Redwood Trust Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to the Redwood Trust first quarter 2023 financial results Conference call. Today's conference is being recorded I will now turn the call over to Kate Morris with Redwood Senior Vice President of Investor Relations. Please go ahead ma'am.
Thank you operator, Hello, everyone and thank you for joining us today from its first quarter 2023 earnings conference call.
On today's call are Christopher <unk>, Chief Executive Officer, Dash, Robinson, <unk>, President and Chief Financial Officer.
Before we begin I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward looking statements.
Forward looking statements are based on current expectation for countless assumptions and involve risks and uncertainties that could cause actual results to differ materially.
We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance cause actual result to differ from those maybe expressed in forward looking statements.
On this call. We may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP.
A reconciliation between GAAP and non-GAAP financial measures are provided in our first quarter.
You, which is also available on our website and would Trump dot com.
Also note that the content of today's conference call contains time sensitive information that are only accurate as of today and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.
Today's call is being recorded won't be available on our website later today.
Now I'll turn the call over to Chris for opening remarks.
Thank you Kate and good afternoon, everyone.
Appreciate you joining us today for Redwoods first quarter earnings call.
I'll begin with some introductory remarks about our first quarter performance and the market opportunities in front of us before handing the call over to dash and broke to discuss our operating and financial results.
Overall, it was a very productive first quarter for Redwood.
We have continued stress in the mortgage sector. We were pleased to end the quarter with a positive economic return for shareholders. Our GAAP earnings were <unk> <unk> per diluted share for the first quarter and our non-GAAP earnings available for distribution or <unk> 11 per share.
Our GAAP book value per share was $9 40 at March 31.
Down about 2% quarter over quarter.
Since March 31, we've continued to protect book value and estimate our current book value is flat from quarter end.
The notable improvement in first quarter earnings was largely driven by healthier mortgage banking activities, including almost 1 billion in whole loan distributions across our residential and business purpose lending platforms.
These dispositions freed up meaningful capital.
With relatively wide inventories, particularly in residential mortgage banking, where we've chosen in recent quarters to be very conservative with our capital and market positioning.
This is in light of the rapidly rising rates and subsequent volatility the market has endured over the past year.
In step with the reduced capital allocation, we took further steps in the first quarter to reduce costs, allowing our operating platforms to run more efficiently going forward.
With continued low leverage strong financing and robust liquidity our balance sheet today remains strong and will allow us to be flexible and capitalize on market opportunities.
As a result of our actions in the first quarter, we boosted our cash and cash equivalents by approximately 60% from year end 2022.
We've also made significant progress in developing private capital partnerships that we expect to greatly enhance our liquidity and production opportunities going forward.
Away from Redwoods results in the first quarter conditions within the broader financial sector warrant attention, particularly as these conditions lend themselves to investing opportunities.
As you know extreme disruption and dislocation in the banking sector is dominated financial headlines since March <unk>.
<unk> is now underway amongst the regional banks, something we expect to reset the competitive landscape in mortgage finance in the coming quarters.
This will benefit both our residential and business purpose lending businesses as well as create third party opportunities for portfolio investing.
As a nonbank mortgage aggregator a residential business has operated since the mid 19 nineties kind of belief that 30 year fixed rate mortgages should be match funded through securitization or other prudent asset liability strategies.
As a result of extremely accommodative fed policy in recent years, some banks chose to effectively ignore the interest rate risk associated with owning mortgage loans by funding them with deposits often unhedged.
The resulting asset liability mismatch for banks, which have not been seen since the SNL crisis helped to fuel below market mortgage rates when the fed started hiking admittedly proved difficult to replicate in the private securitization markets.
Created a headwind for nonbank constituents, what are the key rationale behind our conservative posture residential mortgage banking in recent quarters.
But the music has now stopped for many depository.
When the dust far from settled we can offer a few early takeaways through the spectrum of efficient markets.
One bank cost of capital is rising.
<unk> liquidity remains at a premium.
And three reliable counterparties, such as Redwood are positioned to emerge as a leading mortgage finance partners to banks.
Over time, we expect the market to function more rationally as it had prior to the extremely accommodative fed easing cycle, we experienced through the Covid pandemic.
