Q3 2023 Redwood Trust Inc Earnings Call
Ladies and gentlemen, good afternoon, and welcome to the Redwood Trust, Inc. Third quarter 2023 financial results Conference call.
Today's conference is being recorded.
I have allowed to them to call over to Kaitlyn Mauritz Redwood 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 third quarter 2023 earnings Conference call with me on today's call are Chris <unk>, Chief Executive Officer Dash Robinson, <unk>, President and Brook Carrillo, Chief Financial Officer.
Before I begin I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward looking statements forward looking statements are based on current expectations forecasts and assumptions and involve risks and uncertainties that could cause actual results to differ materially.
We encourage you to read the company's annual report on Form 10-K, which provide a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward looking 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 third quarter, but the review, which is available on our website Redwood trusts dotcom.
Also note that the contents of today's conference call contains time sensitive information, but are only accurate as of today, probably not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.
Today's call is being recorded and will be available on our website later today I'll now turn the call over to Chris for opening remarks.
Thanks, Kate and welcome everyone to Redwoods third quarter earnings call.
There is no question that our markets are in a state of transition.
Acted by the final throes of hyper aggressive fed policy ongoing geopolitical strife and proposed regulatory rule changes that will usher in a new era of housing finance.
In the third quarter, the gravitational pull of an inverted yield curve continued to take its toll on the mortgage sector, particularly on the market values of fixed rate portfolio investments Redwood you got book value was down 5% for the third quarter, largely a mark to market adjustments directly attributable to the rapid rise in the 10 year Treasury, which took place in the final.
Most of the quarter.
Since quarter end, we estimate our GAAP book value to be down approximately 2%.
For those in our sector, who have already reported their third quarter results GAAP book values have been down 8% on average.
Trying to make sense of this market achieved through the fog of 8% mortgage rates, it's difficult for any of us, especially given the prospect of an extended period of higher for longer benchmark rates. If the economy continues to outpace our expectations and.
Housing affordability at the lowest levels, we've seen since the 19 seventies and transaction activity at multi year lows. Many market participants are simply retreated to the sidelines.
In fact, as we head towards year end, we've already started to see the same dimunition of market activity that we observed a year ago.
That's why it's so important for us to keep our shareholders apprised of the transformational changes that we expect to become prominent in the coming months. Our perspective is informed by 30 years of cycles and market turns and learnings from things we've got longer missed in order to best position our company for the future and.
And to summarize our view do you expect a major secular shift in how mortgage related assets will be owned and financed in the years ahead.
Takeaway in the non agency mortgage space, we have long stood as a critical provider of liquidity and.
In fact, we believe the option value of our franchise has never been higher than it is today.
You contextualize, our thinking we expect a convergence of how both agency and non agency mortgage markets function with a large percentage of non agency loans getting distributed to match funded private credit institutions, largely in securitized form and away from bank balance sheets and the.
Agency mortgage market, Fannie Mae and Freddie Mac were created for this purpose to provide liquidity to banks and other lenders by aggregating and securitizing the residential loans for distribution to bond investors.
In the non agency mortgage space similar intermediaries must emerge to provide that liquidity and reminiscent of Redwood as founding thesis. There is no one better positioned than us to do so.
Natural noncompete and partner to our loan sellers.
And then to preserve their customer relationships, while maintaining liquidity and then otherwise illiquid market.
As we previously mentioned our near term production will remain risk minded given the challenging market backdrop.
We'll not be scaling volume at any cost.
Instead, we'll be focused on growing wallet share with large banks, many of whom have not needed a capital partner Simpson.
A great financial crisis ended.
The aftermath of that crisis, we would remind shareholders that the last time that regulatory rule significantly changed from the mortgage sector.
In that sense, we're neither predicting nor in need of a major boost in industry wide transaction volumes to achieve our near term objectives.
We're focused on further solidifying relationships, providing much needed liquidity to our new and existing partners with the goal of realizing transformative and durable market share gains as the yield curve normalizes.
As you May recall, our second quarter earnings call in July took place just hours. After the Federal reserve released newly proposed risk based capital rules for the U S banking system.
Our thesis at the time was that while the final rules would likely evolve bank management teams have looked to comply with the spirit of the rules well in advance of their passage.
Three months later, our thinking has thus far been validated and our progress has been well timed with the emergence of fresh demand for our products from new sources of capital complementary to our traditional distribution channels.
Basketball outlined in his remarks results in leading indicators. We are tracking are pointing green with a response from regional and other banks it has exceeded our expectations.
Without a safety net of zero cost unlimited deposit capital.
Asset liability mismatch that owning mortgages proposals for banks is inherently risky we.
We realize that large banks creates a high degree of uncertainty and are naturally pushing back against the proposed risk capital changes.
Our response will be to help our partners approach these changes constructively.
We believe it's possible for banks to preserve lending footprints, including for first time homebuyers with the right capital partner.
Our team is home to a degree of operational excellence and the non agency mortgage market over decades, allowing us to support our bank partners with more than just our rate sheet.
