Q2 2023 Redwood Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Redwood Trust, Inc. Second quarter, 'twenty 'twenty 'twenty financial results conference call today.
Today's conference is being recorded.
I will now turn the call over to Kaitlyn Mauritz, let whats senior Vice President of Investor Relations. Please go ahead ma'am.
Thank you operator, Hello, everyone and thank you for joining us today for our second quarter 2023 earnings Conference call.
With me on today's call are Chris <unk>, Chief Executive Officer, Ashley Robinson, President and Brookfield, Chief Financial Officer before we begin I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward looking statements forward looking statements are based on current expectations forecasts.
[noise] assumptions and involve risks and uncertainties that could cause actual results to differ materially.
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 and cause actual result to differ from those that 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 second quarter Redwood review, which is available on our website, but what Trump dot Com also note that the content on 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.
Finally, today's call is being recorded and will be available on our website later today.
I'll now turn the call over to Kratz for opening remarks.
Thank you Kate and thank you all for joining us here today.
Before we dive into our quarterly results I'd like to take the opportunity to share how redwood its position with respect to the impending regulatory rule changes concerning higher bank capital charges for holding residential mortgages. We expect some version of this proposed rule to become final in the foreseeable future in response to the regional Bank crisis more importantly.
We expect it through the benefit of hindsight. These regulatory changes will mark a major turning point now the most non agency loans are owned and distributed in the United States.
Our confidence in this outcome stems from working behind the scenes with many bank executives like US you were the proverbial pockets headed after watching portfolio mortgages play a central role in the demise of Silicon Valley Bank and first Republic Bank earlier this year.
In fact over the past few months, we've completed the Onboarding and have already activated a number of regional and midsize banks with aggregate assets of over two trillion dollars. We're in various stages of bringing many more online in the coming weeks and months.
In some cases, a number of these banks represent long standing flow relationships, we've built over many years or even decades.
Others are new to Redwood now previously how loans on balance sheet, but no longer find it economical to do so.
As the tide turns more and more depository or looking to redwood given our long standing track record of accumulating in distributing non agency loans.
As such our strategic focus will be to continue on boarding such depository is with the goal of becoming their primary capital partner as they look to serve their jumbo clients in a seamless manner, even before the final regulatory changes go into effect.
Try and contextualize, a transformational shift that we've received for our market I'll begin by reiterating to todays listeners that mortgage cycles are no longer determined by wall Street.
Today, they're almost exclusively determined by Washington D C.
Monetary policy and the path of mortgage rates is governed by the fed regulatory rules and enforcement actions concerning banks and other lenders is overseen by the treasury the FDIC OCC CFPB and others and of course housing policy is dictated by the current administration primarily through the FHFA.
Hey, and HUD.
Altogether. These government Influencers play a much more prominent role in the booms and busts in the mortgage market than they ever had before.
And the effects of Washington has on banks and their propensity to land has always had a profound effect on redwoods business. That's why we considered this impending regulatory change and keeping with our historical experience to be a very positive market shifting event for our business.
As many of you know Redwood got its start in the back of another bank crisis, Yeah smell crisis.
As interest rates rose and credit worsened. Many depository is that held long duration residential mortgages started losing money and became insolvent as the loans declined in value. It was through this lens, where redwoods value proposition became clear.
The company was built to serve banks and other originators relied upon mismatch borrowings for liquidity.
Our ability to match fund long term mortgages with long term debt via securitization technology provided an outlet for lenders Justice Fannie Mae and Freddie Mac did for agency conforming mortgages.
Since our founding almost three decades ago. The non agency mortgage market has endured significant changes at Redwood has continued to provide valuable liquidity to the market by aggregating residential mortgages. So that lenders can recycle their capital to continue making new loans and.
In recent years, we've expanded our consumer business to also serve housing investors in response to the secular shifts in how homes are owned in the United States.
During the second quarter of 2023, we completed our 143rd residential securitization and packaged billions of dollars of bulk pools through distribution to all types of investors.
Fast forwarding to today, we are witnessing yet another round of policy changes in Washington will kick off this next era of the mortgage market.
The outgoing era characterized by 41% increase in home prices. Since 2020 was fuelled by extremely accommodative fed monetary in government fiscal policy in response to the COVID-19 pandemic.
With benchmark fed rates reduced to effectively zero. During this period <unk> had an almost limitless supply of deposit capital to lend as the country battles Covid.
Many banks chose to Opportunistically put that money to work in 30 year jumbo mortgages and.
These mortgages are predominantly held in portfolio for investment rather than distributed into the capital markets.
These mortgage portfolio has proved to be sound credit investments impose a little principal risk to the banks with the interest rate mismatch between the 30 year loans and the deposits funding them was undeniably significant and in many cases very risky.
Even as benchmark Treasury bills gaps from near Zero in January 2021 over 5% in March 2023, the perceived stickiness of deposits compelled many banks to continue offering mortgages to preferred clients at rates well below market.
In fact prior to the onset of the regional bank prices this past March.
The Tories originated two thirds of all jumbo mortgages in the first quarter.
As we take stock of the situation today the cost of deposit capital is now rising rapidly and deposits continue to lead the banking system with both consumers and businesses are demanding much higher rates on their savings.