Our residential platform has competed as an aggregator that has served a deep bench of investors reliably buyer RMB S bonds in whole loans.
Well nothing changes overnight, we are seeing early but definitive signs of a fundamental shift and bank asset allocations that we believe will anchor our go forward residential conduit strategy.
We expect an increased appetite by certain banks to sell newly originated loans, which would otherwise be held in their portfolios.
This may also lead to more strategic dispositions that present us with scalable investment opportunities.
As always the reliable and user friendly relationships, we've developed over time will be invaluable as this channel evolves.
In addition, so long as credit risk can be priced appropriately liquidity concerns for regional banks are likely a tailwind for our BPL platform and provide an opportunity for us to diligently gain market share as we customize products to serve our best customers and identify areas, where our liquidity will be at the highest premium in coming months.
As changes unfolding how mortgage debt is financed we also remain focused on the evolving landscape and underlying homeowner equity.
Over the last several years, we've steadily grown our investment in <unk>, our home equity investment options, which allow consumers to tap into the store value without adding to their monthly debt burden.
But first mortgage rates still elevated and access the second lien financing largely constrained to the best credits consumer demand for Hei remains very very strong.
In our minds. This marketplace is currently situated is not fully equipped to meet the moment, putting redwood in a unique position to truly institutionalize the product to better align consumer and investors.
Looking ahead, we see a number of compelling opportunities in front of us that support our long term vision.
Our strategic positioning across both of our operating platforms as well as our investment portfolio will likely evolve as we progress through 2023 due to the shift in the markets that began in March we believe that the diversification of our model the ability to rotate nimbly between our role as an issuer and an investor remains a competitive.
Advantage as does our experience navigating complex market conditions over many cycles.
With that I'll now turn the call over to dash.
Thank you Chris I'll focus my remarks on the performance across our three segments before handing it over to <unk> to cover our financial results in more detail.
To start it is worth noting that our investment portfolio now represents just under 90% of our allocated capital up from approximately 75% two years ago.
This reflects an increased focus on attractively priced direct portfolio investments and a deliberate slowing of locks in the residential business given overall market conditions.
During the first quarter, we remain judicious and deployment, putting approximately $60 million of capital to work in organically created in third party assets with target return profiles in the mid teens.
As Chris emphasize we believe that the opportunity set for continued deployment is compelling and our teams are actively monitoring both the primary and secondary markets for opportunities, where we have a competitive advantage, including in securities more senior in the capital structure and with a shorter duration than we typically analyze for purchase.
This relative value begin to reemerge in March when events with the regional banks pressured credit spreads wider for more liquid instruments driven by concerns around increased supply of MBS from FDIC auctions or other bank selling.
Our existing portfolio performed well despite this broader price action on.
You're lying credit trends in valuations in the book were stable in the first quarter, we saw healthy cash flows and delinquency rates remained largely unchanged from the fourth quarter of 2022.
Credit performance within our residential securities, namely those backed by Jumbo and re performing loans has remained particularly strong with delinquencies in our Sequoia portfolio now below 1% and a notable decrease in 90 plus day delinquencies within our larger RPM holdings blunder.
Fundamental performance in these portfolios continues to outpace originally modeled expectations gear.
Given these trends it is a worthwhile reminder, that 70% of our net portfolio discount, which at quarter end totaled $460 million or $4 10 per share.
Sits in our jumbo and re performing loan investments.
Average LTV of loans underlying our residential securities portfolio adjusted for estimated home price depreciation realized to date stood in the low to mid Forty's at March 31, 2023, demonstrating the amount of equity that sits within these investments.
Overall delinquencies in our BPL portfolio also remained low both versus historical performance and our initial underwriting, but given financial stresses in the market activity for our BPL asset management team has picked up <unk>.
Consistent with the overall market trends, we are seeing construction timelines increase for certain borrowers and are closely following the recent high profile workouts in the multifamily space.
Trends in the commercial real estate sector more broadly underscore the importance of sponsor quality and active asset management, and our BPL portfolio and the feedback loop from our team remains critical in building. Our go forward pipeline and focusing on sponsors of the experience and financial wherewithal to see their projects through.
