RWT - Earnings call transcript Q2 2018

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Operator

Good afternoon, and welcome to the Redwood Trust Second Quarter 2018 Earnings Conference Call.

During management’s presentation, your line will be in a listen-only mode. At the conclusion of management’s remarks, there will be question-and-answer session. I will provide you with instructions to enter the question-and-answer queue after management’s comments. I would now like to turn the conference over to Kristin Brown, Vice President of Investor Relations. ahead. go Please

Kristin Brown

Good to Vickie. report. thank for you Thank Redwood afternoon Trust us review earnings second joining you, and quarter XXXX

Before with to made we constitute forward-looking or wanted that may begin, statements certain business remind performance during to respect you presentation statements. future financial management's I

or undertakes the to content X, accurate not conference with this analyzes They which reconciliation Review, GAAP no performance and this into and only website, accordance August Form company's assumptions in performance today, provided is of to in annual redwoodtrust.com. quarter subsequent you cause have Redwood to which and statements of both of to actual press factors reflect isolation non-GAAP of should substitute financial second insight earnings update financial company investors XX-K, XXXX. Forward-looking forward-looking those and differ in statements. utilized from based that Tuesday, report and to and of company's available that risks materially. on On performance financial a the for on current GAAP. understanding on not involve are release measures A encourage contains measures. duty read a does this the the results be events company's The GAAP in are and provide aid information the note differ uncertainties that and as included one non-GAAP circumstances. on forecasts will could measures ways measures We to actual description to is of the time-sensitive call, a expectations, in Redwood's Also provided that prepared that performance. or further intend may impact call The refer expressed management provides information to results the material non-GAAP that could between is as some be both we could our our financial considered cause also that

the Finally, today's call later call Chief is today. I being recorded over on and now Executive Abate, Officer, the remarks and will to Chris Redwood's be company's website available opening for introductions. will turn

Chris Abate

and you Redwood’s quarter participating second call. earnings you Thank in afternoon for Thank everyone. good

on Dash and Cochrane, our is Robinson, the call me Joining today President; Collin Redwood’s CFO.

The quarter management for official marked and first the second as start team newly my CEO. transitioned

when recall As our for high first vision out future many transition announced. was laid Redwood’s actually may XXXX you growth the level of back in was management December

likely initiatives commentary define would I start are that like the on many you now to So beginning are longer-term of focused our to there, as business. our

December slide our shifts presentation, with in Following in secular we it on occurring the an the XXXX housing see we analysis of market. January expanded

home an the needs evolving of finally implemented home footprint calculus the we and buyers these lending secular market refer housing expand housing we traditional lending knew emphasis purpose to across business the funding address ownership of and view like with on strategic recently reform tax the only consumers increased but needed how investors of sellers potential our shifts, we to noted alternative lending. we an to prominence towards as real-estate investment. Specifically, and activity means could of non-bank to To rentership, not broader also legislation and the to accelerate change

and earnings. scale and capital and operating to our opportunities, most was reach high and more throughout partners strengthening our and the sellers delivering useful non-bank value to investment We streams, marketplace of our quality to the larger our also would mortgage We lifecycle. recognize that where that if needs ultimately some relationships address the an noted and opportunities seller to repeatable of we on diversify with asserted our financing could lead leverage growing broaden successfully emphasis revenue greater

are we As partnered and with progress with while date. access business stake have the we evaluate we the single-family plan, and a company to In market, addressing in loan X minority lender happy our their long-term a in secular we gaining the housing these flip production. first fixed six rental shifts made Arches, months to the have purpose of taking

Our $XX significant to the was fruit. may it not is quarter, announced the at million time investment seemed in minority have it bearing second but overly already

rental that first began We have X we purchasing purchase. of loans growing are recently and Arches through committed our pipeline family single loans a have to originated

short-term generate in X capital accretive purchase by fix and We also that loans investment August and early committed returns. to flip and residential $XX million managed of to Arches originated expect

provides months ago, a nine mentioned the purchase the next outright also the of months. over XX% an As exclusive our stake platform, with X minority few us we remaining option to Arches

also needs to support We the these strategic half sellers originators us our to to Over mortgage enhancing funding and importance the loans. loan non-banks good made sell progress have are of unique growth.