But in addition, the regulatory capital charges for residential mortgages held at banks or about to rise as well.
Where does the non agency market go from here.
Well for many of these banks continuing to offer competitive mortgage products to retain their clients will be imperative and the solutions Redwood offers are a logical alternative to portfolio lending.
Our reengagement with many banks over the past few months has validated this statement.
In recent weeks, we have recast our correspondent network and renewed or establish new partnerships with depository is which in the aggregate speak for approximately 45% of new jumbo originations.
A number that by our estimates represents upwards of $130 billion in annual volume.
We view this as our target addressable market when combined with the independent mortgage banks within our existing seller network.
As dash will cover that business channel has also resumed growing our June lock volume was more than the previous two quarters combined with July flow volumes continuing to grow.
As our bank partners will attest going live with a capital partner in the non agency sector requires much more than just flipping a switch for.
Are banks, especially investing in these relationships Intel's workflow changes underwriting guide implementations on officer training systems integration, and Onboarding regulatory compliance protocols cash and collateral management and other infrastructure enhancements necessary to distribute whole loans with no noticeable impact.
The consumer experience and.
Partnering with Redwood allows this work to be applied across a variety of mortgage products that we offer lenders to meet the diverse needs.
Need to close and reliable execution acting as part of our competitive moat.
Perhaps our biggest differentiator is that while we help our bank partners serve their customers. We don't seek to serve those customers directly in other ways such as by running our own competing origination business, eliminating this inherent conflict of interest that often exist with our competition decided by many banks is found.
<unk> to our partnership.
To sum things up our enthusiasm has grown considerably in recent months bolstered by our engagement with an increasing number of originators eager to work with Redwood with such significant changes afoot.
For Redwood to play a centralized role going forward is rising rapidly and importance theres a lot of work ahead, but the leading indicators, we use to assess our progress, including the strategic onboarding of new loan sellers and the depth of the origination channels, a reliable roadmap for the growth of our residential business going forward.
I'll now turn the call over to Dash and Brooks will cover our operating and financial results for the second quarter.
Thanks, Chris the second quarter represented a turning point for our residential mortgage banking business.
Our narrowed over the past several quarters and residential has been one of disciplined and readiness.
Priority is moving existing risk and managing our pipeline to historically low levels with the premise that a combination of rational loan pricing and a more accommodative securitization market, but ultimately re emerge.
That moment has arrived and looks familiar to us in several important ways as.
As the dust settled on a period of intense stress for the banking industry. It became clear how various stakeholders would likely fair amidst the fallout.
The likelihood that the country's largest banks will have to hold substantially more capital against residential mortgages.
As Chris articulated meeting the moment will require the right mix of competencies that have long been our competitive advantage.
Since the end of Q1, we have increased capital allocated to our residential mortgage banking segment and began re engaging with bank partners, who since COVID-19 have predominantly use deposits to fund non agency originations.
We are still early in the shift and would expect to transition to take form over the next few quarters.
But early momentum has been positive.
In the second quarter, we locked $567 million of loans almost five times, the first quarter's volume and the highest since the second quarter of 2022.
A portion of second quarter volume was seasoned bulk pools purchased at an attractive discount to par.
We have seen an increase in bulk opportunities in recent weeks.
As sellers have wrap their heads around the economics and the critical tradeoff of bolstering our capital and liquidity.
As a driver of longer term portfolio deployment opportunities going forward. We also expect this work to position us well to provide other types of solutions to banks, including credit risk transfer and other mutually accretive structures.
Combined with the recently implemented expense measures second quarter activity resulted in an annualized segment returned for residential a 43% the highest in over a year.
Margins for the quarter were 178 basis points, well above the target range of 75 to 100 basis points within which we have traditionally run the business we.
We expect to continue increasing our capital allocation of residential through the second half of the year, including in support of products that will help consumers access the substantial equity in their homes.
As Chris articulated the essence of our residential business from the beginning has been to provide flexible and reliable liquidity is a prudent long term owner of credit and interest rate risk with secular shifts in the market advancing quickly the prospects are bright for our business ready to once again unlocking substantial operating leverage.
Turning to business purpose lending demand for <unk> broad suite of products remains supported by key housing fundamentals, including elevated occupancy levels and ongoing demand for rental products driven by continued pressure on housing affordability.
Also demand however remains tempered by persistently higher financing costs impacted most acutely by the rapid rise in sulfur and the resulting overall slowdown in transaction activity with benchmark rates once again higher including the 10 year Treasury rate hovering just under 4%. We expect some project sponsors to remain on the sidelines while.
Those may seek both bridge and term products that lock in a fixed rate, but offer more prepayment flexibility.
Our BPL volumes were down modestly quarter over quarter, driven by a decline in originations of our fixed rate term product with bridge fundings up slightly.
Overall fundings for the second quarter were $406 million split between 68% bridge and 32% term.
Early July marked the one year anniversary of our acquisition of Riverbend lending and our single asset Bridge channel turned into a strong showing in the second quarter with a growing go forward pipeline and continued investor demand for the product.
Reduced lending appetite at banks and disruption at certain private lenders are also shaping up as a meaningful tailwind for BPL volumes going forward.
