Q3 2022 Redwood Trust Inc Earnings Call
Good afternoon, and welcome to debate with Trust, Inc. Third quarter 2022 financial results conference call.
The conference is being recorded I will now.
Switching to cool as actually Kaitlyn Mauritz, great food Senior Vice President of Investor Relations. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today for Redwood third quarter 2022 earnings Conference call with me on today's call are Chris you've heard about that Chief Executive Officer Dash Robinson, <unk>, President and Brookfield, Chief Financial Officer before we begin I want remind you that certain statements made during management's presentation.
With respect to future financial performance May constitute forward looking statements.
Forward looking statements are based on current expectations forecasts and assumptions and involve risks and uncertainties that could cause actual results to differ materially.
Thank you to read the company's annual report on Form 10-K.
A description of some of the factors that could have a material impact on the company's performance and cause actual results to differ.
It may be expressed in forward looking statements on.
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.
One is prepared in accordance with GAAP.
A reconciliation between GAAP and non-GAAP financial measures are provided in our third quarter Redwood review, which is also available on our website.
Dot com.
Also note that the content of today's conference call contains time sensitive information that is only accurate as of today and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today.
Now I will turn the call over to Chris for opening remarks.
Thanks, Kate and welcome everyone to Redwoods third quarter 2022 earnings call.
Before I hand, it over to dash and broke to discuss our operating results and financial performance I want to begin by framing the quarter in light of the broader market conditions, we've been facing.
I'll also comment on how we plan to navigate the myriad challenges facing the mortgage market.
But before we proceed let me first summarize our headline results.
Redwoods GAAP book value declined to $10 18 per share at September 30th.
Five 6% declined from $10 78 per share at June 30th.
As was the case in the prior quarter Mark to market adjustments of negative <unk> 50 per share on our investment portfolio with a primary driver of our 44 cents per share GAAP loss for the quarter.
As many of you know market swings like we've seen recently create volatility in our quarterly GAAP earnings due to the accounting elections, we apply.
That said the credit backing of our investment portfolio and its associated cash flows remained rock solid during the quarter and we remain confident in our ability to recover a mark to market declines in future quarters.
As it means the Isolator operating performance from these short term fluctuations in market prices, we have reintroduced a non-GAAP metric this quarter earnings available for distribution.
For the third quarter earnings available for distribution was <unk> 16 per share.
This compares to a loss of 11 cents per share in the second quarter when applying this metric.
We also declared and paid a <unk> 23 per share common stock dividend, which is unchanged from the previous quarter.
As you might suspect brookwood much more to say about our quarterly financial results in her prepared remarks.
What markets need to normalize for operating businesses returned to their optimal levels of performance, both our residential and business purpose mortgage banking platforms rebounded from the second quarter and successfully navigated the markets to near breakeven levels. As we continued to leverage our deep network of whole loan buyers and our securitization capabilities.
Distribute loans.
I say this in the context of a market where distress and significant realized losses are now testing both the viability of many residential originators as well as the book value perseverance, many mortgage investors, particularly those more exposed to a volatile and inverted yield curve.
Our credit focused investment portfolio, while impacted by Mark to market volatility continued to demonstrate the fundamental strength and relative outperformance consistent with our long term thesis, we had when constructing the portfolio.
All told while today's market remains humbling for all participants our results reflect a degree of resilience that is manifested in the solid book value performance relative to the broader mortgage sector as.
As the market is absorbing the spring cycle condition subsequent to quarter end have remained challenging and we estimate our book value at October 26 to be down roughly 3% to 4% since quarter end.
With more volatility expected as the fed works to combat inflation, our emphasis on robust liquidity strong investment cash flows and conservative market positioning of mortgage banking will likely carry through into the first quarter of 2023.
Regarding our liquidity as a reminder, we ended the third quarter with 297 million of unrestricted cash on hand, which represents roughly three times, our view of potential risk capital needs based on the liquidity of our assets and how they are financed.
Our debt has been enhanced dramatically in recent years with approximately 90% of our investment portfolio debt stack being non marginal <unk> nonrecourse at September 30th.
We continue to see very healthy bank demand to finance, our products and maintain sufficient excess capacity to grow and scale our business with approximately $3 8 billion of available capacity through existing warehouse lines at September 30th.
Okay.
Preserving operating flexibility also requires the ongoing rationalization of our cost structure something we've been focused on in addition to maintaining lower overall loan inventory balances and more nimble loan distribution strategies risk.