Many banks have understandably not had to flex their loan sale muscles in many years, creating uncertainty.
Our ability to swiftly onboard and educate our lending partners provide incredible value today as they work to pivot from net buyers of portfolio lenders to net sellers on a forward flow basis.
Besides the long term opportunity, we estimate that banks have over $1 four trillion of jumbo loans held on their balance sheets today before considering ongoing production.
We further estimate that around 50% of the jumbo origination market, a number which could represent 100 to 150 billion or more of annual volume could pivot to an originate to sell model.
Leading indicators suggest that the shift is now underway.
We believe our third quarter mortgage banking results are indicative of how banks and other financial institutions will look to finance their mortgage production going forward.
Given the changes we foresee for our markets, we've begun thinking more holistically about the redwood platform and believe that evolving our capital structure and be carrying long term private capital partnerships must be a top priority.
As I have emphasized we continue to observe the transition occurring with our role as a banks private credit institutions and specialty finance companies such as Redwood rapidly evolving.
In particular regulatory cross currents are redefining the most efficient holders of real estate related assets as well as those who will finance and service them.
As evidenced by the joint venture that we announced this past summer the value proposition that platforms like ours offer institutional credit investors has grown dramatically over the past few years with investors seeking out the assets we create.
These investors include the likes of pension funds life insurance companies sovereign wealth funds and other nonpublic, who are accretive capital the lack of the origination of our sourcing capabilities that we offer.
So possessed patient capital a key advantage when holding less liquid non agency investments such as ours.
In keeping with these trends are long term strategic focus will be to further position our mortgage banking franchises to meet this unprecedented market opportunity with ample working capital and access to a deep set of products.
Our investment strategy will naturally evolve in kind, but continued focus on deployment of our organically created assets to third party capital partners in lieu of traditional direct investing.
This includes a strong internal focus on the next frontier of non agency investing which is credit risk transfers and bank portfolios, where significant risk capital can be freed up at a relatively low cost.
We expect progress on these efforts and partnerships to continue to play out in the coming quarters I look forward to keeping our shareholders current as we proceed.
I'll now turn the call over to dash.
Thank you Chris.
I will now cover details of our operating platforms and investment portfolio during the third quarter before turning it over to Brian to discuss our overall financial performance.
As Chris highlighted in his opening remarks proposed changes to the bank regulatory capital regime, while far from final.
Turning into the tailwind we expected for our residential mortgage banking business in many cases ahead of schedule.
Well, we believe we are still in the early innings of this sizable market shift. It is clear that business models are evolving quickly with important ramifications for how 30 year mortgage risk as funded unhedged.
Always our team has been already enabled partner third quarter locks were $1 6 billion close to Triple second quarter production with approximately 40% of this volume coming from depository.
Since March our residential team has engaged with depository from coast to coast Onboarding, new partnerships and bringing our total count of active seller relationships to 185 and growing.
This group now includes over 70 banks, including some of the nation's largest regionals and large financial institutions, many with assets over $200 billion in extensive mortgage origination footprints.
All of these institutions have just commenced lock activity with us in recent weeks, implying an attractive runway for growth notwithstanding persistently higher rates in fact, our locked pipeline in Q3 carried some of the strongest credit characteristics. We've seen in recent years, 772, FICO, 72%, LTV and 33% debt to <unk>.
<unk> ratio.
In keeping with the momentum we see for the business, we nearly doubled our capital allocation to residential mortgage banking in the third quarter and expect that allocation to grow further heading into 2024.
Our estimated share of overall jumbo production in the third quarter approach, 4%, well above our historical 2% to 3% range and up from just 1% in the previous quarter.
Reflective of both a growing seller base and deeper penetration with existing partners.
Residential purchase volume in the third quarter was $815 million up over 340% from the second quarter think sellers accounted for 50% of total quarterly purchase activity up from just 10% in the second quarter and a de minimis amount in Q1 of.
Of note total book activity at over 90% of which was from banks was a key driver of third quarter purchase volume much of its season loans acquired at a significant discount to par.
Notwithstanding the persistent rise in rates, we continue to evaluate both schools coming to market more evidence of the scarcity of shelf space for many banks seeking to balance pressures on capital liquidity and net interest margin.
Distribution channels for Jumbo remain open and we sold $391 million of loans in the third quarter through a combination of securitization and whole loan dispositions.
The team followed up quickly in the fourth quarter by closing our fourth Sequoia securitization of the year, just last week, bringing our total residential securitization activity for 2023 to over $1 billion.
Both deals were distributed to a broad base of buyers, including several new insurance and money manager of investors.
And were executed within our target gain on sale range.
Recent print was achieved amidst the 10 year treasury yield moving within close to a 50 basis point range and just over a week an important statement about the power of our platform and the depth of capital that remains under invested in the space.
The same regulatory changes driving strategic progress in our residential business are also an opportunity for core vest.
Our business purpose lending platform.
