Q4 2023 Redwood Trust Inc Earnings Call
Good afternoon, and welcome to the Redwood Trust, Inc. Fourth quarter 2023 financial results Conference call.
Today's conference is being recorded.
I would now like to turn the call over to Kaitlyn Mauritz with Investor Relations.
Go ahead ma'am.
Thank you operator, Hello, everyone and thank you for joining us today for our fourth quarter 2023 earnings Conference call with me on today's call are Chris <unk>, Chief Executive Officer, Josh Robinson, President and Brookfield Alley, 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 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.
Cause 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 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.
non-GAAP financial measures provides 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 fourth quarter Redwood review, which is available on our website Redwood Trust Dot Com also note that the content of today's conference call contains time sensitive information that our own.
Accurate as of today, and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.
Today's call is being recorded and will be available on our website later today.
I'll turn the call over to Chris for opening remarks.
Thank you Kate and thank you all for joining us today for our fourth quarter earnings Conference call.
I, often do I'll begin with some commentary around redwoods broader strategy and market positioning for dash and broke cover off on our operating and financial results.
2023, Redwood entered its 13th year as a public company. We took this milestone is an opportunity to complete a corporate renewal of sorts to position the firm for the next big housing finance cycle for.
So the last mile of the outgoing cycle has been stubborn, especially given the early you sell off in rates. Our goal has never been to perfectly time of trade.
Rather we're working to ensure that the winds of change in housing finance are squarely at our backs as market activity begins to pick up and regulatory changes begin to take shape.
Putting it all together we are on the precipice of several operational and strategic milestones that will help drive our story and our earnings in the decades to come.
A big part of last year's renewal was to strengthen our capital position.
This included re optimizing capital allocated across our business lines and building a significant pool unallocated excess liquidity to be squarely for offense as market trends to begin to shift.
We accomplished this through the completion of a number of financings in the fourth quarter as well as an inaugural unsecured debt offering in the first quarter of 2024.
The second facet of our renewal was to boost our operating efficiency as.
As Brook will highlight we achieved our goal of a 5% to 10% expense reduction in 2023 landing on the high end of that range.
24, we have a similarly ambitious goal of further boosting efficiency through scaling our businesses and continued cost reductions.
As we mentioned previously over the course of the last year, we began deemphasizing direct portfolio investing in favor of co investments in joint venture partnerships with leading private credit institutions.
This strategic shifts carries with it a number of benefits to our shareholders.
First these ventures are form of large capital providers, who have a long term strategic allocations to our core product offerings.
Second these joint ventures create a pre established and reliable takeout for our products and enhances our liquidity and pricing power ultimately, resulting in more predictable revenues and profitability.
This includes not only investment returns, but also recurring fee streams earned and overseeing these joint ventures.
Finally, these partnerships help us organically scale or operating platforms at a much faster pace than we could achieve on our own ultimately strengthening our franchise and supporting further earnings power from our platforms.
The establishment of new and accretive joint ventures is not merely an aspiration of ours. After announcing one such arrangement in 2023, we expect to continue forging partnerships with additional light vehicles in the near term for 2024.
When it comes to sourcing the raw material to feed our joint venture partnerships, we remain optimistic that the prospect of major bank regulatory rule changes coupled with the balance sheet pressures that many depository is already face will compel more of these institutions to partnering with Redwood.
This should in turn open at that spigot of loans for our operating platforms that for years, we went straight to bank portfolios often without the underwriting rigor demanded by the capital markets.
The other proposed Basel and game regulatory changes continue to receive an onslaught of opposition from paid lobbyists. It does not change. The fact that many banks still require additional risk capital or an outright capital partner to prudently manage their asset liability exposures associated with long duration more mortgages.
Furthermore, the long predicted structures now emerging from bank's CRE portfolios make the solutions, we offer all the more accretive.
With this in mind, we see banks looking for solutions and not waiting around for regulations to be finalized.
This is evidenced by the number of banks, we are now on boarding and the volume growth. We are beginning to see and expect to increase over the course of 2024.
This growth is notwithstanding any additional benefit that would come with a sustained decline in mortgage rates.
We entered 2023, having secured new or renewed jumbo flow relationships with almost 70 banks.
Onboarding, new banks can be challenging due to the work stream changes theyre working with an outside capital partner often requires but as these valued partners make the transition to working with US they've been won over by the expertise of our talented team our speed to close and our seamless execution.
As our engagement with banks ramps up its important to note that our commitment to our deep base of non bank originators, who has never been stronger.
The message, we emphasized all origination partners, whether banks or Nonbanks is the same.
You will operate more safely reliably and efficiently with a trusted partner and Rockwood.
Complement our focus on first lien residential loans, we've continued to invest in our new home equity investment platform aspire.
Today, <unk> remains the largest untapped market and housing finance and housing affordability at its lowest level in decades homeowners continue to look for innovative ways to access the equity in their homes as opposed to moving.
Since launching aspire last year, we have grown our operating footprint with plans to extend to as many as 15 states in the coming months.
Further address the opportunity we see in home equity. We also launched a traditional second lien mortgage product to our network in January.
Combination of second lien loans and Hei has resulted in a unique coordinated solution set for our origination partners.
Our residential investor loan platform Horvath.
We're also beginning to benefit from the pullback by banks in anticipation of higher capital requirements for Investor loans.
