Q4 2024 Redwood Trust Inc Earnings Call
Okay.
Speaker Change: Good afternoon, and welcome to the Redwood Trust fourth quarter 2024 financial results Conference call. Today's conference is being recorded I will now turn the call over to Kaitlyn Mauritz Redwoods head of Investor Relations.
Speaker Change: Please go ahead ma'am.
Speaker Change: Thank you operator, Hello, everyone and thank you for joining us today for Redwoods fourth quarter 2024 earnings Conference call with me on today's call our Crystal Ball <unk>, Chief Executive Officer, Josh Robinson, President and Chief Financial Officer.
Speaker Change: 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.
Speaker Change: These statements are based on current expectations forecasts and assumptions include risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that maybe expressed in forward looking statements.
Speaker Change: On this call me, 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.
Speaker Change: A reconciliation between GAAP and non-GAAP financial measures are provided in our fourth quarter review.
Speaker Change: And also on our website Redwood Trust Dot com.
Speaker Change: Also note that the contents of today's conference call contains time sensitive information that are only accurate as of today, we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.
Today's call is being recorded it won't be available on our website later today.
Chris: And with that I'll turn the call over to Chris.
Chris: Thank you Kate and welcome everyone to Redwoods earnings call.
We look forward to reviewing our fourth quarter performance today as well as sharing some perspectives on the direction of both Redwood and our industry in 2025.
Chris: On the back of the November elections, the last few months it borne witness to an unprecedented dynamic in interest rates.
Chris: Start of a fed easing cycle. It has coincided with a nearly 100 basis point rise in the 10 year Treasury yield.
Chris: It's inflationary retort from the new administration and the prospect of significant government borrowing has acted as a catalyst to keep mortgage rates elevated well into the new year.
Chris: Brook will spend more time on our financial performance, but it's worth highlighting that our full year results demonstrated significant progress returning our operating businesses to strong profitability and delivering a 5.7% total economic return and its three separate 100 basis points swings in treasury yields we also significantly improved our operating efficiency.
Chris: At Cincy and raised our common stock dividend in each of the final two quarters of the year.
Chris: As we approach 2025, we'd like to remind our shareholders of our long held view that most challenges and opportunities in our markets get their start in Washington D C.
Chris: With such a significant shift in governing philosophy from the new administration much is likely to change in the arenas of housing policy and regulation.
Chris: The vast majority of this we expect to benefit Redwood.
Chris: So mortgage rates remain elevated and overall housing activity will likely remain flat in 2025, we see several strategic opportunities that could drive sizable market share gains for our platform supporting greater earnings power.
Chris: Our top strategic priority remains capitalizing on the downsizing of mortgage activity within the banking sector something that has significantly accelerated in recent weeks.
Chris: Three large regional banks have already spurred nearly $10 billion of seasoned mortgage pools to change hands a trend that we expect will continue throughout the year.
Chris: The logic supporting our view is intuitive with continued higher for longer rates dampening prospects for near term origination growth at banks the risk reward dynamic funding fixed rate mortgages with deposits over an extended period as more banks revisiting their mortgage strategies.
Chris: As such we expect the build out of our bank seller network to begin paying increased dividends.
Chris: Of note. Thanks represented 40% of our lock volume in 2024, doubling from 2023 and up from just 8% prior to the regional Bank crisis.
Chris: Divestment for mortgage lending also reflects the prospect for many banks to redeploy capital, notably through M&A after largely being stymied. The past four years increased activity in EM M&A could shake free large mortgage pools once they're mark to market under M&A accounting rules when paired with expected consolidation amongst.
Chris: Nonbank originators this as a meaningful opportunity for Redwood with a recognized track record for closing acquisitions in pursuit of our strategic objectives.
Chris: As persistently higher mortgage rates and a constrained housing supply impede the path to homeownership for many American households demand from our top institutional loan sellers for non traditional loan products has grown significantly.
Chris: Our aspire platform, which we launched in early 'twenty 'twenty four to provide innovative solutions for homeowners to unlock their home equity was recently broadened to include expanded loan products that serve prospective homebuyers, requiring alternative methods to demonstrate the ability to repay underwriting standard.
Chris: For those less familiar with this segment of the market. This focus represents a sizable addressable market for both our existing seller network as well as new originators to Redwood.
Chris: In the last few weeks aspire has been acquiring such loans leveraging our track record as a reliable source of liquidity through best in class operations and common sense underwriting practices.
Chris: The market for these alternative loan products continues to grow but remains ripe for disruption through artificial intelligence and other emerging technologies, we're focused on to reduce cycle times expand the funnel of qualified consumers.
Chris: We're also in the early stages of a new administration that has emphasized the need for policy reform to address housing affordability and accessibility.
GSE reform is once again, a topic of discussion and while privatization would take extraordinary resolve from the federal government over an extended period of time.
Chris: Dressing lower hanging fruit, such as GSE mission creep and overall government overreach and housing is a viable possibility in the near term.
Chris: To put GSE expansion into perspective loan limits for GSE insured loans have increased by 60% over the past five years compared with just a 10% rise in average household income are much more rational approach would ensure that loan limits align with actual purchasing power and redirect more of the gse's efforts.
Chris: Two addressing core impediments to homeownership, particularly for low to moderate income homebuyers such.
Chris: Such progress and realignment would directly benefit our Sequoia platform as we are best positioned to provide extremely competitive mortgage rates for nonconforming borrowers.
Chris: As many in the industry no our nonconforming mortgage rates have been at or lower than comparable conforming rates in many instances.
Chris: We are optimistic that news housing regulators may reverse what has become known as an era of enablement for the gse's to unnecessarily crowd out the private sector.
Chris: And we look forward to playing a key role in Derisking The American taxpayer as the administration works towards greater privatization of housing finance.
Chris: It's hard to overstate the scale of opportunity these trends can bring to bear for Redwood, making our recent strategic progress all the more critical.
Chris: Beyond our securitization and whole loan distribution competencies, our strategic joint ventures with large private credit institutions have set us further apart from our competitors.
Chris: After finalizing our second joint venture in the Middle of last year, we have already surpassed the $1 billion threshold of cumulative fundings into our jv's on top of the billions of dollars of loans that we have securitized or sold to third party investors in 'twenty 'twenty four.