Borrowers who have historically sought funding from banks now frequent our pipeline discussions and while the overall credit environment calls for continued caution in selectivity demand from capital partners remains strong for well underwritten BPL loans to quality sponsors.
We've been in dialogue with several banks and partnership opportunities that would allow us to access their existing pipelines with an eye towards mutually beneficial outcomes.
With a lifecycle lending platform that offers both bridge and stabilized term financing, we are well positioned to capture incremental market share that we believe will continue shifting to private lenders.
Corvettes funded $411 million of loans in the third quarter, a slight increase from the second quarter with a 10% increase in bridge volume being offset by a decline in term production with Enbridge, our build for rent aggregation product has seen increased demand from borrowers and carries a favorable risk profile given the turnkey nature of the homes being financed.
In keeping with broader market trends multifamily origination remains light as sources of capital become more selective especially for value add projects.
And while we expect volumes for our fixed rate term loans to remain influenced by benchmark rates. Our bridge portfolio remains fertile ground for refinances and the term loans as borrowers progress with projects.
As with residential our distribution efforts within business purpose lending remain a key differentiator.
We distributed over $350 million of BPL loans in the third quarter, including a highly accretive private securitization with a quality institutional partner.
Bulk whole loan sales and initial contribution of bridge loans to our recently established joint venture with Oaktree.
As Chris highlighted in his comments given the elevated demand for and attractiveness of our assets, we see opportunities to further diversify these distribution and partnership structures the.
The BPL sector overall continues to manage through macro cross winds that are impacted sponsor sentiment and reduced transaction volumes across the industry.
As we highlighted on our last earnings call. We remain focused on the impact of higher short term interest rates have on sponsors notwithstanding overall strength in leasing trends.
In anticipation of this impact our team has continued to work with borrowers well in advance of their loan maturities to a SaaS project plans and ensure they manage towards successful completions.
While 90, plus day delinquencies across the bridge and term books declined slightly in the third quarter to 4%. We continue to manage through pockets of stress, particularly in our bridge portfolio or some combination of rate modifications and fresh equity from new or existing sponsorship have ease the burden of rapidly rising rates across a small handful of sponsor relationships.
<unk> and.
Engagement with borrowers has been productive, particularly when it occurs in anticipation of the need to reassess the project and we believe that these efforts provide ample runway for sponsors to complete their work, while strengthening our position as a lender.
Hi mortgage rates also continue to impact consumers' ability to access equity in their homes.
Underscoring the importance of secondary financing products that fit the current environment.
We were pleased last month to formally launch aspire, our home equity investment or hei origination platform.
As a quick reminder, hei or products that allow homeowners to monetize some of their homes equity without an additional monthly payment burden in exchange for sharing in a portion of the change in the homes price going forward.
This launch comes after years of investing in and financing Hei and was a natural next step in the progression of our support for this nascent but growing sector.
With our track record of supporting housing accessibility as well as our sizable connectivity with mortgage lenders. We believe we have a unique opportunity to help scale and institutionalized hei in a way that will benefit consumers.
Fire allows us to do so directly and part by leveraging our nationwide correspondent network of loan officers a significant advantage over more traditional high cost marketing campaigns.
Turning to our investment portfolio, while the rapid rise in 10 year Treasury rates during the final month of the quarter significantly impacted fair values. We continue to see strong underlying credit performance are re performing loan portfolio saw the lowest 90 plus day delinquencies in almost three years and delinquencies and our Sequoia book remained flat quarter over quarter.
Below 1%.
These credit tailwind created a window during the third quarter to optimize segments of the portfolio in support of our long term thesis and strategy.
In that vein, we were able to free up over $30 million of capital net of financing for deployment in areas, we believe to be more accretive to long term shareholder returns.
Notably and opportunities presented by continued shifts in mortgage funding markets overall.
Other areas, where we can invest alongside strategic capital partners.
I will now turn the call over to Brooks to cover our financial results.
Thank you Das we've reported earnings available for distribution or <unk> of 11 million or <unk> 10 per basic common share as compared to $16 million or 14 cents per share in the second quarter, resulting in an EAP return on common equity of four 3%.
The decrease in EAP was primarily due to lower net interest income kind of breaks bonds in our investment portfolio inclusive of a higher balance Atlanta into non accrual status in the third quarter.
Dissipate significant recovery of the associated interest going forward and expect net interest income to trend higher beginning in the fourth quarter.
The decrease in net interest income was partially offset by higher mortgage banking revenues on the corner, which increased over 20% versus Q2.
Adjusted for acquisition related intangibles, our combined mortgage banking business has generated an 11% after tax return on the quarter.
Income from residential mortgage banking activities increased 10 million on the strength of higher volume attractive execution on our securitization activity and overall market risk management.
Well hedged against basis exposure on our growing pipeline throughout the quarter and benefited from a steepening of the yield curve as a result margins by 80 basis points, which is in line with our target and on power.
Income from the business perfect mortgage banking activities increased by $1 million driven largely by the accretive term loan securitization financing that <unk> described.