with As $XX unique or difficult is loans this for launched obtain the solutions, of impossible a of a capital traditional financing earlier value-added in can million leader structured provide funding of through promoting sourced channels. we We and expansion deploying sellers conduit. summer, natural portion our this while mortgage our initiative that to solutions credit the

We this and Another focus in towards this past the meaningful significant ours this the with have housing accommodating million. multifamily over investment credit to been in deployed Capital investment initiative quarters has deployed spent three capital about our through time portfolio cultivating $XX early August. opportunities expand was in market investment of to credit. multifamily relationships

new underway next a quarterly position have expect be call. conference talk in detail of be them about should product We a fall, scalable portfolio our on Heading in we source to for multifamily to and accretive earnings in us our and we quarters. future initiatives the credit additional into

are taken helping round taking off we platform. to have remind our are definitely to Taken shareholders multifaceted the gas scaling new on foot important banking not these initiatives we it's But together approach out mortgage our our the to traditional business. that

the Choice mid-XXXX. the Redwood in since to securitization our third program quarter third we in fifth are completed recently we fact, and In started date

significant program a post-crisis our securitization overall Sequoia our XXth achieved Sequoia also milestone this issued for summer. having We

first the distant like first our residential in more we a great I’d when of operating profitable a near-term pace growth. post-crisis our company's to the Dash key comment had next Well his Our commitment been RMBS this annual line this to In remarks. volume banking investment on million expect era XXXX and in June signify XXXX. stock by will wide our year we've on backed during for The offerings to to seem over challenging two and in the prepared included this expanding and $XXX reference we over the the we closing, restarted issuance our accretive goal opportunities, raised securitization achieving in debt we This XX years. activity with issuance RMBS nine capital letter in and start our targets, where July. from remain activity track with deals convertible we first industry acknowledged offering has mortgage shareholder market in history decline origination common strong, environment. further a late

shareholders. continue managed especially we approach the As is internally an be of will company, interest capital long-term believe our to our to common what in raising equity

future continuing As quarterly our over Robinson, on to communicate Redwood’s in look I vision progress to call strategic to the forward I'll Dash President. updates. turn unfolds, With that our

Dash Robinson

further as first basis These it to successfully capacity in more metrics uptick our you, mortgage quarter. of jumbo four of second quarter, our XXXX caused efforts the operational the purchase Through $X.X were their off purchase assess volume was we outsized the channel track challenging realized validate margin mortgage the the to the does full-year loans the Thank $X everyone. billion rates growth banking I'd to on second billion. the Despite Sequoia the of mortgage quarter X% and relative margins increased production afternoon banking approximately we such through $X.XX has and originators and points billion volume $X Overall, meet like margins Choice. expected to underscore changes Redwood on XX% to from XXXX. total XXX quarter. basis trajectory up activity our end conditions and overall our quarter, from billion, generated $X of within securitizations and given of prior XX near-term Chris, diversification business benefits totaling quarter banking good often and the to as with guidance over completed for our for mix. first versus that requirements to our long-term range billion of The in points start

purchase of XXXX, volume, of year money causing the bring jumbo heavier accounting heading our In based first a Choice remains Choice meet XXXX. of area reaffirms spreads most spreads growth that expected loans The current XX% in for some our pipeline our we in on pricing seen view, quarter for XX% the us environment as we our the Through the somewhat to half dynamics have year and volume and increase quarter approximately issuance versus billion Additionally first $X.X second of XX% to total this represented market first purchased in of saw of soften widening. the of of for our retrace billion. quarter. on up in the we second This overall XX% to channel the diversity end. Redwood value of in to the recently money full with volume, notably begin and second purchase significant trend firm product Notably, earlier Choice. lock the from quarter goal quarter into have we RMBS of transactions our quarter full sellers, of reflected nature loans XX% $XX track year