Chris: Our distribution capabilities have helped drive the re scaling of our operating businesses positioning us to set ambitious new benchmarks for volume and distribution across our Sequoia and corvus platforms in 2025.
Chris: For our shareholders. The key takeaway is our commitment to profitable growth both within our core business and through new initiatives aimed at expanding access to credit for more American households, looking forward, we remain focused on identifying and seizing transformational opportunities whether via emerging technologies like AI or an established lending classes.
Chris: Such as Homebuilder finance, where we believe compelling entry points now exist.
Chris: With the recent addition of a new Chief Technology Officer, we are well positioned to scale. These initiatives in the year ahead.
Chris: Before I hand, the call over to Dash as a California headquartered company, we want to take a moment to express our deepest sympathy to all those who lost their homes and the devastating fires that swept through the Los Angeles area in January.
Chris: While we anticipate minimal financial impact to our business due to our limited exposure to the directly affected regions. We are reminded of the significant losses experienced by homeowners and tenants across the state, including some with ties to our workforce and a small number who have received financing through our platforms.
Chris: Our servicing team is actively engaging impact in homeowners.
Chris: And we are profoundly grateful to the first responders firefighters and countless volunteers, who selflessly assisted all of those impacted directly.
Chris: Their efforts are a testament to the power of community and the vital role we all play in rebuilding restoring and protecting the dream of homeownership with that I'll hand, the call over to dash.
Dash: Thank you Chris.
Speaker Change: I will cover our operating results before handing the call over to <unk> to conclude with our financial highlights.
Speaker Change: Fourth quarter closed out a year of meaningful strategic progress for our recently rebranded Sukhoi platform.
Speaker Change: While mortgage rates rose 50 basis points during what is typically a period of seasonal slowdown.
Speaker Change: Lock volume increased 4% from the third quarter to $2 3 billion.
Speaker Change: This growth was on the strength of our highest flow lock volume since early 2022 and increased activity with independent mortgage bankers or iam bees, which rose 23% quarter over quarter.
Notably with mortgage rates still hovering at around 7%. This momentum has continued into the new year January locks totaled just over $1 billion, 35% ahead of Q4 as pace and almost two five times January 2024 levels.
Speaker Change: Quarter's results rounded out the strongest year for the platform since 2021 $9 billion of total lock volume was close to 40% sourced in bulk forum and activity with 175 total sellers, notably no flow partner, representing more than 7% of full year production volume.
Speaker Change: We expect this granularity to drive further volume growth in 2025 is the dynamics, Chris described may draw more sellers to seek to transact and more significant size, particularly amongst the 120 depository is now in our network.
Speaker Change: In all during the fourth quarter, we distributed $2 $5 billion of Sequoia loans more than half in whole loan form to 10 different counterparties and the remainder through three Securitizations. This was our most active quarter for loan sale activity since the first quarter of 2022 and included several large sales to banks a good reminder, that wall on balance the dip.
Speaker Change: <unk> footprint and mortgage lending continues to add broader loan growth needs are compelling certain banks to add to their mortgage portfolios leveraging their relationship with redwood to do so.
Speaker Change: We expect this distribution channel to remain a tailwind in 2025 as many of these partners have indicated a desire to transact more programmatically.
Speaker Change: Our securitization activity on our quarter was also a highlight as we priced one deal each across 30 year fixed agency eligible investor and adjustable rate mortgages or arms important versatility in an evolving market. The arm securitization was backed by the season Bank portfolio, we acquired in the third quarter of 2024.
Speaker Change: It was completed less than two months from settlement highlighting our speed to execution on pools, originally funded for a bank balance sheet and not capital markets distribution.
Speaker Change: In total 2024 was our most active securitization issuance year in over a decade.
Speaker Change: Evidenced of the depth of demand from investors for our established top tier shelf that issues at a reliable cadence.
Speaker Change: Year to date, we have already distributed $1 $4 billion in loans largely through two securitizations that achieved strong execution and continued whole loan sales.
Speaker Change: Our distribution strength is just one of the tailwind we believe makes our estimated 5% market share in 2024, a steppingstone for further growth our ground game with banks is unparalleled and positions us to capture a meaningful portion of the potential wave of supply that Chris discussed.
Speaker Change: Another emerging competitive advantage that we've highlighted recently is the expansion of our spire platform to include a full suite of expanded loan products that we have begun to acquire from our seller base.
Speaker Change: Recent commentary from the fed reinforces a patient stance on further rate cuts, we expect more sellers to address higher for longer market conditions by expanding their product offerings. We estimate our current seller base originated over 30% of the 80 plus billion dollars of these types of loans originated industry wide in 2020 for a critical run.
Speaker Change: To start for this product launch and a key competitive advantage for redwoods growth into this space.
Speaker Change: Core vest our residential Investor platform also made key advancements in 2024 highlighted by volume growth efficiency enhancements and broadening of distribution channels fourth quarter fundings totaled $501 million up nearly 10% from the third quarter and our highest volume since the third quarter of 2022 despite.
Speaker Change: Despite the backup in rates origination activity remained balanced between term and bridge loans term loan production was up over 40% from the third quarter and comprised 45% of total quarterly production in line with our historical targeted balance between bridge and term originations.
Speaker Change: Single asset bridge or S E volumes rose slightly to another record quarter of originations, we continue to invest in growing originations in both SAP and <unk> loans are smaller balanced products as they remain well bid by investors and represent large addressable markets and an attractive opportunity for wallet share growth January reps.
Speaker Change: As added more forward momentum for the business as fundings eclipsed December volume and were close to double those of January 2024.
Speaker Change: Strategic progress in this area will be keyed by distribution, which remains a strength of the platform.
Speaker Change: <unk> distributed $507 million of loans during the quarter largely to our joint venture with CPP investments and into whole loan sales, we placed $375 million of loans into <unk> during the fourth quarter and through January have contributed over $1 billion to these vehicles life to date, an important milestone as we pursue similar structures to.
Speaker Change: Drive growth across the enterprise.
Speaker Change: In November we completed our first securitization with loans from the CPP joint venture of $300 million transaction backed by bridge loans and structured with a 24 month replenishment period.
