Q4 2022 Redwood Trust Inc Earnings Call

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Speaker 5: Good afternoon and welcome to the Redwood Trust Incorporated 4th quarter 2022 financial results conference call. Today's conference is being recorded. I will now turn the call over to Caitlin Moritz of Investor Relations. Please go ahead, ma'am.

Speaker 6: Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's fourth quarter 2022 earnings conference call. With me on today's call are Christopher Abate, executive officer, Dash Robinson, president, and Brooke Perilla, chief financial officer.

Speaker 7: Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecast and assumptions, and involve risk-man certainties that could cause actual results to differ materially.

Speaker 8: We encourage you to read the company's annual report on Form 10K, which provided 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 forward looking statement.

Speaker 9: On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measure is provided to not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP.

Speaker 10: Our reconciliation between GAP and non- GAAP financial measures have provided our fourth quarter Redwood review, which is also available on our website at redwoodtrust.com.

Speaker 11: As a reminder, the company's financial statement audit to the year ended December 31st, 2022 is not yet complete. And the results we're reporting today are unaudited and may vary from the company's auditous financial results for the year ended December 31st, 2022, presented in our annual report on Form 10K for 2022.

Speaker 12: including due to the completion audit procedures relating to the valuation of our deferred tax assets at December 31, 2022. The company's 2022 Annual Financial Statement Audit is scheduled to conclude on schedule in late February in advance of our full 10K filing.

Speaker 13: Also note that the content of today's conference call contains time-sensitive information that's 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.

Speaker 14: I will now turn the call over to Chris for opening remarks. Thanks, Kate, and thanks to everyone for tuning in this afternoon.

Speaker 15: We're excited to have the opportunity to speak with you today in our fourth quarter results. Now, so update you under performance in the first month or so of 2023.

Speaker 16: We'll also touch on how we reviewed the opportunity in front of us for the remainder of the year.

Speaker 17: As you probably suspect, I'll cover off on the high points and then Dash and Brook will handle our business of financial performance in greater detail.

Speaker 18: The fourth quarter rounded out a year that brought about sudden change to the mortgage markets.

Speaker 19: In a manner that was markedly different than we'd seen through previous downturns and past housing cycles.

Speaker 20: In 2022, the Federal Reserve's efforts to curb inflation led to the most pronounced jump in rates in over 40 years.

Speaker 21: Largely freezing mortgage refinance activity and profoundly affecting consumer behavior in the housing market.

Speaker 22: Significant increases in rates, severe spread widening, and ongoing bouts of volatility characterize much of the second half of the year.

Speaker 23: While a result during this period certainly didn't meet our expectations, we focused on improving and protecting our book value, managing risks and positioning our company for the past all."

Speaker 24: As we all know, long-term focal points such as these are sometimes only fully appreciated in hindsight.

Speaker 25: It was such a challenging year now behind us. He resolved to break the Huddle on the early January and quickly build momentum towards our 2023 priorities. That's exactly what we've done, realizing a welcome uptick of activity and a few accomplishments worth noting that have helped to improve our Gatbook value thus far in 2023.

Speaker 26: Already this year we've completed a Fertz. offering reopening a segment of the market that it seemed little activity last year while expanding our balance sheet to an alternative source of capital.

Speaker 27: Next up, we completed a sale of $213 million in business purpose lending, or BPL loans, to a top institutional partner at Accretive Terms for both firms.

Speaker 28: The sale of this pool of loans was about whether or not it was for us. We created four of a minimum for the platform that has positively impacted our new loan pricing and reaffirmed our VPL business potential to build from last year's record volumes.

Speaker 29: In tandem with our BPL loan sale, in late January our residential team completed our first Sequoia securitization in over a year.

Speaker 30: Once again, this deal helped reset the market and has now influenced a significant expansion of the RMBF's issuance calendar by other sponsors. A good fact for all market participants.

Speaker 31: Investor demand for our securitization was the strongest we'd seen for any private label deal in over a year, and it allowed us to increase bond prices and boost our gap gain on sale.

Speaker 32: Through these actions, as well as other optimizations across our balance sheet, we grew our unrestricted cast position to just over 400 million at February 7th.

This robust liquidity puts us in a strong position when considering our future debt maturities will allow us to proceed opportunistically in our markets, including through M&A and other creative investments.

Accompanying this boost in available capital has been a significant reduction in our go-forward operating expenses.

As Brooke will touch on, the primary focus here has been to reduce costs that can flex with loan volumes. As Brooke will touch on, the primary focus here has been to reduce costs that can flex

We've been very strategic in this regard, managing costs while preserving full optionality to take advantage of market conditions as opportunities arise.

As we think about capital allocation going forward, we expect consumer mortgage volumes to remain challenged as the majority of homeowners are not financially incentivized to refinance their existing home or move to a new one with the prospect of assuming a much higher mortgage

In response, we have reduced working capital allocated to a residential mortgage banking business by about 70% throughout 2022.

We acknowledge that January brought about some much needed stability to the market, which is partially due to a modest decline in mortgage rates.