While many of our core BPL customers have never been efficiently served by the banks principal strength of the business. Our current pipeline includes many opportunities in which a sponsor is seeking financing options away from their banking relationship and.
And with an estimated $200 billion of multifamily loans currently on bank balance sheets, we anticipate increased opportunities to capture customers seeking a reliable and flexible lending partner.
Were drivers of rental demand remain entrenched and continue to influence consumer behavior overall.
Overall leasing trends are strong and the average cost to own an entry level home now sits over 60% above the cost to rent a single family home or apartment equivalent to $500 a month in payments. This is the highest delta in at least three decades, and particularly relevant for a portfolio like ours in which average underlying rent is generally between 1002.
<unk> hundred dollars per month.
In addition to persistently higher borrowing costs limited supply of for sale housing continues to support the rental market.
Analysts estimate that barely over 1% of the $85 million plus single family homes in the U S are currently for sale the lowest ratio since at least the early 19 eighties.
In planning for the second half of 2023 replaces a continued premium on reliable funding sources to feed operations.
Fortunately there are premier capital partners in the private credit markets, who are eager to work with us in this regard during.
During the second quarter, we announced a strategic joint venture with Oaktree to support core vast bridge lending platform as previously announced in June the vehicles expected to unlock purchasing power of bridge loans in the amount of approximately $1 billion.
Inclusive of secured financing.
Through the joint venture Redwood earns upfront and recurring fee based income streams for creating the assets and managing the joint venture.
The overall structure of focused exclusively on investing alongside each other 80% oaktree, 20% Redwood with redwood maintaining the relationship with our customers.
And Oaktree, we gain a highly respected investor who is both familiar with our platform and eager to support the expansion of our bridge lending business. Overall, we continue to see deepening demand from investors for our broader suite of BPL products. This is strengthened distribution channels that will serve as an important complement to the joint venture, including traditional whole loan sales and private securitization.
Place with anchor investors.
During the second quarter, we sold $200 million of bridge and term loans to a variety of buyers and expect this type of distribution to continue being a meaningful part of the business.
And mapping out the next chapter of our BPL business, we remain mindful of the macro credit environment, particularly the impact of short term interest rates that we expect to continue weighing on project sponsors notwithstanding continued strength in overall leasing trends delinquency.
Delinquencies in core Vas term and bridge loan portfolios ticked up during the second quarter to four 2% within overall modeled expectations and generally reflective of a small subset of sponsors working through a rapid rise in borrowing rates across their portfolios and in some cases extended project timelines.
Occupancy rates are tracking to plan as our rents on newly turned units, while we incrementally increased loss expectations across these portfolios during the second quarter and believe these fundamentals will be important mitigates to any ultimate severities, our asset management team will continue prioritizing proactive surveillance.
Conditions persist and increased work is required with sponsors to SaaS project plans and take other required steps where appropriate.
Fundamentals in our overall investment portfolio remained robust driven by strong employment data embedded equity protection from a season book and borrowers incentive to protect one of their most valuable assets, our low coupon first mortgage or.
Our jumbo and re performing loan securities saw continued strength in performance delinquencies were 90 basis points in Sequoia and 9% for our RPM book.
Later of which is at its lowest level since the end of 2019.
Opportunities to execute capital relief arrangements with banks would allow us to add incremental exposure to high quality seasoned mortgage pools are complimentary cash on cash returns.
So our existing portfolio.
I will now turn the call over to Brook to cover our financial results.
Thank you Dash, we reported higher earnings available for distribution or <unk> of $16 million or 14 cents per basic common share as compared to 14 million or 11 cents per share in the first quarter, resulting in an EBIT return on common equity of six 2%.
Increase in <unk> was driven by recovery in residential mortgage banking income and by a reduction in G&A expense in the quarter.
Income from residential mortgage banking activities increased $4 million in the quarter do you do any resurgence in lock volumes off of recent lows.
In June alone, we lost three times the number as long as they locked in the first two months of the quarter.
As dash noted gain on sale margin for well in excess of our historical target range of 75 to 100 basis points.
Income from business purpose mortgage banking activities decreased as spreads remain relatively stable during the second quarter compared to the first quarter were spread tightening benefited existing inventory and volume declined 7% from the first quarter.
G&A expenses decreased by $5 million from the first quarter and lower fixed compensation in equity compensation expense as a function of efficiencies created through firm wide expense initiatives.
On an annualized basis G&A of 31 million represents the midpoint of the range. We previously provided for the year and the second quarter included approximately $1 million related to severance expense.
GAAP net income available to common shareholders of $1 1 million or zero cents per diluted share compared to $3 2 million or two cents per share in the first quarter.
GAAP earnings for the quarter were also impacted by net negative investment fair value changes from incremental impairment on our bond portfolio and fair value declines on a re performing loan or RPI investment.
Spread widening during the first quarter, despite fundamental credit performance of our RPI, but continuing to improve.
Net interest income remained stable from the first quarter of 2023 as higher net interest income from mortgage banking and corporate cash were offset by a full quarter of MSR financing and increased borrowing costs additional.
Additionally.
Interest income was impacted by sales in the quarter as they freed up incremental capital through investment portfolio optimization and reallocated the proceeds to the growing opportunity in residential mortgage banking.
We sold securities that were largely non strategic third party assets and were executed at accretive levels to Q1 book value and we recognized gains of approximately $6 million.