Speaker Change: Overall repayment velocity in the core vast portfolio was up 20% from the third quarter with over $400 million of pay downs, including $320 million in the bridge portfolio.
Speaker Change: 90, plus day delinquencies in the bridge portfolio improved by 10 basis points as we continue to successfully execute on the cohort of resolutions, we anticipate finalizing over the near term delinquencies.
Speaker Change: Delinquencies in the term loan portfolio moved marginally higher in part driven by smaller pool size and net of 80 basis points of resolutions with minimal realized loss severity.
Brook: As Brook will further describe delinquencies and associated fair value changes remain concentrated in multifamily bridge loans that we largely stopped originating in mid 2022.
Brook: <unk> in the single family cohort of our bridge portfolio remained below 4%.
Brook: Across our broader investment portfolio higher benchmark drove modest reductions in fair value for our credit performance remains strong most notably across our jumbo and re performing loan portfolios. These.
Brook: <unk> collectively represent nearly 70% of our portfolio's net discount to par and are backed by loans, whose borrowers continue to protect the substantial embedded equity in their homes.
Brook: As our secured financing against these securities continues to Delever there are windows to unlock this net discount and further optimize overall capital allocation supporting growth in our operating platforms and funding the associated long term investment opportunities.
Brook: And with that I will hand, the call over to Brook. Thank.
Brook: Thank you guys build on your earlier discussion around branding I want to highlight an important update to our segment May mean that you will see reflected in our earnings materials, we've aligned our business units with that Brandon identities to better reflect their market positioning and strategic okay. All residential consumer segment as NASA.
Speaker Change: Financial Investor It sounds corvette and our investment portfolio is now Redwood investment.
Speaker Change: Turning now to our financial results I'll be referring to GAAP earnings of negative $8 4 million for the fourth quarter.
Speaker Change: Seven cents per share compared to positive $13 1 million or nine cents per share in the third quarter, reflecting fourth quarter GAAP Roe of negative 3%.
Speaker Change: Vic to the fourth quarter fair value changes, primarily reflected the mark to market on our larger Bowen with multifamily at baseline.
Speaker Change: Impact from higher benchmark interest rates on a re performing loan securities for the full year 2024, we recorded GAAP earnings of positive 47 million or 32 cents per share equating to a GAAP return on equity at four <unk> percent.
Speaker Change: With the decline in GAAP earnings Q4 book value per share decreased to $8 and 46 days.
Speaker Change: Full year 2024, we delivered a total economic return of five 7%.
Speaker Change: Our common dividend, which we increased twice in 2024.
Speaker Change: Earnings available for distribution or <unk>.
Speaker Change: For the fourth quarter was $18 4 million or 13 cents per share compared to $25 2 million or 18 cents per share in the third quarter.
Speaker Change: Sequential decline primarily reflects the absence of nonrecurring other loan income and the normalization of HCI contribution the latter of which had benefited from higher than modeled home price appreciation in the third quarter. Excluding these factors the core.
Speaker Change: Our earnings drivers of our business remains stable quarter over quarter with consistent performance across net interest income mortgage banking and other income and G&A expense.
Speaker Change: Net interest income increased 8% from the third quarter to $27 6 million in the fourth quarter, which represented nearly 40% increase year over year supported by the $525 million of capital we deployed on the air.
Speaker Change: Fourth quarter income from Sequoia mortgage banking activities was $16 8 million.
Speaker Change: The decrease from the third quarter as gain on sale margins remained well above our historic target range of 75 to 100 basis points that was slightly below the elevated levels from the third quarter full year return on capital improved from 10% in 2023% to 22% in 2020 for fourth quarter income from Corvus mortgage banking activities was $9 6 million.
Speaker Change: A decrease from the third quarter as higher volume was offset by more normalized margin full year adjusted return on capital improved from negative 3% in 2023 positive 17% in 2024 hour improved return on capital for both operating businesses year over year was the result of our focus on growing volume and an efficient capital light manner.
Speaker Change: This allowed us to reduce the days, we hold loans on balance sheet for Sequoia and reduce our working capital for corvette by roughly 30%.
Speaker Change: G&A expenses decreased from the third quarter, primarily as a result of lower compensation expense fourth quarter G&A was effectively flat relative to the same period in 2023, despite significantly higher volumes in our operating platform.
Speaker Change: That point net cost to originate for corvette improve by 28% in 2024 relative to the prior year and <unk> costs improved by 59% relative to 2023 in both cases these improvements prior to levels better than our target efficiency ranges.
Speaker Change: We continue to fortify our balance sheet and build our liquidity.
Speaker Change: Unrestricted cash as of December 31st with $245 million, which grew with the $90 million senior unsecured bond offering that price in January at the tightest yield to treasuries, we've achieved in that market.
Speaker Change: In the fourth quarter, we also completed a transaction to effectively extend a portion of our convertible debt maturity.
Speaker Change: Together with other actions taken we have reduced our convertible debt as a percentage of equity from 65% just two years ago to 31% at the end of 2024.
Speaker Change: We reported total recourse leverage of two four times for the quarter down slightly from two five times in the third quarter recourse leverage and our investment portfolio remained low at <unk> eight times at December 31, we had excess warehouse financing capacity of $4 7 billion more than double from $2 1 billion as of year end 2023, given the <unk>.
Speaker Change: <unk> growth and scale of our operating platform, we expect to increase our capacity further to support our growth ambitions in 2025 and continue to see strong confidence from our lenders and our ability to seamlessly upsize our facilities, ensuring we can efficiently absorb the portfolios that we anticipate will come out of banks.
Speaker Change: Looking ahead, we anticipate significant growth in our mortgage banking business is in 2025, even amidst elevated interest rate level.
Josh: Josh noted January lock volume for <unk> exceeded 1 billion, primarily driven by flow business.
Josh: Given this momentum we currently anticipate a 30% plus year over year volume increase.
Josh: A target return on capital and approximately 20% for that segment in 2025 with substantial upside potential from large bank portfolio distributed by regional banks.
Josh: Corvettes early 2025 performance suggests run rate volumes approaching <unk> 5 billion annually facilitated by our strategic focus on growing single asset bridge in D. C. Our originations at 60 plus billion dollar market, where we have substantial ability to grow share.