G&A expenses decreased by 1 million from the second quarter as our operating businesses were able to demonstrate efficiencies on higher volume.
With residential and business purpose mortgage banking saw a decrease in cost per my own declining to levels that we believe support profitable credit scoring program.
<unk> also declined in part due to lower expenses associated with performance based long term incentive compensation.
GAAP net income related to common stockholders was negative 31 million or negative <unk> 29 per diluted share compared to $1 million or here since the second quarter negative earnings per share to a book value to $8 77 compared to $9.26 in the second quarter, reflecting a total economic return of negative three six for the third quarter.
GAAP earnings for the quarter reflected the impact of the sharp increase in rates later in the quarter on a re performing loan securities. Despite the continued positive trends in fundamental performance that has been mentioned.
Fair value changes were impacted by certain nonperforming loans and loan modifications at the ash referenced and also by spread widening within the V. P outbreaks portfolio. The negative fair value changes were partially offset by fair value increases for hei assets as a servicing asset which benefited from an increase in rate.
Unrestricted cash and cash equivalents as of September 30th $204 million as we repaid the remainder of our convertible debt that matured in August Consequently, recourse blackberries with two three turns for the quarter only one kind of way to put it against the investment portfolio.
Over the last 12 months, we raised multiples of the cash needed to repay our 2023 convert.
The vast majority of proceeds were raised organically through the optimization within our investment portfolio given the relatively low amount of secured financing leverage the carry that.
We have approximately $300 million of unencumbered assets remain a continued potential source of capital, which can serve to fuel growth of our mortgage banking businesses.
<unk> continued to repurchase corporate debt across our term capture through the fourth quarter, we have begun to repurchase our 2024 convertible on maternity and will continue to evolve our capital structure over the longer term to balance our corporate debt ratios with more permanent forms of equity capital to drive accretive growth.
We continue to see strong demand from Counterparties to Panther assets, we successfully renewed two maturing loan warehouse financing facilities with $1 billion of capacity with key counterparties during the quarter.
Overall at September 30, we had excess capacity of $2 2 billion, which they are likely to further increase to support the continued growth of our BPL and residential businesses.
In the third quarter, we sold a $49 million of securities that were largely non strategic about their second quarter evaluated recognizing fair value gains of $2 million, while these sales reinforced market appetite for our collateral.
Roughly $390 million and embedded in that discount for $3.26 per share that we carry forward into future quarters.
We were able to redeploy this capital into the growing opportunity across our operating platform wherever Athena attractive target returns of 15% to 25%.
As a result residential mortgage banking capital greater than $150 million from 89 in the second quarter.
The efficiency of our distribution effort, we believe that our near term volume targets could be supported by roughly $200 million of capital given.
Given the work we've done in both residential and business purpose mortgage banking I think forecast our operating businesses are positioned for profitability and continued growth.
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 and one on your telephone keypad.
Confirmation tone 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.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question comes from the line of Rick Shane with J P. Morgan. Please go ahead.
Hey, everybody. Thanks for taking my question this afternoon.
I'd like to talk a little bit about the origination environment, obviously hated skewing pretty significantly towards purchase not a surprise.
Underlying that we're also seeing a skewed towards new home purchase.
Because of the lack of availability of inventory.
Im curious if youre seeing any.
Any disruption or.
Dislocation associated with homebuilders, providing subsidized financing in order to.
Drive volume in this environment.
Oh, Hey, Rick it's Chris.
I think so.
The housing market has been surprisingly stable.
In recent months.
And I think that you know in our markets. We actually did have a small amount 20% or so of recent locks had been revised some of that has to do with bulk pools that we purchased but biomarker as a purchase market.
I think the fact that active.
Active listings are half of what they typically or historically is a big part to do with a stable housing market and the.
The rate concessions from the homebuilders have.
We have not.
At least from our perspective impacted our book or what we're seeing.
Got it and in Chris with that in mind.
These flee the big opportunity and you guys have been clear about the impact of Basel, III and the opportunity that creates.
Does it makes sense to also partner with the homebuilders.
And again for as long as I've known you guys, it's not anything I've ever thought about or asked about.
But do they make do the homebuilders makes sense as channel partners as well.
They certainly could reckon this is down I mean in the in.
In the history of the Jumbo business, we have we have done some of that we do have sellers that have.
Smaller homebuilding ventures that we have actually done business with in the past.
Other opportunity that comes out of what you're articulating is with BPL.
I referenced it in the prepared remarks briefly but we.
We are still seeing a lot of homebuilders either pivot.
For sale too for rent strategies themselves or move that inventory to other clients of ours, who.
Who are looking for financing. So we are starting to see more of that it's a product that has gotten more and more.
Interest here is the homebuilders are looking to continue to diversify.
And address some of the just overall financing challenges.
You are referencing.
We really liked that risk because as you know in that case. The construction is done we don't we don't finance those until certificate of occupancy is in hand, so that's actually been a reasonable part of the of the BPL pipeline here in the past quarter or so so that's definitely another opportunity off the back of some of the trends you are articulating.