It's simply too early to tell, however, if this is the start of a trend or simply pent up demand following a slow port quarter.

In the meantime, strategic focus of ours remains tending to our seller base and ensuring we have products that meet their needs as the market evolves.

This includes refinement of our expanded prime products, as well as investor products that cater to consumers who own second homes or are looking to finance a single rental property.

Despite our belief that consumer mortgage volumes will remain under pressure in the near term, there remains heightened demand for BPL products in a sector that is very much still in growth mode. BPL borrowers, unlike consumers, aren't locked into low 30-year rates and are therefore not content to sit on the sideline.

They are transaction oriented, executing on business plans, and require liquidity from our loan products to fuel growth.

With demand for rentals still elevated, we continue to see investors actively seeking the range of solutions we offer.

The rental market has been tasked with providing more alternatives for households, including multi-family, bill for rents, and workforce housing.

Our focus remains on originating BPL loans secured by assets with strong fundamentals and quality sponsors. That's why we remain particularly bullish on our BPL business, even with base for the prospect of a potential recession in 2023.

Perhaps the overall positive market sentiment to start the year matters most with respect to our investment portfolio as it remains a primary driver of our book value.

While the fourth quarter mirrored much of 2022, with further credit spread widening, thus far in 2023 the story has been different.

Market prices for securities have begun to firm up, reflecting lower mortgage rates, increased housing market activity, and positive deal flow and currentization markets.

I'd like to continue emphasizing that the vast majority of market and market declines we incurred on the portfolio in 2022 remain largely detached from the underlying cash lows. The book continuing to display strong credit fundamentals and low overall delinquencies.

With a weighted average year-end carrying value of 62 cents to principal face value and a projected forward loss adjusted yield of 15%, our investment portfolio had approximately $500 million or $4.33 per share of net discount at year-end that we have the potential to realize through earnings over time.

While the path of home prices and its impact on mortgage credit remains the critical question for 2023, we believe our portfolio construction with many seasoned assets and significant HPA realized to date makes it resilient to a wide range of downturn scenarios for the economy.

With our strong cash position, we remain intentional about steering capital and resources towards markets that we believe perform better in this environment and assets we believe to be undervalued, including Redwood's corporate debt and equity.

We repurchased 88 million of our own securities in 2022 and continue to be active in doing so in 2023.

We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our upcoming 2023 convertible bond maturity.

and remain opportunistic and repurchasing elsewhere across our convertible debt stat.

While uncertainty is likely to linger well into 2023, we believe we're in the late endings of its Fed cycle, remain confident in our ability to navigate further challenges for the colors of our diversification, strong balance sheet, and most importantly our people.

Our platform offers a compelling opportunity and a unique access point to invest in a very dynamic housing market. With that, I'll turn the call over to Dash Robinson, Redwoods President.

Thank you, Chris. Following a turbulent 2022, we enter 2023 ready to take advantage of current market dynamics and drive accretive results across our operating businesses and investment portfolio.

I will focus my commentary on the recent performance of these segments and our current outlook in positioning before turning the call over to Brock Current Overview of our financial performance.

Our investment portfolio, which now represents 84% of our allocated capital and remains the key driver of our dividend, continue to deliver strong fundamental performance in the fourth quarter.

Notwithstanding further unrealized for value changes that impacted book value.

Cacheload durability remained robust across the book, an important input into our ability to realize the net discount and carrying value.

Cushflow durability remained robust across the book, an important input into our ability to realize the net discount and carrying value that Chris referenced.

The liquidity rates were stable to improving across the portfolio. For our organically created assets, a book that includes BPL loans and securities.

and retain bonds from our Sequoia shelf. Quarter N90 plus day delinquency rates that at 2% down from 2.1% at the end of Q3.

Elsewhere, delinquency rates on our core re-performing loan positions, what we refer to as SLST,

also improved with 90 plus days delinquencies half a percent lower quarter over quarter.

Even with the recent slowing in HPA and modest home price declines in certain markets, equity continues to build in these underlying loans as borrowers remain consistent in their payments.

In aggregate, we estimate that the loans underlying our security support portfolio have LTVs of approximately 50 percent.

Results have also been favorable in our Home Equity Investment Option Portfolio, or HEI, the majority of which is either securitized or financed through the warehouse line that Brook will touch on.

Life-to-date speeds on our Securitize portfolio have been approximately 20%, and realized returns have been strong, protected in part by an average discount to initial home value of approximately 18%.

This allows the holder of the AGI to withstand meaningful downward pressure and home prices before incurring loss of investment. Notwithstanding fundamental performance, fair values and our investment portfolio were once again impacted by spread widening during the fourth quarter, in sympathy with trends across the market.

As Brooke will describe in more detail, these adjustments continue to be largely unrealized and have begun to reverse meaningful year-to-date.

As Chris Rappin, our portfolio's net discount to face now stands at $4.33 per share, the realization of which comes into clear review of each passing quarter of performance.

