Redwood Trust, Inc. (NYSE:RWT) Q2 2024 Earnings Call Transcript

Redwood Trust, Inc. (NYSE:RWT) Q2 2024 Earnings Call Transcript August 1, 2024

Redwood Trust, Inc. reports earnings inline with expectations. Reported EPS is $0.13 EPS, expectations were $0.13.

Operator: Good afternoon, and welcome to the Redwood Trust Inc. Second Quarter 2024 Financial Results Conference Call. Today’s conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood’s Head of Investor Relations. Please go ahead, ma’am.

Kaitlyn Mauritz: Thank you, operator. Hello, everyone, and thank you for joining us today for our second quarter 2024 earnings conference call. With me on today’s call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, 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 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 may be expressed in forward-looking statements.

On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our second quarter Redwood Review, which is available on our website, redwoodtrust.com. Also note that the content 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. Finally, today’s call is being recorded and will be available on our website later today.

With that, I’ll turn the call over to Chris for opening remarks.

Chris Abate: Thanks, Kate, and welcome everyone to Redwood’s second quarter of 2024 earnings call. As always, I’ll kick off our opening remarks before handing it over to Dash and Brooke to cover our operating and financial results. At our March Investor Day, we said that investors in RWT hold the keys to tremendous optionality on the future of housing finance. This statement was meant to reflect our unique strategic positioning in response to anticipated regulatory shifts and the rapid emergence of private credit investors in our sector. Today, after a second consecutive quarter of approximately 50% growth in residential consumer lock volumes, combined with 40% quarterly growth in residential investor loan volumes, validation of that statement is upon us.

Year-to-date, we have distributed close to $3.5 billion of our collateral. As investors continue to exhibit strong demand for the residential assets, we are uniquely positioned to source and manage. And now, as the Fed finally begins to exhibit signs that its historic tightening cycle is ending, a macro environment to facilitate transformative growth can emerge. Putting it all together, we think the case for Redwood has never been clearer. To recap our second quarter results, we improved our operating efficiency on the back of strong volumes, while realizing a 20% reduction in fixed costs. Earnings available for distribution was $0.13 per share, 70% higher than the prior quarter. Our June 30 GAAP book value was $8.73 per share, roughly flat on the quarter, and we estimate book value is up an additional 1% to 2% at July 31.

Progress with our bank partners illustrates the core asset liability challenges these institutions still face when funding fixed rate mortgages with deposits. This drives shifts in bank product and portfolio strategies and has further evolved how banks serve their customers. As we continue to focus on forward flow jumbo production with the banks, we now consider the $1.3 trillion of seasoned jumbo loans on bank balance sheets to be an addressable market for us. In fact, in the second quarter, approximately 35% of our bank lock volume came from such seasoned portfolios. All told, our lock volume with banks grew 80% quarter-over-quarter. On the regulatory front, recent commentary from the Fed also suggests that a re-proposal of the Basel III Endgame rules is imminent.

Though we were the first to acknowledge that anything can happen in Washington these days, we’re encouraged by the early feedback on Christy Goldsmith Romero, who has been nominated to be the new Chair of the FDIC. Goldsmith Romero stated publicly that she is “very open” to the re-proposal of the Basel III Endgame capital requirements, and that the agency under her leadership will strive to follow congressional intent concerning a law requiring banking agencies to tailor their capital regulations to bank size. We currently expect a vote on this nomination to occur in September after the Senate returns for a 3-week session beginning the week of September 9th. Turning to our investor loan business, demand from private credit institutions helped drive the strongest return for our residential investor segment since 2021.

As you recall, our recently established partnerships with CPP Investments and Oaktree are indicative of the ongoing demand we have witnessed for our residential investor loans. These joint ventures, combined with ongoing inroads with whole loan buyers, will help evolve the platform’s revenues toward recurring and predictable fee streams, facilitating scale with less direct capital usage through time. Looking ahead to the second half of the year, we remain pleased with our market positioning and will continue to execute on our strategic goals. However, we’re preparing for unexpected challenges, particularly in light of an already unprecedented presidential election cycle. Though rates remain stubbornly high, a data-driven Fed now has increasing evidence to commence a more accommodated monetary policy, and we’re optimistic on what that could mean for our markets across the residential housing landscape.

We look forward to further updating you on our progress as regulatory, monetary, and political changes take shape this fall. And now, I’ll turn the call over to Dash to discuss our operating performance in more detail.

Dash Robinson: Thanks, Chris. Second quarter operating performance across our platforms reflected important progress on wallet share, improved efficiencies, and continued momentum on distribution. We grew revenues, increased activity with joint ventures, sold term loans to a new strategic investor, and maintained our monthly cadence for jumbo loan securitizations. Residential mortgage banking’s lock volume growth was driven by increased penetration across our seller base, including the 80% quarter-over-quarter increase in bank volumes that Chris referenced. As seasonality helped nudge overall industry volumes up from the first quarter, we estimate our overall second quarter market share in jumbo to be approximately 6%, up from 5% in the first quarter.