third expect with Choice program additional securitization We the far in were and quarter. our year, inception. mentioned, execution transactions to this Chris on the since so third As prime fifth quarter, have pleased of complete expanded transaction since Sequoia we completed the the in the later our

even been execution remain particularly and it of as we open which active selling quarters. whole several last securitization discipline comprised We in our keeping distribution the strong pools, XX% loan quarter the sale active. has second often our when in maintained of channels whole Additionally, the total is

we a Since capital momentum investments investment of capital end, both the new approximately our Arches. have bonds Chris into investment third over second capital existing work. our one activity as Over quarter quarter's X quarter portfolio, Overall $XXX including to the actively freshly into second $XXX created initiatives. XX% was we has including flip strong been and deployed million our the an and Turning deployment. and putting have Sequoia the capital raise in fixed multifamily of investment million to and carried described. for minority was we organically in and quarter, the This of quarter deployed

remained as assets. rotate allocations in quarter the active in we Additionally, of we less our second continue out strategic and to lower the optimizing capital yielding

a with redeployment million quarter, approximately report with single up gains. complete $XX Arches efforts freed second capital on $XX unrealized our we million strong we of rental start. Specifically, previously capturing a to X are for progress family during of as I’ll the off

have of in non-owner in being single believe demand sector growing loan pipeline observe robust financing recently a occupied a inefficiently nationwide. secular market needs Overall, for first and served. we and We borrowers rental funded family for trends continue had suite to driving housing our are the this

X existing in us more our Our several an Arches and integration scale business-purpose areas be to within even new partnership these we provider positions solutions us to additional a partner make types network. platform lending will of viable with with well our drive believe estate loans seller the and real

Now Collin Cochrane, Chief Financial going to over I'm to results, financial to Officer. our Redwood’s turn recap

Collin Cochrane

second our summarize first compared quarter, $X.XX Thanks, quarter. core $X.XX in per and the To in Dash, quarter with everyone. compared financial our the and the first GAAP $X.XX $X.XX results share per earnings were earnings afternoon share with for were good

gross within quarter Our reflects margins with range first after the quarter. second expected long-term outperformance lower banking results our in income mortgage

relative first decrease a our portfolio experienced we optimization security the sales realized Additionally, moderated. to pace from quarter as in gains of the

at $X.XX with return to share June quarterly XX, $X.XX which of Our GAAP our X.X% new generated total the of value increased a quarter. dividend book per rate per economic share for $XX.XX

and the long-term Hedging, an Derivatives increase. debt primarily this increase in our contributed Our solid of value the earnings to and

modest investment On makes this of interest slight strategy driven minimally was for changes a our benefit higher portfolio income impacted our REIT net in from to and Net in of Year-to-date On retaxable require the the offset rates utilize associated which slightly will exceeded decreased mortgage income expense representing As $X per book quarter $X long-term first due we've and reflecting income characterized value at taxable by swap our less our value though due being from and hedges, a and from by carryforward interest spreads. interest from portfolio a item. more our adjusted quarter lower a in from side hedge Shifting during portfolio quarter million the a yields at sensitive banking recent quarter. net changes taxable our hedging operating dividend to investment share line than changes saw expense the loss gain to is multifamily net rising in as dividends and was to fair mostly a value our fair benefit on increased portfolio combined at which reduced increased deployment TRS. CRT the first and quarter $XX second gains our optimization. total interest the decrease first included rates net swap the by previously, portion our basis, noted the second benefit interest overall and investment by during gains, income quarter, primarily us improvements from optimization of basis, million has expense in the interest for result million capital from for moment, income our capital likely higher the capital was decrease $X.XX a to fewer REIT. portion we

