to the sector and so, you know, we need to keep the lights on and we need to keep, you know, the open sign.

on the door. And so we're always going to be locking loans, we're always going to be managing pipelines. But ultimately, how aggressive we are is determined internally. We're not facing share. So I think we're starting to see what we need to see. We feel good about our expense base. We feel good about our workforce. And our stable volume levels are much higher than we saw in the second quarter, but also very, very achievable.

you know, with a few originators, you know, kind of shutting down during the quarter, you know, kind of whether that presents opportunity or kind of how you view non-QM going forward.

Yeah, we do see opportunities there and we're in the midst of pursuing them. I think non-QM, which is closer.

to the bleeding edge on credit, was probably hit the hardest during the quarter. The PLS bonds that were issued struggled and so made it really, really tough for some of the dedicated originators. And we saw some didn't make it. But I do think there's a strong need for those products. We rolled out a bank statement product recently.

You know, we've got a QM flavor to that, but we've also got some QNONQM options as well. For us, you know, we've been very, very patient on the REZY side, certainly with respect to M&A. When you look at our M&A recently, it's been really zeroed in on BPL. And a big reason was, you know, you saw the SPACS, you know, in the past year, year and a half, and where some of the REZY platforms, the trade just didn't make sense to us.

But now, one of the reasons why I've been very patient with our capital is to be in a position to either take share organically, which we see a path doing immediately. But also be open for business on investing in other platforms or partnering with other strong originators. So I do think that that opportunities in the process of opening up, you know.

The rate moves in the second quarter weren't good for any product, certainly any fixed rate product, for any type of credit. So that market is challenging for everybody, but as things start to stabilize, we're really excited about the opportunities in non-QM.

Great, thank you. Our next question comes from the line of Kevin Barker with Piper Sandler. Hopefully we'll see you with your question. Hopefully we'll see you with your question.

Thank you. Given the negative gain until this quarter on PPL and residential mortgage banking,

It would seem like, yeah, obviously there's a lot of rape volatility that you're dealing with. It's hard to hedge that pipeline with that type of volatility. Could you just maybe give us a little more detail on what the average seagining of the portfolio was for the residential mortgage portfolio and then maybe the BPL portfolio that you sold this quarter versus what you sold in 2021.

Like where there are certain portfolios that you saw bleed into the second quarter that you just had to move on with. That you just had to move on with.

I think this seasoning was probably pretty consistent. We keven on average.

we were able to move the risk on loans usually between 45 and 60 days in residential.

your securitization or wholesale, we continue to sell a lot of our production forward as well. You know, I think the magnitude of the rate move was sort of a big deal. I mean, in terms of where we sit today again, we have an unallocated pipeline and residential about three quarters of a billion dollars with a gross whack just over 5%. Ramon Roes Cloak

That coupon is well in excess. We are pretty confident of where a lot of our peers are carrying coupons right now. But it also is 100 bps above the weighted average coupon we were carrying at March 31st which as you know is just reflective of the speed with which rates ticked up. So it was less a seasoning thing than just continuing to move risk judiciously, and the ability to sell a billion two of loans in Q2, and not have to do a securitization.

I think was a pretty big deal. In terms of how margins in RESI perform versus benchmarks, I think hedging was actually a big alpha in residential this quarter. We saw jumbo spreads on average, as I mentioned, probably 100 bps on average versus agency mortgages, just reflective of where we were in the environment. And agencies underperformed benchmarks a little bit, but it was a very rough quarter for jumbo. We think about 100 bps in spread versus where our margin is.

the same sort of fallout risk in terms of when we locked the coupon to that bar

So that one was really just credit spread widening. I would say in Q1, when there was more concerns about duration in the market, the credit curve flattened mostly because AAA's widened, so if you had a few and large, a whole on portfolio, which are pipelines, which we didn't, the AAA price action really impacted the anon sale, and Q2, the credit curve steeped fairly dramatically.

which really was the thing that impacted the SFR pipeline.

It resulted in the P&O there really was not hedging.

and MPP.

Got it. Okay, and then you know if we were to see similar rate volatility, would you be more likely to hold some of those?

Some of those loans on balance sheet, or would you continue to recycle through them with the same strategy today?

One thing I would say is just on, you know, in terms of where our capital allocation has trended.

You know, our 630 capital allocation reflects 100 million lower from residential, more in banking, redeployed back in the investment portfolio. And that's just a byproduct of our view on the relative value of bridge today. And so...

in terms of where we have a lot of the...

The comments we made around interest rate volatility, those bridge assets are 12 to 18 months. The comments we made around interest rate volatility are 12 to 18 months. 12 to 18 months. 12 to 18 months. 12 to 18 months.

Assets in general didn't experience the same level of...

of spreads that we saw in the term book. And so as we sit here today, a lot of our pipeline in terms of what we'll hold is because it's.

It's a bird jet that is a nice orner from a nymph perspective. We like to have it on balance sheet. We do tend to, we've securitized our British portfolio and a few transactions, but it all works from an economic perspective to warehouse on balance sheet. It's a very important thing for us to do, to have it on balance sheet. We have to work from an economic perspective to have it on balance sheet. We have to work from an economic perspective to warehouse on balance sheet. We have to work from an economic perspective to warehouse on balance sheet.

Kevin, on your question on Rape Ball, I mean, you know, our, again, our pipeline.