Josh: Williams would underpin a mortgage banking return of 25% to 30% in 2025 for our mortgage banking segment, given the capital light nature in which we run the business.
Josh: While the.
Josh: The recent expansion of fire mandate gives us access to the 100 billion dollar addressable market for Japan in credit with potential for 2025 volume to exceed 2 billion with one run rate returns in line with Macquarie a target return on capital.
Josh: And there is a lot of market volatility and policy developments unfolding, we will keep the market apprised of our outlook for 2025 later in the first quarter.
Josh: And with that operator, we will now open the call for questions.
Josh: Thank you we will now be conducting a question and answer questions. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd 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.
Josh: One moment, please while we poll for questions.
Bose George: Thank you. Our first question is from Bose George with <unk>. Please proceed with your question.
Speaker Change: Hey, everyone. Good afternoon.
Bose George: I wanted to ask about the.
Speaker Change: The current run rate.
Speaker Change: Relative to the dividend.
Speaker Change: Obviously hinted last quarter, but now it's back down again, how do you think about just.
Speaker Change: The run rate the cadence the drivers of the AAD getting to the dividend.
Speaker Change: The timeline that you're expecting now.
Bose George: Sure Bose I'll start this is broken.
Speaker Change: Ill hand, it over to Chris.
Some of this is in my prepared remarks, but in terms of the kind of quality of AAV I think sometimes the headline doesn't tell the full story, we mentioned in our prepared materials.
Speaker Change: Our home equity investment option income was actually down a couple of pennies below.
Speaker Change: We would expect from just what we see in terms of kind of our baseline assumptions for that portfolio and <unk>.
Speaker Change: And market drivers. So if we had normalized for what we expect from baseline or patient AAV would've been roughly 15 cents and we had mentioned.
Speaker Change: In Q3 that.
Speaker Change: Even a little bit of ahead of schedule given some one timers that I mentioned in the quarter two we had elevated margin.
Speaker Change: Certain of our products within corvette and then also kind of a one time nonrecurring fee, but just in terms of drivers that we see from here, we feel really confident about progress net interest income has been a really positive story and we see drivers of that to continue to increase.
Speaker Change: On the <unk>.
Speaker Change: <unk> yield compression that we've seen recently has slowed so far and will be a continued story in the first quarter that will be positive.
Speaker Change: We saw a 50 basis point decline on our cost of funds in the quarter and that will really have a full quarter impact in the first quarter and then you recently saw our our $90 million.
Speaker Change: Senior unsecured offering deploying that capital we will continue to drive net interest.
Speaker Change: Income you mentioned you know really positive early volume drivers for operating businesses at those more normalized margins will also continue to support.
J D.
Speaker Change: You know a decent amount of capital optimization to continue, especially as we continue our infringement resolution activity within corvette.
Speaker Change: Support our AAV further as we redeploy that capital into our operating businesses.
Yes.
Speaker Change: Okay.
Speaker Change: Just also quickly add Bose.
Speaker Change: Yes.
Speaker Change: It's very important to the board that.
Speaker Change: We pay an attractive dividend.
Speaker Change: From a current income perspective, and obviously.
Speaker Change: You can see in our financials that we've got a significant amount of liquidity. So.
Speaker Change: We're tracking towards that dividend on an <unk> basis, but I'd also say that I think with AAD in adjusted earnings metrics. There is a lot of apples and oranges comparisons across the industry. When I look at our book performance over the past few years versus some others in the industry I think we've significantly outperformed.
Speaker Change: On an economic basis.
Speaker Change: Sort of neutralizing some of the adjustments we feel really good about.
Speaker Change: Tracking.
Speaker Change: Sure.
Speaker Change: Okay. That's helpful. Thanks.
Speaker Change: Just in terms of the timeline to I mean, do you guys think about whatever 123 quarters, it's like a timeline to the EDI sort of equal the dividend is that.
Speaker Change: Yes.
Speaker Change: We feel like we've got good line of sight this year.
Speaker Change: Do those converging, but again as far as the level of the dividend goes part of that is feedback from shareholders. Current income we've got really strong liquidity, but when we look at NIM growth and then we put out some I think broke included some some guidance in her remarks around volume growth we've seen.
Speaker Change: Even in January across the business lines really strong.
Speaker Change: Volume growth, we've already done two <unk> deals priced.
Speaker Change: So we feel like all of the sort of forward looking metrics are there for us and I'd say over the next few quarters, we would expect those to converge.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you. Our next question is from Crispin Love with Piper Sandler. Please proceed with your question.
Speaker Change: Hi, This is <unk> on for Christian Love, just two quick ones for me in terms of the BPL can you just discuss the competitive environment and how it's shifted at all as rates have backed up.
Dash: Sure Hey, Brian It's dash I can take that.
Dash: I would say, it's evolving I would say, it's more of a tailwind at this point.
Dash: For us just based on the depth of our products and also the depth of our capital I think when you combine.
Dash: All the products are doing across term bridge, SAP, SCR and combine that with our distribution.
Dash: I think thats frankly, a very rare combination and this market. We're looking to add talent, we're able to add talent from competitors at this point.
Dash: Based on how.
Dash: The market has evolved I would say BPL in general tends to be a bit more rate agnostic on an overall industry basis. So there is there is still good volume out there.
Dash: <unk> as I mentioned in Brook too are areas, where we have a lot of room to the ceiling frankly in terms of grabbing market share.
Dash: Having a compromise on credit standards or pricing so.
Dash: So we view all those as <unk> has always had a lot of different lenders in this space different shapes and sizes, but we feel really really good about our combination of product mix reliable execution and probably most importantly distributions.
Thanks, and then I know <unk> touched on this a little bit in the prepared remarks.
Speaker Change: But can you just given insight as to where you expect leverage to trend into 2025, and how comfortable you are with the current liquidity position that'd be helpful. Thank you.
Dash: Yeah absolutely.
Dash: Our residential pipeline will be the largest driver of that.
Dash: <unk> of leverage that we have around kind of two to two and have it could even go up to three or beyond depending on where we are in quarter end timing with disposition activity of some of these larger boxes.
Dash: All activities I think in our prepared remarks that we mentioned we're seeing.