We're especially conservative with respect to the consumer residential mortgage sector as industry volumes continued to be affected by rapidly accelerated mortgage rates.
This along with record home price appreciation in recent years has pushed home purchase affordability to new lows and home refinance incentives even lower.
Just this week, the MBA announced their mortgage applications had decreased to the lowest level in 25 years.
Meanwhile, the largest buyer of mortgage backed securities. The Federal reserve is fully exited the market well money center banks and overseas sovereign investors have also pulled back significantly.
This has resulted in very low market liquidity and for securitization issuer, such as ourselves formidable risks associated with aggregating large volumes of loans for future deals.
Given this dynamic and our conservative outlook for volumes, we've continued to reduce our capital allocation to residential mortgage banking.
Which is down almost 60% since the beginning of the year.
By design, we have tremendous uses for the freed up capital, however, including compelling investment opportunities in residential credit made possible by the market downturn.
That one's the diverse nature of our businesses, particularly our ability to act as either a securitization issuer or an investor as market forces dictate remains a key competitive advantage for redwood.
As we head into the fourth quarter.
The fundamental story underlying our balance sheet remains very strong and our investment portfolio continues to generate durable cash flows through a return profile that does not overly levered to the shape of the yield curve.
I'd like to illustrate this by focusing on our $1 2 billion securities portfolio, which looks quite a bit different than more typical portfolios investors have become accustomed to seeing in our sector.
And our portfolio mortgage backed securities are not held a net premiums as is often the case for mortgage rates nor are they held at record high multiples as we've seen recently from mortgage servicing rights.
To the contrary our securities portfolio was held at an aggregate $458 million discount to principal value or just over $4 per share at September 30th.
This translated to a weighted average holding price of approximately 69 cents on the dollar on our balance sheet.
Why does this matter.
For starters. It means were entitled to 100 cents on the dollar for assets, we currently own at 69 cents.
It also means the underlying loans can absorb significant credit losses before we lose any of our capital depend.
Depending on your perspective this either represents significant downside protection to our current book value or significant upside potential to our future book value based on your outlook for the economy.
But in these unique times, there's actually more to the story than that.
In the aggregate the loans backing our securities portfolio. The true engine behind our earnings upside potential had an estimated current LTV of 50 at September 30th as a result of significant portfolio seasoning and record home price appreciation that we've experienced over the past few years.
That implies at an average borrower can now withstand an extreme decline in home price decline well in excess of what we typically saw during the great financial crisis and would also need to stop making monthly payments before any of our principal on the underlying mortgage was at risk.
Usually the story within there and it would be a very good one when we think about the inherent fundamental strength of our securities portfolio and by extension our book value.
But it's hard not to also acknowledge that our common stock has been trading Europe's largest discount to book value since the great financial crisis.
This is due to in an environment, where macro views and the path of interest rates and assumed distress have overwhelmed the fundamental narrative across our sector.
After 28 years as a public company, we've seen this before and we've amassed empirical and operational data to help us make sense of such rare divergences.
And our analysis shows a compelling opportunity to invest in our own publicly traded shares as.
As well as our convertible debt outstanding.
We've already expressed this view by repurchasing close to $60 million of common stock over the last five months, but we anticipate doing much more in the near to medium term have ample capital to do so.
I'll now hand, the call over to Dash Robinson Redwoods President to further discuss our operating results.
Thanks, Chris while macro themes from the first half of the year remain key drivers of overall market activity in the third quarter.
Performance across our businesses and investment portfolio was a testament to our long term positioning and our ability to successfully navigate this extended period of market volatility.
The abrupt move higher in rates has impacted all corners of the financial markets and its perhaps now felt most acutely in residential mortgage volumes with some industry estimates pegging overall year over year activity down 50% or more.
Our residential business remain conservatively positioned in the third quarter marketing $461 million of jumbo loans, while distributing $612 million of Loews altra sales to eight discrete whole loan buyers.
Importantly profitability on these third quarter sales was in line with our historical target gain on sale range. As a reminder, our most recent sequoia securitization that was executed in January of this year and in 2022 overall, we have now sold $3 7 billion of loans and continued attractive securitization market notwithstanding the challenges that Chris referenced.
Yes.
At September 30, our net undistributed loan inventory was $712 million down 5% from the end of Q2.
We have continued to incrementally reduce our inventory thus far in Q4 the.
The relatively high average coupon of our inventory has allowed us to create investment profiles that whole loan buyers find attractive.