While these sales reiterate market appetite for our collateral above our marks we retained roughly $400 million of embedding that discount that we carry forward into future quarters.
Over 85% of which they control the call right time.
Book value per share for the quarter was $9.26 as compared to $9 and <unk> 10 from the first quarter.
Putting the nominally positive quarterly economic return on common equity for the second quarter.
The primary drivers of book value during the second quarter were flat basic earnings per share is impacted by the previously mentioned fair value changes and our 16th common dividend per share.
Restricted cash and cash equivalents as of June 30th.
357 million.
Which exceeded our margin on about that.
Leverage was down slightly to two two times for the quarter.
We continued to manage our near term corporate debt maturities accretively during the quarter repurchasing an additional $31 million of our upcoming August 2023 maturity, bringing the outstanding balance for that maturity to $113 million.
We pay the remainder in mid August with existing cash on hand that has been invested in short term treasury balance and effective rate, which exceeded our cost of funds on that debt.
As we've demonstrated over the last number of quarters, we have the capacity to generate additional capital organically through the establishment of new financing for certain of our unencumbered asset, which can serve both difficult growth. If our mortgage banking businesses are continuing to repurchase corporate debt across our term structure to optimize our capital structure.
Furthermore, we're actively engaged in capital partnership conversations like our recently announced joint venture given our significant uses of offensive capital we see in front of us.
We continue to be successful in managing financing facility capacity for our operating businesses renewing to BPL lines and one residential line, representing approximately $1 billion of capacity under its on my retirement.
Overall at June 30th we had excess capacity of $2 6 billion to support the continued growth of our BPL and residential businesses.
Looking ahead, we intend to add two financing lines in the third quarter related to our recently established <unk> joint venture procure additional financing for our nonperforming BPL loans and add one additional financing line for Hei and 10 other home equity lending products.
As previously guided during our last earnings call, we reset our common dividend level in the second quarter to align with our anticipated near to median term earnings profile ultimately enhancing our ability to capitalize on growth opportunities across our businesses going forward, we see significant opportunity to increase our allocated capital to the residential business.
Yes.
With the changes we've made to our cost structure, we can generate returns accretive to our dividend yield for the residential business and 500 million to $1 billion plus quarterly purchase volume given lack the lock volume trends, we're seeing today.
Chris and dash of covered we anticipate volumes to continue to increase in the third quarter as we begin purchasing from our newly established an existing thankful partnerships and source of additional pool.
We are already seeing these trends manifest thus far in July .
The direction of interest rates could impact our projected second half volumes and for the remainder of the year. We also anticipate a rebound in volumes and BPL due to several factors discussed earlier by Chris and Dash. These include new capital partnerships. The introduction of new products disruptions, we're seeing in the competitive landscape and the possibility of the federal reserve concluding it.
Hiking cycle.
And with that operator, we will now open the call for questions.
Thank you.
Ladies and gentlemen, 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.
Information John will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question comes from the line of Doug Hurdle.
Credit Suisse. Please go ahead.
Thanks, Amit.
Thanks for the color on the residential opportunity.
First hoping you could talk a.
How you see the competitive environment.
Developing are there other nonbanks.
Non banks that are looking to kind of get get into this market and kind of how do you see that.
Playing out.
Hey, Doug it's Chris.
Well first of all I.
Think that theres, probably not anyone that's directly.
Competing with US today, we expect more competition.
But the engagement, we've had with banks, particularly regional banks.
Has been.
It's been more or less.
You know us to this point so we've had a lot of back and forth and we're working with a lot of new partners.
But I think thats sort of a natural evolution of what we do we've run. This this correspondent business now for decades, and I think reputation Ali we're pretty well established.
About the banking system so.
There's been quite a few inbounds.
And we're very focused on that segment.
It's early to say the regulatory announcement today.
Specifically applies to banks with over $100 billion of assets. That's been our primary focus up to this point, but I think over time, we plan to continue to build out the depository facet of our network.
To complement the <unk> that we've done business with for many years, So I think it.
It's very early innings.
But I also don't think that the banks are waiting for the rules to be finalized I think that there's probably not many bank executives today that are looking to double down on portfolio mortgages.
For obvious reasons, so finding liquidity as a priority and as you know we're very focused on the non agency space.
This segment of the market that Fannie and Freddie don't serve so we're pretty excited about the opportunity and we look forward to keeping you up to date on it.
And then I know.
You guys talked about seeing increased lock volume today, but.
If you could just give us a sense as to what are the timelines from turning a lot of these conversations that you're having today into.
Kind of.
<unk>.
Yeah.
You know that these banks were talking to now in terms of the market share opportunity the addressable market you're talking about how how long does it take to start turning those conversations into into meaningfully higher volumes.
Okay.
Oh, well I think.
We're we're well underway at this point and some some banks, where we initiated discussions over the last call it month or two.
We're now actively locking with effectively their live and online.
I mentioned in my opening remarks, there you know, it's a big investment for a bank.
That's used to.
Having tailored underwriting and processes to be able to sell into the capital markets Theres a lot of compliance theirs.
Considerations with respect to loans that are securitized bowl. So all of that work. There is there's quite a big infrastructure build for banks, who have not been active in the secondary markets. So the timeline.