Activity on the quarter was highlighted by the purchase from a bank of a sizable pool of seasoned hybrid adjustable rate mortgages, or ARMs, that we expect to settle later in August, an important development that underscores our role as a solutions provider to bank balance sheets. The transaction also represents attractive diversification from our traditional 30-year fixed rate offering, which, given banks’ traditional footprint in ARM lending, may become a growing opportunity for our business. As is often the case, when market conditions become more favorable, new players in our space attempt to enter or reemerge, a phenomenon we saw in the second quarter as a handful of issuers pursued market share from independent mortgage bankers, or IMBs. This dynamic quickly shifted as securitization spreads began to retrace, tightening from earlier in the year.

IMBs remain a longstanding competitive advantage for our business, and in spite of these entrants, we grew IMB lock volume by 10% quarter-over-quarter. IMBs represent 50% of quarterly volume, and we expect this group to remain a critical focus in driving our overall wallet share higher. Distribution has kept pace with the growth, and we priced three jumbo securitizations during the quarter, while maintaining an active posture on pipeline hedging. This drove gross margins of 72 basis points, just below our historical target range, despite TBA widening and softening in issuance spreads. Already in the third quarter, we priced our seventh jumbo securitization of the year backed by $638 million of collateral and sold $150 million of whole loans to an insurance company.

Our Residential Investor segment also posted impressive upticks in volume and profitability during the second quarter, funding $459 million of loans, up 41% from the first quarter. Importantly, origination momentum came from higher margin products where we have prioritized growth. After several quarters of impact from persistently higher rates, term loan volume rose 90% quarter-over-quarter and was close to half our overall funding mix, key progress given our historical footprint in this product. We also achieved record volume for both single-asset bridge and DSCR loans, growing each 50% from the first quarter. July fundings for the full business were in line with average monthly volumes for the second quarter. Market demand for our products, most notably from large pools of institutional capital seeking long-term partnerships, remains a key differentiator for the platform.

We sold $415 million of loans in the second quarter, a high watermark for distribution away from securitization. This included sales to our joint ventures, including the initial funding on the CPP Investments JV and an accretive sale of $240 million in term loans to a large insurance-backed buyer. This was a notable transaction and represented a sizable new investor for our loans. Our results reflect the benefits of the partnerships that we have established, and looking ahead, we believe the depth of our distribution sets us apart in managing the business to durable profitability. Credit performance in our Residential Investor portfolio has remained stable overall, but continues to command asset management focus, particularly related to workout activity within our legacy multifamily bridge portfolio, the strategy we largely discontinued in the summer of 2022.

Through the process of stabilizing this portfolio, we have continued to incur incidental workout costs as we progress toward productive resolutions. Given the pace of paydowns and workout activity, we expect this portfolio to continue factoring down in the next two to three quarters with moderating interest rates, potentially accelerating payoff and refinance activity. The second quarter was a recent high point in deployment within our investment portfolio, with over $130 million of capital put to work. Investments were generally focused on shorter duration, higher coupon securities from third-parties, and helped drive the growth and net interest income that Brooke will describe in more detail. Fundamentals within our overall $3.4 billion investment portfolio continued to perform well, particularly in our jumbo and reperforming loan books, where performance has materially exceeded our modeled expectations.

The carrying value of this portfolio has been significantly impacted by the 550 basis point hike in benchmark rates over the past two years. As rates stabilize and potentially begin to come down, the book values of our long-term fixed rate investments stand to directly benefit. With the overall portfolio still carried at an aggregate $2.18 per share net discount, 65% of which is from our jumbo and reperforming loan securities. This represents a key source of earnings upside that in recent quarters has been hard to unlock. I will now turn the call over to Brooke to discuss our financial results in more detail.

Brooke Carillo: Thank you, Dash. We reported GAAP earnings of $14 million, or $0.10 per share for the second quarter compared to $29 million, or $0.21 per share in the first quarter. Earnings available for distribution, or EAD, was $19 million, or $0.13 per share for the second quarter, up 70% from $11 million, or $0.08 per share in the first quarter. This resulted in an EAD return on common equity of 6.5%. primarily due to growth in net interest income and higher net income contributions from both our mortgage banking platforms. We saw positive fair value changes on our investment portfolio in the second quarter, but performance lagged the first quarter due to higher reserves on our bridge loans. Our book value per share was $8.73, a slight decrease as compared to $8.78 at March 31.

Including our $0.16 common dividend, we delivered an economic return of 1.3%. This brings the year-to-date total economic return to nearly 5%, which would exceed our dividend yield on book value on an annualized basis, underscoring our ability to deliver a stable to growing book value and consistent dividends despite a volatile market backdrop. Higher volumes and improved operating efficiencies resulted in higher returns across our operating platforms during the quarter. The Residential Consumer Mortgage Banking segment delivered a 16% return, and the Residential Investor segment delivered a 13% return, adjusting for the amortization of acquisition-related intangibles. Net interest income continued to grow in the second quarter, increasing by $1 million to $25 million.