This active pipeline management allowed us to reduce our capital allocation to residential mortgage banking to a $150 million freeing up valuable investment capacity as Chris mentioned earlier.
Given the continued slowdown in capital markets activity, we believe that many market participants are grappling with large inventories of lower coupon loans and we are also seeing certain large depository has meaningfully reduced risk appetite for non agency loans, especially through their correspondent channels.
Additionally, FHFA announcement earlier this week to reduce fees for certain mission driven loans ultimately represents a tailwind for private capital as markets normalize.
Given the expectation that G fees will rise for other parts of the GSE footprint within which issuers like ourselves have historically been competitive and.
In combination these may represent important competitive tailwind for us when the market begins to turn as are hallmarks of speed and reliability are more critical now than ever.
Turning to the business purpose lending our team made important strategic progress in the third quarter from several key distribution wins as well as significantly advancing the integration related to the Riverbend acquisition, which closed at the beginning of the third quarter the.
The revenue diversification from our BPL business continues to play out amidst the new interest rate and policy regime.
As affordability remains challenged there is continued demand for rentals driving low vacancy rates and healthy cash flows on our loans borrower demand during the quarter continued to skew heavily towards bridge loans, even on stabilized portfolios of homes.
As many sponsors were reticent to lock in higher rates for more than two to three years all in corvette funded $570 million of new loans during the quarter over 80% of which were floating rate bridge loans.
Over quarter decrease in production was in step with our estimates for overall industry volumes.
And for US was largely driven by reduced <unk> volumes as sponsors grappled with higher rates fridge originations were down only 16% versus Q2.
We were successful during the third quarter and distributing BPL loans through both securitization and whole loan sales our team completed a $274 million private FSFR securitization with a large global institutional buyer at the end of the quarter and we sold $85 million of loans, including <unk> loans to an existing institutional buyer and single App.
That bridge loans produced by riverbed into a handful of whole lot partners.
As expected market dynamics are causing overall borrower demand to evolve with many housing investors, taking a more cautious approach due to higher financing costs and uncertainty about the near term path of home prices.
While the fourth quarter has historically been a very busy one for BPL originations with sponsors often seeking to complete transactions by year end.
We would expect the recent slowdown in lending activity to continue in some capacity as transaction flow ebbs and borrowers not facing near term maturities wait for more favorable conditions.
That said there remain opportunities to write loans that compelling risk adjusted returns, including lower leverage refinancings of bridge loans into <unk> loans and loans to support construction of single family homes for rent and market is still seeing meaningful supply shortfalls in quality rental housing stock. Additionally.
Additionally, as is the case in the consumer residential space constrained market liquidity has had a meaningful impact on many smaller BPL originators presenting us with an opportunity to prudently gained market share as others continue to pull back.
Growth in home prices and rents the past several years represent important tailwind for our BPL borrowers and currently leave ample headroom to refinance maturing debt, but the reality of higher borrowing rates as leaving many sponsors with less excess cash on hand post refinance creating opportunity for us to think creatively about complementary product offerings that may.
Offer a compelling risk reward for future capital deployment for lenders like ourselves with the requisite structuring expertise and capital flexibility.
Turning to our investment portfolio credit fundamentals remained strong during the third quarter as evidenced by continued durability of cash flows and low overall delinquencies at.
At quarter end borrowers 90 days or more delinquent represented 2% across our organically created residential BPL investments.
Book that comprises approximately 70% of our total portfolio and includes $13 billion of loans across our Sequoia and corvette securitization shelves and unsecured ties bridge portfolio.
This compares to two 4% at the end of the second quarter reflective of continued accretive work by our asset management team on loan resolutions.
As we have mentioned before a significant portion of our investment portfolio is underpinned by loans with at least five years of seasoning, providing them with important cushion as home prices and rent growth trends begin to abate from their recent peaks.
Like we saw in the second quarter, However, valuations continue to decouple from fundamentals.
Fred widening, particularly later in the third quarter was the dominant factor in the financial performance of the portfolio, resulting in further noncash unrealized fair value marks.
Overall, we deployed $235 million of capital during the third quarter largely split between organic BPL investments third party investments and the completion of the Riverbend acquisition. In addition to the share repurchases that Chris referenced.
With observed delinquency rates on our books still very low we remain focused on drivers of potential future borrower stress, including ongoing debt service and refinance risk.
Our BPL bridge portfolio remains an area of strategic focus given borrower preference for shorter term debt with more prepayment flexibility.