We remain active in optimizing our capital deployment during the fourth work, putting approximately $100 million to work across organic and third-party investments, and repurchases of our near-term, critical debt maturities and attractive discounts.

While spreads have stabilized meaningfully here today.

We still see ample opportunity to deploy capital creatively across our operating platforms. Third party securities in our own capital structure.

Our operating platforms have quickly turned the page on 2022 with strategic progress in the early weeks of the year, reversing some of the volatility induced P&L from the fourth quarter.

In business purpose mortgage banking, while broad market headwinds persisted through the end of the year, the team not some key wins that are already paying dividends in 2023, including advancing the riverbend integration.

growing our whole loan distribution capabilities, and adding a new non-recourse borrowing line for bridge loans.

That meaningfully enhanced our overall financing flexibility.

We originated $424 million of BPL loans in the fourth quarter. Down 26% from Q3 but in line with our estimated volume trend for the market overall.

Our production mix for the quarter between BPL bridge and term loans rebalanced compared to other quarters in 2022, as more sponsors opted to lock in long-term fixed rates where possible in lieu of shorter-term floating rate bridge debt.

BPL term production volume was up 36% quarter of over quarter driven by a significant increase in term multifamily funding. The fourth quarter spending surrounded out full-year production volume of $2.8 billion. A record year for the platform that led increased importance to diversifying our distribution channels to position ourselves appropriately for 2023.

We sold $92 million of BPL fridge and tourmalines during the fourth quarter, and over $220 million more in January .

recycling capital for a growing go-forward pipeline across our products.

Distribution and profitability on new BPL term production has been particularly strong as we complement a best-in-class securization platform with a deeper hold on buyer base attracted to the structure and quality of our loans.

Importantly, the overall improvement in sentiment in January carried over to our sponsors.

We're once again leaning in on refinance opportunities or taking advantage of more constructive conditions to put fresh capital to work Either through traditional acquisition channels or newer partnerships emerging as a result of dynamics between the four sale and four rent markets

Our progress in loan distribution has proven well timed and it's both improving sponsored demand and significant uncertainty around funding capacity in certain of our competitors.

Additionally, we continue to optimize financing on our bridge loan portfolio.

Inclusive of a $335 million financing line we completed in December , at year end, 100% of our bridge portfolio continue to be financed on a non-bargable basis.

with 70% of the financing also non-recourse.

We maintain substantial access capacity to support new production and future funding obligations on existing loans.

That was standing more favorable marker conditions and the equity backing of our BPL loans.

Given the overall environment, we continue to expect increased engagement from our asset management team in 2023.

including with bridge loan sponsors seeking to refinance and managing earlier stage delinquencies within the term law, which were modestly at year end.

As we have previously highlighted, our overall origination footprint in 2022 focused largely on sponsors with some sort of real estate stabilization strategy.

Approximately 90% of originations were either bridge loans to sponsors improving and leasing off single and multifamily properties or fixed rate loans on already stabilized loans.

Given our progress in integrating Riverbend in the past six months, we expect to round out that production mix with an increased emphasis on single asset bridge lands.

focused on repeat customers of the Riverbend platform with strong liquidity profiles and track records.

Importantly, capital markets distribution for these types of loans is relatively mature.

And we are well positioned to broaden our whole on-buyer partnerships and begin leveraging existing and creative financing to keep more on balance sheet.

Our residential mortgage banking business maintained its defensive posturing in the fourth quarter, locking $43 million of loans and managing our lowest level of inventory since early to mid 2020.

This was by design as jumbo mortgage rates during the quarter moved off their 7% plus highs down to the 6th. An improvement but not enough to drive purchased money volumes higher in an environment in which refinance demand remains substantially muted.

In improved market conditions in January allowed us to reverse much of the fourth quarter's widening of our residential inventory, which at year end stood around $660 million that currently sits at roughly half that amount after several small hole-on sales and a successful completion of our January sequoia issues.

our first in over a year.

Execution on the securitization was indicative of improved market sentiment with final pricing meaningfully through where the pipeline was carried at your end.

In monitoring market sentiment, we believe we will be able to further distribute the remaining pipeline at favorable levels.

As Chris mentioned, capital and costs allocated to our residential business have been reduced commensurate with recent transaction volumes.

However, we have preserved the optionality to lean back in as conditions warrant to continue serving our cellar base, including through enhanced roll outs of our expanded prime product offerings.

The recent exit of one of the largest players in the correspondent market highlights the durability of our partnerships even after a period of reduced activity. As many of our sellers continue to prioritize capital efficiency and continued right sizing with costs.

They put as much value as ever in our consistent speed and reliability.

I will now turn the call over to Brooke to cover our financial results.

Thank you, Dash. In my comments today, I will provide an overview of our Gap and Non Gap results for the year and quarter and December 31, 2022, and discuss select quarter to date metrics relating to the first quarter of 2023.

We report a gap book value of $9.55 per share, reflecting an economic return on equity of negative 3.9% for the fourth quarter.