The roughly $130 million of accretive capital deployment during Q2 contributed roughly $4 million to net interest income. This was somewhat offset by lower net interest income from the bridge portfolio due to a smaller portfolio size, as we saw nearly $400 million of payoffs and $200 million of transfers into joint ventures in the first half of the year. Additionally, loan modifications led to a 10-basis point reduction in our weighted average coupon on the portfolio compared to Q1. We anticipate that continued accretive capital deployment and the resolution of lower-yielding legacy bridge assets will unlock incremental capital for redeployment, further optimizing our Investment Portfolio’s net interest income. We benefited from measures taken in recent quarters with general and administrative, or G&A expenses, decreasing by $1.2 million from the first quarter, primarily due to a 20% reduction in fixed employee compensation.

Given the progress in scaling our volumes, efficiencies also improved in our operating businesses. The cost per loan for a residential consumer decreased to 22 basis points from 36 basis points in the first quarter, driven by bulk activity. With two consecutive quarters of 50% growth in loss volume, we anticipate that operating expenses will trend back closer to a 30 to 35 basis point historical target range. We also saw the net cost to originate for residential investor, improving to just under 100 basis points in the second quarter, which is also approaching long-term efficiency targets for that business. We maintained a robust cash position of $276 million at quarter end, effectively unchanged from the first quarter even as we grew the business and deployed accretive capital.

Post quarter end, we retired our 2024 outstanding convertible debt using existing cash on hand, reducing our total convertible debt outstanding to $364 million, down 43% year-over-year. We closed one temp securitization and one resecuritization, freeing up approximately $70 million of incremental cash. Pro forma for these activities, our July 31st cash and cash equivalent position stood at approximately $275 million. We were active on the financing front, securing $2.5 billion in new or refreshed capacity, including $1 billion to support our joint ventures. These new facilities, executed on favorable terms with existing bank partners, are expected to support growth of our own production. We added a few new facilities to maintain sufficient runway for our residential consumer pipeline with a $300 million facility that supports our capital-light, high capital return strategy.

Additionally, during the second quarter, we drew down $125 million of our CPP Investments facility and still have another $125 million remaining under that facility. We also completed an $85 million senior unsecured corporate note offering with a 9% coupon inside our inaugural issue in January, providing incrementally accretive capital for deployment. Total recourse leverage was 2.1x for the second quarter, up from 1.9x in Q1. The increase was attributable to higher balance of residential loans and inventory, partially offset by the conversion of over $200 million of recourse debt secured by bridge loans to longer-term, nonrecourse structures. We believe we have sufficient capacity to support the further growth of our operating platforms, with $6.1 billion in total financing capacity at quarter end, of which $3.8 billion was undrawn and available.

Looking forward, we aim to build on the momentum generated in the first half of 2024. We remain committed to growing market share and deploying capital accretively to grow earnings throughout the remainder of the year. And with that, operator, we will open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Bose George with KBW.

Bose George: Can you talk about the bulk pipeline, and also can you discuss just the economics of the bulk business, like was there any financial impact from the acquisitions this quarter, or is that when it’s disposed? Yes, how that differs in any way from the regular full volume?

Dash Robinson: Sure, Bose. It’s Dash. I can take that. In terms of the prospects for bulk, I think we remain really optimistic that the transaction we talked about that we expect to settle later this month is the first of several. Obviously, those are a little bit more episodic conversations with banks versus our sort of point-of-sale flow business. But if you look at the dynamics, number one, with rates, obviously with this recent rally, we’re getting much closer to a point where dollar prices may make sense for certain banks looking to dispose of seasoned collateral. Obviously, the dynamics with Basel, banks looking to manage overall balance sheet sizes, continues to be a dynamic that we see a lot, and we think is a tailwind for availability of bulk.

So those are all positive tailwinds. And oftentimes, including this situation that we talked about, it involves being around the loop with these banks and constant dialogue, whether that’s being active on the flow side already or simply being in with the C-suite of these banks with the decision makers and being the first phone call when they decide to sell those portfolios. So, obviously, a bulk pipeline looks and feels a little bit different than flow, just given how episodic it can be, but we feel like there are a lot of tailwinds, including being able to get one done. There’s always a lot of learnings, particularly with seasoned portfolios that really matter. In terms of the economics, I think we are appropriately conservative in terms of how we thought about the economics in the second quarter of the pool.

As I mentioned, it was scheduled to settle later this month. We’ll intend to execute that in the third quarter. So there’s hopefully some incremental upside there. And like we talked about on the call, the fact that it’s hybrids, I think, is meaningful. As you know, hybrids are not commonly securitized. They’ve historically been a bank product. Sometimes they do trade bank-to-bank or maybe even with insurance companies. But we’re really excited to control that production because we think it’s differentiated in terms of what the market is buying, and I think also sets us up well to potentially do more hybrids on the run as well.

Bose George: Okay. So that makes sense. But just in terms of like when you think about your target range of 75 to 100, the bulk doesn’t necessarily need to kind of fall there. Is that fair?