As we noted last quarter, we have been advancing negotiations with several banks and partnership opportunities that would allow us to access their existing pipelines with an eye towards offering our broad product set and deep capital markets experience.
As we think about the year ahead and observe a period of heightened stress for many commercial real estate borrowers it's worth reminding our shareholders that our business remains squarely focused on residential housing finance, whether it's single family or multifamily focused.
All of our assets are mark to market through our GAAP income statement offering confidence that our GAAP book value reflects the prevailing market conditions. This is important to convey as industry concerns continue to mount over the adequacy and trajectory of seesaw based accounting alternatives.
As we take stock of these past 30 years, we're extremely proud of the role of Redwood has played in providing liquidity to parts of the residential housing market not well served by government entities. The long term support of our shareholders has allowed us to continue pursuing our corporate mission of making quality housing whether rented or owned accessible.
The all American households.
Our business is built upon the belief that the best opportunities are usually found through initiatives that others won't pursue our trends they perhaps don't foresee.
<unk>, we believe that there is no one better positioned to support the changing housing finance landscape and Redwood.
We're excited to share our thoughts what we see is this unique opportunity for our business as well as our current market outlook and corporate strategy and redwoods upcoming Investor day scheduled for March 19th.
I'll now turn the call over to dash.
Thank you Chris.
I will now cover the performance of our businesses before handing it over to <unk> to cover our financial results in more detail.
Residential mortgage banking continued its strategic momentum notwithstanding a modest quarter over quarter reduction in volume driven largely by seasonality.
As Chris articulated, even though the timing and substance of the Basel endgame roles will inevitably evolve.
Management teams are prioritizing the ability to distribute 30 year fixed rate mortgage risk.
As the economics are retaining these loans have changed dramatically given the end of the era of cheap deposits.
This takes commitment in time, especially in a lot of the standards of the capital markets with internal processes and approach.
Such we're pleased to be actively engaged profitably with sellers that control, an estimated 60% of jumbo market share, including 70% of the largest 20 banks with active mortgage businesses.
Overall for the fourth quarter, we lost $1 $2 billion of loans at gross margins of 111 basis points up from 80 basis points in the third quarter and above our historical target range of 75 to 100 basis points.
25% of the quarter's volume was bulk activity with both banks and Nonbanks over 55% of the quarter's total lock volume came from banks up from 38% in the third quarter.
We purchased $1 billion of loans close to 15% for a unique program with depository that allows us to settle loans directly into securitizations optimizing our capital usage.
We are complementing our bank activity with a continued focus on independent mortgage bankers for RMB is a critical group of partners, whose business models have always centered around distribution to capital partners such as Redwood.
All in we estimate our $2 $8 billion of locks in the second half of 2023 to represent approximately 5% of total jumbo market share compared to our historical range of 2% to 3%.
While higher interest rates continued to impact overall industry volumes, we still believe our strategic progress is just beginning and deepening our partnerships with large market players.
As such we see significant opportunity to deploy further capital under this strategy as we support our banking partners and grow including through the home equity financing products that Chris highlighted Brook.
Brook will speak more to this when she covers our outlook for capital deployment.
Finally for this segment securitization markets continue to be favorable and we followed our two fourth quarter Sequoia transactions with two more thus far in 2024.
Backed by approximately $800 million of months receptivity for these deals has been strong in this execution has supported further momentum and locks which quarter to date total $750 million with continued strong credit characteristics.
<unk> 772 average FICO in 72 average LTV at an average gross coupon of 696%.
As Chris mentioned, the broader pullback by banks, there's also a potential tailwind for courthouse.
Last few weeks have brought refresh dialogue around risks and commercial real estate portfolios of banks and other large portfolio lenders.
The mental challenges that exist in certain commercial segments have driven many traditional lenders to the sidelines opening up a potentially attractive client funnel for our platform once lending conditions normalize.
Corvettes continues to prioritize lending strategies backed by single family and small balance multifamily properties. The ladder typically 20 units or less.
Reduced demand from sponsors amidst persistently high rates cause quarterly fundings to dropped 17% from the third quarter to $343 million.
Term loan funding volumes increased 10%, however, and we continued to commit capital to our single asset bridge or SAP platform and further develop other bridge product offerings.
Notwithstanding the fact that rates remain elevated we see runway to grow term production, including in the potential to refinance portions of our bridge book is.
Just work towards stabilization.
We continue to see several areas of heightened interest from real estate investors after launching our debt service coverage ratio or the SCR loan product in the third quarter, we saw a 20% increase in fundings in the fourth quarter for these loans alongside a 30% quarter over quarter increase in production.
As was the case in Q3 borrowers. We're also engaged around a renovation rent and build for rent products, including aggregation lines typically the dominion of banks.
Support lease up strategies once certificates of occupancy are procured.
Our investor loan products continue to attract attention from capital partners, we distributed $111 million of loans through whole loan sales and sales to the joint venture that we closed in mid 2023.
Our fourth quarter. Originally on securitization was also a significant achievement in that it allowed for increased capacity to finance our various loan types flexibility, we expect to be valuable over the next 24 months as lending conditions evolve.
Turning to our investment portfolio our activities since the end of the third quarter reflect progress in the evolution of our capital deployment thesis, including active portfolio management to recycle valuable capital and manage risk.
Over the past several quarters, we have spoken regularly the significant value embedded in our broader investment portfolio. This includes the net discount to face value within our books and Relatedly, our ability to harvest additional capital given low levels of leverage and continued strong credit performance.