Dash: Train for that Ken.
Provide some.
Dash: Just very near term dynamics around leverage at quarter end as refinance those and then distribute but.
Dash: We feel really good about our liquidity position, we ended the quarter with $245 million of cash subsequent to that we did that.
Nearly $100 million bond offering we have $325 million of Financeable.
Dash: Unencumbered assets and so we have.
<unk>.
Dash: We have significant dry powder from our perspective to continue to.
Dash: Simon business is also dunson.
Dash: <unk> of non recourse financing.
Dash: Activities.
Speaker Change: Refi Ed away from some of our recourse debt and actually Brian capital.
Speaker Change: I feel really good about our liquidity to take advantage of the operating environment right now.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Our next question is from Eric Hagen with <unk>.
Speaker Change: Please proceed with your question.
Eric Hagen: Hey, Thanks, how are you doing.
Speaker Change: A question on the Jumbo do you guys feel like there's still room for the credit box to expand or just like based on your thresholds for rescue feel like Youre already maybe operating it.
Eric Hagen: Upper end to that risk spectrum and then.
When you guys target bulk packages of loans from third parties as the risk profile similar to what you originate yourself.
Eric Hagen: Okay.
Speaker Change: Good questions I'll take them sequentially.
Speaker Change: I think in the core jumbo business, there's probably some room, but I would probably point to aspire. The launch we did about a month ago is probably the best answer to your question in terms of our view that there is.
Speaker Change: A very large existing addressable market for alternative types of loan products that we feel we can we can purchase and underwrite very very well.
Speaker Change: Non QM was probably an 80 plus billion dollar market for total originations last year.
It was the largest non agency securitization market.
Speaker Change: Last year as well as broker articulated.
Speaker Change: We expect that Tam to grow to probably a $100 billion. This year and when you think about where rates are some of the dynamics with housing accessibility, we think those products when underwritten well could.
Speaker Change: It could be game changing for us.
Speaker Change: Footprint in this space, which is exactly why we've expanded the aspire mandate so.
Speaker Change: So for sure I mean, I think within our core jumbo business. We've always had for steel products <unk> remain about 20 basis points or so but.
Speaker Change: But I think the launch of aspire is probably the best evidence we feel like there's a huge tam out there that we can we can access well.
Speaker Change: In terms of your question on bulk obviously it depends on it depends on the seller it depends on the seasoning.
Speaker Change: I think with more of those season pools, you tend to get.
Speaker Change: Lower mark to market Ltvs.
Speaker Change: Generally out of the money coupons lower <unk> versus on the run production probably to state the obvious there so.
Speaker Change: It depends but generally what we've seen has been really pristine credit.
Speaker Change: De Levered borrowers, where it really is just about speed to execution and the ability for a seller to have confidence in our buyer like us to execute.
Speaker Change: Yes, good color guys. Thank you.
Speaker Change: When you guys highlight the fact that the unsecured debt has come down to I think you said, 30% of the capital stack, how does that maybe change your philosophy about capital allocation just call. It this year I mean do you see.
Speaker Change: Like it gives you more flexibility to capitalize the bridge portfolio a little further.
Speaker Change: More generally I mean is there ways to optimize the leverage in the bridge portfolio.
Speaker Change: Any further from here.
Speaker Change: There definitely is.
Speaker Change: And I think that will continue to be a priority for us.
Speaker Change: This year not only in terms of loan level resolutions, but also how you know how we finance that portfolio, we definitely improve that in 2024, there's more room to go which is a huge focus for us.
Speaker Change: Particularly on the bridge portfolio as it relates to the broader capital structure.
Speaker Change: I think yes, as you know a lot of what we've done is optimize our secured leverage which has helped us reduce our <unk>.
Speaker Change: Unsecured financings, particularly our converts obviously the $90 million offering of FERC referenced was also unsecured but with that allows us to do Eric.
Speaker Change: Referenced this a little bit at the end of my remarks.
Speaker Change: Since those are secured as those de lever.
Speaker Change: There is room to re lever those we've done that.
Speaker Change: A fair amount over the past few quarters and just the nature of that data allows us to access more capital more quickly in terms of how that structured.
Speaker Change: Capital is going right into the.
Speaker Change: That capital is going right into.
Speaker Change: The operating businesses.
Speaker Change: As it relates to the unsecured debt, we've been sort of lagging into one difference I would call out as some of the Optionality as you know with converts they tend not to be callable or maybe callable a very short period of time before their maturity the unsecured debt we've lagged into here over these past three issuances.
Five year non call to which it was really really good prepayment optionality for us and allows.
Speaker Change: Allows us to optimize that part of our capital structure much sooner than we otherwise would have with doing.
Speaker Change: A more convertibles.
Speaker Change: Thanks for the great color I appreciate it guys.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question is from Steve Delaney with citizens JMP. Please proceed with your question.
Steve DeLaney: Sure Hi, everyone. Thanks for taking the question I guess Brooks first just for starters I think when.
Speaker Change: When you guys first started talking about this segment.
Steve DeLaney: You had a lot of moving pieces that just want to applaud.
Speaker Change: Got it.
Speaker Change: With Sequoia corvette and Redwood to have all of the consumer mortgage products and Sequoia the investor products in core bass.
Speaker Change: Really will help us.
Speaker Change: As we set up our models and just explain the company.
Speaker Change: The product.
Speaker Change: Brand the products I guess is what I'm, saying and Brian and Nick your segments to a product like that.
Speaker Change: My question is.
Speaker Change: Rates really bad or today.
Speaker Change: Can't remember a time in my career, where people spend as much time talking about rates and with the beds could do with the 10 year is going to do it.
Speaker Change: It seems like the whole stock market trading off rate so it.
Speaker Change: As an adult kind of frustrating.
Speaker Change: <unk> really do matter.
Speaker Change: I guess to that point.
Speaker Change: Can you give us an idea of what.
Speaker Change: Where youre pricing 30 year from jumbos owner occupied.
Speaker Change: It can be a range. If you don't want to I assume you probably have these rates on a website somewhere I'm, just curious where that rate is owner occupied.
Speaker Change: Prime Jumbo 30 year fix.
Speaker Change: Where are we today, what's the range of the coupons on those mortgages.