Dash Robinson: It could. I mean, I think for bulk where we’re in touch with larger loans and there’s less fallout pipeline risk to manage, you’re right, it could make sense to work for a little bit below that. That’s not how we feel like we’re working on this portfolio. We felt like with this portfolio we’re working within our range. But you’re right. With bulk, there are efficiencies and through time it could make sense to work for a little bit less if the capital efficiency is ultimately there.

Bose George: Okay. Great. And then, actually just one more on switching to the bridge loan, the delinquency increase. Can you talk about the drivers? Was that on the multifamily trends? What drove that?

Dash Robinson: Sure. So, in terms of the overall trend of the book, it was a modest uptick. It was largely driven by multifamily. We did resolve several of our 90-plus bucket during the first quarter. But in general, that book, Bose, I would say, just a few things. In the bridge portfolio overall, we’ve continued to see runoff. We had close to $0.25 billion of payoffs in the second quarter. So, some of that increase is because we actually do have a smaller portfolio at this point. In general, we’re seeing the lending markets open up. We saw a lot of loans refinance out in the second quarter that we were probably less constructive on refinancing. So you’re definitely starting to see flow of funds increase in those markets. So it was definitely a modest uptick, but we resolved a lot in the second quarter. And importantly, that portfolio remains ring-fenced. It’s just over 10% of our overall capital at this point. And we’re continuing to see it factor down.

Operator: Our next question is from Douglas Harter with UBS.

Douglas Harter: Hoping you could talk a little bit about the decline in revenue margin this quarter. How much of that would you attribute to the competition you mentioned versus the volatility in TBA and securitization spreads?

Chris Abate: This is Chris. On margins overall, there’s a lot of forces at play. There’s a lot of issuance activity that’s picked up. A lot of it has to do with the mix of the collateral. But what I would say is, we continue to become more efficient. And so, we’re controlling what we can control. I do think that we’re still projecting historical ranges for margins. That’s 75 to 100 in jumbo, for instance. We still like where that sits, mostly because there’s pushes and pulls in the market. And as margins go up, you see more competitors, which we have seen very recently. And when there’s a glut of supply, deals widen and competitors leave, and margins trend back to the range. So I think it’s part of the noise of the business. But I still think the historical ranges that we speak to are the right way to think about the economics.

Douglas Harter: Great. And I apologize if I missed — sorry, go ahead, Brooke.

Brooke Carillo: No, I’m just going to say as a reminder, we were — we have been lost the prior two quarters, kind of well in excess of our historical gain on sale as primarily securitization spreads. We’re continuing to tighten in on execution. And so, for us to be able to generate in and around our historical gain on sale, when both AAA spreads to TBAs and TBAs were widening throughout the quarter, we think was pretty well underscore the effectiveness of our hedging regime there.

Douglas Harter: Great. And I apologize if I missed this, but did you give an outlook for either July locked volumes or your outlook for the full quarter?

Chris Abate: No, we didn’t.

Operator: Our next question comes from Crispin Love with Piper Sandler.

Crispin Love: First, can you talk about the HEI product a little bit, which saw a big pickup in revenues in the quarter? What drove the pickup? There was primarily just valuations there. And also just HEI in the area, you’re bullish on near term what rates are and how you do the outlook.

Brooke Carillo: Yes, it’s a great question. The main driver of those at work, you’re correct. And then, the portfolio in terms of its overall valuation was that those were really fair value changes on the portfolio. A lot of what we have in terms of income on that portfolio is almost think about it as like recurring accretion. Those underlying options are struck at a discount to appraise value, and so almost act like a bond instrument in certain ways that a lot of our return from the underlying option is accreted through time. In excess of that accretable return every quarter, we did see a modest pickup in the fair values also from both an improvement in HPA throughout the quarter, as well as a small improvement in the forward forecast for HPA.

Crispin Love: Great. Appreciate that. And then, can you just also just speak to your current thoughts on the dividend? And if you and the Board think you are at the right level at $0.16 when you look at GAAP EAD, and then also the rate outlook with the Fed likely to begin cutting in the coming months. And then, what you might need to see to get back to covering the dividend with EAD?

Chris Abate: Yes, I’d say high level and Brooke can color commentate. We feel very good about the current level of the dividend. And we feel like starting with our March Investor Day, we’re tracking towards EAD covering the dividend at $0.16, EAD was $0.13. I think more importantly, though, in the big picture, there is the prospect of a rate cut. And we talked about the macroeconomic environment for our sector has been very, very challenging the past few years. As that environment shifts, that should definitely be a tailwind behind us, not only in our ability to lower funding costs and generate incremental net interest income, but the book, the portfolio, we have a lot of longer duration fixed rate assets that have been impacted by rising rates over the past few years. And to see that start to recover, that’s another facet of earnings generation on the GAAP side that is quite meaningful in how we think about the dividend going forward.