The fourth quarter brought meaningful progress on this front, because we completed three securitizations out of our investment portfolio.
These transactions included a re securitization of re performing loan book, our first rated securitization backed by home equity investments and a $250 million revolving transaction backed by bridge loans. We have also continued to optimize our portfolio next to the continued sale of non strategic assets.
Credit performance within our portfolio remains strong overall.
It's Chris emphasized our portfolio was back squarely by residential credit much of its season been created organically through our operating platforms with over 85% of our overall capital underpinned by single family housing.
Our RP, all jumbo and single family rental loan portfolios, all saw stability or declines in 90 day plus delinquencies since the third quarter as borrowers remain motivated to preserve the equity in their homes and protect their advantageous interest rates.
Performance in our single family Bridge portfolio, which now represents close to 60% of the overall bridge book has remained resilient our portfolio an area of anticipated growth continues to pay down as expected and we are replenishing our revolving bridge securitizations predominantly with new F&B production <unk>.
Additionally, starches continued progress with built in rent projects, many of which are now in the lease up phase.
As we highlighted in last quarter's earnings call. The multifamily bridge portfolio remains a key focus area as borrowers grappled with the prospect of an extended period of higher rates. This portfolio largely financial sponsors seeking to do modest amounts of improvements of the property drive rents and either sell or refinance.
Loans were originally underwritten with average debt yield is close to 9%.
That are underpinned by units fetching around $1000 per month or less than web a portion of the market less exposed to the upcoming delivery pipeline.
The fundamentals behind these strategies, notably occupancy rates and equity in the properties remains strong 90, plus day delinquencies have increased driven largely by sponsors facing increased costs to lack the resources to bring the project to stabilization.
This creates opportunity for fresh capital that we believe is supportive of ultimate recovery to our loan book remains actively managed and for approximately 30% of the portfolio, we have seen sponsors and Jack fresh equity or perform under recast terms and we estimate an incremental 20% of the multifamily bridge got qualifies for a term refinance today.
And with that I will turn the call over to Brent.
GAAP net income of $19 3 million for the fourth quarter or 15 cents per common share compared to negative $32 6 million or negative <unk> 29 in the third quarter, resulting in a fourth quarter GAAP return on equity of seven 3%.
Significant quarter over quarter increase in GAAP earnings was largely driven by 15 million of positive investment fair value changes compared to negative 42 million in the third quarter. This reflected the impact of declining rates and spread tightening on our investment portfolio, coupled with continued strong underlying performance of our rather than something too.
Net interest income or NII was essentially flat this quarter as a modest improvement in bridge NII was offset by lower portfolio and I I'm from securities sold and higher interest expense on new financing activity as we can.
In the third quarter, we still anticipate recovering a portion of the associated interest the non accrual allowance overall NII is expected to trend higher beginning in the first quarter.
While GAAP earnings improved in the fourth quarter, the net effect of the common dividend and equity instruments cause book value per share declined one 5% from the third quarter to $8.64.
Accordingly, we achieved a positive total economic return of 3% for the fourth quarter.
Earnings available for distribution or <unk>.
<unk> was $7 1 million or five.
<unk> common share for the fourth quarter as compared to $12 6 million or 10 cents per share in the third quarter.
A decrease in <unk> was primarily due to lower income from mortgage banking activities on the quarter.
Income from residential mortgage banking activities decreased slightly in Q4.
That's the seasonal factors on jumbo lock volumes were somewhat offset by a 31 basis point improvement in margin.
Coming from residential mortgage banking activities decreased from the third quarter and French fundings were lighter than friends on term loan normalized compared to the third quarter were spread tightening benefited loan inventory.
Note that in the fourth quarter of 2023, we evolved the calculation of.
Removing the previously presented to line item titled change in economic basis of investment. Additionally, we changed the presentation of our income statement at Hei income net of choice.
$11 7 million this quarter and was previously captured within investment fair value changes in that line item.
Income associated with Hei is attributable both to embedded accretion from underlying options on home and periodic fluctuations in value from factors like home price appreciation and all captured in our non-GAAP.
Imagine a pretty.
Obviously discussed we've continued to fortify our balance sheet and built our liquidity, our unrestricted cash and cash equivalents as of December 31, 293 million, which increased to $396 million at the end of the last week.
It represents our cash position that is 190 million hired since the end of the third quarter on last quarter's call. We pointed to the low requests by eventually carrying the investment portfolio and the opportunities that afford that's your raised organic capital or securitizations during the fourth quarter underscoring our ability to capitalize on that dynamic and we ultimately generate at a hunter.
$25 million of capital from this financing as long as the two new BPL lines that we established in the fourth quarter, which gave US additional festival capacity.
Importantly, the term financing activities from our securitization allowed us to reduce our margin by securities repo and our allocation to third party portfolio assets, while preserving investments on balance sheet represent the majority of our $2 and 68% of portfolio discount as.
As a result of all activities on the quarter. We reported total request my friends at two two times down slightly from the third quarter importantly, recourse leverage in our investment portfolio decreased from the third quarter analyst here at <unk> nine times at year end.
31st we had excess warehouse financing capacity of $2 1 billion, which makes sense brown to $2 6 billion today.