The primary drivers of book value were a 40-cent loss in basic earnings per share and our dividend of 23 cents per share. Gap earnings were impacted by negative investment fair value changes of 21 cents per share, which continue to substantially reflect unrealized mark-to-market changes.

For an end available for distribution, with negative 11 cents for sharing the fourth quarter, as compared to 16 cents for sharing the third quarter, driven by a loss of 28 cents for share for mortgage banking due to credit spread widening on both the residential and BPL inventories.

More specifically, our lower marks on our inventories reflected a lack of activity and available distribution channels at year-end, a trend, as noted by Chris, that has reversed thus far in the first quarter.

Overall, gap net interest income decreases from the third quarter due to lower mortgage banking inventory as volumes and average balances declined in the fourth quarter, while our cost of debt increased partially offset by higher average coupon for our bridge loans.

As Dash mentioned, during the fourth quarter we posed a new $150 million dollar borrowing facility for HTI investment which contributed to the increase in interest expense.

Importantly, economic net interest income was nearly $6 million higher than gap, primarily due to higher average balance of economic investments from capital deployment.

Liquidity was solid as of year end and has been building. Unrestricted cash and equivalence increased by $141 million to $400 million from December 31 to February 7.

This is a function of various activities already covered, such as a $70 million preferred stock offering, as well as whole loan sales, securitization, and financing optimization efforts.

As we noted in the review, we also see incremental opportunities to generate over $100 million of liquidity beyond our existing cash position by financing a portion of our $300 million plus of unencumbered assets.

While our total recourse debt balance of 2.9 billion was unchanged quarter to quarter, the decline in tangible equity drove a modest increase in leverage from 2.6 to 2.8

Given the financing and capital market activities we conducted thus far in 2023, our estimated total record leverage ratio fell to 2.2 times at February 7.

This decline in leverage is also attributable to our repurchase of nearly 60 million of convertible debt since the end of the third quarter, contributing both to reduce interest expense and realize gains for our shareholders.

With respect to the term structure of our liabilities, we have $1.8 billion of recourse leverage maturing in 2023. As financing markets remain orderly, we foresee no issues rolling these facilities to normal force.

To further illustrate, during 2022, we renewed or established 18 financing facilities, representing 6 billion of total financing capacity.

In terms of our outlook, we are currently estimating book value to be up 2% through February 7th in both GAAP and EAD earnings to reapproach our dividend level for the first quarter.

We see several factors that support the return to more normalized return levels for the business throughout 2023.

With the mark-to-market changes we've experienced, we are carrying the investment portfolio at a forward yield of approximately 15%.

and credit spreads affirming.

Across both mortgage banking platforms, we have largely cleared the inventory overhang from last year, which further improves our gain on sale and volume outlook.

Furthermore, in business-forbiz lending, we are building on our origination volumes from 2022 and are seeing profitable execution fueled by improved distribution alternative.

Our nimble capital allocation has underscored the diversity of our revenue streams and our ability to optimize the business dynamically based on where the best risk-adjusted returns are in the market.

We have a variable cost-driven model, which has allowed us to reduce operating expenses at the residential mortgage banking segment by 40 percent year over year, reduce capital allocated to the business by 70 percent, yet preserve the optionality of a flagship platform that has historically generated ROE as an excess of 15 percent. Let's go...

Given the changes we've made, even with a smaller opportunity set, maintaining our historical market share in margins are sufficient to generate normalized returns for this business.

And finally, in response to the challenging market conditions we face this year, we have been focused on rationalizing our overall operating footprint.

General Administrators or GNA expenses increased slightly from the third quarter, primarily due to employee severance and related transition expenses.

However, for the full year 2022, GNA expenses were down 20% relative to the prior year. Perform a for expense reduction initiative completed since September 30, we currently expect 2023 run rate GNA expense to be 5 to 10% lower than full year 2022 comparable levels in line with our guidance on last quarter's earnings call.

We expect these changes to our cost structure to lead to improved profitability in 2023. And with that, I will turn the call over to the operator to open the line for Q&A.

Thank you.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. Our first question comes from Stephen Laws with Raymond James. Please state your question.

Hi, thanks. Good afternoon.

I guess first want to touch on the conduit business, remember a year where we've seen it kind of...

move like it did as volatile through the year. As you look forward, what do we need to see to kind of see more stabilized margins there and solid profitability, although obviously on lower volumes and from what you've seen in the first Sequoia deal and some other transactions in the market year to date.

You know, do you feel we've turned the corner there or kind of what you're out looking on margins and margin volatility as we move to 23?

Hi, Steven. It's Chris. Good question. You know, I think for RESI in particular, obviously, it was a really tough year for mortgage banking and volumes, and there's pretty well-known reasons for that. You know, as far as …

turning the corner goes, you know, I think the first thing that we got done this year was a Sequoia deal. We saw a much, much greater demand for the issuance. That was the first deal that we've done in over a year. And I think that as demand returns, you know, in the PLS markets that will create greater confidence, certainly for PLS.

aggregators like ourselves to begin acquiring and leaning in on rate. Now that said, we're still, I think, a ways off in rate as far as where most people would be interested in refining homes versus where current rates stand, north of six.

some cases 7%. So I think we're cautious in declaring victory here in the first quarter as far as things fully stabilizing. But we've built some optionality as Brooks said. We've taken a lot of capital out of the business and one of the great things about Redwood is Has.