June sheet balance and including capital, equity in we in of position, approximately recently raised and of the to July. of convertible $XXX our capital million $XXX million million $XXX Turning our debt

maturity. April, available about repaid upon for We million. equity to of over total proceeds debt its $XXX issuance of $XXX from the the and the a the with Additionally, with we quarter in brought $XXX bit investment convertible that million million capital ended

to are putting work. we good this already start off a mentioned, capital Dash new As

at expect recourse will deployed. quarter. to capital our to track payments in we our reduced begin And leverage, targets remained close level, full provided our quarter outlook. per summary, Redwood end dividend exceed our I’ll fourth in of up new year-to-date In our raise and from the while debt-to-equity the Regarding remain X.Xx leverage the track back of tick meet on to at ratio second with leverage $X.XX this we year equity our the July leverage also operational share are financial results expected XXXX on as review. we

of expectations and to banking Choice and meet full $X XXXX remain our Specifically volume XXX basis margins basis track our to our range within for from allocated and capital purchasing billion jumbo expected million a on with of to purchase return business $X of mortgage XX%. points generating points loans XX% year doubling XX on between

continue we portfolio, XX%. expenses operating conclude allocated performance. on prepared And company the why to remarks. commensurate with corporate in expect expectations expect compensation Operator, capital continue with with full million start returns investment million our full that we X% year our between line with For of and to to Q&A. And don't I'll $XX finally, $XX year variable we

Operator

Agrawal Thank with you. go to [Operator We’ll Vik Instructions] Point. Compass first

Vik Agrawal

to about of environment. excess maybe the thanks you and Hi, how When competitive bit good afternoon to long a out? does system? that start to that long-term question. do that your could expect I we the then thinking think are that take than think sale taking could kind the averages – And higher slightly your on how in do the gain point? for my with potentially come want you on you little potentially at be mean capacity And

Chris Abate

welcome back. Vik, Hey,

Vik Agrawal

Thanks.

Chris Abate

I there. As capacity there this very about far that rationalization. it's the from heard perspective It point season it's busy historically a be second quarter the is excess selling sure call to quarter. the for this don't out I'm goes, have going something a at seasonal and includes was on as spring most quarter capacity think

number could but quarter think to we in number for see us business. fall business. fourth occur. the balance sheet. it This to key is routinely time happens see and cyclical we'll the the later a It's rationalization, continue this positioning of our to in two period perhaps some needs you or start So a in The mortgage one our

margins have aspect and long-term any in of think some line of compressed drawing you to caution a few be a past the We always As we sheet advantage we'd the able rationalization. we'll expectations. provide balance do. guidance has we had know, like to specialty take Redwood niche just line products the hope caution given We margin against the a them. strong perspective, From very against what feel of we our also through but certainly through months, quarter first outside a We then significant spreads in and drawing those. that and

XXX make we think in where the is expect points basis basis capacity points to in XX that I long to run business. money the is once corrected

Vik Agrawal

Okay, thanks. couple potentially to director January. been risk in come term now it’s have have potential of But thoughts little in times. the early few there is discussion? or have my terms or on a Any And I is next a still expiring we capital that sharing to discussed times think of up FHFA question private

Chris Abate

early little there with is TBD. think January to certainly GSE if has membership market but successor to because Washington meaningful a days. on revisit something the in still a focused for We the these positive certainly It’s very it Mel bank which to Watt benefits we’re potential potential to the home also with do is private also loan respect one in reform, our is status,

Vik Agrawal

deployed of the we think for you’re Arches How you in that Then production. the $XX to X for remainder point? – capital lastly, think allocation at this for year should you that is about deploy million about or year the of remainder that I have mentioned the

Dash Robinson

or couple to The Arches one. that remarks and fixed think prepared capital It’s X is the take product. talked Vik. in million Hey, about deployment resale would more in Chris that shorter a the pieces. of rehab I during $XX Dash. I the will and flip term, different

into production portion type and that to purchase capital some earlier particular of work put purchase X Arches. from agreement this of we a also flow so entered month to concurrently And a

we’ll So we a the that maintained we year, a a said, of know we've that, on capital what the million the of we've our how million be be deployment hope leverage loans that end scale top that time. monthly that working is won't and by single our by of to least for level. started capital some the month year quite as time there. we've those at $XX to clip. that like piece at of to over for capital of And have you is be gives purchasing expect you Separately been and rental end now deployments to on deploy We’ll the that at hope so the but sort sense $XX pipeline family

said have a rental deploying We've So we of our loans clip and class. the monthly as I building. purchased couple we hope end that be by pipeline single of into the the year that's first family to asset which

So it's you partnership. those X the sum parts think of two the when about Arches

Vik Agrawal

Thanks answering Okay, for it.