We expect to increase our capacity further to support the continued growth of our operating businesses. In addition to our existing cash position, we have approximately $318 million of unencumbered assets today and remain on continued potential source of capital, which can serve both to fuel growth of our mortgage banking business and well continue to repurchase debt corporate debt across our term.
Sure.
We have de Levered, our capital structure through accretive convertible debt repurchases as well as the organic capital creation and common equity issued through our ATM program from the beginning of 2023 through today. We have retired over 200 million of convertible debt, reducing our amount of convertible debt outstanding by approximately 30%.
We are also taking advantage of the opportunities that we see in front of us today and mortgage banking as facts during the fourth quarter, we viewed the opportunity to raise common equity as a value accretive strategy given the blended mid teen deployment returns, we see today in light of the growing opportunity for residential consumer mortgage banking, we increase the capital allocated to this segment.
$150 million since the first quarter of 2023.
We expect to grow another $50 million to $75 million in the near to medium term.
Susan to raise capital for this opportunity comes with a significant focus on the anticipated earnings accretion and future book value growth. These earnings to create for our taxable subsidiary.
We began last year my guy in the market that we weren't lower general and administrative or G&A expenses by 5% to 10% from 2022, while G&A increased quarter over quarter, primarily as variable and long term incentive compensation increase commensurate with the improvement in quarterly GAAP earnings. We ended 2023 with a 128 million of G&A, which represents a nine.
Per cent reduction year over year, we remain committed to controlling operating expenses to achieve further cost savings of another 5% to 10% this year and sustained profitability, while balancing strategic long term opportunities.
Looking ahead, we feel confident about our strategic positioning given our excess capital we'd love to continue opportunistic deployment of capital into products with attractive return profiles that are complementary to our mortgage banking businesses to support the dividend, while we transition to a more capital light model and mortgage banking returns crystallize the scale and with that operator, we will now open the call for.
Question.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
Formation tunnel 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 snarky.
Our first question comes from the line of Rick Shane with Jpmorgan. Please proceed with your question.
Thanks, guys for taking my questions. This afternoon.
I'd like to talk about the dynamics on the origination side and the residential consumer mortgage banking business.
Obviously, there was a bit of an uptick in the quarter on margin you cite that it's above sort of the historical average.
Assuming that that is a function of the movement in rates and that being favorable to gain on sale.
If you could talk about that dynamic and what youre seeing in the first quarter that would be great.
But more importantly, I'd love to talk about sort of what <unk> seen through the channel.
Are you seen as capacity comes out our originators being more disciplined about margin and delivering loans that are more valuable as they are not chasing volume as they would at the inflection in the cycle.
Sure Hey, Rick it's Chris Thanks for the questions.
Hey.
Yes, just to just to <unk>.
Talk about resi for a few moments.
We feel extremely good about our trajectory.
Some of this is in the context of.
You know housing market housing finance market, that's been extremely challenging.
The origination market is probably the smallest it's been in a number of decades, so to be taking market share.
Against that backdrop, we feel really good about.
Some things I'll mention.
You know in the last six months, we've locked loans with 135 unique sellers, which has to be a record for us.
Nobody represents more than 5% of our production.
Do you think about other aggregators.
It's often the case that a few originators are responsible for half or two thirds of production so to have.
135 in the last six months with nobody more than 5% you start extrapolating that to as this market starts to turn around obviously, we had a softened rates to start the year.
But at some point in 2020 for rates.
Should flatten.
Flatten out and start going down so how we're positioned for that.
As extremely good from my standpoint, so that's a big part of what we're bullish about I would say we did five securitization in the fourth quarter. We've done a few <unk> deals in the first quarter.
Spread tightening has been part of the gain on sale story.
Our deals have been met with very robust demand and.
And I think people are really starting to get behind the story, particularly in consumer which is exciting so I think for us.
Lot of it is.
Today's call a lot of it is what's behind us versus what's ahead of us and I think for Rajiv.
Particularly for the balance sheet as Brook laid out.
We're not we're not staring down.
Alco challenges.
Banks are dealing with with Rajiv mortgages at cost.
We're not dealing with commercial mortgages and seasonal reserves, we all know the trajectory there.
I think you know.
Most people think that there is quite a bit of pain to go.
So having done what we've done over the past year with the balance sheet and it is putting ourselves in a position I think we have something like $285 million of excess capital.
As of today.
To really go on offense I think our story is a little bit differentiated from.
What you might see elsewhere as far as what's behind us versus what's ahead of us but certainly.
Outside of seasonality factors in the fourth quarter, we're really excited about the volume trajectory of our resi business, it's still a really tough market.
But again to have some of these underlying that that we're seeing really foundational for this business to take off particularly as rates start to stabilize.
Got it Hey, Chris just just to circle back what what Im curious about is.
Obviously, we've seen demand for your channel partners the originators decline.
2023 was a lot about rationalization of.
Supply.
I'm curious about is when you speak to your channel partners are they at a point now where they feel that supply and demand has achieved an equilibrium that is attractive for them.
I mean, obviously, having a strong exit is important but is there enough volume and enough economics for them on it.
Equilibrium basis to make the business attractive again.
Well I think.
Yeah, obviously, a big part of our business as the <unk> and the non bank originators, it's only been in the last six months or so where banks I think we're up to 70 banks, which were active with had been part of that dynamic.
I think both are in different spots I think with <unk>.
Some of them.
<unk>.
Gotten ahead of others as far as capacity corrections.
I think there is some pain to go for some <unk>.