<unk> loans now represent 27% of capital into our investment portfolio and delivered a cash on cash return during the third quarter of approximately 18%.
Over 95% of our bridge portfolio is directly originated by <unk> per our proprietary underwriting guidelines, which are consistently reassess and have become more conservative in light of the overall lending environment.
Average loan to cost on our 2022 bridge portfolio is approximately 78% with an average as stabilized loan to value of approximately 65%.
Over 90% of our bridge lending supports a sponsor strategy of acquiring and stabilizing single or multifamily real estate, rather than traditional shorter term rehab and sales strategies.
This has an important impact on the profile of our portfolio. The distribution of maturities is relatively smooth over the next 24 months with only 35%, having a contractual maturity within the next year.
Additionally, a substantial portion of the book is structured as lines of credit where we benefit from the structural benefit of writing one loan backed by a broader portfolio of homes.
As Chris mentioned, we will continue to deploy capital strategically knowing that while we are seeing many compelling opportunities, including within our own capital structure investing in these markets requires an important discipline and balance as such we expect to maintain a defensive posture until the market finds a firmer footing.
And with that I'll turn the call over to Brook, Carrillo Redwoods, Chief Financial Officer to cover our financial results in more detail.
Thank you Jos as Chris mentioned, our GAAP book value was $10 and 18 pence per share.
Or five 6% lower than $10 78 per share at the end of the second quarter.
That decline was driven by negative 57, primarily unrealized fair value changes on our income.
Our dividend up 23%, partially offset by 7% per share and other comprehensive income and its Bob.
$24 million of share repurchases in the quarter.
Consistent with evolving industry practices that we have.
We introduced a non-GAAP measure we provide the market insight into our run rate operating and investing Martin called earnings available for distribution.
<unk>, which was 16 cents per share in the third quarter as compared to negative <unk> 11 per share in Q2.
Adjusted GAAP net income for realized and unrealized gains and losses the change in basis of our investments as well as certain periodic expense side that.
We believe this measure will aid our stakeholders valuation of our long term performance and our relative performance given it is a more consistent measure across peer and GAAP net income.
Earnings available for distribution should not be considered an indication of our taxable income.
Required to be distributed by the IRS.
Alright. Good review provides a reconciliation of EAP.
The key drivers of our results relative to the second quarter were higher economic net interest income from our investment portfolio, which benefited from higher asset yields.
Rate of deployment and improved mortgage banking results. These improvements were partially offset by a long term interest expense.
Full quarter impact of our June convertible debt issuance.
Our mortgage banking platform has rebounded significantly from the second quarter EPS.
PPL mortgage banking activities saw a $26 million increase versus Q2.
Brent stabilized <unk> and positive underlying credit trends.
Income from residential mortgage banking activities was $20 million higher as margins recovered unimpaired distribution execution, but overall profitability remained impacted by lower volume.
As previously mentioned investments fair value changes continue to have a measurable impact on GAAP, earning and were negative 58 million compared to negative 88 million in the second quarter.
Further credit spread widening during the quarter and several of our investment classes.
And within our re performing loans and securities portfolio.
These fair value changes largely reflected unrealized mark to market losses, while fundamental credit performance, including delinquencies and Ltvs remained stable across our portfolio.
Negative fair value changes were partially offset by fair value increase that.
Our interest rate hedges, MSR and floating rate bridge loans, which benefited from rising interest rates.
On July 1st to be clear.
Previously announced acquisition of <unk> for an initial cash purchase price of $44 million based.
Based on our purchase price allocation, we recorded $37 million of new goodwill and intangible.
General and administrative expenses or G&A and create from the second quarter, primarily related to employee severance and related transition expenses, which are excluded from EIB.
Additionally, G&A included transaction expenses from Riverbend and the operating expenses associated with the addition of the platform.
Other expenses increased slightly from the acquisition related intangible amortization expense.
Both our continued focus on cost management initiatives and the alignment of our compensation structure with shareholder have resulted in an approximate 20% reduction of operating expenses year to date versus the comparable period in 2021.
We expect run rate operating expenses declined another 5% to 10% from year to date annualized level as we head into 2023.
To further address our go forward cost structure as our outlook for 2023 continues to take shape.
During the third quarter, we prioritize liquidity and deepened our financing options.
Leverage at quarter end was two six times essentially flat to June 30th as lower debt balances and our operating businesses were slightly offset by lower tangible equity due to portfolio fair value changes in share buyback.
The level of recourse debt in the investment portfolio remains relatively low under one time.
