Redwood Trust, Inc.

and welcome to the Redwood Trust, Inc. Second Quarter 2020 Financial Results Conference Call. During management's presentation, your line will be in a listen-only mode. At the conclusion of prepared remarks, there will be a question-and-answer session. I will provide you with instructions to join the question queue after management's comments. Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead. Thank you, Kate.

Hello, everyone, and thank you for participating in our second quarter 2020 financial results call. Joining me on the call today are Chris Abate, Redwood's Chief Executive Officer, Dash Robinson, Redwood's President, and Colin Cochran, Redwood's Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and could 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. Reconciliation between GAAP and non-GAAP financial measures is provided in our second quarter Redwood review, available on our website at redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today. The company does not intend and undertakes 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. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer, for opening remarks.

Thank you, Lisa, and thanks to all of you for joining the call today. We're extremely pleased with the progress we've made in response to the collapse of liquidity that the non-government mortgage sector experienced in March. The COVID-19 pandemic has continued to rage on since then, and as a nation, we are now experiencing a second round of lockdowns after a spike in coronavirus cases during July. So Redwood's story through this crisis will continue to be written. We are now in a unique position to not only weather the storm, but also take advantage of a significant recovery in our business lines, which is now underway. Before I proceed with the discussion of our businesses, I'll preview our financial results and condition. Our second quarter gap earnings were $1 per share as compared to negative $8.28 per share in the first quarter. Our gap book value per share increased almost 30% to $8.15 at June 30th from $6.32 at March 31st. This represents a retrace of nearly one-third of the first quarter book value decline linked to unrealized losses in our investment portfolio. While not uniform in magnitude, asset valuations were materially higher and still possessed significant upside to the extent the economy continues to recover. During the second quarter, we successfully recast most of our secured recourse debt. In aggregate, recourse debt declined from $4.6 billion in March 31st to $1.8 billion at June 30th, reducing our recourse leverage ratio from 6.9 times to 2.1 times. On a pro forma basis, factoring in a new non-recourse facility we entered into during July, our recourse debt has further decreased to $1.6 billion and our recourse leverage ratio was 1.9 times. Marginable debt, or that portion of recourse debt that is subject to daily margin calls, represented only about 23% of our recourse debt, or $375 million on June 30th on a pro forma basis. In comparing our $529 million of unrestricted cash at the end of June to our marginable debt, our coverage was approximately 1.4 times, leaving us with ample room to allocate significant capital to our operating businesses and new investments as we have begun to do. Importantly, the evolution of our capital structure has been managed organically, without the proverbial need for a crisis-driven, dilutive equity capital raise. Not only did we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt at significant discounts, generating $25 million of economic gains. These repurchases provide the lasting benefit of reduced debt service costs and leverage, and some of the gains can contribute towards long-term technological investments we have planned for our platforms. will continue to opportunistically repurchase our long-term debt or common equity to the extent we believe valuations remain significantly detached from fundamentals. With our capital structure enhancements largely complete, we paid a second quarter dividend of 12.5 cents per share at the end of June. Second quarter dividend aligned with the current size of our balance sheet and reflected a sustainable level that we would hope to build upon as we begin to deploy our excess capital and as the economy and our business cash flow stabilize. We remain committed to delivering an attractive dividend to shareholders while remaining well positioned to opportunistically deploy capital going forward. When taking stock of the extreme market shocks brought about by COVID-19 and our go-forward earnings, we believe it's still premature to look too far ahead, as the true impact of the U.S. economy and the mortgage industry is yet to be seen. From a macro perspective, the recovery in financial markets remains meaningfully detached from the continued and in many areas accelerating health pandemic. Record job losses and the associated economic contraction has significantly outpaced the great financial crisis in both speed and severity. The spectacular resiliency of the financial markets, as best we can tell, is still buoyed by extreme monetary and fiscal stimulus with the prospect that risk assets can be supported either directly or implicitly by the Fed until a COVID-19 vaccine or effective treatment can be found. While the Fed has not yet indicated support for the non-agency mortgage sector through TELF, significant engagement is ongoing, and we do not believe the ship has sailed. Discomforted by the prospect of trying to predict in time the outcome of the pandemic, and with an election looming in November, we put ourselves in a position to be patient and