We're a 29-year-old business and we've got the ability to shift capital and resources to their highest and best use. So I think when it's not a tremendously great time to be issuing, it's usually a good time to be investing. And so I think we've created a lot of optionality there to be an investor and Rezzy.

And so I think, you know, in 2023, we're going to proceed cautiously. You know, hopefully we can continue issuing. We'd like to issue another scaradization here at some point in the next and the coming months.

But in the meantime, I think we're focusing on broke areas across the business and Dash had a lot of comments on the BPL business earlier on. And I think that, for a lot of reasons, that business is something we're going to focus on the first couple quarters of the year.

Thanks. And we're going to follow up on one of the options on the Rezzi side. You have the home equity investment seen in the deck, you know, new new financing facility put in place in the fourth quarter. You know, can you talk about the opportunities there? Is that an area you view as attractive now or kind of how do you?

you know, forch rank your options for the investment side as far as new capital being deployed.

Yeah, I think it's very exciting. You know, that's a great example of some of the optionality that we've built into the platform. Certainly, if people are not incentivized to move or refinance their homes, they'd like to extract trapped equity within their homes.

Anybody that's bought a home in the last two or three years is sitting on quite a bit of equity by and large And so, you know our HCI Initiative is really meant to to sort of modernize the home equity Process and you know, we'll have a lot more to say about it I think in the coming months, but certainly we see strong demand

Great. Appreciate comments with Seemun Kresson. Thanks. Our next question comes from Rick Shane with JP Morgan. Please state your question. Thanks everybody for taking my question. I'd love to talk a little bit about how to think of the residential mortgage banking income line and the loss in the fourth quarter. I'm assuming that because of the execution

that some of that was marked to market from pipeline from the third quarter and I'm wondering with the Sequoia sale in the first quarter if some of that sort of been reversed. I'm just trying to understand the the locks and the purchases and the fundings and the timing of everything.

Sure, Rick and Stache, I can take that. You're right, it was largely the Resi Mortgage Banking outcomes for Q4 were largely a result of the mark-to-market on the book we held at 930. As we noted, we locked a little over 40 million of loans.......

in Q4, so the position did not move meaningfully between 9.30 and the end of the year.

So the revenue outcomes for Bresi Mortgage Banking were really results of just spread widening.

in the market, you're right. And some of Brooks commentary on book value also includes an improvement in the caring value of the pipeline here in January and the early part of the year, half of which has been realized through the Sequoia deal that we executed.

So the position since 930 has been fairly easy to trace just because we added to it barely in Q4. And you're right, much of that has reversed thus far in January .

with the Sequoia execution and the prospects as Chris said of doing another one.

Got it. And again, looking at the loan sales in the fourth quarter, it was only $131 million. So there was presumably a realized loss on the 131, but the remainder...

whatever the outcome is on the Sequoia transaction will see in a few months.

Yeah, I mean we, whether it was marked market adjustments or realized losses, we reflected the value of that pipe at December 31st and I think that is the right way to think about it since then. Things have firmed up quite a bit in RESI. We wanted, we anticipated that and we prepared to issue that transaction right out of the gate. There's an American

together around inventories and volatility.

There are a lot of moving parts here but at the end of the day the economics at Redwood are really determined by credit performance. We've alluded to, you know, related to the securities portfolio, no deterioration.

no variance or model. Can you talk a little bit and provide some additional insight in terms of what you are seeing, pockets of strengths, pockets of weakness in residential mortgage credit at this point, from a credit perspective?

Yeah, I mean, I'll touch on consumer resi quickly and then Dash can touch on BPL because at the end of the day all of our businesses are, as you said, somehow tethered to Rezzy Credit. You know, our consumer Rezzy Book, which is our traditional jumbo, our expanded climate.

our RPLs, our Reperforming Loan Book, just continues to perform remarkably well. Delinquencies have been essentially flat and in many cases declining. These are largely seasoned loans, most of which have participated in significant HPA over the past few years. You can now run over to the next portion of this webinar I will now introduce to you how

Just looking at some numbers, you know, our select book, you know, our estimate for average, you know, HPA adjusted LTV is under 40 choices around 40, just over 40, and the RPL book is in the mid 40s. So, when you think about our embedded discounts there, you know, what you're getting for to select is 28 million.

choices 34 and RPL is 278. You know, they're sitting on significant, significant home equity before any of these positions incur meaningful losses. So we continue to feel very, very good about where the book is positioned. Certainly, including with some downside scenarios with our session.

the empirical performance within BPL remains really, really good. You know, bridge delinquencies, you know, we're down from where they were earlier in the year, now just over 2%, very strong level. You know, the single-family rental book, which is largely securitized, as I mentioned in my prepared remarks, we saw a slight uptick in certain matters in the sense that it has not been

early stage delinquencies in that book at year end, that has been trending in the right direction already year to date, just with our asset management team, you know, as they always are, just engaging very directly with borrowers. So, just as a reminder on the bridge portfolio, the vast majority, around 90% of what we finance, are in some shape or form a rental or stabilization strategy.

to a close to a 9% debt yield or higher. You know, we're very careful about how we trend rents and all of that's overlaid. You know, we're focusing on, you know, the most sophisticated sponsors, you know, with the best liquidity. I think the reality, Rick, you know, even as rates have come down, you know, the 10 years sits right now, probably 55 basis points below its peak.

from Q4. The reality is, you know, across the...