Creates opportunities to generate an additional $75 million to $100 million of capital by optimizing existing financing. We also estimate that we can generate an incremental $250 million of liquidity.
In excess of our current $297 million of cash by Encumbering, our financing currently unlevered asset.
We believe this is more than sufficient.
To cover both opportunistic capital deployment and upcoming corporate debt maturities.
So far in 2022, we have renewed extended or established $5 5 billion of line across 14 facility. In Q3, we successfully increased our extended warehouse lines with new and existing the domestic depository, representing 300 million of capacity for the residential mortgage banking business.
We added a new 500 million dollar warehouse line for our business purpose mortgage banking operation and completed a facility upsides.
We have maintained nearly 90% of our total investment portfolio debt and non margin about a nonrecourse financing, which aided our liquidity during a volatile market, resulting in a net return of cash to redwood.
Total margin activity on the quarter as the benefit from hedging activities outweighed additional margin to our financing counterparties.
The borrowing costs have gone up but the portfolio remains well matched in terms of the assets relative to that with a floating rate coupon payment.
Operator, we can open up the lines for any questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad.
All information tone will indicate your line is in the question queue you.
You May press Star and then two I would like to turn this question from the queue.
For participants using speaker equipment, it might be necessary to pickup your handset before pressing the star keys.
One moment, please while we poll for questions.
Yeah.
Okay.
Okay.
Our first question is from Doug Harter of Credit Suisse. Please go ahead.
Thanks.
You mentioned you're looking to.
Be a little bit more active in deploying into your own capital structure can you just talk about.
You know that the attractiveness of common versus kind.
Kind of handling the upcoming convert maturity early and kind of how you're weighing the various parts of the capital structure.
Sure Doug This is Chris.
We.
At this point feel very good about our.
Our capital position across the board.
We're aware of the August 2023.
Convert maturity, but.
But when we look at our capital both both in place today as well as what can be freed up or optimize within the book. We think we have ample room to do a significant amount kind of both on the stock and debt. If we choose obviously the dynamic is constantly changing.
Remiss not to say you know as I mentioned in the opening remarks that the common is trading at.
A discount that we rarely see we've.
We've seen it only a few times over the course of the Companys history, So that definitely has our attention.
As well as being opportunistic across the businesses.
It's difficult.
Difficult in mortgage banking today, but there is somewhat of an inverse relationship between issuing an investing which means it's a great time to be an investor. So we're definitely opportunistic as far as.
Investing in our business as well as investing in third party assets.
And Brook, you mentioned the ability to kind of.
Additional financing from from the portfolio is.
Is that something that you guys are actively looking.
Actively working on today or would you kind of weight Oh or are you waiting until you actually need. It you know just how to think about.
That type of liquidity source.
It's a good question I think the answer is a bit of both.
I think we have we ended the quarter with $300 million of cash on hand, and so.
Given the rising cost of capital we're not in a hurry.
To raise all of that $300 million of potential capital that we cited in our prepared remarks and at once if you want to make sure we're accretively deploying it.
But there are tangible near term opportunities that we see far better.
On the financing that we mentioned the 75 million, that's kind of more optimally financing some of our or assets that have.
Our financing in place that are delivered over time, and so theyre much lower effective advance rate and we should get out there from other financing Counterparties and then also from financing currently unlevered assets at attractive rates. So it's a bit of both.
You likely won't see yesterday on one quarter.
Understood. Thank you.
The next question is from Jay Mccanless of platelet Securities. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. The first one I had.
The SG&A went up from <unk> to <unk>, because the riverbend acquisition, but I guess, how much of that increase was one time and what should we expect for that line going forward.
It's a good question. So as you mentioned G&A was up $8 million about $2 five mm.
<unk> million dollars was from the addition of riverbend into our platform and then we had another $5 million of transaction expenses that were one time in and excluded from our earnings available for distribution.
We had a few other onetime items that were associated with expense streamlining of $4 million. So that will continue to be a one time item and then there was another and adjustment relative to last quarter for a one time benefit relative to a payroll tax so.
And I.
I think in terms of run rate going forward.
And we had.
And I would say about 6 million of one time expenses that were nonrecurring.
And.
A couple of comments in my prepared remarks around run rate expenses going forward, but.
If you take the 5% to 10% of the expense cuts that I cited.
Our run rate has been thus far that's about it.
$160 million and a total opex run rate Fad.
Okay, great. Thank you for that.
And then next question I had I guess any commentary post quarter about delinquencies in any of the bridge portfolio or the <unk>.