For banks I think it's really the capital partnerships.
We are working with a number of regionals and.
It's really about.
Working with loan officers and understanding the value proposition that we can bring.
But certainly I think I think our pricing has been aggressive we're looking to take share at this point, but it's still a very challenging market I don't think anybody is completely out of the woods from an origination standpoint because.
There's still a lot of capacity out there the MBA and others estimated excess capacity I havent seen the numbers recently, but it's.
We're definitely not I think at a point of equilibrium.
For us for our business as I mentioned earlier.
We've sort of dealt with our balance sheet, we feel great about.
Our capital position and so we're in a fortunate position to be really aggressive.
We want to be and take market share, which we're doing.
Perfect that's exactly what I was looking to hear thank you Chris.
Thanks.
Our next question comes from the line of Don <unk> with Wells Fargo. Please proceed with your question.
Can you talk a little bit more about the outlook for multifamily delinquency trends, they ticked up a little bit and I guess, maybe more broadly I know investors are worried about supply.
In some of the hotter multifamily markets can you talk about what your thoughts are.
Sure Dan It's dash I can take that I.
I may spend just a minute on.
The bridge portfolio broadly because the contours of that book have migrated.
And significantly over the past year I talked about.
Sort of a pivot in our production mix over the past five to six quarters really.
Focusing in more on single family strategies and bridge, which was really the original thesis of the business going back a number of years. So I think broadly we've been we've been pleased with the overall performance of the British book I think we're clear eyed about some what's going on in the multifamily market just just some context for how the book overall has.
Then I'll touch on multifamily.
Last year, we saw over $800 million in Paydowns in the bridge book Cumulatively, which is about 40% of.
The balance of the bridge book entering 2023, we're continuing to see some really good buoyancy in the single family strategies, both with SAP.
Which is an area as I mentioned, we're continuing to grow from an origination standpoint as.
As well as build for rent, which is underpinned by generally one to four unit housing.
Housing those projects are progressing there they are in lease up mode in many cases.
And we're starting to see real opportunity to term those loans out as well, which again is the original thesis for for.
For those types of loans to help the term funnel.
Think in multifamily a few things I talked about this in the prepared remarks.
We are generally financing sort of BB minus type of multifamily.
Our average rents in place are about $1000 a month right now that reflects.
Many cases, 15% to 20% growth.
And rents from our sponsors.
Since acquisition, but we're certainly cognizant of some of the headwinds overall, we do think that that piece of the market is less exposed to some of the supply.
Yeah.
Tunnels that we're seeing for deliveries over the next year or two.
But we certainly have seen some sponsors run into issues I do think when we look at the book and as we've always talked about getting ahead of issues, but also being able to delineate between sponsor issues and project issues and there is an important difference there.
I think the delinquency uptick.
<unk> seen in the book really reflects issues with sponsors.
Our 67% to 80% of the way through our project and have just simply run out of the resources to finish it but theres a lot of meat on the bone.
And I think what we've found is.
Significant interest from the sidelines and getting involved in projects we took it.
A few properties Oreo this quarter, we have significant interest in those we anticipate having those under contract soon.
And we have some loans, which were working through actively right now where the sponsors are bringing fresh capital the table or we're finding fresh.
<unk> sponsorship to do so.
I would point back just in closing for the response, you know what what I said in the prepared remarks.
The multifamily strategy for bridge, we've been significantly more selective over the past five to six months excuse me quarters.
It's been less than 15% of our overall fundings in that period of time.
Most importantly, though we feel like we've got our arms around the book and we've made significant progress with a good chunk of it.
Almost a third of it.
Has had active or fresh equity infused or is performing under some recast terms over the past two quarters. We think another 20% outside of those is eligible for a term refi today.
We have a portion that are delinquent and the rest are really leasing up and running their projections. So I think we're we're clear eyed about the broader headwinds I think we feel good about the markets. We're in and the fact that our projects have meat on the bone for fresh capital, but certainly this is going to be an area. We expect a continued close focus from us over the next two or three quarters.
Got it.
Follow up is just on the dividend do you feel like Youre kind of at the right level here.
Yes, I think.
<unk> prepared remarks, we did touch on just our overall liquidity position I think over the last couple of quarters. You know we have had.
Moving to our balance mortgage banking contributed to a line of sight for earnings to be in.
Covering.
The dividend and or in this case.
The portfolio really carrying the weight I think last quarter, we did make some comments.
At the outset on just the amount of deployable capital. We have today I think that is probably the single greatest contributor.
Outside of <unk>.
Near term significant recovery in mortgage banking to give us line of sight back towards the dividend that combined with some of our commentary on continued expense target.
To provide additional support for the dividend.
As we go forward.
We also have a couple of.
Tailwind with respect to net interest income just from that capital deployment and a continued recovery in some of our non accrual.
Got it thanks.
Yeah.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Hi, Thanks for taking the question. This is Brad on for Kevin Barker.
Im just trying to size up the opportunity to potentially partnering with homebuilders given housing dynamics I know you mentioned last quarter Youre seeing homebuilders pivot from <unk>.
Of course out of for rent strategies is this is a dynamic youre still seeing play out and is this something you would look to do partnering with the homebuilders going forward.
Yes. This is Dan that's a great question.
We look to do that through each of our mortgage banking channels and one of the reasons, we try and do that as I think some of the trends. We saw three months to six months ago are probably reversing again candidly. If you think about just the strength of the bid.