focused on the long term through what will likely be available next few months. The virtue of patience has had meaningful ancillary benefits to us, as we've been able to focus on the strategic evolution of our business model and how our platforms will function in a post-pandemic world. Dash will discuss this in more detail in a few moments. For now, our residential and business purpose lending segments continue to operate in a significantly altered landscape. Many aspects of the mortgage process that historically took place in person, such as appraisals and closings, are now done remotely. Residential credit performance fundamentally deteriorated from the record-low delinquencies the industry enjoyed before the crisis, though continues to run better than most expected. As of June 30th, we received approximately 96% of our payments due in June for residential loans underlying our Sequoia securitizations, and we received also approximately 96% of payments due in June for the single-family rental loans underlying our Corvus securitizations. Most of these non-payments represent loans and forbearance as opposed to serious consequences. The nationwide rise in past-due mortgages thus far does not appear to be weakening the single-family housing sector. Thanks to record low mortgage rates, in some cases below 3% for agency mortgages and trending lower, refinance activity has remained elevated and home purchases have seen a resurgence in demand. By way of shelter-in-place orders and broader, perhaps secular, trends in working remotely, the concept of home has taken on a greater significance for most Americans. Many children are now learning virtually down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states where families live to exit dense metropolitan areas. This is a remarkable shift in consumer preference from even a few short months ago. and one that, on balance, is positive for both our residential consumer and rental products, which are predominantly focused on single-family dwellings. Our residential lending team entered the second half of the year primed for a relaunch, with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders had significantly tightened their underwriting guidelines for newly originated jumbo loans due to the prospect of a severe recession and lack of Fed support to the non-agency sector. Additionally, constraints on the bandwidth of loan officers, who have remained largely focused on high-margin refinancings to agency-eligible borrowers, has weighed on jumbo origination activity. Based on our recent engagement with loan sellers and the gradual narrowing of the spread between agency and jumbo mortgage rates, we've begun to see a pick-up-and-lock activity and expect this to grow meaningfully as we head into the fall. Even with this narrowing, we continue to see substantial relative value in non-agency whole loans, a sentiment shared by our loan buying partners, both current and prospective. Our near-term focus continues to be on recasting our products and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Though our team's efforts may not yet be reflected in results, tremendous progress has been made and we're excited about the resurgence underway. To reach this point, we completed the difficult work of managing through our pre-COVID loan inventory culminating with the sale of substantially all of those loans and the clearing out of our associated secure debt facilities. As part of this process, our residential team completed our Sequoia MC1 securitization in late June, a transaction that brought the sale of these loans to a close. The deal priced better than we expected and positioned us to safely begin locking new loans in July. Transitioning to our business purpose lending segment, the recovery was very much underway at the end of the second quarter, and many more. In addition to their institutional caliber, these sponsors often become accretive, repeat customers for both SFR loans and fresh bridge financing to support new investments. Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more competition to reenter the space. However, we do believe our operational advantage remains durable. Our BPL business continued to make great progress in diversifying its outlets to distribute risk in the second quarter and through July. We completed two non-recourse financing arrangements for over 85% of our pre-COVID bridge portfolio, essentially match funding a book that has thus far displayed solid performance through the pandemic. Investment demand remains very robust for our SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest or provide private financing. We expect these options to become a reliable complement to traditional securitization. The attractive risk-adjusted returns in the space have kept BPL assets in strong demand, and we continue to receive strong indications from investors in our SFR securitizations. As we take stock of the year so far and look towards the fall, we're reminded that we are truly living in historic times. We face a pandemic that has created global economic disruption, trade and technology wars are looming, The fight against racism and social injustice is hitting an inflection point at a global scale, and the U.S. presidential election is a mere three months away. All of this presents an opportunity for all of us to examine our values, reset priorities, and pause while we rethink how we want our world to function. As times evolve, our corporate mission remains the same, help make quality housing accessible to all Americans, whether rented or owned. That concludes my prepared remarks. I'll now turn the call over to Dash Robinson, Red List President.