And what I guess is the appetite.
You guys talked about.
<unk> comments about the appetite being maybe a little more hesitant, but just any any color you can give us around delinquencies there or do you think the marks might get worse on some of those assets.
Hey, Jay it's dash.
No delinquencies have.
Still.
In that 2% range across the that part of the book.
Across the residential and BPL organic investments like we talked about.
That piece of the story for US I think has been a really good one and we're obviously like I said in my prepared remarks very focused on.
Maintaining the durability of the cash flows so.
To your point on Mark to market like we said there from our perspective theres been a decoupling of mark to market and fundamentals, which continued into Q3. So it's hard to comment necessarily on the mark to market part of the book, but from a cash flow durability perspective.
We continue to feel really really good they're a great loans to do in <unk>.
<unk> right now.
We think we've got obviously the great competitive footprint, we're in an environment, where other lenders are clearly stepping back in.
We continue to have really strong conviction about our borrowing base on our products. It starts with it starts with the strength of the sponsor.
And then it goes into how we size the loans, we've always been appropriately conservative in terms of how we think about stressing interest rates and the take out on a bridge loans and that continues to serve us very well and our bridge loans in general are.
A little bit different than a lot of the traditional sort of smaller balance quote unquote fix and flip loans that a lot of other lenders deal, we certainly do some of that but.
Most of our loans are to larger sponsors.
And allow us to get back to the table with them a lot throughout the life of alone there.
We're very well reserved for interest coverage.
There's ongoing covenants around leasing cash flow coverage et cetera, So those things give us not only high confidence when we size of those loans.
But also the opportunity to make sure we're very high touch with those borrowers throughout the life of their projected that.
It's proven a tailwind to performance to date, we expect it to be going forward.
Great and then just one other housekeeping thing when you were talking about the bridge portfolio.
You gave a couple of stats and I couldn't write them down fast enough. I think you said it was 78% loan to cost and then I missed the LTV stat on that.
It's about 65.
Okay. Thanks for taking my questions I appreciate it.
Thank you.
Our next question is from Eric Hagen of <unk>. Please go ahead.
Hi, Good afternoon Hope you guys are doing all right going back to the liquidity here just a second can you describe what's included in the unencumbered asset pool.
Sure.
Our mix of our assets that are levered today.
Things like our <unk>.
Quitting improvement option.
Some of our subordinate securities. It's a mix of things that are in our third party and organic securities that we own.
Allergy.
Turkey is unlevered.
Okay got it thank you.
And then on the sales of the BPL loans in the quarter can you talk about the execution that you got there and what the gain on sale look like there and you also say with your unfunded commitments in the BPL portfolio.
At the end of September .
Yes for the execution.
The loans, we sold were largely single asset bridge loans.
We're keeping a net strip of anywhere between 25% to 75 basis points. It maybe average was about 50 or 60 on the quarter.
The average unfunded commitment.
Is just under $1 billion, which we expect to sort of play out over the next couple of years. The vast majority of that is in longer term build for rent.
Projects that we expect to fund over the next sort of six to eight quarters.
So just to provide some context, but that's the current number.
Thank you guys.
Our next question is from Steve Delaney of JMP Securities. Please go ahead.
Thank you.
First applaud that E D decision I think it's a very timely.
And the district, it's very similar to the distributable EPS measure that the SEC mandated for the commercial mortgage REIT and Thats been widely accepted by investors. So hopefully you don't get any pushback.
You'll find a lot of support with the analyst on that.
Also bridge loans the topic Tonight.
Youre funding has held up well.
Funded.
Matthew funded 470, and only sold $48 million.
To me that suggests that you're you're thinking about doing another securitization you did one in the second quarter for $250 million is are.
How are you.
Is the difference between the origination volume and the the whole loan sales of $48 million.
Right.
Indicate is that accurate that you hope to hold those and be able to securitize them as a permanent investment on your books, rather than sell them selling them off thanks.
We certainly have the flexibility to do that and we did as part of the $5 70 as single family rental.
Overall that we did and we did it like I said in my remarks of $275 million FSFR securitization as well in Q2, which was great.
Q3, excuse me, which is.
Which was very accretive we have the optionality to do either one Steve I think our intention.
As to probably do a mix of whole loan sales and we are comfortable with the gain on sale.
A good chunk of the bridge book is already financed nonrecourse and non mark to market.
About $550 million of Boe.