<unk> production in the first quarter remain largely consistent with recent trends as low housing inventory and constrained affordability continued to create a natural support for rental demand.
$438 million of BPL loans in the first quarter roughly flat to the fourth quarter with a similar production mix of 40% term and 60% bridge.
Looking ahead, we are positioned to capture market share intelligently as certain competitors react to lower overall volume with more aggressive lending terms.
And as other step back from the market in light of recent regional bank disruptions.
Key wins provided early momentum in the first quarter for our BPL platform, including a large loan sale in mid January to a repeat buyer.
We also continued to sell the majority of our single asset bridge loans to third parties with the remainder primarily included in bridge loan Securitizations to replenish repayments as.
As loan sales become a more meaningful part of our distribution strategy within BPL, we have seen an uptick in investor interest in these loans that we view as an important catalysts to further growth as.
As the quarter played out market turbulence picked up and sponsor sentiment became more selective.
That said, we are seeing certain top borrowers begin to put fresh capital into traditional single family renovation strategies in markets that have already seen a leg down in price largely on the west coast.
And with others continuing to break ground on a longer term build to rent projects, including in southeast markets, where rental demand remains relatively strong.
While multifamily has seen relatively muted activity other than refinance activity at stabilization. It remains to be seen how the recent stress in the office sector, which in our view hasn't yet hit a crescendo will influence multifamily as a fellow commercial asset class.
Our residential business entered 2023 with just over $600 million of loan inventory on our balance sheet. The vast majority of which was distributed to the through the two Sequoia Securitizations, we completed during the quarter.
With net loan exposure at March 31, 2023 of just over $70 million. The lowest since mid 2020, we are well positioned to lean into the likely re cutting of the mortgage origination landscape, which we expect to include an evolution of our flow acquisition business and renewed opportunities to source portfolios in bulk.
Chris Covenant detail the opportunity with the regional bank fall out, but I would add that success there will require more than running the traditional loan pricing models, we are likely witnessing a fundamental shift in how 30 year fixed rate mortgages are funded whether they be non agency whole loans or liquid agency MBS. This will require creativity and how loans are aggregated in prep.
For sale or securitization and an evolution in the optimal pools of permanent capital that fund homeownership.
While it will take time for the market to reach its new equilibrium. This all reads through well for a seasoned operator like ourselves who has key competitive advantages and the ability to efficiently connect various parts of the housing finance market.
I will now turn the call over to Brooks to discuss our financial results.
Thank you Dash, we reported GAAP net income available to common stockholders of 3 million or two cents per diluted share compared to negative 47 in the fourth quarter of 2020 tail book value per share for the first quarter was $9 <unk> compared to $9 55.
Fourth quarter.
Looking at quarterly economic return on common equity of approximately 1% if.
The primary drivers of book value during the first quarter were positive 710 basic earnings per share and unrealized gains on available for sale securities.
Which reflected credit spread stability and therefore, essentially flat investment fair value changes for our portfolio during the quarter and our 23 cent dividend per share.
Importantly, 100% of our earning assets are mark to market on a quarterly basis, and therefore substantially all unrealized gains and losses are reflected in our book value.
Earnings available for distribution or EAP.
<unk> <unk> per basic common share as compared to negative 11%.
Per share in the fourth quarter, resulting in an EBIT return on common equity of 5%.
The change was driven by <unk> 29 per share quarter over quarter increase in mortgage banking income.
Creative distribution execution.
Overall GAAP net interest income was stable versus the fourth.
What are the nominal reduction was primarily from lower net interest income from mortgage banking due to lighter average balances and higher financing costs from the increase in Sofia.
This was nearly offset by lower corporate debt expense and a higher yield on corporate cash and importantly, economic net interest income continued its recent momentum.
$1 million from fourth quarter levels, primarily due to higher income from Brent investment.
Unrestricted cash and cash equivalents at 404 million at March 31st exceeded our margin above that and were held in short term treasury money market funds and accounts that global money Center Bank.
Our liquidity position remains in effect.
Portion of unallocated capital, which we categorize as corporate grew by over 200 million given the casualty rates on the corner and other capital we continue to hold as much capital or.