Brooke Carillo: Yes. Just to pick up on Chris’ comments, one thing to answer the part of your question around just earnings covering the dividend, I think when we put out the Investor Day comments, that was really under the backdrop of a higher for longer or kind of more of the same rate backdrop. So, a lot of what we laid out was really centered around our capital deployment. We have raised or unlocked a significant amount of capital from the fact that we had carried such low recourse leverage in the portfolio. You saw that take down again this quarter, so sitting just over a half a turn. When we think about the dry powder that we have to invest to continue to drive NII through accretive capital deployment, we really think about it as about $250 million today.

We cited $275 million of current cash, but pro forma for the other $125 million or so remaining under CPP. And we have a lot of sources of capital, I think, behind that just in terms of the unencumbered assets that we still carry in our portfolio. As we mentioned in some of our prepared remarks, we are continuing to unlock some of those unencumbered assets through term securitizations that are pretty accretive and allow us for incremental capital to be redeployed at higher spreads today. And then, furthermore, I think if you, to Chris’s point on a rate cut, if you look at the mix, especially with the uptick in residential volume, we have about $1 billion more floating rate debt than assets today because of that fixed rate residential pipeline that we finance with warehouse line debt.

So that is, we see immediate pickup to NIM there.

Operator: Our next question comes from Jason Weaver with Jones Trading.

Jason Weaver: Dash, I’m going to miss your remarks about July, but the jumbo retention rate looked quite a bit higher at 630, but with the effect of the securitization subsequently, that might be more evened out. Is that correct?

Brooke Carillo: Yes, that’s right. We’ve since done a deal in July. You’re seeing that we have about $963 million of loans on balance sheets. You could continue to see that increase just as we continue to gain share and further support growing our volumes. But we are at about a deal a month cadence in the securitization markets right now. So, depending on the timing of those securitizations, you might see that balance fluctuate up and down over quarter end.

Jason Weaver: Got it. And Dash, I wanted to ask about HEI as well. Can you talk about the build out of the sort of the sourcing network behind that?

Dash Robinson: Sure. I can take that one. This is Dash. When we decided to build that business organically a couple of years ago, we felt like we had a couple of main competitive advantages. Number one was just the operational infrastructure we have in place with the existing businesses, which is a stark contrast to a lot of the newer players that have come up over the past few years. But also inherent in that is this sort of “wholesale sourcing network” where we can source potential HEI customers from our existing loan sellers or other sort of B2B contexts that a lot of other players aren’t doing. The traditional model is more direct-to-consumer, spending a lot of money on marketing to get the word out, assessing your pull-throughs, et cetera.

We definitely do a little bit of that. We have a modest spend on direct-to-consumer. But the real moat for that business from our perspective is the moat we have in other businesses with just this unique relationship that we have with 200-plus sellers. We have other relationships with other platforms that are in touch with other groups of consumers that may be interested in HEI. There’s a whole emergence of secondary financing with second lean products. As you probably saw, Freddie Mac has sort of provisional approval to start purchasing closed on seconds. I bring that up because it sort of illustrates the overall momentum in the space and that there’s just a whole group of consumers we can unlock on a wholesale basis that we can serve through Aspire, which is the HEI platform.

So it’s still early days. We’ve been very judicious about the spend and the rollout because of just ranking the rate environment and also the relative newness of the product. But we’re starting to see a lot of momentum in those channels. We’re excited to see what that brings in the second half of the year.

Operator: Our next question comes from Don Fandetti with Wells Fargo.

Don Fandetti: Yes. Can you talk about whether or not you think Fed cuts could help some of the bridge loans get further refinanced out, and when you think that delinquency rate might peak?

Dash Robinson: Good question, Don. I think there’s a few things going on. I think there’s the math of an explicit cut, where certainly floating rate debt burdens will come down if SOFR goes down in the second half of the year. That’s a math equation that will help incrementally. But I think maybe the overlay there is just what’s happening with the sentiment in the market and the fact that I think the market has much more clarity at this point on potential timing of the Fed cutting, and when we’re going to go into a more accommodative cycle. And I think we’re already seeing that make a difference, kind of like I mentioned in response to Bose’s question. It’s already making a big difference in how capital is flowing in the space.

Not only are you seeing the lending markets open up, not only like in conduit land, but also private lenders that were probably more willing to step up and refinance loans today than they were six to nine months ago. You’re seeing a lot of equity on the sidelines start to come off the sidelines in housing finance, where there’s — again, there’s more clarity to what’s going on with interest rates, more conviction around investments, things of that nature. And you’re also seeing borrowers remain in projects. That’s what’s most important for us to keep sponsors engaged. Our multi-book, in particular, inherently is pretty seasoned because like we’ve talked about a lot, we sort of deemphasized that strategy coming up on two years ago at this point.

And so, if you’ve been in a project for 2, 2.5 years and you’ve stuck with it, you have much more conviction now, frankly, than you did six to nine months ago when rates were higher, the markets were harder, and there was just less of a path to stabilization with rates and lowering. So, I think the math will help incrementally, but I think what really matters most is sentiment. And we’re starting to see sentiment definitely shift, which we’ve seen in runoff of our bridge portfolio, in which we’re obviously pleased with.