Bonds out there through two Securitizations, we have another facility bilaterally, which is nonrecourse and non mark to market them.
Cumulatively that capacity is over $1 billion.
Which is obviously very valuable so we do have the ability to sort of keep those outside of a traditional securitization contacts and feel very good about the returns in the.
The match funding and the lack of contingent liquidity risk given how those deals are structured but we're always exploring a bunch of different avenues, we could look at it broadly distributed deal.
There was great interest in and the loans that we make certainly because of where the return profiles are in no small part because of their floating rate, obviously sofer's higher so it'll be it'll be a mix of things, but I do want to underscore that the current financing apparatus is we have are are compelling as is so we don't feel like our hand would be forced.
Got it thanks.
Cash on that.
The BPL whole loans I mean, obviously when you were back in the days when you were selling prime jumbo loans to banks had a pretty good bid there when you look at BPL whole loan sales.
Is the buyer there a private fund private debt fund or.
I know, obviously, you don't want to be specific but what's the nature of the end buyer and investor in that product.
It's a great question.
Probably a mix of certain insurance vehicles.
Companies that have an appetite and sort of an expertise.
To deploy into the space.
It's certainly traditional funds money managers.
The securitization we did in Q3 was placed with one investors would have a very large global institutional investor with a few different sleeves of capital and so I think one big upside to continuing to grow the BPL business has just continued whole loan buyer education, I think theres a relatively.
The whole loan market for BPL, it's not as efficient as jumbo is when markets are more orderly than they are today and so that's a.
That's a huge upside for us it's traditionally not the banks, which is as you know Steve part of the reason we love the business. It's just sure.
Got efficiently no there is no cheap money coming into.
That particular sector like the banks normally flood.
That's right.
Well lastly, the reallocation of capital away from the origination building rather than trying to Bang your head against the post to make that happen on a volume basis I'd I applaud that and you have proven you can be an opportunity opportunistic investor over the years and I know theres strong relationships that allow you to make that happen. So.
All the best for the fourth quarter in closing out the year. Thank you.
Thanks, Steve.
Our next question is from Bose George of <unk>. Please go ahead.
Hey, everyone. Good afternoon.
Wanted to ask about the funding markets I mean, they sound solid, but just can you talk about any trends there or are you seeing changes in terms of advance rates or the number of lenders inactive in the market et cetera.
Hi, Ben so far it's been very our team I'm into.
And in my prepared remarks that we've rolled about $5 5 billion of lines across 2014 facilities I'll, let domestic bank and we've had a.
A lot of stability in terms of our advance rate.
We are have recently seen a little bit of increases on spread just given everyone's cost of capital has gone up and but as.
And most of the facilities that we use are for our mortgage banking inventory, where we're resetting the coupon five with the market. So.
That's why continuing to see durability from our net interest income in terms of our ability to cushion that impact yeah Bose I'd also add that the collateral quality.
Remains high and.
Collateralized lending business and I think you know there's big differences today.
Versus 10 or 15 years ago. After after the great financial crisis.
Lenders are pretty confident in the collateral and the performance to date, so that keeps it keeps the market's open.
Okay, Great that's helpful. Thanks.
Switching to the thanks for the AAD.
Disclosure.
In terms of the returns from the discounted assets as they run off I assume that isn't captured in EAA day rate is that going to just be like in book value or.
No. We actually are we arent trying to capture the concept of accretion to our teams and based on some investments, but I know our materials just came out here just shortly before the call.
So we do outline in detail what the add backs are.
And we only have a very small portion of our assets that are held for sale licenses are like a $140 million, which are effective yield. So we're trying to capture that.
Principal question of our income by effectively and recapturing some of our effective yields back through income okay.
Okay. Thanks, and then could you just repeat what you said earlier about the goodwill.
From the Riverbend acquisition.
Yes, we have about $37 million of goodwill and intangibles from the Riverbend acquisition.
Our $44 million right.
Okay, great. Thanks, a lot.
Okay.
Thank you. Our next question is from Stephen laws of Raymond James. Please go ahead.
Hi, good afternoon.
A lot's been covered on the BPL side, but one question on kind of pricing and I guess really cross.
You know bridge NSF are but you know how much has not as rates I don't want to say it stabilized, but we don't have this rapid pace of increase or maybe we're getting a month few weeks, how quickly youre able to get pricing reset have we seen that flow through or is there still some catch up.
Across products and or have you been able to kind of maintain or increase your spreads as you think about this cost of financing for the new investments increase though.
Yes.