Got it Hey desk. Thank you Chris Thank you very much guys.
Thanks, Greg.
Thank you.
Our next question comes from Bose George with VW. Please go ahead.
Hey, everyone. Good afternoon.
Wanted to ask how does the resi lock volume how did that look in a tober.
And then just move up in interest rates persist now how do you think that could impact volumes industry jumbo volumes in 2024 versus this year.
Good question Bose I think the pace of play in October has been pretty consistent with the latter part of Q3.
So we've been pleased with the daily lock flow.
I think thats notwithstanding higher rates I think again, that's driven by the fact that our our bench of sellers is deepening number one and number two where we're adding wallet share here with the folks that were already.
Already been penetrated with over the past few quarters.
Certainly rates continuing to trend up will continue to impact the size of the overall pie I think we've been really pleased frankly with with the credit quality of the loans, we've been locking as I mentioned in the prepared remarks, some of the best credit profiles, we've seen in quite a while at rates that are at or touching 80% gross margin.
At this point, so we'll see how it evolves.
I think we've been pleased with with the recent trends in October is on pace with the latter part of Q3, Yeah Bose I'd add just another way of expressing that.
<unk> borrowers certainly what we've seen from an underwriting standpoint.
They were well qualified with a 3% tenure in there they are well qualified with a 46 10 years or so so I don't think.
We've seen much in the way of.
Slower volumes, especially for purchase activity, but we'll have to wait and see how things right out.
Okay. Great. That's helpful. Thanks, and then can you talk a little bit about the bulk purchase opportunity do you think this could end up being fairly meaningful how do the economics compare with.
Your regular flow business.
We continue to be optimistic about those continuing to come out.
I think we're a particularly strong bid for ball for a few reasons number one.
Just our operational history with more and more of these sellers as being around the hoop on a flow basis, we think positions us well.
Two.
To be a helpful partner to those sellers and when.
When it's when it's time to explore a bulk sale.
As we talked about those those types of loans booked at a discount of paired particularly well.
The securitization so I think we naturally have.
A pretty strong bid for those types of loans to complement our on the run or on the run production.
So it's definitely a big opportunity I think certainly obviously with the evolving capital rules that will be a big deal. If we see a little bit of a rally in rates from here that could unlock more frankly, this dollar prices trend up a little bit.
For those that may not be hedging their positions on more seasoned loans. So.
It definitely move the needle and frankly, we think is the banks in general start to get their head around the rules and frankly, they get more at bats, with us on the flow side that will that will make the bulk opportunities hopefully.
Come with even more speed than they have over the past quarter or so.
Okay, great. Thanks, a lot.
Thank you.
Our next question comes from the line of Don <unk> with Wells Fargo. Please go ahead.
Can you talk about your credit outlook through the BPL investment portfolio delinquencies improved a little bit this quarter, but I guess youre doing some modifications and our borrowers are having a lot of success in terms of going from variable to fixed.
Working out well.
Yeah. Good question I can take that.
I think that the.
Starting at the high level I think a lot of the trends. We're seeing this quarter are consistent with the ones. We've been speaking to the past quarter or two I think in general.
Business plans are going fine, we're seeing pockets of stress with sponsors.
Some of whom have been able.
To bring additional capital to the table to rebalance.
In other situations frankly, Don where it's been the right project, but the wrong sponsor and we've had to bring in.
Outside equity and I think we've been pleased with the speed with which we've done that just.
Just to give you a sense for dispute resolution.
Of the 90 plus book at the end of June we worked through over half of those loans at this point either explicitly or in contract.
And expect to be half the rest of the book resolved.
By the end of the year in terms of our Oreo position.
Our Oreo is at 930 over 90% of those readers sold or in contract. So I think we've been pleased with the speed of resolution.
In terms of your question floating effects, yes, that's obviously a priority for for most borrowers in the market to see if they can get to the right level of stabilization too to take out of traditional fixed rate term loan.
<unk> re cutting of deals we did in the quarter were largely floating to fixed.
Where we still are able to maintain accrual rates, 9% or so so definitely still healthy.
Average accrual rates there so in general like the support levels and the tailwind for rents are still there.
And we've been pleased with our ability to <unk>.
In general.
Move on from situations, where we didn't have the right sponsors and the projects.
And <unk> bring in fresh equity from from sponsors.
We felt we're still viable to continue so it asset management remains a big focus for us notwithstanding the fact that we're still very constructive on rents. We do expect this work to continue in the coming quarters, just given the overall environment.
It helps us that.
We are generally focused in markets, where we have a pretty deep broad accident. If a sponsor doesn't work out we can bring in someone else. We've had very good success with that of that over the last quarter or two and I would expect some of that to continue going forward.
Thank you.
Okay.
Thank you.
Our next question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon.
First of all starting with the jumbo side, clearly a big opportunity and Chris I. Appreciate your comments at the beginning about being able to gain market share. When you think internally and then when you guys model out internally and looking three to four years out how much market share do you think you can have.