Be staggered somewhat but I think we're in multiple stages of conversations with a number of banks today and my sense is yes.
We expect volume to grow meaningfully from here.
I think we mentioned that June volumes exceeded the prior two quarters combined in July is.
Is looking like another strong month so.
As we progress certainly.
By the time, we report next quarter.
We should have a pretty good update.
That also I should add.
As flow volume.
So very active in the bulk space and we think there is a pretty interesting opportunity as we.
Turn more of these banks are mine to access some of the portfolio opportunities that that you know with respect to some of the lower coupon mortgages.
To try to provide solutions there so it's a pretty holistic effort at this point, we're meaningfully increasing our capital allocation to the residential business.
We're up to $80 million at June 30th and we're <unk>.
Looking at $100 million to $125 million today.
That we expect to go higher from there.
So again, we will we'll have more to say in the coming months, but the response, so far has been pretty positive.
Great. Thank you Chris.
Yes.
Thank you.
Our next question comes from the line of Don Vendetti with Wells Fargo. Please go ahead.
Oh, Yes, you guys kind of touched on this in terms of more capital being allocated to residential mortgage origination, but just trying to think how you balance playing defense market is still uncertain. I mean are you willing to kind of lean into things more.
Or are you going to sell more investments like you did this quarter or is it a combination of the two.
I think well Hey, John it's dash.
I think as always we'll read the market and do what we think is is most accretive the securities that we parted ways with in Q2, we don't for quite some time.
Levered and those yields were well inside where we saw opportunities away and so where we see incremental opportunities to do that.
We certainly well.
As Chris articulated reallocating more working capital to.
To the resi mortgage banking business from our perspective is definitely among highest and best use.
As part of that I think you can expect to see.
In the coming quarters and element of natural.
Reallocation of capital, we talked a lot about the oaktree JV that will provide very accretive accretive capital parrot pursuit with ours to support our bridge business going forward.
And you could expect us to unlock incremental capital from the existing bridge portfolio as we see maturities around out there. So I think a lot of it will happen naturally with some of the pieces. We've put in place, but we will always have the ability to sort of read the market and respond as we need to.
Got it and then.
You know in the BPL 90, plus day delinquencies were up I was just curious.
Do you think that you have visibility on where and when those could Pete I assume that's due to borrowers under pressure even with higher rates.
Yes, Sir.
You can provide some more context, there obviously asset management for the BPL portfolio has been a big focus for us.
The first thing I would say is the near the 4% or so delinquency rates certainly well within our modeled expectations, it's well within the range. We've seen over the past few years, but to your point the priority remains to really resolve these delinquencies as quickly as possible because the early stages.
We tend to see the most accretive outcomes and where the sponsors remain most engaged.
To that end, we expect the majority of the ones that caused the uptick in Q2 would actually be resolved by the end of the quarter either through cooperative sponsor conversations or bring in.
Some sort of outside equity.
To recapitalize the situation.
The fundamentals on the ground, we're seeing across the BPL book I think are really strong we talked about it a.
A little bit on the in the prepared remarks in terms of leasing velocity. The Reds that our sponsors are able to get that's all looking generally really really good.
To your point a lot of this is technical in terms of where sofa has gone which is cause stress in certain parts of our sponsors portfolios and so.
When you have situations like that just being really on top of it quickly and obviously, including loans that are still performing.
Frankly are just being ahead in trying to anticipate issues that are more technical in nature nature than fundamental.
If these conditions persist.
I think we do expect the asset management work to continue but it's really all about getting on top of these issues early.
To get to those most accretive outcomes that we've been able to get so far.
Thank you.
Thank you.
Our next question comes from the line of Rick Shane with JP Morgan. Please go ahead.
Hey, everyone. Thanks for taking my question this afternoon.
Doug.
The questions about sort of hooking up the pipes on the front end in terms of.
Sourcing mortgages and what that looks like.
Can you talk a little bit in this environment about.
Execution in.
On the back end in terms of resuming Sequoia issuance et cetera, I know you've done one deal a year to date, but I'm assuming that if this business builds the way that you expect.
We will see larger transactions and more frequent transactions.
Yes, great question Rick.
We've done a few deals today and I don't think it's a secret we are in the market with one there's one in the market now.
So certainly securitization is going to continue to be a major facet of our distribution strategy I will say that the market has firmed up quite a bit in recent weeks.
Spreads are tighter.
And so we've got good visibility into where we can execute in <unk> and <unk>.
First quarter second quarter margins on the resi business were well in excess of our 75 to 100 basis point long term targets. So we're not out of the woods. You know there was a fed hike and things are still volatile out there, but I do think.
There are investors.
Are picking up the phone and we certainly plan to be.
Fairly active in the securitization space.
To accompany the volume increases we're seeing on the front end.
Got it yeah, I'm, assuming that you guys, probably when you were buying loans where pricing in for the most predicted rate hike.
What was it 99% predicted.
I'm curious.
Curious.
Thank you.
Is there a feedback loop here that as you see execution in the market. It will continue to refine how you approach your counterparties in terms of your buybacks.
Certainly.
Right now I think you know.
Our typical guides for Sequoia.
A pretty pretty well known at this point so the investor base is quite season with respect to.