Steve DeLaney: Sure Steve.
Steve DeLaney: Moves around day to day, obviously, but I would contextualize it is probably high sixes.
Steve DeLaney: Pending on credit overlay. It made it may touch a seven handle right now that's where we sit today.
Steve DeLaney: Okay.
Steve DeLaney: Got it.
Steve DeLaney: Ballpark, yes.
Steve DeLaney: Thank you back debt.
Steve DeLaney: Over the last six to 12 months.
Steve DeLaney: Where we're below that.
Steve DeLaney: To get a sense for where we are today versus the bottom and how many people are sit around sitting around waiting for rates to go back down 50 basis points.
Steve DeLaney: Yes.
Steve DeLaney: The recent lows over the past 18 months probably.
Steve DeLaney: Very short period of time, when it was back to a five handle very very high fives, but it's largely bounced around.
Steve DeLaney: And the six as you know when the tenure was up sort of closer to 5% our rates were probably very low 77% a quarter yes.
Steve DeLaney: Or thereabouts, that's the range and to your point, Steve that range over a 5% to six quarter period of time I think underscores.
Steve DeLaney: Just all the movements in rates that.
Steve DeLaney: The market's yet raveling listen to your point no question, we had that huge bond rally in September I think the lows in the 10 year, where in September and now we're 100 or so above 100 basis points above that that's helpful. Just to kind of get a sense of kind of what I expected, but it wasn't.
Steve DeLaney: Really sure where jumbo was pricing versus conventional.
Steve DeLaney: That type of thing so alright, that's helpful. I don't think I have any anything else right now.
Steve DeLaney: Yes.
Steve DeLaney: Yes.
Steve DeLaney: Pray for some rate relief, but I think you sounds like you guys have a business thats working with where rates are today.
Thanks.
Steve DeLaney: That that's the most important thing is youre not youre not depending on 50 to 100 basis points and lower to run your business.
Steve DeLaney: No actually Steve I would I would accident that by saying.
Steve DeLaney: As rates have held out higher for longer we're seeing great opportunities from banks, some of which have announced.
Steve DeLaney: Exits from various facets of the mortgage business.
Steve DeLaney:
Steve DeLaney: We are I think we've proven.
Steve DeLaney: To be really effective at pipeline risk management.
Steve DeLaney: In our deals our Sequoia deals continue to price.
Steve DeLaney: At the tightest levels in the sector Theres been five or six issuers. So far this year both of our deals are priced tightest Mr.
Steve DeLaney: According to my records and that gives us.
Advantaged and not just.
Gain on sale margins, but how we can bid some of these big pools of.
Steve DeLaney: $1 billion plus pools that we're now starting to see so so it's actually.
Steve DeLaney: The rate environment has created opportunities.
Steve DeLaney: We wouldn't see with a rally, but obviously I think I think the sector and certainly the housing market.
Steve DeLaney: Would be well served by some rate relief I, just don't I don't see the catalyst in the near term.
Speaker Change: I afraid youre right well. Thank you all for the color I appreciate it.
Steve DeLaney: Steve.
Speaker Change: Our next question is from Doug Harter with UBS. Please proceed with your question.
Doug Harter: Hi, Thanks.
Speaker Change: Chris I know you touched on this during your prepared remarks, but if.
Speaker Change: If we could just get into a little bit more around your comfort that the.
Speaker Change: The banks are going to continue to look to kind of offload mortgage.
Speaker Change: If there is kind of regulatory relief and how much of that opportunity is kind of truly more interest rate.
And.
Speaker Change: Risk management versus regulatory capital relief.
Speaker Change: Yes.
Speaker Change: Doug.
Speaker Change: Paolo I think actually spoke to.
Speaker Change: Our conviction on getting the Basel III rules sort of back re proposed so that actually may happen sooner than later, but certainly it will be more capital neutral.
Speaker Change: The real driver right now is the rate environment and as I mentioned, just a lack of a catalyst for rates to come down and I think these banks are just looking out theyre not seeing much production growth and mortgage as an asset class.
Speaker Change: Moving resources moving capital the M&A picture has changed overnight for banks.
Speaker Change: We could see a lot more M&A, starting this year and for all those reasons I think mortgage is up for grabs we saw which has been in the news.
Speaker Change: $9 billion pool.
Speaker Change: Pool that came to market a few weeks ago.
Speaker Change: Which we bid on behalf of Redwood.
Speaker Change: We've seen others.
Speaker Change: Come up and we're working on a few right now so so behind the scenes.
Speaker Change: There's actually a lot happening that gives me.
Speaker Change: A lot of optimism that in addition to our flow run rates, which brook spoke to will be able to supplement that with some pretty sizeable bank portfolio trades and I think for us that the most interesting part is that we're alive already with a number of these regional banks, which means the technology the purchase agreement.
Speaker Change: All of these adding.
All of the safeguards all of that is in place when we bid.
Speaker Change: We can stipulate a close timeframe, that's very very accelerated.
Speaker Change: So I think we expect to be very competitive.
Speaker Change: Many months on that front end.
Speaker Change: There are some banks that are buying loans from us.
Speaker Change: So so everyone has different needs and different buckets, Phil I think the real.
Speaker Change: Franchise value is in the relationships and just having all of that plumbing in place and having the trust back.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: Very helpful. Thank you.
Speaker Change: Our next question is from Don <unk> with Wells Fargo. Please proceed with your question.
Don: Yes, a question if I look at all the different areas of potential new investment originations portfolios. It just seems like there is.
Speaker Change: Significant opportunities for new investments.
Speaker Change: Perfect World you'd have a ton of capital like how do you manage this from a risk management perspective.
So that we don't get in a scenario, where you bring out a big portfolio in the securitization market has widened out how are you thinking about that.
Speaker Change: Yes.
Speaker Change: Across the business to start with BPL. We've established these joint ventures, we could potentially establish more.
Speaker Change: That's always a focus area and so for some of those larger loans, which you would see in BPL, having established capital partners to risk share in too so.
Speaker Change: Support that business has been huge and that's really freed up our capital to increase our mortgage banking philosophy velocities across the franchise.
Speaker Change: The resi business, we are seeing these big.
Speaker Change: Portfolio trades, which we think these are these are franchise.