Across the bridge space there will likely be sponsors that you need to come out of pocket by a few LTV points You know to refinance into an agency loan etc. And Our focus is making sure we're with sponsors that have the capital to do that and they're executing on their business plans We have a lot of bites at the apple as I think you know in terms of our draws

and ensuring that reserves are rebalanced and we're revaluing properties. So as we, as more and more of those data points come in, you know, we're more and more hardened by how those sponsors are executing, but that's the area, as you can imagine, of increased focus here. You know, Rentsav, Rental Growth has obviously tampered a bit. We expect that, but...

We're still seeing strength in average hour of yearnings, which is a direct input into how we think the underlying tenants are going to perform. So again, the empirical performance has been really, really good, but that's all that stuff that I just mentioned is really top of mind for us for the next few days.

early earnings, which is a direct input into how we think the underlying tenants are going to perform. So again, the empirical performance has been really, really good, but all that stuff that I just mentioned is really top of mind for us for the next few quarters.

Great. Chris, Dash, thank you very much. Thank you.

Our next question comes from Eric Hagen with BTIG. Please stay here.

Hey, thanks. Good afternoon, guys. Hope you're well. I think I have three questions to just bear with me here. I mean, how would you say the return on capital and secaritizing both the jumbo and BPL compares?

say now versus a year ago in Spreadsware at some of their tightest levels.

And then it is the capital that you have in the jumbo segment more or less kind of the minimum that you envision just given where the market is.

Is there any scale that you can achieve with the capital that you have there if origination volume improves? And do you see Wells Fargo exit at their exit from the correspondent channel being an opportunity? And then on the originations in BPL

How often would you say agency funding is a viable takeout for those loans? I think I just heard you mention that in some cases it is. Like is there any connectivity to the fact that G-feas have risen for those loans? And in cases where it's not an agency loan which does supply the takeout, what is the source of capital that typically does? Thanks.

Thanks a lot. Well, we'll try to divide and conquer here. On the RESI front, we'll try to divide and conquer here.

you know, spreads, spreads obviously were quite a bit tighter a year ago, but I think the bigger story is what's happened in the past few months.

and early December , mid-December, you know.

Prime jumbo, triple A's, we're trading two to three points back of agencies. Now it's closer to one in five-eighths or so. So there's been a big snapback, which has significantly improved the economics of securization. Again for us, that's a very...

good sign, but running that business, and leaning in on rate, involves a lot of different moving parts, one of which is you've got to carry fixed rate mortgages with an inverted yield curve. You're incurring all of the spread volatility. So getting up and down in a securitization.

requires additional risk, frankly. So I think what we're trying to do is continue to get more efficient with that business. And we mentioned that we lowered the capital by 70% over the course of the year. As we look to distribute our remaining last year inventory.

We think that capital member can go down further, probably go down to something closer to $50 million. And really what that does is it creates a nice base case to lean back in when we're ready to go. And that money doesn't disappear. It can be redeployed. And all of this sort of pencil is out.

the goal of the fourth quarter was was you know in some sense a modest restructuring to get us in a position to kind of go back on offense which is exactly what we've done to start the year.

On the on the wells front which I think you referred to you know I think that's a tremendous tremendous long-term opportunity for us and for our long-term minded shareholders you know that that's somewhat of a bell-weather of sorts you know I would say wells.

By and large, it's been the largest correspondent aggregator in non-agency, particularly Jumbo, since the great financial crisis. So exiting that space, you know, really is a profound opportunity for us and potentially others.

So, it's not an overnight shift, but I think, you know, for, again, for a company that's heading into its 29th year, you know, our business is the Rezzy business. And, you know, as things evolve here, you know, we expect that to significantly, you know, support our competitiveness in space.

with a major major force like Wells stepping back. So I do think that's very notable and potentially a very big long term tailwind for us. But in the near term, the real emphasis is the Fed, its stability and rates.

particularly in housing and economy that we're most focused on. Eric, to take your questions around BPL, if you sort of divide the bridge portfolio into three areas, multifamily, build for rent, and then the single family stabilization strategy, I would say, in the majority of cases.

on the multifamily side for a sponsor that wants to hold on to the property and has the capital.

10 or to do that. You know, plan A would likely be most of the time an agency or a HUD takeout. Some of that, as you know, is going to depend upon.