From owner occupants with with continued buoyancy in HPA I think some of those trends is probably reverse but that's a big opportunity for resi mortgage banking. It is still one we see in BPL, but I think the.
The dynamics between just where cap rates are going broadly and then.
The owner occupied bed those those can invert, depending on the quarter and so we still actively look to do that.
And both channels for that exact reason, which is those dynamics tend to shift quarter to quarter.
Thanks, and then last one from me I know you guys mentioned it but can you just talk a little bit more in detail on the traction on the jumbo side now given the large opportunity with the banks facing a high degree of uncertainty.
Yes.
Other thoughts there.
Just given the traction we have with so many banks at this point.
It's really become less relevant.
Some of the regulatory changes that people banter about I mean, obviously.
Through the common response of the Basel one game proposed changes that's going to take.
Take a long time to play out.
But in the immediate term.
You've got four and a half 5% deposit rates.
The era, the era of zero cost capital of banks is over.
And it's not nearly as profitable to portfolio loans.
And in fact, there's quite a bit more risk just given.
Capital partner makes a lot of sense irrespective of what the risk capital rules might might say in the future and so that's given us that's embolden us.
And it makes a lot of sense when you think about it because redwood is there's not an originator as we like to say and.
Banks can keep their customer relationships, we can buy servicing we can we can let them keep servicing.
And one of the one of the ways. We've added a lot of value I would say in the past year is helping banks yet.
Acclimated to the capital markets.
Loan file completeness radian.
Readiness just.
A lot of things.
That you can do parking loans in portfolio, you can't do selling selling loan files in loans into the capital markets and so helping banks.
We worked through that has been a big part of the value add that we present and and I think thats been appreciated. So what we're hoping is that the durability of that opportunity.
Is there.
I do think that as we invest the time and the resources to get banks plugged in and online.
I think that's a lot of effort on both sides.
As I said as rates start to stabilize and come down we're really excited about what that means for our business.
Awesome. Thank you.
Thanks.
Our next question comes from the line of Doug Harter with UBS. Please proceed with your question.
Thanks can you talk about either from an environment perspective or from a cost perspective, what you need to see happen for the.
Investor mortgage banking too few to deliver sustainable attractive rois.
Sure Doug it's dash I can.
I can take a swing at that.
Question, obviously, a huge area of focus.
I think it was a few things going on in that in that space right. Now as you know, we've we have a very diverse product set.
I think it is helpful to us we've seen really really good progress.
Particularly in our single asset bridge effort just for context, there, we did about $200 million of that product last year and $40 million in January so the the.
The volume trends there are are heading in the right direction, we talked about growth in D. C are.
Things of that nature, we were very pleased with the 10% quarter on quarter growth in our term book, but.
I think the reality of it is we're being.
Very selective there I think we're trying to be respectful of what the market is telling us in terms of just demand drivers and where capital is flowing.
There is a reality of that business, particularly on the term side and to an extent bridge where.
Uncertainty around rates, where rates are sort of re elevated as they are today, but there is a lack of overall conviction.
Around where they are headed.
Just as a reality we have to continue to work through in that business because unlike in residential these loans as you know are not freely pre payable so borrowers are making.
I call on interest rates for lack of a better term when they lock in these loans and when there's so much uncertainty you've had a 40 50 bps backup.
And the tenure you can make as good a case to 10 years going higher as lower.
Next quarter or two and that sort of uncertainty is.
As a bit of a headwind, but I think in general we're trying to pick our spots. So I think lower rates and some conviction that they'll stay lower is helpful.
But I also think in terms of where capital is flowing.
We're just being choosy around opportunities, we see a lot of deals come across our desk everyday that frankly may fit other people's risk profiles better than ours, we talked about the de emphasis of multifamily over the last five or six quarters.
That's a decision we're very pleased with.
If you look at how things have evolved in that space. So we're going to continue to pick our spots and really leverage the depth of the depth of our products. We do think our existing bridge book continues to be a great source of opportunity for term refinance thats a huge focus area for our sales team and our sales team is busy maybe.
Maybe the average loan balances are going to be a little bit smaller.
And then they were a couple of years ago.
But we feel very good about how we're positioned particularly when you when you bring in the opportunity for the banks as another funnel, we haven't talked as much about that.
And residential investor as we have in jumbo, but that's a big opportunity. It's one we're well positioned for it but we don't want to rush back in.
Save for areas like SAP, where we're really leaning in we're going to continue to be I think selective because I think we're going to be paid to be more selective through time here in 2024.
Great and then.
I believe Chris you mentioned that you had do you kind of view that you had $285 million of excess capital today is that kind of factoring in the remaining 24 convertible maturity or just yeah. Just wanted to make sure I heard that number right.
No not not fully I think we said we had $396 million of cash.
As of last week.
We have $318 million of unencumbered assets, so we kind of need to factor all of that into the.
The convert maturities, but I think I think the headline is.
We feel very well capitalized right now.
We as we mentioned we completed five securitizations in the fourth quarter.
So we feel like we are in a position to get significantly more aggressive at a time when I think a number of our competitors are facing pretty substantial headwinds.
I do think that having the benefit of taking lumps with fair value accounting.
Think about where the stock is trading versus books and the quality of book.
That's something that I think differentiates this business to a certain degree. So I think we're we're feeling very good about certainly very good about the converts but also.