Our contingent liquidity needs.
Utilization of this capital is inherent in our outlook for E&P grabbing <unk>.
Recourse leverage declined on the quarter from two eight times to two three times as we sold or securitized almost $1 billion of alone previously finance had requests warehouse line.
We purchased $33 million of corporate debt and raised $70 million in gross proceeds from our non crop for an equity offering.
In fact since the beginning of the fourth quarter, we have repurchased an aggregate $82 million of our convertible debt across our 2023 and 2025 maturity.
And then $2 4 million of realized gain.
We successfully renewed two maturing loan warehouse financing facilities with key Counterparties and established a new facility to finance the previously unencumbered Sequoia MSR investments.
We further fortified our financing position during the quarter by consolidating exposure with our strongest counterparties and extinguishing underutilized facility.
Specifically related to our residential business, where we have held inventory levels materially below our historical levels.
With these actions we retained significant excess capacity approximately $3 5 billion to support the continued growth of our business that we continue to thoroughly analyze indirect counterparty risks given the recent banking crisis.
General and administrative or G&A expenses decrease from the fourth quarter as a function of recent personnel and non compensation cost reductions from why G&A expenses for the first quarter of 2023 included approximately 1 million of severance and related expenses.
Lastly, we wanted to provide perspective on our outlook for AAV in our quarterly dividend.
Over the past year, we have continued to reposition our capital and strategic focus towards investing activities relative to aggregation activity, our inquiries investment portfolio carry an expected 17% forward loss adjusted yield as of March 31, and we continue to see increased deployment opportunities going forward.
Yeah.
About 2023, starting with positive momentum in the near term impact from the banking crisis unfolded in late March as moderate in the near term outlook of our operating businesses and thus we anticipate EAP to remain below our current dividend level over the next few quarters.
Subject to the determination by our board, we expect to lower our quarterly dividend in the second quarter in line with recent changes made in the broader mortgage rate sector. This year.
A major factor behind this change is the prospect of tremendous capital usage opportunities as a result of dresses that regional bank.
Banks have recently signaled to us a renewed need for an established partner to acquire their residential loan our businesses should therefore be positioned accordingly.
And with that operator, we will now open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is as our question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hand.
Is that before pressing the star keys.
First question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks.
And the last comment you made broke about you know opportunity from regional banks.
Can you just talk about is that relatively newer production that would be higher coupon is that kind of older lower.
Lower coupon now.
And how do you think about the relative attractiveness of.
Of those loans.
Oh, Hey, Doug, It's Chris I'll take a shot at that.
You know, we're we're very constructive right now and the opportunity to work with regional banks.
I'm sure.
That's generated a lot of discussion, but we have a long history of working with banks our conduit.
Historically was anchored to banks.
In recent years with all beside.
<unk> of monetary policy, we've seen what's happened with banks, you know sticking more non agency loans and portfolio. Obviously, we expect that to change and we can go into that.
We started to have some some early discussions which are now underway, but I think the the big opportunity for us as the go forward new production.
We think that.
Sort of re anchoring our conduit to banks as opposed to the independent mortgage banks.
Having a good balance, but but more banks as a big opportunity for us. So over the next few quarters, we're going to work towards that.
I do expect portfolio opportunities to emerge, but as you know most of what's sitting on bank balance sheets right now is lower coupon collateral.
Which is obviously it's.
Its fair value is at a significant discount so.
To the extent that collateral comes out maybe they'll take a rally in the 10 year to do to do so, but we would certainly be in a position to portfolio season.
She is in mortgages as well and securitize them. So I think it's I think it's both but I think what we're most focused on now is to go forward.
And you mentioned in your prepared remarks, the bank cost of capital increasing.
The.
Current.
Thanks.
Rates on Jumbo versus you know kind of what you see is as you know securitization or loan sale exiting.
Are we at kind of a point of convergence, yet or is that the bank yield still below that.
Well, there's one or two banks that stick out from the pack, but I would say for.
For the rest there has been a.
A significant convergence towards what I would call a market execution I think securitization today in non agencies, probably high sixes low seven mortgage rate.
As far as what clears the market.
I think banks are converging towards that.
And we all know the story.