Operator

We’ll go Delaney Steve Securities. next JMP to with

Steve Delaney

gains ask situation trading you everybody. been had over the Hey, for address periods say to good that unrealized in I sold. about let’s GAAP. It's the I to in that where sentences, of simply Thanks evening usually prior now were phrase We realized securities. wanted see gains just that. And this securities versus that those in The actually excess question. don't taking Collin, a GAAP have I’ll core and you. guess,

realized converting simply your that including gain to and You core. are gain in unrealized that a

Collin Cochrane

Yeah, have that right. you

Steve Delaney

Okay.

Collin Cochrane

GAAP but P&L, those mark so marks we they through out core So through to the earnings. we market go back earnings, to to trading the – them get securities do

trading and benefit sell take in securities realize time gains that at ultimately we core. those the those when so And through we point

So you're there. seeing that's what

Steve Delaney

it. Got

or trading Go – course sorry. of am Dash and ahead, So Chris. I on

Chris Abate

The – was securities. on realized just on I confirming. That gain trading gain the the me. was

Steve Delaney

what statement trading the through assume. you securities marked I OCI do But income classify of fair And value exactly type securities great. anyway trading? versus as Okay, that's the

Collin Cochrane

some about as are securities point retain or our but predominantly a under still from Sequoias of of our year At ago of then a our the our classified we transformation. have ago our was of quarters sale. pieces our this securities trading portfolio three for of most time some that [indiscernible] – still we is through that are first-class sale, it’s AFS portfolio long credit for available trading lot now legacy And available back

Steve Delaney

this Okay, thanks. guess, is Dash, I you. for

plans last we talk On the customized it's effective but stealing that mentioned now on these need thing needs about know that little Can are, bit is you the first non-bank a warehouse is obviously providing – that you warehouse $XX a program, correspondents? it your what unique everybody that What that What you're we some. I call, million. marketplace? they think, hole the in

Dash Robinson

business question, idea customized of notion and the couple level a capital strategy we than is lines. provide adding work needs warehouse for our the rifle existing are run working can broader our on leverage help with of effectively structure is sellers of warehouse the is One to At them their that specifically of of more top where example on points an thanks of line. efficiently. Sure, sort bank's Steve. The shock warehouse that high balance additional a sheet more that

Steve Delaney

Okay.

Dash Robinson

compelling a economic the capital as a us that effect warehouse crossed structure with think in we the the recourse as to to that efficiently. and And of lateralization more borrower. the the having well security bit including loans little of operation aspect course recycle allowing leveraging sellers package the preserving sooner, loans but It's buying is the equivalent that is economic these has of their

to We're So working sort business. warehouse capital. we're not that our leveraging provide of a building partnerships

Steve Delaney

got That’s Okay, Chris. it. it. ahead, Go

Chris Abate

sellers. add deliver that our I the initiative do value that that is On more piece to real would we is how

Steve Delaney

Right.

Chris Abate

we because product in network better risk associated activity and it's relatively work able one good front, is things This But time risks do for table initiative. about been more have counterparty engaged the business to that aspect, result we and on necessarily And partner, aspect, that and feel ultimately is years vast of Redwood. not because to financing we’ve is type the without network things another a another of launching much these time we get all to we already this so nuance And going the would and into with the We sellers we type here things we're with management if to of like efficiently. the close, these from fund. is think to these sitting understanding the do their able comfort jump financials have. teams, across we're experience

Steve Delaney

to times, the lifeblood to it's – build business. and mean end and national the go kind adding being right. – financial of is of try mean of new is own a origination cetera. your I than of alternative out and a partner your all lot What's those I so et your stores rather this way strategic a more badly situations platform the bricks and of mortar

adding – the to sounds it like warehouse So look add-on you're the advance.