What type of volume is that you mentioned some things in the comments made me think maybe third party capital helping funding a lot of the the securities retained similar to what the JV is on the BPL side. So can you talk about maybe what your.
Three to five year vision of how the jumbo business plays out.
Sure well.
You know this will be somewhat riddled with assumptions, but we are we do think that.
Some form of these capital rules would go into effect I think most of our bank partners think of that as well.
Our our strategy, which is a little nuanced is basically helping banks preserve indoor grow market share. So we don't necessarily think that banks share needs to be ceded to the independents per se, although we have great business relationships, there as well, but to the extent, we can work as a capital partner with large banks.
We think theres a lot of wallet share there as dash mentioned.
Basically been locked up since the great financial crisis. These loans have gone into portfolio. They have not come out to markets. When we talk about market share.
It really hasnt been an opportunity for a while and so you know that.
That piece of the business is what excites us the most currently and to the extent that.
We can unlock some of that and a good percentage moves from originate to distribute.
Still on a single digits range as far as market share goes we've got a lot of upward mobility.
We will need capital partners, we're focused on Jb's, we're focused and thankfully we've got a lot of interest.
So we want to scale the right way and that's why we made the comment that we're not going to chase volume in this environment, especially as rates are continue to be very very stubborn.
But we do think there's a.
Our marking this volume is.
As a key aspect of our strategy and.
And that's why we keep talking about it and that's why we're so focused on on fast.
<unk> facet of the jumbo market that there really hasnt been accessible in a number of years.
I appreciate the comments there definitely seems like a.
Real opportunity ahead of you here.
Working with the banks.
Follow up on the BPL side, I think from from answered <unk> questions and it sounds like you can sort of work through 90 day delinquencies in about six months.
Seems like Oreos are processed fairly quickly can you talk about that that Oreo resolution process or capital infusion. There do you sell is as you know how do you think about losses, there are potentially gains on liquidations.
Sure in general.
But we try and do.
Obviously as a way to get into Oreo at all.
I think thats reflected in the relatively low percentage that gets there, but I think where we've had the most success frankly is having a plan.
And it's being able to have sponsors lined up.
That we know are going to have interest in the properties and once we take it back.
We will sell it as quickly as possible depending on the particular project selling it as is as most efficient we've been able to do that with a number of these where they just where we had cash buyers in and just moved on in many cases getting out flat to up a bit depending on.
Depending on the situation I think with some of the other projects Thats helpful. Frankly to have a sponsor also lined up where we potentially provide some financing as well, bringing bringing a new sponsor who's buying at a level that makes sense and provide some financing.
And then that loan goes back on our book with fresh capital in fresh and.
<unk> operations, which is helpful. So it sort of depends Steven on.
On the on the outcome, but there's always trying to get as far ahead of the situation as possible to be able to have buyers lined up.
And get those properties in the right hands as quickly as possible Hey, Steven It's Chris I'd also add.
Just from an accounting perspective.
Most of our peer set uses some form of cost accounting certainly for BPL loans commercial loans non QM loans, and we continue to use a fair value and so you know what what the impact there is as rates are going up in the credit environment is getting tougher.
What we're pushing through the P&L.
Encompasses potentially more than just the credit component, we've got the right component, we've got the average life component.
These these are good projects and it's been a tough rate environment, but I think.
The extent, we can work on these there is quite a bit of potential upside.
If we're successful.
Great I appreciate you highlighting that and lastly, if I can squeeze one more in.
Like a couple of Securitizations.
Since quarter end can you talk about market reception kind of what kind of gains or margins you saw on that end.
You know a lot of rate volatility here, we've seen recently.
As noted in your remarks.
Yes.
One was our fourth liquidity of a year in which we just closed about.
About a week ago, we got really strong receptivity to that.
I would say from a margin perspective.
Supportive of margins that are probably consistent with where we landed in Q3 overall.
The fact that the curve.
Has uninvited significantly has certainly been helpful.
We've been able to place bonds to real variety of investors, we have a lot of insurance companies and money managers.
And those books, which we've been which we've been pleased with so definitely supportive of staying within the range of our.
Of our long term margins, which has been helpful.
Part of it also Steve you know, we've been selling higher and higher pass through coupons and have been getting good receptivity. So on this last Sequoia deal, we sold 6% AAA bonds.
Which priced at a very slight discount to par just obviously on a hedge adjusted basis it was higher than that.
We were able to create bond profiles from our convexity perspective that are getting a lot of people in books, we had a few first time buyers as well.
We're exploring the right coupon slots for upcoming deals it's possible, we'll sell six and a half.
Before the end of the year, where we see decent liquidity, we were able to manufacture some really nice profiles with obviously very good carry and more limited extension risks just based on where the dollar prices are so we've been pleased with that notwithstanding the volatility of the execution for Sequoia has remained really strong.
Great. Thanks for the comments this evening.
Yes.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please go ahead.
Thank you. Thank you.
On the BPL portfolio, you know, it's good to see that the 90 day delinquencies to come down and it looks like we've seen a few loans transition to Oreo maybe.