Speaker Change: Accretive opportunities for us so we want to be able to to bid.
Speaker Change: <unk> in the market and as Brook mentioned, we've we've got an excess of financing right now I think a lot of banks.
Speaker Change: Are aware of the opportunities that we're seeing through some of these regional partnerships and are very willing and able to bank them.
But the security the securitization markets are a big part of the story in the distribution.
Speaker Change: We will continue to supplement that with insurance.
Speaker Change: Insurance partnerships or other joint ventures pension funds, we may look at but right now the <unk>.
Speaker Change: Capital Picture I think here is as good as it's been in quite some time, our cash position.
Speaker Change: Our recourse leverage and then sort of the off balance sheet capital that that we can speak for through partnerships makes me feel really good about.
Speaker Change: Going on offense and being aggressive and 25.
Speaker Change: Got it and then on the aspire home equity can you talk a little bit about I assume that's similar where you're either selling and securitizing.
Speaker Change: Can you talk about the margins in that business.
Speaker Change: Mike you talked about the $2 billion plus potential new investments.
Mike: Yeah, Hey, Doug it's dash.
Speaker Change: Would contextualize.
Speaker Change: Those target gross margins in the same vein that we've historically targeted for <unk> sort of that 75% to 100 basis point range.
Speaker Change: On the expanded.
Speaker Change: Product loans that we're buying from our seller network and soon to be expanded seller network with with new partners.
Speaker Change: We will likely start with whole loan sales there is a very robust and deep demand for those sorts of products. There is also a very vibrant.
Speaker Change: The securitization market.
Speaker Change: As we mentioned earlier.
Speaker Change: The joint venture partnership or similar capital partnership is.
Speaker Change: Very much in the cards for that business as Chris articulated, but that's how I would think about gross margin targets for aspire.
Speaker Change: Got it thank you.
Speaker Change: Our next question is from Rick Shane with J P. Morgan. Please proceed with your question.
Rick Shane: Hey, everyone. Thanks for taking my question I have a couple of actually this afternoon.
Rick Shane: When we look at the mortgage banking results for the fourth quarter.
Rick Shane: Income was down slightly from the third but what's interesting is the mix really shift in more net interest income quarter. This more net interest income this quarter.
Rick Shane: Then last less banking revenue.
Rick Shane: When we look at the locks and <unk>.
Rick Shane: Commitments they were roughly the same so it doesn't really explain it.
Rick Shane: Is this a function of holding the loans through the fourth quarter, given the volatility in here and stuff and then.
Rick Shane: That's driving the pickup in Sequoia securitization volume in Q1.
Joseph: Hmm and Joseph.
Joseph: We've talked a little bit about the last few quarters is how we've evolved our financing and hedging strategy for the business and I think that's really what you see in terms of <unk> and.
Joseph: Overall stability in kind of a net contribution of Sequoia, but.
Joseph: Different aspects of it how that's coming through the bottom line in the last quarter. We said our gain on sale was really half of it or so.
Joseph: Attributable to that kind of large rally, we had and at the end of the quarter and rate and so you know that some of the difference, but it was really hedge outperformance and some of our positive Karin.
Joseph: Hedges that were showing up through NII.
Joseph: The result is.
Joseph: Composition shift.
Joseph: Got it.
Joseph: And the reason I ask the question is the capital efficiency slide disclosures a little bit different.
Joseph: This quarter than it was last.
Joseph: No.
Joseph: In my conclusion from sort of comparing them as it does look like perhaps you held the loans a little bit longer in the fourth we're just trying to think about how to sort of plot this out going forward.
Joseph: I think one dynamic you saw in the fourth quarter that we sold a large portion of R. R.
Joseph: Our loan and hope to form a follow on sale that tends to be a slightly longer settlement timeframe than our inside.
Joseph: Simon please securitization cadence and a lot of those settled right in the beginning of the year. So you are right to point that out I think.
Joseph: Going forward, we certainly hope its a solid blend of the two distribution channels.
Joseph: Welcome to whatever is the most accretive.
Joseph: But that could that could an extender or Dave on balance sheet. Finally, I think.
Joseph: In general and you have seen a large pick up in our capital efficiency for the business.
Joseph: Last couple of quarters, we've really driven down our cost per loan and.
Joseph: And we see a lot of the dynamics that drove NII in Ali's mortgage banking NII for Sequoia.
Joseph: Through the first quarter as well.
Got it okay. That's very helpful. Thank you.
Joseph: Second question.
Speaker Change: When we look at the delinquencies they were flat for three of the four categories.
Joseph: Castle with up.
Joseph: Sure.
Joseph: Noticeably after being up in the third quarter as well.
Joseph: Is this seasonal is this concentrated in any particular regions how should we interpret the increase in 90 day think using that product.
Speaker Change: Hey, Rick it's dash I can take that.
Speaker Change: I don't think its necessary seasonal but I would emphasize that.
Speaker Change: With those sorts of.
Speaker Change: With those sorts of portfolios because they are stabilized.
Speaker Change: Lot of the times is just borrowers sort of dealing with.
Speaker Change: Short term collection issues or short term opex increases in and getting back on sides, which is what we we largely expect with this uptick that book actually prepaid reasonably quickly during the fourth quarter. So about 30 or 40 basis points of that increase is also just a smaller pool size.
Speaker Change: We haven't we.
Speaker Change: We havent securitize, those loans and about a year and a half we've been largely selling them.
Speaker Change: Either into joint ventures, or frankly to insurance companies and so part of the uptick is also the fact that it's a smaller pool size.
Speaker Change: Quarter on quarter.
Speaker Change: Got it okay that makes sense.
Speaker Change: Last question since I'm sort of I think at the tail end of this I will I Hope you guys now indulge me one last one.
Speaker Change: When we think about the aspire product and we compare it to the traditional sequoia product the traditional sequoia product add extremely low losses and more importantly, I think is very very low data to the mortgage credit cycle that was really that is really the inherent strength.
Speaker Change: Of that product.
Speaker Change: I'm curious when you think about aspire and <unk>.
Speaker Change: Sounds like its largely home equity, but it also sounds like it may be some high LTV and maybe some lower FICO scores can you give us some context on that.