<unk> today, which is the cost of deposits are going up.
If you have zero cost of capital.
You can you can price mortgages pretty low and that's what we had seen one of the reasons why we've we had pulled back or gotten a lot more conservative on the residential side with our conduit.
Now, we're seeing that that <unk>.
<unk> and I think.
The big the Big picture is that.
30 year fixed rate mortgages really belong with companies like Redwood, we can talk about the reasons, but I think the banks are realizing that as well I think regulators are realizing it and as that transitions that should be very good for for our volumes, but it's not going to be a light switch is not going to be an overnight.
Change.
It's something that we expect to work towards over the coming quarters.
Great. Thank you Chris.
Your next question comes from Eric Hagen with <unk>. Please go ahead.
Okay. Thanks Hope all is going well can you say, what kind of dividend yield or poor payout on book value you see as a sustainable level based on the dividend commentary you gave towards the end there. Thanks.
Yes.
The business is in somewhat of a state of transition based on the significant changes that we're all seeing play out, particularly with the banks.
I think we're brookwood is going with her commentary was sort of realigning our dividend in step with what you are seeing across the sector, which is probably in the 20% to 30% range as far as the decline from current levels.
You know as you know we have no issues with with paying the dividend.
<unk> got.
Significant cash it's just getting it to a level that we think is sort of balanced.
Obviously.
As the business starts to transition.
That will hopefully start.
Going higher, but I think the our thinking as far as where the board will be to declare the dividend likely in June as is probably in the neighborhood of 20% to 30% lower than it is today.
Yep got it thats helpful. Thanks.
My second question here is about the relationship you see between your leverage and the valuation in your unsecured debt your ability to access that market more generally like how do you think about your leverage from that standpoint.
And whether there's like a threshold you feel like you're targeting to protect the valuation in the unsecured portfolio.
Hi, Eric Yes.
I can start with that I mean, I think in general.
But you know that's the reduction that we saw in the first quarter and our required leverage was attributable to the significant amount of dispositions that we were able to successfully clear and I think.
When we lap tap the unsecured market and on the preferred side I think we saw a bit of a capital structure arbitrage, there and we certainly welcome raising additional perpetual equity capital and in the context of those.
And as you know that we lost and.
That we last saw but the last time that we access the convertible market I would say that you know, we've really ever seen secured financing alternatives and unsecured kind of on top of one another and that has reversed course about what you're seeing.
Healthy our secured financing, we freed up about $140 million of cashless in January and an effective cost of capital and the kind of mid fives to six area that was at or above our marks are accretive to book and so I think in terms of addressing the 'twenty three as they already have.
Then the cash that's been invested in short dated treasuries to do so and when we think about our 24.
$400 million of cash on hand, and only $275 million of unsecured debt maturing through 2024, we have well we view to be a significant amount of ads.
Cash on hand, plus the $314 million of unencumbered assets, we have that could raise another conservatively 100 million to address this and.
That does 24 as well, but that means that our 24 is our yielding around 24% we've been buying back other have.
David maturities just on and on.
Kind of in a more appealing risk adjusted basis relative to other investment portfolio opportunities, though right now apparently focus I think we have in my commentary I said, we have a.
A lot of capital optimization to do just to make sure that we're focused on our dividend.
And continuing to focus on NIM for shareholders.
Yep got it that's helpful. Thank you guys.
Next question Stephen laws with Raymond James Please go ahead.
Hi, good afternoon.
Broke the follow up on the financial questions can you maybe talk about.
Net interest income you know basically flat sequentially or if we trough do you expect the grinding lower from here kind of how should we think about that.
The NII as we move through the multi year.
Yes, I think we said last quarter that we and that we saw Q4 is a fairly good run rate. So obviously, we had a very very modest reduction from the fourth quarter about 400000.
And we remain really focused on economic net interest income to which was $1 million higher than GAAP.
I'm sorry, it was up $1 million over the fourth quarter, and almost 8 million higher than GAAP net interest income as both a function of discount accretion and other kind of effective interest from assets that is not captured in our GAAP net interest income.
And mostly I think the upside in NIM from here as is in and around that capital deployment opportunities that we're seeing to continue to grow the investment portfolio.