You know what to expect when we launch.
Deals.
We're educating banks on that process as well and certainly servicing into a securitization.
Guidelines and exceptions.
Geographic diversity all of those facets that play a role.
We're helping banks get up to speed, who havent been actively selling loans in the past.
That will continue to take time.
But we also view those relationships is quite sticky.
Yeah.
It is a big investment working with a capital partner.
And we also have the benefit of of <unk>.
Bank balance sheets, helping us with aggregation and warehouse and so forth.
The partnerships.
We're off to a good start and ultimately.
We're very confident that we'll be able to securitize. The mortgages that were acquiring profitably, we actively hedge and manage our pipelines.
So this is all.
You know, our bread and butter for Redwood and we expect that in the coming months and quarters, especially if this rate hike.
Cycle.
And in the fall.
Hard to say, but I do think more capital will flow back to the sector and liquidity will continue to improve.
That's great. Thank you very much.
Thank you.
Our next question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon.
Chris It seems like.
The real opportunity I think you guys are kind of glowingly about.
What do you Think's ahead with the resi business, but also mentioned the discounted pools that may be available. How do you think about capital allocation. It seems like rosy mortgage banking is an increasing need for capital given the outlook there.
So what does it take when you see a pool that you're looking at to justify the capital going into that purchase as opposed to continuing to see.
Port growth in the mortgage banking side.
Hey, Steven.
It's a balance.
We're constantly.
Whang.
Right right allocations between the businesses and certainly the risk capital liquidity capital, we need to run safely.
I think some of the portfolio opportunities are still emerging certainly we've been active in bidding bulk pools successfully bidding bulk pools.
But there remains.
Billions and billions of dollars of underwater mortgages on bank balance sheets, and we're in a position to offer <unk>.
Solutions, there whether it be credit linked notes.
Acquiring the loans outright.
That we think hopefully over time, we'll emerge those opportunities as we organically.
Reestablished flow rate relationships with many of these banks.
Over time. This is a very good problem to have because we now see.
Fairly large growth opportunities in residential, but we're also growing BPL.
As Dash mentioned, we've got a great partnership now with Oaktree to facilitate.
Significant growth in our bridge business, where.
We're actively.
Working with other potential capital partners. There. So I think it's a really a holistic approach to growth that we're focused on today and certainly.
Third party opportunities with our investment portfolio will be part of that.
Great.
Most of the other things have been answered so I appreciate the time this afternoon.
Thank you.
Thank you.
Our next question comes from the line of Steve Delaney with.
<unk>. Please go ahead.
Thanks, Hey, guys.
Really great news somehow now that I'm thinking about that movie what wasn't a call back to the future or something and it's just.
Kind of really exciting to hear you guys talk about the prime jumbo product because it's been such a part of your legacy so.
Glad very glad that opportunities develop for you could you estimate I know, we're talking bulk and flow it sounds like you have.
Been able to do some.
Bulk season purchases is there any way to estimate the magnitude of that say over the second half of the year in terms of what impact that may.
A range of what impact that could have on your balance sheet in terms of.
Loan balances in that product.
Sure, Steve Hey, SaaS I can I can take a stab at that.
I think.
The way to answer that is sort of a look at it the traditional origination footprint for these products.
With banks and non banks, obviously, where we.
We are very very well connected with the <unk>.
And historically, you've been very well connected with the regionals and we also have from time to time partner with the traditional money centers as well.
On certain partnerships and if you think about the.
The jumbo origination market has historically a 300 plus.
$1 billion market I mean at the moment and we talk a little bit about this in the review we're connected with almost half of that market share.
If you think about regionals and non banks.
That doesn't even price in the potential migration of origination footprint away from some of the money centers, obviously has a lot to learn in terms of what what happens today.
Terms of the roles that Chris was articulate was articulating earlier.
So it's a very very big opportunity and we've been we've been heartened as Chris said by the speed with which a lot of these partners have either re engaged or are engaged from the.
Our new with us, which is which is fantastic.
The other piece I would sort of reemphasize that Chris articulated is just as wallet share.
As a percentage of the jumbo market overall as you well know, we've historically run our business at a 2% to 3% sort of overall market share and in terms of the folks that we engage with our wallet share has kind of been between.
8% to 12% to 14% over the past few years with some some dispersion around that average.
The operational moat with these banks, where that have not sold loans before.
Or for whom it's been a while is really.
Pretty meaningful our.
Our view is that.
Once we get operationally set up with somewhat as Chris said, its not just flipping a switch it takes a lot of work, there's a lot of vendor management or other considerations and so just being the first mover here and frankly, the first of locked loans.
With this cohort from our perspective, there is some real upside to what our historical wallet share has been which can also really move the needle.
That's helpful context, I appreciate it dash and so where we are today on like on the flow business, where are these banks I guess this ties into your at your assumed at DMT execution, but were 7% on an agency 30 years I guess in that ballpark, maybe 60 to 80 bps.
Where are the problem, where the prime jumbo is being priced in terms of in terms of coupon on new originations.
Well Prime jumbos are close to conforming so they're in that 7% range same ballpark yeah.
Same ballpark, but but we're now at a six coupon on on Triple A's, which allows those bonds to price much closer to par or even above par and so just from a liquidity standpoint, we're not dealing with the convexity issues that we had to deal with over the past the better part of the past two <unk>.