Maybe could you maybe provide a little bit more depth on how that portfolio is performing.
Hospital, maybe categorize some of that portfolio is either like a watch list or classified and how that's developed over the last few quarters.
Yeah.
Sure I think we.
We measure.
We obviously have a bunch of different metrics in terms of.
Managing the book.
Maybe I'll stop short of quantifying the specific buckets, Kevin, but I think we look at a few different key metrics, obviously payment velocity and delinquencies are the one that we talked the most about.
These calls and publicly but the other big thing we look at is just overall.
Number one just where the projects are on schedule.
So we spent a lot of time focusing on that.
And making sure that these.
Concerts or are getting up and down as quickly or if not and need more time.
That means number one for potential extensions and obviously fresh equity because obviously these projects take longer.
Ultimately interest expense will go up through time.
Because of the longer duration loan.
To give you some context on extensions like give or take over the past six months or so.
We have extended probably 25% to 30% of the book on average those extensions range from anywhere from three to six months.
And generally we have not had to extend the second time, we've had sponsors generally again in and out in those time frames.
That is an expected part of the bridge business is frankly, it always has been even before market conditions have gotten harder.
We've done a really good job a much better job frankly over the past 18 months to 24 months getting ahead of some of these issues.
Being out in front of situations, where we're talking to sponsors three to six months before their maturity and we may assessed the maturity date well in advance of that actual data and from our perspective actually we think that's healthy because.
At those points in time, that's the right. That's the right point in time to be able to get a fresh equity and I understand that the interest rate that theyre in is right and just really understanding how much more time they need so I think Kevin the biggest thing is time right.
Just understanding if the sponsors need more time.
To get these projects done and I think you know.
The modifications of the extensions are sort of a good initiative that I would say.
So with regards to that market are you seeing an increasing amount of competition a decreasing amount of competition.
And are you seeing your ability to either.
Increased price on new originations.
Maybe just a general view on the competitive dynamic within the BPL book.
I think it's pretty dislocated still Kevin I think on any given loan we still will compete with a handful of other lenders.
Who will be aggressive I think there are on balance, though there there are a lot of shops that have retrenched significantly or completely frankly.
One cohort there obviously is the banks.
As I mentioned, we are starting to see a lot of loans, whether it's smaller multifamily are built around all.
All day would have been the stomping ground of the banks, where those loans are coming our way so thats definitely.
Tailwind, but as you know theres a lot of private lenders in this space and Theres, a fair amount of private capital as well.
So I think on any given loan like I said the competition can be deep but in general.
I think the competitive landscape is probably as good as it's been in the past few quarters, given our overall position our ability to stand up these capital partnerships and just there are fewer folks able to lend constructively than there were three or four quarters ago.
Would you categorize as the returns on capital within that business.
Spanning significantly relative to where it was six to 12 months ago on any new business that you are underwriting.
I think it's mix.
I think on I think it would be but we consider BPL mortgage banking you know where we are.
Originated and securitizing, our term loans I think those gain on sales are pretty static from where they were a few quarters ago. We were certainly pleased with that business.
Businesses row, I think is generally consistent.
I think on the overall grid side I think yes in certain pockets.
Have seen.
Some tightening bias on loans just in general because frankly, there are not as many good ones to do as there were a few quarters ago right and so the good sponsors.
For the lower level.
Average, which obviously is where lenders are there can be some some pricing pressure. There. So I think there has been some expansion on ROE and the bridge space.
Think BPL mortgage banking is probably overall consistent with where it's been.
Thank you very much.
Thank you.
Our next question comes from Steve Delaney with JMP Securities. Please go ahead.
Hey, good afternoon, everyone. Some some good discussions this afternoon.
Chris I think it was you did mention something in the context of some expanding relationships I believe.
You mentioned a C. R T product something new that was evolving could you elaborate on that a little bit. Please.
Didn't get that Raj did it with you.
It probably was okay.
Okay.
On on CRT.
Yeah I think.
We've been focused with with banks on their back books, certainly and as we've as we've signed up banks I think we have 50 or more recently approved.
With a big pipeline behind that.
We're getting better access better visibility to two.
Portfolio challenges that they may have and so we've we've introduced.
Some structures that we think are pretty straightforward and obviously.
You know the fed.
Recently issued some guidelines and I think there's.
To me the market feels like it's more accepting of some of these structures than perhaps a few years ago and so you know we're.
Definitely open for business there it is a big.
Capital expenditure and that's where I mentioned, we are focused on partnerships.
So you know our business our franchise is having access to these opportunities.
And we're excited to partner with with other businesses too.
To fund them to fully fund them, but I think the the arbitrage if you will on lowering risk capital through CRT is very real and as the rule changes go into effect I think more and more banks in particular, we will look to CRT.
CRT potentially via credit linked notes to be a solution.
Again that doesn't allow them or doesn't it doesn't require them to sell the asset sell the loans in record you know a big P&L charge alright.
Alright wise, yes, you're good loans right, so sort of good loans, they're paying loans.