You're simply prefunding some.

going buy to loan You’re the anyway, right.

you like to bit it are term as when settle you businesses the a warehouse dollar, right? what sounds them out a to – and the little on strategic business take loan so is lender senior that will bank that's But more comfortable a of that being you’re going just opposed you at – if you to So of actually part to financing pay Am advancing like their a the to looking if tack the line. the I is going reading sitting all and XXX% beyond in. of down their just this

Dash Robinson

same strategically that. important of to creative example point of capital another of all If above. and that This your all loans It's will to product the the essence album that All be genre. our Choice the and point in the the business of the is really our differ. is get than deployed ourselves seller. sellers that with done the more the and activities product it and really ways reliably working it, our partnership just of make one in that's is to others. them. there partner other deepening and and Steve. innovation fund from all think could in nature customization to these efficiently Chris’ partnership To I It's of with more partner hard deployed, towards to goal capital are growing

Steve Delaney

I you all appreciate the of thanks. comments,

Chris Abate

Thanks.

Operator

next Bose with go KBW. George to We’ll

Bose George

increase? good talk about think afternoon. a you timeline Can the or press good just guys, the way Hey, capital guys for you that about deploying to

Collin Cochrane

the $XXX mentioned, the Yeah, I off deployed. million lined about of start already mean, beginning I with we in here get Dash think, strong to got a at quarter to really third up

good think to I rest a a forward pin down year, but feel we to a the of hard we QX, look pace. as for strong the it's exactly start number off QX like for or we’re and

some I review, door. out mentioned will get take think that in to time the that it we the capital

So mentioned that out we the very some can get lot there here, to year. could gets we this is early could we be just dilution that potentially that slight there out, of seeing of but that a near-term there we're in up consider. the pace if as on keep by end here the And variables

Dash Robinson

where chunky. we've our our like feel we assets to add others the Dash. more transactions – It's this is leveraged structured nice the been Bose, I easily source would partnerships and date about that replicate. that thing what’s One has deployment structuring quarter to is creativity can been it that

deploying million to help composition with because we're in our And this also that and efficiently with regular to the $XXX addition unique so but and quickly will towards capital activities. obviously build more we're of thrilled $XXX thrilled million, us the the it’s investing

it’s but the So of investment about. composition also excited the the it’s that number we’re

Bose George

your great. Okay, once sort that of sort similar makes look you’re asset fully Thanks. actually is deployed? of That leverage similar rent end capital as going then of terms to being the it the is new roughly just sense. Will similar? in And – on up the leverage in classes

Chris Abate

products. to speaking business the you’re loan clarify purpose to Just specifically

Bose George

single Yeah the stuff, business yeah. all purpose yeah that family loan,

Chris Abate

the little at And back. finance the take how those loans the we The of if family a our Yeah, particularly you on will of jumbo leverage amount I think will haircut how be look we for will the then little a we’ll warehouse bit lower fatter than about be lines. run rental course it of structure is appealing currently. things that that's securitize business when one single capital bit

family to and x than deployment excess rental typically the is to about we've our be an before larger Choice single programs. Select Choice expect select we X and Choice. We be of X both to talked expect

So they’re it loans. than but slightly aggregate newer available, securitize certainly and leveraged less classes. we be how will Leverage our jumbo typically is asset then

Bose George

– any BP Mac Okay, in And on multi-family then the whether updated Freddie you thanks. side? the there do thoughts actually just wanted more multifamily to program the

Chris Abate

to Yeah us. a strategic and continues priority for that be

deployed human amount capital. resources a towards of and lot that increasing of an have effort We

we're So the would optimistic year that's front market. us, of us second to the increasingly active half in and supply and in expect the definitely be center that for I about

Bose George

thanks. great Okay,

Operator

to no to now closing further are turn Chris remarks. this back There call the questions Abate at like I time. for would

Chris Abate

we much call. time appreciate remain confident much. the about position the to We bullish for very Okay, and participate on our you market our the taking you today the on very Thank future. in Redwood’s feel earnings prospects

Operator

does today’s for We participation. you conclude your conference. That thank

Redwood Trust (RWT) 7 Aug 182018 Q2 Earnings call transcript