Speaker Change: The potential here that it is a higher returning product for you, but also has a higher standard deviation of returns over the cycle.
Rick Shane: Yes, Rick.
Speaker Change: I'll start and we can see where it goes but.
Rick Shane: Aspire.
<unk> taken a step back.
Rick Shane: It's become a big initiative of ours because.
Rick Shane: The institutional seller base that we operate.
Rick Shane: Has started to onboard more of these products. So as we've been in this higher for longer environment, I think the prospects of a refi wave that many large originators.
Rick Shane: Top 10 originators were hoping for waiting for.
Rick Shane: They are not waiting for any more and as a result of that.
Rick Shane: They are refocusing on more specialty products non QM products.
Rick Shane: D C. Our bank statement.
Speaker Change: Second liens as you noted.
Rick Shane: So really.
Rick Shane: An expansion from the traditional 30 year fixed jumbo et cetera, So I think because of that it's interesting the non QM space has really been.
Rick Shane: A focus of the spoke originators specialty originators and what we're seeing is sort of the bluebloods.
Rick Shane: The industry get really focused on these products, which is which is great for us because.
Rick Shane: We're completely plugged in there in many cases, a top one or top two.
Rick Shane: Buyer of their mortgages and so.
Rick Shane: It was really an expansion that started with originators that we plan to sort of pick up that business, but but it's really we ran redwood choice. We branded our expanded program in past years. This isn't wildly different we expect credit performance to be very very strong.
Rick Shane: Since these are these could be higher LTV or there could be alternative underwrites.
Rick Shane: Certainly.
Rick Shane: We would expect the performance not to meet sort of the Super Prime Jumbo.
Rick Shane: Experience, which I think <unk> mentioned was around 20 basis points.
Rick Shane: We still we still are very early innings, and we don't have a.
Rick Shane: A lot of performance history with these products at Redwood.
Rick Shane: So it's going to take some time to see how things shake out, but I wouldn't I wouldn't.
Rick Shane: Think of this as a huge deviation.
Rick Shane: Credit wise from what <unk> seen from US we expect these to be really good credits and I think the real the real shift is.
Rick Shane: Seeing these these product classes being.
Rick Shane: On boarded by the really large institutional originators as opposed to some of the smaller originators that have been leading the charge here in the past.
Chris: Chris It's really helpful context, Thank you guys.
Chris: Okay.
Speaker Change: Thank you. Our last question is from Jason Weaver with Jones trading. Please proceed with your question.
Jason Weaver: Hi afternoon, everyone.
Jason Weaver: First I was hoping you might be able to characterize.
Jason Weaver: A bit of what your conversations are going like I know that GSE reform is probably.
Jason Weaver: Our long dated prospect, but how are you thinking about expanding either the seller network within sequoia or expanding wallet share and how your negotiations with those partners are going right now.
Jason Weaver: Our network.
Jason Weaver: We already do business with the vast majority of of the industry.
Jason Weaver: Our originators are originating agency mortgages non agency mortgages and so we.
Jason Weaver: We feel very plugged in across the board.
Jason Weaver: I do think that GSE reform, a privatization is a long ways away.
Jason Weaver: We commented in our prepared remarks that.
Jason Weaver: Our advocacy.
Jason Weaver: In Washington, we will be focused on.
Sort of the Doge.
Jason Weaver: Our approach to <unk>, which is mission creep and low limits, we think it's.
Jason Weaver: Crazy that the government is subsidizing $1 $2 million mortgages.
Jason Weaver: Those are the types of things that I think a change in the near term that have been enabled by regulators.
Jason Weaver: Over the past few years, that's business that that we've spoken for for years and years and they've done a great job serving that market.
Jason Weaver: So for me, it's more what can we do too.
Jason Weaver: <unk> refocused the Gse's on core mission activities, let the private sector Phil.
Jason Weaver: Filling the gaps.
Jason Weaver: If the Gse's do move towards privatization.
Jason Weaver: You know that that would level the playing field for us. So we've been we've been operating in the private sector with no subsidies.
Jason Weaver: You know of any kind and if that playing field gets leveled we feel extremely good about our capacity to compete.
Jason Weaver: Our securitization infrastructure.
Jason Weaver: All of those things.
Jason Weaver: But.
Jason Weaver: I'm not sure that our seller base will change significantly.
Jason Weaver: Outside of you know through the Aspire initiative. In addition to our current sellers will probably add.
Jason Weaver: A host of specials.
Jason Weaver: Generators as well that will buy loans from.
Jason Weaver: Got it thank you and one other just slight modeling questions thaws overhead relief in the run rate in G&A from last quarter aside from units volume issues and seasonal pattern.
Jason Weaver: Are you seeing any efficiency efforts there that you expect to persist.
Jason Weaver: Yes, the decline that we saw in the fourth quarter was really driven by lower compensation expense.
Jason Weaver: A lot of our variable compensation and equity compensation is very closely aligned with performance and the performance in the fourth quarter.
Jason Weaver: Translate into lower Opex there.
Jason Weaver: I think in terms of as we go forward we've pointed to several.
Margaret: Margaret for how we are engaging.
Margaret: And the Kpis of our business across our operating platforms and Redwood as a whole and how we've been driving efficiency over the last year I think.
Margaret: You know a lot of that with other business out of our operating businesses.
Margaret: And we are pulling back volumes and cutting cost accordingly.
Margaret: <unk> expense.
Margaret: As we move forward a lot of it will be very tied to <unk>.
Margaret: <unk> growth of our operating businesses.
Margaret: And then and variable compensation that that solid performance.
Margaret: Alright, thanks for that Brad.
Margaret: Thats It for me congrats on the quarter and good luck to you.
Margaret: Thank you. Thank you.
Speaker Change: Thank you there are no further questions at this time I'd like to hand, the floor back over to Kaitlyn mauritz for any closing comments.
Kaitlyn Mauritz: Okay. Thank you everyone for joining our call today. We appreciate you taking the time to hear our view on the quarter and outlook for 2025, as we mentioned there is a handful of materials.
Kaitlyn Mauritz: On our website in the form of the Redwood review in the shareholder letter that we encourage you to take a look at and thank you again and have a good evening.
Kaitlyn Mauritz: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.