The nature of the underlying tenants, the affordability angle, things of that nature. Agency and HUD takeouts, we see that very commonly to the extent the sponsor wants to stay in the investment. Many of our multifamily sponsors, I'd say most, do focus on tenants where the GSEs and HUD are actually in a spot of continuing to lean in around housing affordability.

That tends to occur when the GSEs hit their caps, which they have annually, as you know. We also can do that when a sponsor...

is stabilized and views it is more efficient to refinance private label as opposed to waiting the number of months of Seasning required by the GSEs at certain stabilization levels. So we do we do see opportunities like that on the bill for rent side some of those are eligible for agency that depends upon how the property is partial

And then typically for single family bridge stabilization strategies, it's a win-win for us to be the takeout. That's a huge source of our term business, which we securitize. It was our bridge book response, which we finance with us into a longer term fixed treatment. So that's a recommended clamshell time for CLP. So that's a recommended clamshell time for CLP.

That was really helpful detail. Thank you guys very much.

Thanks, Eric. Our next question comes from Derek Somers with Jeffries. Please state your question.

Yeah, you get afternoon guys. With well-degasating correspondents and some other smaller non-QM lenders, hitting some speed bumps, do you see that as more of a volume opportunity or margin opportunity in the near term or a combination of both? And then just to tap into the capital allocation to the mortgage lending, I know you guys said you were reduced to it by 70%.

Wells and other money center banks remain very competitive on the retail side, on the branch side in mortgage. So that piece of the puzzle hasn't meaningfully changed, but I do think as things stabilize it could be quite a game changer for us in particular. You know as far as the flexibility of the capital, you know I think it's very very flexible.

and optimizing it is one of the hallmarks of the platform. I think what our goal is in residential mortgage banking is to preserve full optionality. We focused on variable costs.

But as far as the integrity of the platform, the relationship of the seller base, the technology, it was a continuing to make investments in technology, you know, all of that is something we focus on on a day-to-day basis. So as far as leaning in, again, you know...

We control the Raid Sheet, so the points at which we feel comfortable from a wrist standpoint, getting more aggressive will. I do think that we need to see a little bit more here in the first quarter, potentially into the second quarter, to really get that flywheel turning as rapidly as we like. But like I also mentioned, we've got a lot of uses for the capital.

about how long you think kind of aggregation periods are now, you know, whether that's to securitization or to whole loan sale and, you know, kind of what you might be able to do to even shorten that time further just kind of given the volatile period that we just went through. Yeah, I mean, we, again, we can speak to...

We took a year off, essentially, between securitizations. So when the moment was right, we were able to hit the market pretty quickly and we did a few weeks ago. That spoke for a substantial amount of our inventory. And as we've mentioned, we're hoping to do another deal here in the coming weeks or months.

Also think you know focusing on quote-unquote mini bulk and in selling selling Loans as smaller bulk pools to investors is going to be an emphasis of ours So I think there's there's ways to manage it, but but ultimately You know what we really like to do is get back to kind of the regular way aggregation You know that we've seen the past few years. We just you know we're just proceeding cautiously Thanks, and then you just talk about kind of how you envision your your capital structure You know obviously have the converts coming due this year issued the preferred. You know kind of what you see the the optimal mix

of the capital structure? Thanks, Greg, it's a good question. You know, we probably saw from our materials that through the first quarter and the fourth quarter, we bought back about 55 million of our capital.

Our 23s and 25s, you know, since we started buying back our converts, we've actually seen our capital structure tighten in quite nicely, which I think was also aided by our preferred actually offering the price inside our convertible debt stack as well. I think we did a small inaugural issuance of preferred intentionally. As youalties, an vård Bennet there.

So we, and you also probably noted from our materials and prepare remarks that we have done a nice job Continuing to raise cash on hand so we are set with 400 million. We have 300 million in total unsecured That mature through 2024 so we will likely

CS continued to either re-purchase that at discount or to seize it. If you even think about the level of costs that we have in our 2023 maturity, you can cover that interest expense with six month of fees all today, which is quite amazing. So I think we will continue to address our term

to your question. Yes, Brooke, could you talk a little bit about how you're thinking about net interesting common Q1 and then maybe some of the pluses and minuses as you work through the year?

Yeah, it is a good question. I think, you know, what you've seen out of our net interest income line item is stability in the fourth quarter. We reached what we really see to be a good run rate. We've had a lot of...

More one time see the income that have come to net interest income over the course of the year and those represent upside from the levels we saw in the fourth quarter but items such as yield maintenance have been as high as 4 to 5 or 7 million in different quarters throughout the last year that was essentially flat in the fourth quarter.

And so we think GAB net interest income in the fourth quarter represents a good run rate, as I mentioned. You know, we, we,

We are continuing to deploy capital into bridge which continues to be a nice tailwind for NIM. Actually, it's contributed a positive four million to an interest in income on the quarter. It generated a 27% return on the capital for the quarter. So in terms of deployment opportunities, especially with the amount of cash that we're sitting on today, that continues to be an area of focus.