Don Fandetti: And so, you think the delinquency rate could continue to tick up a little bit but remain relatively contained?

Dash Robinson: We have our arms around this portfolio. It’s hard to exactly prognosticate the exact direction, but I think what we would expect to see continued pace of resolutions, we are actively engaged with outcomes on the vast majority of our 90-plus bucket at June 30, so we expect that to continue to run off. Being honest, we certainly expect to confront pockets of other issues in the portfolio. We expect that to come up, but we’ve got the right asset management team in place to deal with it. We’ve talked a lot in recent quarters about being ahead of the curve with these sponsors, which really matters. And I think you’ve seen that in the pace of resolutions. So I think we will continue to see resolutions in the book. Will other stuff come up? Yes, but we’re ahead of the curve on those issues, which I think will help with the expediency of those resolutions.

Operator: Our next question comes from Stephen Laws with Raymond James.

Stephen Laws: I wanted to touch base on NII and JV fees. Brooke, I think you mentioned some payoffs, and we’re going to, as some investments shift, see an impact there. Can you talk about the outlook for NII as more assets go into the JVs and kind of how we should see JV fees ramp? And I know in the past you guys have talked about $0.15 of annual EAD once that’s fully scaled. Can you give us a timeline, give them the pace you’ve seen in the second quarter of how you — when you expect those JVs to reach scale?

Brooke Carillo: Sure. I’m happy to start. I think it’s a great point to raise on just the timing disconnect between — historically we have $100 million of loans paying back to us. We redeploy that $100 million of that right into our investment portfolio and into bridge loans. I think the important piece is that, while there might be a small revenue recognition delay between the fees being scaled and the JVs combined with 20% of the NII fees, it unlocks a tremendous amount of capital. I think that that’s what my earlier comments were centered around. $250 million I think is a conservative number for our investable capital today, just given our sources of capital. That will more than offset the impact of a smaller bridge portfolio directly on balance sheet, but that would either come from more noninterest earning revenue, so more mortgage banking revenue as the capital is redeployed either into our operating businesses or potentially into more third-party investments like you saw us do in the second quarter.

Our capital deployment really generated about $4 million of incremental NII. We did have an uptick in our corporate debt expense to finance it, so we will continue to see that NII piece grow throughout the second quarter. Just in terms of timing, we did disclose that we put about $120 million of loans into the CPP joint venture. However, that was late in the quarter. We also stood at multiple financing lines. These lines we view to be really accretive terms that are really going to help drive volume for us profitably in that business. And so, Q3 is an open road for deployment into those. And just given an overall pickup in the BPL volume that we saw both on the bridge and term side, we should be, over the next few quarters, ramping quite nicely.

Stephen Laws: And I want to follow up on kind of a broader higher-level question about the bank relationships. I know over the last year or so, as you guys have really started growing that given the shift in the market, it doesn’t just turn on overnight. I know there’s a difference in underwriting loans for bank balance sheet versus your exit of securitization. So, can you talk about how the maturation of those relationships or seasoning works? And are things still ramping up? And I think it probably goes to your point earlier about just being around the hoop with conversations with managements announcing some bulk purchase opportunities of season loans. But can you talk about how long that usually takes from forming that initial relationship to when you feel like you’re really moving at 100% as far as capturing the flow and opportunity with those bank sponsors?

Chris Abate: Sure, Stephen. I’ll take that one. The bank relationship building has been ongoing, as you know. And we’re really pleased with some of the metrics that we’re seeing. Certainly, bank volume is a percentage of total lock volume, number of active sellers. I think we’re right about 50-50 between banks and IMBs, and most of that momentum is with the banks today. So, we would expect that to continue to go higher on the bank side. The relationships, the way we think about it is we continue to be doing infrastructure building with these guys. And ultimately, this is the first time we’ve kind of declared the $1.3 trillion of jumbo sitting on bank balance sheets is officially an addressable market of ours, which is what we’re trying to do.

We’re trying to build and grow the markets that we can address. For years, those were loans that we never saw. And I think that what’s really interesting is as these relationships stood up, and as monetary policy shifts, we can buy loans from banks, and we’ve been an avid seller of loans to banks. So what’s most important is the infrastructure building and having these relationships. We sort of approach it through the context of a vendor versus just a capital takeout. They invest a lot in the technology and the training. So, we think that these are durable relationships. Most of our competition, almost all of our competition for loans these days continues to be on the IMB side. The vast majority of securitization activity that picked up right into July were competitors on the IMB front.

On the bank side, we continue to have great access. And most of my personal time these days is spent working with bank executives and advancing these partnerships. So, it’s really exciting to start to see the work manifest into volume and earnings. And hopefully, all the work that we’re doing today and over the past year, 1.5 years is going to contribute more significantly going forward. So, for us, it’s full speed ahead with banking partners.

Operator: Our next question comes from Eric Hagen with BTIG.

Eric Hagen: A lot covered here already. But one follow-up on CoreVest. Is CoreVest the direct servicer for all the loans in its portfolio? And maybe you can share how the servicing function specifically has kind of evolved in that business as it’s grown and how you’re managing the cost as just in light of the delinquency pipeline?