Which is you know sitting.
15 out of 17% for ready all that then in the corner.
Great and then Chris or Dash, I forget, which one of you mentioned in your prepared remarks that talked about I think pretty low inventory of <unk>.
Current mortgages I think that was held for sell through for <unk>.
<unk> can you talk about the pipeline on the BPL and you know very strong contribution there for mortgage banking in Q1, and how we should think about volume margins or maybe just net contribution from that segment here.
Here in the next couple of quarters.
Sure Stephen It's Josh I can I can take that.
Yes. It was it was a solid volume quarter.
For BPL, obviously pretty consistent with where.
For the fourth quarter, and we talked in Q4 about what we viewed as the opportunity.
Just sort of build upon our volumes in 2022.
We still see.
Notwithstanding the flat volumes quarter over quarter, some real potential upside.
Later in the year one of the things we pay particular attention to as you can appreciate is just the relationship between the term and the bridge pipeline. We were really pleased to see term volumes.
About 30% quarter on quarter they were.
There are an increasing percentage of our production mix over the past few quarters, and we would expect that to continue for a few reasons number one.
Benchmark rates being well off their off their highs from a couple of quarters ago.
Those coupons.
In the high sixes, maybe low sevens are working a lot better than they were with the 10 year over 4%.
We are starting to see more momentum.
Out of our bridge portfolio in terms of feeding the term business, which is always how that business. Those businesses were meant to work together as you know.
So we're pleased with that.
With bridge.
The overall funnel is.
It's smaller than it was a few quarters ago as you know just overall activity, particularly in the smaller balanced multi space are multi in general is certainly down.
But we are seeing new and interesting opportunities and bridge, obviously, what's going on with the builders and pivoting to four ran away from four sales strategies, that's a big opportunity for us in terms of financing some of those folks directly.
Our folks that they sell to.
And obviously just the depth of our relationships the high repeat customer business well over 50% of those are all those are all helpful. But with bridge it really comes down to picking our spots.
With an overall pie that's been that's smaller than it has been over the past couple of years.
Great I appreciate the comments this evening thank you.
Next question Bose George with <unk>. Please go ahead.
Hey, everyone. Good afternoon.
Wanted to follow up on the BPL sort of the size of that market.
Redwood review in the slides, but it looked like a quarter of a quarter the size of the overall market you guys increased it does that is that right and just curious what was driving that.
We thought it was pretty consistent we have weeks, obviously with our.
Yes.
With our suite of products.
We serve customers sort of across the spectrum folks that own one or two stabilized single family all the way to folks that are owning and operating a larger multifamily properties. So I think we see the overall pie.
It was about the same.
We probably.
Added in a couple of.
Additional facets of the market a few quarters ago, specifically multifamily so that may be what youre seeing Bose as we've expanded some of the multifamily products with some partnerships. We've built so that may be that may be the increase there that youre seeing but overall, particularly.
As Chris said.
With what's going on with the regional banks.
We view that as a big tailwind to BPL too and.
That's definitely going to be on the comm and next few quarters.
Okay, great. Thanks, and then actually just going back to the dividend can.
Can you remind me.
The discount accretion that does flow through the <unk>.
That's correct.
Okay.
Okay, great. Thanks.
Next question, Steve Delaney with JMP Securities. Please go ahead.
Hello, There can you hear me.
Yes, Hello, Okay, great having to come into the cell phone today apologize look shareholder letter, which was really insightful. This quarter. You had certainly had a lot to talk about with what's going on.
Yes, I think you mentioned that you sort of tightened up your borrowing relationships, so a little bit.
Should we read into that.
Maybe <unk>.
Moved away from regional bank relationships, there and trying to focus primarily on the global New York Banks, maybe just a little color about the change you did make in your financing.
And also can you comment one way or another on whether you have or had or whether you had any ongoing borrowing relationships with FRC.
Hi, David Brock I can take this one yes, I said in prepared remarks that we consolidated a bunch of our financing exposure with our strongest counterparties a lot of what we extinguished in terms of capacity was frankly, just underutilized facilities, given where resin volumes have trended in the last few quarters.
But we are certainly focused I mean, we put out.