We actually saw that was driven not only by volume, which was actually done on the quarter, but we had average coupons on bridge right. We're about 50 basis points higher than cost of funds increases. I would really point you to economics net interest income as we head forward.

You know that was 6 million higher as I mentioned in my prepared remarks than gap net interest income That's driven by some discount accretion and also effective interest on certain assets that aren't captured in our gap net interest income But rather through investment fair value changes But those are run rates You know that is run rate income for us. So

I think we will do a better job highlighting economic net interest income, but we see tailwinds for economic NII to continue to grow, both from deployment and certain of those assets whose effective yields will continue to be realized through it.

I would also just know our financing costs. They were up about 100 based points last quarter, but they've really stabilized. So with the projected front ends of the curve, and also spreads on renewal to be really stabilized, we had them seen spread widen a bit on financing lines throughout the mid-second half of the year.

those would be very stable. So we continue to have more floating rate exposure on the asset side of our portfolio than on the debt side of the portfolio. So any further increases to rates should actually be at tell when to end.

be very stable. So we continue to have more floating rate exposure on the asset side of our portfolio than on the debt side of the portfolio. So any further increases to rates should actually be a tailwind. OK, great. Thanks for the detail.

And our next question comes from Bozah George with KBW, please stay your question.

I suppose George, your line is open. Please go ahead. Sorry I was on mute. Hey guys, I just wanted to ask about investment opportunities, sort of the best investment opportunities that you're seeing and how returns compared to that 15% enforced yield on your existing portfolio. Hey, what was this DASH? I can take that. Um...

are very much in that context to you. Obviously some of this is aided by the fact that

We're in a higher total rate of return environment with benchmarks and also our lending spreads, you know, have certainly wide and

the market over the past year or so, although they have tightened up, given the market dynamics the past few weeks. Away from that, as Chris articulated earlier on the call, given market dynamics, we're definitely seeing more interesting opportunities.

on the third party side as well. We've been a regular investor in agency CRT securities, those have certainly tightened in this year, but those potentially remain interesting. There's some other shorter dated opportunities as well. More senior non-rated cash flows that others are issuing that we're focused on as well as other types of return profiles.

with that mid teens or higher still based on where we see the market right now. Okay, great, thanks. And then actually just going back to the resi mortgage banking business, in terms of getting back to normalized returns, do you need to see some pickup in refi activity or as sort of industry capacity gets pulled out over time, you can sort of get to normalized returns that way? Yeah, it's kind of all of the above. I think the first and most important thing is stability and rates. I think that rate volatility has kept a lot of consumers on the sidelines with respect to buying homes, obviously refinancing homes.

But the business can function in high rate environments. I think the housing demand and housing market has picked up in January and we'll be heading into the spring selling season here. So I think the capacity...

issue is a real issue. It's a bigger issue, I think, for mortgage originators than it is for us. If anything with the Wells announcement, you know, there's going to be fewer players. So that piece is a positive. But I think the real answer is, is a rates ability, because it not only drives consumer behavior, but also demand for demand for...

coming horizontally. right it is a good one.

Okay, great. Thanks for that.

Our next question comes from Steve Delaney with JMP Securities. Please state your question. Thanks. Folks, hi. I was a little late getting on, but I wanted to ask you if you haven't already covered it. Your January Sequoia deal, the Pramjambhu deal. Did you?

Yeah, it was about five and a quarter gross a little bit above that steep.

Okay. So, so, so pretty tight and was that, I'm sorry, you both of you mentioned sort of this mid-teen kind of target hurdle. Um, did, was that deal?

The execution there, did that get you there or was there something unique about that that you needed to clear those out, get those permanently financed. But at the margin today with current loans that you're purchased money, jumbo loans that you're originating and pricing.

Do you think that 15% ROE hurdle is doable on this loan product? Yes, so the portfolio we securitized...

You know, it was probably among the more seasoned that we've ever securitized. Someone else asked the question. I think it was like we typically securitized jumbos within a month or two. You can probably glean by the coupon. These were a bit more seasoned than just, you know, we saw them market up early in January .

and you know, as you recall, Steve, you know, the pieces that we keep from those sequoidials tend to be a lot thinner. And so, yes, they are. The piece we kept was sort of in that load of mid teens context.

But if you know it was sort of 1% or less of the of the capital structure and I if you look at where current coupon is I think Chris sort of hit on it yes if you look at the model you know mid high sixes note rates you know yeah just from a term perspective

you know, should be able to guess you're there, the challenges, you know, with the rate stability and all of that and the consumer demand just getting to ask to actually be able to do that.

Yeah, it makes sense and I appreciate Chris's comments about you know

This volatility and people just decided, okay, let's wait it out. But you know, we get into the spring. People need houses. You know, I think the purchase side will pick up. And it's nice that you've tested the waters here. Everybody knows the SMT brand. We'll see what the rest of the year brings. But I hope.

We'll get some more momentum in the purchase market for sure. Thanks for the comments.

Thank you. Thank you.

Ladies and gentlemen, that was our final questions for today. That also concludes today's conference call. All parties may now disconnect, have a great evening.