Years.
As rates rose and you've had these large inventories of underwater mortgages. So a lot of that the market is through <unk>.
<unk>.
The new issue market is much healthier as a result of that and we had talked about that.
In recent quarters. So so in many respects, we're we're in a better spot from a from a liquidity standpoint, and that allows us to really lean in on pricing.
And because these banks in particular have large inventories of mortgages, we can combine.
Some combination of flow with bulk we're looking at probably close to a $1 billion of bulk pools right now.
And so that really allows us to move more quickly and the quicker we can turn to capital and move the pipelines the much.
Just just creates much more certainty on the execution side than we've had in quite a while so so that's all very positive.
And like I mentioned earlier.
We're in various stages of implementation with new partners.
So it's going to take some.
Time to.
To really see.
How much of this addressable market this $130 billion to $150 billion of of originations that these banks.
Have spoken for on an annual basis, how much of that.
We might see in the capital markets, but but I do think that.
Being a reliable partner.
Matters more to depository.
Yes.
<unk>.
The whole process of plugging in I think is.
It takes it takes more work.
Takes a bigger investment.
So I don't think youre managing down to the last basis point of execution I think I think you're really focused on reliability.
And understanding.
Each other and exceptions and just sort of all of the <unk>.
Innerworkings of selling loans so.
So that's the that's ultimately.
Over the course of the next few months I think we'll have a much better sense for how big this market can be.
Can you can you just estimate roughly how many bank partners that youre engaged with I mean, obviously youre not going to be specific I guess when you do securitizations that information, but you know are we talking about a dozen banks.
Several dozen banks that you're that you're actively involved with.
Oh.
<unk>.
Closer to 70 plus.
And Thats.
And that's that sort of live engagement.
We've got obviously.
Thousands of banks in this country and to some degree all of them.
We will probably benefit from from an outside capital partner to varying degrees.
So we're we're well underway Steve then.
As we as we turn more of these guys on.
Live with our platform.
It's going to be.
Shifting this balance I think of banks and non banks back to something.
To reference you back to the future comment.
Something that.
We've experienced in the past.
Much more balanced between the independents and the depository.
Thank you very much for your time and your comments.
Very helpful.
<unk>.
Thank you.
Our next question comes from the line of Bose, George with Gabe VW. Please go ahead.
Hey, guys good afternoon.
Wanted to just ask you about sort of the cadence between the current and more sort of normalized returns.
Is there a way to kind of think about.
How that how long that takes and then there's the bank opportunity here kind of accelerate that process.
Yeah.
It's a great question.
Our investments fair value changes, which tends to be one of the delta between GAAP and <unk>.
As meaningful this quarter as it has been in fact in certain prior quarters.
Net interest income has been stable for the last three quarters I do think generally.
AAV here represents a N.
A better run rate as we head forward.
Thanks, Chris and Dash as plan with the trends that we're seeing in July in terms of.
As lot volumes for <unk> and <unk>.
We had.
And.
We haven't had a meaningful pick up in our expectations for the second half of the year that could really be somewhere between a three to 5 billion in volume.
To Chris' point on bulk opportunities that flexes up and down.
In a fairly quickly here just given the.
The pace of what's unfolding out of the bank so.
That alone could.
Could add a couple of cents here today.
As we move forward on our residential mortgage banking.
Revenue and I think yes.
To tie the comments into capital earlier, as well as Christine mentioned like $100 million to $125 million of allocated capital to Ravi.
What youll see from US is just the benefits of our our operating leverage and scale from here you know our cost per loan with meaningfully lower in the second quarter versus the first but.
We could flex volumes probably.
At least two full time here and with a lot of that hitting the bottom line correctly.
The same thing with how we're thinking about these partnerships as they are structured.
Our capital efficiency perspective, as well so.
We're able to address a lot of that volume to our existing capital allocation that we've set aside for the business.
Okay, Great. That's helpful. Thanks, and then just switching over to BPL.
Just in terms of the securitization market. There can you just any color on trends. There is I don't think you've done a deal. This year is there is it sort of signs of that market, becoming more open.
Yeah.
This is down there are.
On the on the on the fixed rate side.
For our term product, which we have historically securitized a fair amount of.
As you know, we're the only ones really doing that specific product and securitization, but it tends to map closely to some of the single borrower <unk> transactions and we've seen a little bit of momentum there recently.
Which is good.
And then on the on the bridge side, there continue to be deals.
That are unrated, although there is some potential for at least one rating agency to start to break those transactions in the second half of the year, which would be.
Which would be very very accretive for that market and bring a lot of new investors and which is which is exciting.
To that point, we've really spent a lot of time over the past couple of years diversifying.
Distribution and BPL, obviously Oaktree is a primary example of that we sold about $200 million of BPL loans in the first quarter.
We haven't done is as you probably know.
Broadly syndicated securitization.
And over a year at this point, but we continue to support the business through other distribution channels. So as that market continues to normalize thats, that's upside for us and we're obviously tracking that closely and mode and we will certainly utilize it if it makes sense.
Okay, great. Thanks, a lot.
Thank you.
Next question comes from the line of Eric <unk> with Jefferies. Please go ahead.