Very excited to be deploying capital.
Opportunistically and we very much see a path towards covering the dividend. We've got a lot of ways to get there we haven't spoken much about the JV opportunities that we foresee but those are those are things that behind the scenes are in later earnings. So we're excited about.
Things that we can get done in the first half of the year if not sooner.
So thats.
At a high level, where capital is at.
Great. Thank you.
Thanks.
Hey, good afternoon, Thanks for taking my question.
Thank you Brandon I know, it's early but on the closed end second lien product.
Italian or thinking about the size of that market margins versus the existing book.
That's a bigger opportunity or how do you see that versus HELOC.
Closed end seconds is a product we've rolled out.
Very recently in early 2024.
The way, we're attacking that market is a combination of of traditional product like a closed end second along with hei, which is something we're still very bullish on.
As I mentioned in my remarks home equity is absolutely the biggest untapped market and in housing finance.
We're all over that internally and I do think to a certain degree.
The path of rates will be a big factor.
But youre seeing its very tough to move mobility is extremely constrained.
With most of the vast majority of the country, having termed out if you will.
Their homes three.
<unk> three 4% to 5% rates. So I think we were not as focused on the block as we are closed.
But I think we're very focused on.
That sector and.
Aspire, which is R hei.
Startup.
Homegrown startup, we expect originations there.
To go up.
Fully precipitously as we as we get licensed in more states and get the business scale to origination network.
Got it that's it for me thanks for taking my questions.
Thanks.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good afternoon.
Couple of follow ups first.
Talking about the delinquency metrics kind of ticking up some.
On the multi year the corvette side can you talk about the outlook say over the next two to three quarters. As you continue to work through that where do you think those peak.
And talk a little bit about resolution timelines do you expect to take losses as you resolve these do you feel like the collateral there supports your attachment point.
And maybe touch on the build to rent that went into Oreo.
I believe the footnote said is under contract for sale. This quarter, maybe it's already happened, but can you give us an update there and whether you expect to take a loss on that.
Sure.
I think broadly Steven.
Well.
We'll probably stop short of predicting where <unk> are growing but I think we continue as I mentioned I feel very good about the real estate, that's underpinning us the resolutions that we've had and.
Generally have had either no severity or severity in the single digits, where we where we have them.
Speed and honestly creativity of <unk>.
Resolution and just the discipline around that process is important.
Hum.
The properties that we took oreo over the past couple of quarters. We did so cooperatively our loans are structured with a lot of different hubs instead.
Instead of borrower to.
He's a resolution more quickly rather than waiting the customary a year or two for foreclosure depending in the states that you're in so I think we're.
We're pleased with that.
Importantly, we have a lot of demand for the real estate and it's because like I mentioned earlier.
General Theres a lot of meat on the bone.
In these properties, there's a lot of capital on the sidelines that I think is an opportunity it is beginning to to.
To deploy.
Haven't closed that Gulf of rent project, we expect to do that soon we don't expect much if any loss on that we have two other built around projects that are actually leasing up where we got.
Actually some reverse inquiry interest this morning through a broker thats interested in.
Purchasing those particular projects so that.
The good thing is for our book.
Particularly with the demand drivers for leasing and the fact that in many of these cases. It really is just down to lease up as opposed to a significant amount of operational risks with renovation I think we feel good about the general outside demand to step in and recapitalize projects.
But most importantly in terms of.
The book in General a lot of sponsors are sticking with it they're driving rents.
And the vast majority of cases.
They are replenishing reserves there.
Doing all the things required to get these projects over the goal line and as such we've talked about 50% of the book.
And what we feel is really good shape in terms of performing or eligible for it for a term refined. So we will see how things go like I mentioned, we're clear eyed about some of the headwinds that remain in that space, but given how the book is situated.
We're optimistic for overall good outcomes.
I appreciate the comments there and then a follow up on the liquidity question. It's been touched on a couple of times.
Can you talk about whether you've you've used the ATM many year to date, how you think about valuation of issuing off that issuing stock.
At various levels versus book.
Given what investment returns are as you deploy capital.
Maybe update us on what's remaining under that authorization and whether you expect to re up that.
Yes, great question.
So a couple of things.
We have not utilized the ATM year to date.
And we did and I think some of our rationale there.
A lot of the proteins that we added.
We raised in the fourth quarter really not earmarked for.
The growing opportunity in residential I think we used about net $50 million of capital for Ravi, which has really grown every quarter throughout the year throughout 2023.
We effectively issued around close to 90% of tangible book.
Based on that math.
We were looking at kind of mid teens blended returns, that's a pretty rationale payback period.
We think based on the earnings accretion that really drives.
Our future book value growth through our.
<unk> alright areas over time.
And so it was.
Those.
And of that math that we were looking at that drove the ATM utilization. We also look at it really.
Comprehensively with some of the other actions taken on the financing.
Brian It was a kind of broader deleveraging that we have.
You know that we've done of our capital structure to really Paramount as some of our convertible debt and reduce our margin loss securities repo.
And just kind of net reduced our overall convertible debt maturity stack and all of which we think is very accretive.
To our shareholders over the long term.
Turning to look at the.
The residential.
Banking opportunity really on N.
And earnings accretion basis.
To continue to find that opportunity I would also just note that it is.
Given the work we're very cognizant.
Ignorant.