Dash Robinson: Eric, it’s Dash. Thanks for the question. So, we — for our bridge portfolio, we are essentially the special servicer so we can interact directly with borrowers and sponsors. For both the term and the bridge books, we’re not the primary servicer. So we don’t do the basic payment collection. We farm that work out to third-parties. In our securitized term portfolio, which, as you know, is the majority of that book, those are rated transactions. So, there are rated primary and special servicers. There’s very specific protocols within remics for special servicing. We’re obviously involved as the owner of the subordinate bonds, but there is a third-party named special servicer. Like I said, in the bridge portfolio, payment collections are done by a third-party, but our asset management team is directly engaged with those sponsors as needed.

Eric Hagen: Got you. Okay. That’s helpful. So how are you guys thinking about the cash position at this point? How much organic cash do you feel like you’re generating, kind of like on a quarterly basis? How are you thinking about the pipeline of unsecured debt coming due? Just in light of other mortgage finance companies that have taken the opportunity to refinance their debt as well.

Brooke Carillo: Yes. I think we feel really good about our cash and liquidity position today. Pro forma for paying off our converts, we’re sitting at the same cash position that we’ve had for the last couple of quarters, and we put a lot of money to work accretively. The only two kind of main recourse financing obligations that we had through the next 12 months we addressed in July subsequent to quarter end. We have had elevated bridge maturities. We are probably expecting in and around $350 million or so stepping down to high 200s of maturities of our bridge portfolio over the next number of quarters. That provides a very nice source of capital for us, as well as some of the resolution activity that Dash mentioned unlocks accretive capital that we can redeploy at more optimal levels than where it sits today.

We also have dry powder from the CPP facility that I mentioned and a pretty good playback for the unencumbered assets where we sit today. But as I mentioned in my prepared remarks, our convertible debt is down 43% year-over-year. We’ve done a lot of work on the capital structure and raising term nonrecourse financing as you probably saw. We moved about $200 million of bridge loans into nonrecourse, non-marginal structures. Most of that bridge book is financed today in nonmarginable nonrecourse structures. We just feel really good overall about both our liquidity position, being able to go on offense, and also our liability structure in general.

Operator: Our next question comes from Rick Shane with JPMorgan.

Rick Shane: I apologize if some of this has been covered. I’m bouncing between calls this morning. Look, one of the interesting developments we’re going to start to face is a pickup in speeds as rates fall. When we think about many of the mortgage rates we follow where they own instruments at premiums, we’re starting to factor that into our models. Historically, Redwood has owned instruments at pretty significant discounts and benefited from a pickup in speeds. Can you talk a little bit about that dynamic, where the accretable discount is in the portfolio and what you would need to see in terms of movements of rates to really see that manifest?

Chris Abate: Sure. We can tag team this one, but I think the headline response is, the vast majority of — well, most REITs, I would say, these days own assets at premiums, as you articulate it. And speeds are probably the biggest threat to those values and eroding the premium. I think for us, we continue to talk about the fact that our book set a significant net discount. I think it’s $2.18 share of realizable discount. Speeds, obviously, is an accelerant to that. So, we are definitely, from a portfolio perspective, in a position where speeds will help value significantly. On the on-the-run businesses, generally speaking, lower interest rates will help our business. I think we’ve been positioned for higher for longer, as Brooke articulated earlier, and certainly the forecast of when rates might come down has moved pretty immensely.

I think last quarter, few were predicting a rate cut even this year, and now we’re building a consensus towards possibly September. So, the macro environment that that could create for us is definitely a tailwind, and the combination of starting to realize that accretable discount on the book. Again, our portfolio, we’ve talked about multi-bridge, which is actually a relatively small piece of our overall book. As a portfolio, the credit performance of the book has been extremely strong. When you think about what’s going to move it, it’s not credit, it’s rates, and [Technical Difficulty] come down, we will hopefully start to — that will be a contributor, at least to GAAP earnings. So that’s a big piece. And obviously, if speeds pick up for the on-the-run business, that means that there’s more loan activity.

And if there’s more loan transactions, there’s more regular way business for us as well. So that’s definitely something we can manage. I think we continue to fine-tune our hedging regimen for our resi business, which is obviously the rate-sensitive business. And there we feel really good that we can continue to lock loans and distribute into securitizations as speeds go up. So those are a few things, but I think overall, the headline again, Rick, is we’re positioned, I think, meaningfully differently than many others in the sector.

Rick Shane: Got it, Chris. And if I could ask one follow-up. Is the takeout for most of your multi-family bridge, the Fannie-Freddie multi-family window, and are you starting to see a pickup in activity there, even though short rates remain elevated as the tenures comes down?