Much like on the resi side, we refresh our pricing daily I think with with bridge loans you know that.
Definitely has a more sort of loan by loan analysis based on sponsor quality leverage geography, So we always have.
No great Optionality, there is I think Stephen for the fixed rate <unk> loans, we don't actually lock those loans until right before we fund.
That's a little bit of a simpler pipeline management tool than with the traditional jumbo pipeline I'd say, yes, we do have pricing power you know clearly the fact that silver is now at 3% has sort of moved.
The effective floating rate coupon and at the very high single low very low double digits, which is which is appealing.
We'll compete on every loan, but I would say the.
Our overall pricing power is.
Is it a good a good place.
To your point, we do have the ability to be very nimble in terms of how we adjust.
Our prices versus what we're seeing in the market.
Thanks, Chris.
Chris you touched on this a couple of times you mentioned third party Securities I think talking to dog and Steve brought it up as well.
10, 11, 12 years ago, you guys bought a pretty material amount that you've been sold over the following years at some pretty attractive returns, but I think that if.
If I remember correctly, maybe the rest of your capital stack wasn't so cheap so kind of thinking about how you view the relative attractiveness of buying something back in your stock and retiring it versus buying third party securities that you can sell later, maybe recycle that capital back into the say origination business. If it returns at that point.
Yes no.
Great observation, we did we did a lot of this after after the great financial crisis and I.
I would say securities arent aren't quite as cheap as they were back then.
I do think there are probably getting cheaper.
In the consumer <unk> market for instance.
Theres not a lot of.
Securitization getting done right now other than age collateral and sort of been the story for the year.
It's somewhat of a distressed.
Area right now, where if you don't need to be securitizing.
At least certainly in jumbo youre probably not.
So so eventually you know these warehouse lines that are fall. This collateral will come to market. They may not come to market until Q1, but it will end and there should be some extremely compelling opportunities to put capital to work. So I think it's kind of a timing issue for us.
The one thing we have great line of sight in is obviously.
No share repurchases and so that's something that we can effect immediately.
Obviously.
It's going to be a focus of ours, but.
But I do think we're starting to see really good opportunities.
And of course, you know one of the one of the great parts of the BPL business as we can continue to organically create these investments.
When you look at the profiles of the investments we're putting on the books today, they look extremely attractive to me and by controlling the credit in the underwriting.
We feel really good about the quality of the book and certainly.
Across a range of scenarios based on what's going on with economy. So overall I think it's definitely an investor's market and.
Hopefully you see.
Some virtuous combination of both here in the coming quarters.
Thanks, Chris I appreciate that and lastly, just some comments on horizon can you provide maybe an update on your portfolio are there you know in this environment you know any outperformers any underperformers.
You know I'll highlight and then from a new investment standpoint, certainly valuations in the public markets have moved a lot have you seen similar moves in the private market are those valuations catching up.
How does the new pipeline of Horizon's local.
Thanks for the question Stephen.
I would say we've become as you might expect.
Even more judicious around capital deployment and Horizons Horizons has always had a very specific investment thesis around trying to marry.
Durable technology solutions with needs for our business or our markets. So it's always been sort of a rifle shot approach and I would say even more so today obviously given.
Given where the markets are.
The book were generally very very pleased with.
We did on a net basis right up a small amount of the overall horizons investments.
This quarter.
Theres no bellwether like.
Further.
Yeah.
Opportunities for the underlying portfolio companies to raise capital. So in Q3 four of the portfolio companies and Horizons actually did raise incremental capital we participated into one.
One part one led to a small write off in the other other.
Other three where basically non unpriced deals that were basically flat to the prior raises which is great because it allows them more runway without.
The dilution risk of of the prior investors, including ourselves. So I think we've been really pleased with that but look the market is the market overall is challenging obviously these these companies.
Where are largely very early stage of seed round that we're investing in so you don't see the daily price action, obviously like you do with the publics, but it's clearly.
Made its way in.
So more of the top of the funnel I would say in terms of the earlier stage companies.
But you feel like it will it will create more opportunity for us we're still focused on business models, which are.
So more a cyclical and more.
More sort of serving inefficiencies and durable markets, whether its solutions for landlords and tenants blockchain use cases that are more durable through cycles.
Not cyclical to volumes and I think we've been well served by that so far but more to come for sure.
Great I appreciate all the comments this evening.
Yeah.
There are no further questions and does this today concludes today's teleconference. Thank you for joining US you may now disconnect your lines.
Okay.
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Okay.
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