Our current pipeline puts us in a really unique position, I think, to be able to lean in, but...

The discipline of ensuring that we can move efficiently where we're pricing our risk is really sort of in grain in the business and certainly were never. The discipline of ensuring that we can move efficiently

I don't want to put ourselves in a position to be a four-seller, but I think the discipline of turning the portfolio, turning the capital and being able to recycle the position. I'm turning the capital and being able to recycle the position.

has put us in the position we are today, and that's a discipline I'd expect us to continue.

Great. Thank you. Thank you for taking my question.

Thank you. Thank you for taking my question.

Our next question comes from the line of Trevor Cranston with GMP Securities. Please proceed with your question.

All right, thanks. Once my questions have been covered, I guess one follow-up to your outlook for the housing market.

When we look at the figure, you guys give this 335 per share discount on the portfolio relative to par.

Can you not talk about when you incorporate the current economic landscape and housing outlaw country models, how much of that discount to what you would expect to realize and market every day and if the expected life of all those who have changed meaningfully over the

I wouldn't say it's changed materially Trevor. I think a lot of that is just again, because of where the book is situated from a seasoning and LTV perspective. We talked about the mid-40s loan to values on average for Jumbo and RPL. In our BPL book, particularly SFR, again, just the tailwinds of double-digit rent growth the last couple years, and then what I mentioned earlier about the fact that a lot of our sponsors are probably in that below market rents with our tenants.

I don't think it's moving materially. I think our outlook obviously is influencing how we think about our guidelines, particularly for BPL stressing the takeout on our bridge loans and looking at leverage.

and then obviously in residential focus on, you know, that team come and the things we always focus on. So I think, no real meaningful move in loss expectations. Again, just based upon, you know, the seasoning of the blocks, but obviously where we see things going forward, as always, it's gonna influence our underwriting guidelines going forward.

Okay, that makes sense. Thank you.

Our next question comes from the line of Eric Hagen with BTIG. Please proceed with your question.

Hey, thanks for squeezing me in here. I'm coming in a little late, so apologies. I think I just have to kill.

The first one is just what are the core sources of liquidity you think you might use as a home base if you will?

on some of the debt that comes due next year. And then secondly, can you remind us how the business purpose loans are serviced?

And whether there's any obligation to repurchase loans from

Securization trust and such.

realization trust and such. Thanks.

Eric, we covered this a little bit. Let me expand on it and see if I address your question on terms of force of liquidity. We ended the quarter with 371 million of unrestricted cash. We ended the quarter with 371 million of unrestricted cash.

And in addition to that, we had another 40 million of loans which we've spent today on stage and hadn't been financed over quarter end, so about $412 million of pro forma cash. And then we had another $450 million of unencumbered assets. This was the impetus for a lot of the comments we've had around better financing and optimization. We only have about 1.4 turns of leverage on our investment portfolio in general, and so we see a lot of...

areas of the portfolio that we can more often please finance to create organic capital.

One thing we didn't mention, you know, on this call is that in more normalized markets, we've created a decent amount of organ and capital just from the cash flows of our mortgage banking entities. We have about $2.7 billion of unused warehouse capacity to fund incremental growth from here. And one thing that we don't put in our financials, but something that has been a really nice tailwind for us, we have about $2.7 billion in cash flows.

500 millionish capacity on our RTL facilities that are revolving, that just given the amount of payout paydowns that we see on those assets, is a nice natural.

source of liquidity for us to continue to finance that business and given the way to average cost of debt on those facilities is a nice tailwind given where we have two bonds today.

And Dash, I'll let you comment on the second question. Sure, for servicing, Eric, we...

We farm payment collections, basic collections, third parties do on our behalf. We have a full asset management team within Corvettes that's very actively involved. We have a full asset management team within and we have a full asset management team within Corvettes that's very actively involved. We have a full asset management team within Corvettes that's very actively involved. We have a full asset management team within

particularly on the bridge book, when an SFR loan gets securitized into a REMIC, there are certain rules of the road around loss made efforts. So I would say actually, and we put this out, but CoreVest actually procured a rating from DBRS Morningstar recently to be a special servicer on potentially go-for-it transactions. So that's a very exciting development for us. It can bring some of that work in-house, recapture some economics, and then Secretaries have like the last-gen and the consumer side of it. That does require exposure to get endorsement.

allow us to be not much more incrementally involved on the SFR side, but always very actively involved in bridges. I think you know, and then...

On the securitizations, there's no obligation to necessarily repurchase. Obviously, this is setting aside the standard rep and warrant construct of any securitization. But there are triggers which we're currently well below, above which if we don't buy out loans, delinquent loans, the deal does go into amortization. But we're well below those at this point.

That's typically how those work.

typically how those work.

I'm going to say if I may give a shout out to our asset management team. Our, you know, the 1690 day delinquencies on our capital book in general fare really well to the market. And we've seen even with the nice numbers that we posted for quarter and we've seen about a 25% reduction subsequent quarter and in our 60 day delinquency book on the term side and had a nice quarter in terms of positive resolutions in our very small ARIA book. So.

That continues to be a nice competitive differentiator for us, and the credit quality of that underlying portfolio remains very strong.

continues to be a nice competitive differentiator for us and the credit quality of that underline portfolio remains very strong. Thanks for subscribing and

Thanks Eric.

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