Pie chart in our Redwood review into just around having our largest.
And exposure with the largest money center banks.
We are all learning lessons from the evolving banking crisis, and but I think as you know for us it's very important.
<unk> to deal involving counterparty and risk management as every news headline unfolds and but yeah, we feel really good about where our financing is as focused today in the structure of this financing agreement.
Thanks, Robert and we do not have any FRE.
To your question on that.
Thank you Dash would you ask the next one was coming to you anyway.
The conversation about strategic dispositions rather than just.
Sort of on the run.
Okay.
Just building a pipeline on the run.
And putting more capital to work faster.
We know that Blackrock has the mandate on MBS sales from SBB in SBA and why.
Do you know if there are any residential whole loans in those portfolios and as the FDIC and communicating with the street about potential whole loan sales from those portfolios.
Yes, Steve well the answer is yes, our whole loans.
Commercial loans.
The challenge continues to be.
The bid offer.
These banks a lot of these this collateral is.
How old at a significant loss and so.
So I think I think the instructions to Blackrock, obviously, I don't know them, but it seems like it's there's no mad.
Mad Dash to liquidate the inventory and so I think there are kind of working.
The pipeline so to speak.
So right now certainly there's been some lists that have come out.
I think things have traded pretty well things that have traded have traded pretty well, but it's mostly.
AAA RMB us some of the easier more liquid collateral.
The whole loans I think.
I haven't seen much in the way of whole loan distribution. So that's something we're still waiting for.
When did you say and do you think that with what's going on the duration problem that you touched on in the shareholder letter.
I'd like to just.
Personnel prices over 30 years ago, and you would have thought that asset and liability management would have evolved.
It doesn't appear that it really did do you think that there could be regulatory pressure.
On the banks broadly.
Going forward as a result of this where they're just not going to be allowed to hold that those types of 30 year fixed rate loans and a significant.
Percentage of their asset mix.
Yes.
Whether there are allowed or not.
Just to rewind the clock if you go back to the great financial crisis, and how the banks repositioned they more or less got out of mortgage credit no more subprime.
The Ginnie business was effectively seeded to the independent mortgage banks.
And then what they did effectively over the years was they started.
Accumulating whole loans and there was a few reasons for that one was.
The Basel treatment and to which has turned out to be a really big one is they were able to hold them at cost.
And not have to mark them to market.
Big difference with US is we've got on our balance sheet I think we have $63 million of unrealized losses on our $13 billion balance sheet.
So everything we do is mark to market. It goes through the P&L more or less than kind of what you see is what you get so I think that just given the severity of these unrealized losses.
Similar to how the bank's repositioning after the great financial crisis, which was a credit crisis I think here the prospect of adding more of 30 year fixed rate exposure.
It just doesn't make a lot of sense and one of the reasons why.
The redwoods at a world where created as we're just a better holder of that risk we match fund through securitization.
When you look at our balance sheet, we are not funded with.
Deposits, obviously and so to me, it's we're very logical partner for the banks, we have been for many years and I do expect.
<unk> there to be a change I, just don't see much upside for banks wanting to to add to this risk position at this point.
Very good thank you I appreciate it.
The comments from all three of you. Thank you.
Thanks, Steve.
Next question Henry Coffey with Wedbush Securities. Please go ahead.
Greetings I always enjoy going after Steve.
Because im sort of concerned about the same thing and it's really not the GSC you need to go back to but like Steve said, it's gone.
Going back to the Ninety's and seeing this but.
Are there any.
I really have two questions are there any <unk>.
Factors out there that.
That would create more urgency with the banks, there's a very impolite phrase we use but the banks have a tremendous capacity to.
Hold on to.
Underperforming assets.
<unk>.
But is there is there anything a foot that would put them in a position to say no you have to sell these at market you have to recognize the losses and you have to move on and get on with life. Because there's also a drag to earnings.
It's going to last several years for some of these institutions.
Yes.
To answer that as best Best I can.
There could be regulatory changes that that.
Push banks towards liquidating collateral my sense is.
That's probably not an and.
The interest of the system at this point.
I think that.
When you look at the balance sheets of the small banks the big banks the regional banks.