Hi, good afternoon.
Follow up on our BPL.
We kind of saw the pivot of BPL volumes towards the bridge product. This time last year as.
As we lap that time period and see some rate stability are.
Are you seeing that prior year's vintage a bridge loan shown any interest in moving towards the term product. There is the mix still favoring the bridge.
100%.
The mix was about two thirds bridge one third term in the second quarter as I think we've talked about.
Before.
The business is humming that mix is probably closer to 50 50 in terms of rates rates being normalized.
Et cetera, so yes.
Particularly given we're so for us a lot of sponsors.
Have come to us asking for some sort of term product may be shorter term with more prepayment flexibility. So we would expect that mix to continue to evolve more towards some equilibrium between term and bridge that said the term business.
Is very much linked to benchmarks because as you know those loans are our size not only the value of the homes, but also debt service coverage and so.
We have to be mindful of that but yes, we obviously very proactively manage the book as I mentioned earlier and we are definitely seeing an increase in sponsors looking to term out the key to that obviously is execution of their business plans and getting to the required stabilization.
In order to get there most of the bridge business that we do is sort of lighter rehab. So that's very constructive for occupancy in terms of how quickly.
These sponsors can get to the right stabilization, but we're certainly optimistic that the mix evolves in the second half of the year for the reasons you articulated.
Rates will have something to do with that but that's certainly the plan.
Great. Thank you and then one quick follow up just on G&A expenses, given the kind of near term opportunity on originations volume and then increased cadence.
Will we see any increase the upward pressure on G&A.
Just.
Where do prior guidance still hold there.
No.
As we mentioned in the prepared remarks of our prior guidance should still hold.
We do view Q2 to be a good proxy for.
Next quarter as we head forward, although we did have about $1 million of sovereign.
And other transition related expenses in that number this quarter as well.
And then we just.
We just referenced on the Opex side for revenue that we still have a lot of operating leverage that that business is about a third lower in terms of overall cost than we were last year.
On.
We still see opportunities from here to increase our operating leverage before we add in my heart.
Great. Thank you that's all for me.
Thank you.
Our next question comes from the line of Eric Hagen with <unk>. Please go ahead.
Hey, how are we doing.
Couple of questions here I think on slide 30.
The average borrowing cost for the recourse debt is about 7% what's the yields for the retained assets that are secure in that portfolio.
And then with the separate separate question here with the unsecured debt coming due in 2024 and some of the fish.
Fish's thereafter, what kinds of considerations do you feel like you can make around repurchasing that debt retiring at early kind of similar to what you just did with the 2023.
Yes, most of that debt is against our investment portfolio I would say that carried a 16% for yield at the end of June 30th.
Okay.
Yes.
And I'm, sorry, and your second question.
Looking at just what kinds of considerations you guys make around repurchasing the.
The data retirement retiring at early 2024 is in the 2020 fives.
Similar to what you just did with the 2020 threes.
Yes.
We mentioned in some of our prepared commentary that we're definitely.
Provisioning and some of our capital to continue to address our unsecured.
Part of our capital structure, the 24 inch appealing to us.
And a number of our theories as well and so we have.
Several ways between our.
Strategically repositioning part of our third party investment portfolio also with $250 million of unencumbered assets on balance sheet and then additional liquidity that we mentioned through the refinancing and activities that were actively pursuing for the third quarter and all of that reasons.
Excess capital beyond what we have.
And that we have earmarked for the 24 to continue to address our capital structure ALC.
A continued shift from unsecured to secured financing just given relative value there.
Yes. That's helpful. Thank you guys very much.
Thank you Sir.
Thank you.
Next question comes from the line of Kevin Barker with Piper Sandler. Please go ahead.
Hi, guys. This is Brad Pvz altar, Kevin Barker.
I know you touched on our loss expectations already in the BPL segment. The steps you guys are taking to mitigate it.
The extent you see any further pressure there how would this impact your Susan good allocate capital towards the BPL segment going forward.
Well I think I think the market conditions always impacts all of our capital allocation decisions. So I don't I don't think that anything has necessarily changed.
Where.
Where the puck is going as probably evolving the nature of the BPL footprint on the types of products that we're most focused on originating and if you look at Q2.
For instance, it was much more indexed to.
To the to the long term loans.
Built for and things like this things that are probably more directly responsive to.
Some of the supply elements within single family.
Overall activity in multifamily is just is lower based on what's going on in the market and some multi was less than 10% of our Q2 activity and BPL.
That may that may tick up a little bit in the second half of the year, but I think.
The way, we try and run the business is responsive to where we see obviously the biggest needs, which will which from our perspective will lead.
To outperformance than they are in the underlying book So as I said, a few minutes ago.
Based on the <unk> joint venture and where we see alternative uses for capital.
Our expectation is that some of that capital will probably naturally reallocate away to support mortgage banking businesses Holistically.
But in general.
We're always focused on sponsor business plans et cetera, and I, just think we're going to run the business responsive to.
Where the market needs liquidity, and frankly, where we see the strongest fundamentals.
Thank you.
Thank you.
As there are no further questions. The conference of Redwood Trust Bank has now concluded. Thank you for your participation you may now disconnect your lines.
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Yes.
Okay.
Yes.
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