Dash Robinson: Rick, it’s Dash. That’s definitely a piece of it. Like I said, we had about $0.25 billion of runoff in bridge in the second quarter. A good chunk of that was multi-family. Many of those sponsors do go Fannie-Freddie. And as you know, a 10-year at 4% versus 4.5% is a big 50 bp difference in terms of the viability of those loans being taken out in terms of where debt yields are. So, obviously, this rally, particularly with comments yesterday, I think is continuing to support refinances where a lot of loans that maybe didn’t work with [10s] of 4.5% work now. So we’re definitely seeing that. The loans we want to recapture into our term book, we’re doing that. Like I mentioned a few minutes ago, there are a lot of loans we’re happy to see go away, and we’re also seeing those go away.

So I think it’s the GSEs, but as I also mentioned, there’s a lot of private lenders that I think are more comfortable coming into the space to take loans out that may not have as clear a path to a GSE takeout, but there’s just more — there’s liquidity flowing a little bit more freely in the system, even the way from sort of the Uber institutional takeouts like the GSEs. All of this does a tailwind to paydowns and things of that nature. But you’re right, we’re in a pocket of rates where incremental rallies make a lot of difference between loans that work and loans that don’t into GSE takeouts.

Rick Shane: Got it. Sorry, I sort of had you guys repeat that. Appreciate it.

Operator: Our next question comes from Steve Delaney with Citizens JMP Securities.

Steven Delaney: Nice to see you guys are staying busy out there. I wanted to pick up on the rate thing too, before Rick brought it up. We’ve had this big rally in the 10 years since late April and about 70 basis points. I’m just curious if you’re already, if that 70 basis points or so move and probably get a little more, are you already seeing any impact on your locks, number one, and this whole rate phenomenon that this could go on, we could be looking what, 10 year, 3.5, maybe by mid 2025. Is there any difference between sort of the bank channel and the IMB in terms of rate sensitivity is really one question. And the other is, what is that level, that magic number, Dash, in terms of a 30-year fixed rate that you think just really swings it to the where you’re getting the vast majority, 70% of your business in refi versus purchase?

Chris Abate: Steve, I’ll start this one and Dash can add. I think what we’re trying to do with our business is really be less rate sensitive than we’ve been in the past and have volumes that we feel like are durable in basically any rate environment. I think what that means practically is our bank channel, we’d love to be an ongoing 30-year takeout for banks. I think the hybrid product is a better portfolio product for banks for obvious reasons, just how they’re funded and the deposit base. And so, we can be competitive there. But if they lean in on hybrids, it gives us an opportunity to be a 30-year takeout for those guys. And then, on the IMB front, it’s more competitive. We see people, sellers kind of come in and go out. And so there, I think, whereas despite the fact that we saw some new entrants buying loans from sellers in Q2 and into Q3, our IMB volume continue to grow.

And so, I think we’re very well situated there. One thing, and Dash can speak to the 10-year, but one really interesting thing for us is, as the 10-year comes down, the unrealized losses on these bank back books will potentially reach a point where banks will be comfortable selling or risk transferring or whatever it is. And that starts to get really interesting for us. I mentioned that $1.3 trillion sitting on bank balance sheets. I feel like we’re better positioned to take that call than most at this point. And that gets really exciting. So there’s a lot to like about this business as rates start to come down. I do think I’ll turn it over to Dash.

Steven Delaney: Yes. You’re saying you could see some bulk flow, not just some bulk opportunities off the bank balance sheets when their discount rate is reduced. Is that what I’m hearing?

Chris Abate: Yes, that’s what you’re hearing. So we’re having the conversations all the time. And each bank has unique circumstances. But when you look at the makeup of some of these portfolios, the unrealized losses have been too significant to want to realize candidly. As rates come down, those unrealized losses come down, I think there’s a lot of bank executives that would love to clean up some of these portfolios. So that’s all the infrastructure work we talked about in building those relationships to get those phone calls.

Dash Robinson: Steve, in terms of just the 10-year directly impacting volumes, I think a rally — a further rally in the long end, to Chris’s point, probably has the most direct impact on unlocking some of these back books at the banks. Candidly, whether jumbo rates are in the high 6s or the low 7s probably doesn’t make a huge difference on refinance activity. As you know, those folks have mortgages a couple hundred bps below that. But similar to the commentary on the resi investor side, I think a lot of it is a sentiment thing. Single family housing has been extremely buoyant. And the locks we’ve seen, even with jumbo rates in the low mid-7s, I think reflect consumers that want to enter the housing market and have conviction that now’s a good time to invest because they didn’t do it a year ago.

And that was five to seven points ago on HPA. So they’re figuring there’s conviction to get in and buy a home. If rates were to rally further into the 6s, I think from a sentiment perspective, that probably does a lot for transaction activity. A lot of it is psychological. I think once you get into the 6s, a lot of consumers think about that rate as at least in the context of long-term historical rates. And you probably start to see more come off the sidelines. Obviously, the overlay is supply. And the fact that there’s still not a lot of housing supply coming out because a lot of people are still sitting on very low coupon mortgages and are less willing to sell and move. That’s why the HEI business is so interesting to us. But I think as rates get into the 6s from a sentiment perspective on purchase money, we think that will be a tailwind.

Operator: We have reached the end of our question-and-answer session. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.