Any of them that that we're sticking mortgage loans and portfolio of fixed rate long duration.
Product is dealing with the same issue to varying degrees in some some greater than others and we know who those are.
But I think as far as what might incentivize them to liquidate.
As I mentioned, you know rally in the 10 year.
Shrinking some of those unrealized losses to the point where.
Liquidating becomes more more palatable.
Is one thing.
I don't I don't foresee a major shift where the sector kind of purchase the risk because I think.
Candidly speaking a lot of these banks.
Arc to market the balance sheet are probably underwater.
So to me the real answer is kind of over a period of time too.
Differing circumstances as those losses, perhaps shrink.
The incentive to move on my might go up.
Yes, that's what we saw in the early eighties.
Just sort of dragged it out forever.
Is it fair to say, though based on some of your comments around the subject that the mortgage side and the residential mortgage side the jumbo mortgage side.
We will become a larger piece of the business over the next sort of six to 18 months say and predominate more than you know the business purpose lending or do you think it's a more of a.
A balanced equation.
Well I think we'd like it to be a balance but.
We expect to have the capital to.
To grow each sort of independently as significantly as we can I definitely think.
These changes cyclically it could be very very good for Redwood as I mentioned, we've been we've been at this for 29 years and.
Buying and distributing.
<unk> mortgage credit risk among.
Among other products is a hallmark of what we do.
I also think to your earlier point.
The the NIM story in the NIM drag is going to be big for banks as well and so one nice thing about Redwood is.
We're very very focused on distributing risk we did we completed two securitizations.
Residential securitizations this quarter and we basically have cleared.
All of our inventory significantly cleared it so basically what that means is that.
The loans that were accumulating today are on a run current mortgage rates, we're not sitting with 3% to 4%.
Four 5%.
Really it's what that does is it allows us to be more aggressive.
And not having to worry about clearing out.
Some of that risk. So we're actually in a great spot a healthy spot to to grow in and I do think these changes they won't happen overnight, but.
I expect this to be very positive for our business.
I think on on multiple fronts, you convinced us that you have ample liquidity and capital resources.
We've certainly seen it in the buybacks and the cash build et cetera et cetera.
Is there any sentiment and the board to take them more.
Say, a deeper dividend cut so book value continue to grow I know you said you probably don't think you'll be earning the dividend over the next few quarters, but is.
Is there a thought process I mean, we know you have the capital. We know you have the cash but is there a thought process to go much deeper into the cut and.
And get book value growing again.
It's something we're really trying to triangulate around the right answer.
It is one piece of it but as you as you have alluded.
We think we're going to have great uses for the capital accrue.
Accretive uses and so I think right now we've been envisioning something in that 20% to 30%.
What range and again that's that's.
Sort of factored into what we've seen in the sector and knowing that there's not a precise level.
Just given some of the volatility in the market and some of the transition that's underway in our businesses.
But to.
To me.
We're trying to triangulate around all of those factors and certainly growing book as is.
Is the goal.
So.
It's a tough call I wouldn't want to be.
I think I could make it do a good job of pulling it off but thank you very much.
Thank you next question, Kevin Barker with Piper Sandler. Please go ahead.
Hi, This is back to the offer Kevin Barker just a quick question for me.
You mentioned on the prior call you expect run one run rate G&A to be down 5% to 10% from 2022 levels and we're seeing the cost reductions coming through could we just get an update on your expectations for how expenses will progress for the remainder of the year.
Thanks.
Thanks for the question, Yes, I think we're still on track and the guidance that we gave last quarter was really that we would be kind of our base G&A would be around $120 million to $130 million for the quarter and we still had some.
The modest level of severance and related transition items and the first quarter number, which we should have for another quarter here as well.
And the biggest data that we'll have around that guidance is really where we ended up on variable expenses those were down 60% last year versus 2021, but most of those are really tied to volume and performance.
<unk> comp both on the cash side.
And our equity comp, so, but those would fluctuate with finnair.
<unk> financial results. So I think that the guidance that we put out last quarter is best case. Thank you Sterling.
Thank you I appreciate it that's all for me.
Thank you we've come to the end of our Q&A session. This concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.
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