How we deploy those proceeds and over then over what time period to make sure that we are crystallizing our assumptions on the earnings accretion to the ATM does afford us a nice latest unlike match fund.
And with that being said our stock is often.
Oh, you mean in the fourth quarter.
Great I appreciate the comments and look forward to seeing all of you next month.
Thank you.
Our next question comes from the line of Eric Hagen with <unk>. Please proceed with your question.
Hey, Thanks, Howie done had gone back to your comments around the NIM and looking at the cost of funds on slide 32, how much of that balance would reprice and over what kind of timeframe. If the fed were to cut interest rates.
We have a pretty.
We have a.
I would say a pretty.
Pro rata.
Maturity schedule for our recourse leverage that really rolls throughout throughout 2024.
Somewhat.
On a somewhat balanced basis, and so a lot of our major lines are a year in nature, but one of the most important things that we did in the fourth quarter with with the amount of debt that we raised and into the first quarter with the unsecured debt.
A lot of it has pretty attractive prepayment flexibility and optionality and with.
Largely it being callable within the next two years or so.
We really do think it's a good option on where we are.
And the rate and the rate landscape, because we're either going to crystallize.
Returns through mortgage banking in the near term and at attractive gain on sale margins are put on longer term investment that pretty attractive.
Return profiles here.
Right, Hey, essentially all of the securitized debt is fixed rate is that right.
Yes, that's correct.
Okay, and then the investment portfolio and the capital allocation on slide 29.
You feel like you can draw any more leverage against that portfolio and which assets are.
Held unencumbered at this point and what kind of advanced rate do you think you can draw against us thanks guys.
Great question, and sorry that maybe for Jeff.
Chris mentioned, we have another as of today, we have about $318 million.
An encumbered assets centered largely around some of our organically created subordinate securities to castle in RTL that.
Created through our mortgage banking initiative.
On the Sequoia side, we have.
Some of our re performing loan securities other multifamily a lot of what we did last year was selling some of our western Hey, Jake our fixed rate third party assets at a gain.
In this environment, just given that they were fixed rate bonds.
Are largely non strategic and didn't carrying throughout the rest of the investment portfolio.
<unk>.
Thank you.
We think there is a couple hundred million to raise there just given then.
Advancing some of these are securities or assets that are already financed elsewhere and so we have.
Any tangible data points around lenders appetite for those.
Yes.
And then some of them, we just have chosen not to.
Finance and to mitigate that.
Overhang of interest expense.
Got it. Thank you guys so much.
Thanks, Eric.
Our next question comes from the line of Steve Delaney with citizens JMP Securities. Please proceed with your questions. Thanks I appreciate it so Chris you mentioned the upcoming 30 year anniversary. So how many of those 30 years have you have.
Have you been.
Sitting at Redwood.
Well, if you count the dog years, it's a lot more than 30%.
Yes.
And then it gets 18 or so.
Okay that was good.
It could be in the twenties, but I was I was data you sorry about that.
No seriously congrats for both the company obviously.
That great record overall at time and for <unk>.
For your longevity and leadership there as well.
Well done.
Just looking at the jumbo volume.
And the last two quarters of the year $1 six one point too.
Would you think next year, if we were to for now until we see some potential rate relief, which we may or may not get.
Would you guys think $5 billion to $6 billion.
Is a reasonable starting point.
For Jumbo production next year or am I being too conservative.
No I think that $6 billion range is definitely something we think is achievable.
Obviously.
Rates rates are the big question Mark.
And so we.
We can't predict the path of rates, but I do think that.
What we're seeing below the service really gives us confidence that as rates start to flatten and come down the business is in a great position to scale we are.
There is so much to do still with banks I feel like we're just kind of scratching. The surface. We're just getting banks online various stages and as I mentioned in my remarks, when you when you look at how.
How the business changed after the great financial crisis, the vast majority of the jumbo business sort of moved on bank balance sheets.
Yes.
We think thats going to change.
We think the regulations are going to change, but we also think that.
The incentives that banks had to do that are no longer present, you don't.
No longer have zero cost capital.
<unk> got a lot more scrutiny from an asset liability management perspective, you've had some banks.
<unk>.
Go down so so for us.
<unk> got this massive jumbo.
Portfolio opportunity that we haven't seen in 15 years.
Irrespective of kind of rates.
We're just very excited to be looked at as a capital partner again for that piece of the business.
This hasnt been.
Up for grabs if you will on the Pls side people ask why securitization volumes.
Stayed low after the great financial crisis, it wasn't because there were no jumbo loans being.
Being originated was because they were all ending up on bank balance sheets, so to the extent that changes.
It's going to mean really great things for us in the Pos market.
So that's really why we're excited.
Think that there's structural changes happening with how capital is going to flow through the sector.
We noted that also applies for the investor loan business as well for core vest, we're seeing greater inbound for banks, who are now dealing with seasonal challenges. So theres just a lot of headwinds out there and to be sort of hopefully on the other side a lot of a lot of that is why we're we're probably.
Optimistic on today's call.
Hey, you bet duration.
30 year fix.
Fixed rate duration, whatever it works out to belongs a lot better than.
And bond portfolios in Boston and L. A than it does on bank balance sheet. Thus.
As far as the stability of the financial system as a whole. So no question. Thanks for the comments.
Thanks, Steve Thanks, Steve.
Ladies and gentlemen, this does conclude our question and answer session. It also does conclude our conference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.