So keeping them on the books and reducing the risk capital is probably the right way to go.
Yes, so maybe cost them, a little more cost to carry.
A little hit to net interest income, but not a big capital hit for for selling the assets at a discount so.
Okay. Thank you on that.
We've been highlighting to clients.
The attractiveness and Redwood goes far beyond.
70, whatever it is 75% of book value price to book.
Just using them overused term, but we're saying you think about the strategic value I think you went up this with your the option value of that franchise never hire so with your permission.
Might throw that strategic option value out there for them and see if anybody gets hooked on that one.
Well, you've never needed our permission so.
Perfect.
Do you use your judgment.
It is we are trying to sift through the noise of rates.
It's hard it's hard on a quarter to quarter basis to see some of these opportunities we just want to make sure that.
Our shareholders do because things are turning behind the scenes and the engagement we've had from you.
All market participants, especially banks has been we haven't seen this in and probably the better part of two decades. So it's something that we're very focused on and we do think that as the market stabilizes.
Youll start to see more and more activity and and you know again I think I think what you've heard from most people.
Most of their filed is that you know we're looking for stability in rates I think even at these higher for longer levels. I think if there's stability you know you'll start to see more more and more housing activity.
So that's that piece needs to come together for the market and for Us sure.
We still have to take our lumps with fair value hits on portfolio assets that frankly are performing very well.
But you know it is things are things are definitely evolving in the markets and keeping us busy.
Oh, well look forward to 2024 and beyond thank you for the comments.
Thanks, Steve.
Thank you.
Our next question comes from Eric Hagen with BP. Please go ahead.
Hi, Thanks, how are you doing maybe it's just a couple more on the jumbo.
Was there a mark to market impacts from interest rates for the jumbo loans that are held for investment and how does that contribute to performance how sensitive would you even say that that portfolio could be even further backups in interest rates from here and then if you. If you guys wanted to add capital to the jumbo business like where do you think you'd source that incremental capital from illiquid bucket would you maybe take it from.
And how much liquidity.
Do you think you can see him when he is.
Do you start to scale up the jumbo pipeline.
I can start arrogant.
And then the margins that we reference on the quarter I'm, making mortgage banking income our all inclusive.
Any.
Are you changing on that.
On pipeline, but in my prepared remarks, I mentioned you know we were hedged at TVA is its quite early.
A significant tailwind for us in terms of how that.
<unk> performed over the course of the quarter.
And so you know our interest rate risk management was really notable in the quarter and the right way.
You know in terms of additional capital to fund that business that is and one of the asset classes.
He has been squarely underscore I never like to thank Chris and Dash made around private capital interest in our platform.
And now the private market are certainly paying a premium and try.
Quality of the collateral that we're buying today enforcing that's reflected in that execution of our securitization, but also in that yeah.
The breadth of discussions that we're having around folks interested in partnering with us on on aggregating.
Today.
In addition, I would say just regular way of bank warehouse demand continues to be really strong for that kind of collateral and.
It demonstrates that we're seeing are reflective of that today Tim.
Okay, great. Thank you guys.
Okay.
Thank you.
Our next question comes from the line of Kyle Joseph with Jefferies. Please go ahead.
Hey, good afternoon, thanks for taking my questions.
I mean, you mentioned and I live in Qatar and in the fourth quarter like that the specific driver of that.
Yeah.
The main item that drove the decline in interest income on the quarter. It was really a one time reversal of prior quarter interest and that was on our non accrual allowance.
Note that you know aren't.
What we call our non accrual loans and that in a broader list of.
And just a 90 day bucket and and really doesn't have anything to do with our view on the comparability, it's been fairly formulaic and to date and so you know a lot of that $6 million decline and that was from.
Prior quarter are first of all really in our in our N. B remains a comparable today and so as we look out to Q4, we really expect it and I wouldn't more roughly approximate what we sign in Q2.
<unk>.
Okay.
Got it. Okay go ahead, sorry, one other thing I would just note that and you know.
A lot of what we talked about in our prepared remarks is really a strategically.
<unk> capital from the third party investment portfolio into our operating businesses and cellular Youll continue to see a shift from us in terms of.
And income generated from NII and noninterest income and that was apparent on a quarter of our mortgage banking businesses.
Non interest income.
On the $3 5 million and so that will be a shift that will continue to play out as well.
Got it and then just one follow up for me on the aspire product is that is that purely equity are there any second lien in there and how do you foresee that flowing through the P&L and impacting margins.
Yeah today that.
You know that is only that the true equity product.
You know that we've been talking about we are focused on closing seconds as well.
And other home equity products. It just you know generally speak to what we view as a massive opportunity in the home equity space today.
But that you know that off.
Through investment fair value changes and.
Like our other options that we have on balance sheet today and from some of the other third party originators.
Got it thanks for taking my questions.
Okay.
Thank you.
Has there are no further questions that concludes the conference of Redwood Trust Inc. Thank you for your participation you may now disconnect your lines.
Okay.
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