Redwood Trust, Inc.

Good afternoon and welcome to the Redwood Trust Incorporated Third Quarter 2020 Financial Results Conference Call. During management's presentation, your line will be on 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, ma'am.

Thank you, Ashley. Hello, everyone. Thank you for joining us. With me on today's call 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'm pleased to announce we recently launched a new company website with a refreshed brand identity that reflects our evolution as an organization over the past several years. This launch includes a new investor relations page where investors and analysts can easily find material related to our financial results. We hope you find this new site helpful. I also 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 these 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 is provided in our third quarter Redwood review available on our website at redwoodtrust.com. Also note that the content of the 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 the company's 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. As Lisa mentioned, we've got a fancy new website, and I encourage everyone to take a look to learn more about the company and the things that make us who we are. A particular note for those on the call, Lisa has rolled out a new investor relations section with enhanced functionality, which should make accessing our results and filings much easier going forward. In the third quarter of 2020, Redwood moved forward. With the early shocks of the COVID-19 pandemic behind us, we solidified our team and positioned ourselves to take advantage of extraordinary opportunities emerging in our markets. Our businesses are back to operating at full throttle, and we're optimistic that we will end 2020 on a high note, even with policymakers and markets on guard with respect to the election next week and a new wave of coronavirus cases emerging throughout the world. We feel well prepared for this and are positioned to take advantage of any dislocation that might arise. As I discussed last quarter, we spent much of the early spring focused on recasting our balance sheet and positioning our businesses to relaunch from a position of strength. We are now conducting new business at a rapid pace, leveraging our experienced team and very strong industry relationships forged over many cycles. We are pleased to once again see this hard work reflected in our financial results. Our third quarter GAAP net income was $1.02 per share, which includes record contribution from our business purpose lending segment. Our residential lending business also achieved record-breaking results with select lock volumes of $2.1 billion growing from nearly zero in the second quarter. Additionally, our portfolio of investments continue to increase in market value, growing 10% since June 30th. The past few months, however, have been about much more than getting back to business. After such a profoundly challenging period for our sector and country, we were compelled to think critically about the type of company we want to lead over the long term, including how we fit into a nation grappling with civil unrest, pandemic fatigue, and a depressed job market. We emerged with great clarity on who we are and where we are headed. Our business continues to gravitate towards where our capital is most impactful in our residential and business purpose planning segments, complemented by portfolio strategies where we hold distinct competitive advantages. The Federal Reserve injecting an unprecedented amount of stimulus into the financial markets, the de-tethering of asset prices from underlying fundamentals is the most pronounced we have seen since the lead-up to the Great Financial Crisis. A vast amount of capital is now in need of deployment, and this excess liquidity will continue to support higher prices for mortgage investments and exacerbate their scarcity value. Looking for any possible leg up has become a strategic priority for many investment houses to access the whole loan raw material that is used to structure these types of investments. This happens to be exactly what Revit's platforms have built to provide. Demand for our loans continues to grow stronger as the year unfolds, And we've leveraged this with our counterparties to enhance our distribution strategies and compete more effectively for volume, also reducing our exposure to market volatility. Recent successes in securing non-market to market financing facilities across our product lines, including significant capacity for financing residential loans and forbearance speaks to this. Most of these new facilities were completed with our traditional banking partners. We're expanding our reach by partnering with non-bank financing sources that will allow us to use our working capital more efficiently. The culmination of these efforts has given us a head start of sorts in the non-agency sector and resulted in rapid reflation of our loan volumes and the potential to gain share in growing markets. Today's completion of our first Sequoia securitization backed by loans originated since the COVID-19 crisis began is an important affirmation of our progress. Like our recent capital securitization of single family rental loans, we're extremely pleased with our Sequoia execution. Dash will provide more details on the securitization markets and growth we see in our sector in his opening remarks. As operating strategies take shape, the rise in our portfolio's asset value since May has continued to offer an excellent opportunity for our current shareholders. And a significant upside we have seen in these investments appears to be a somewhat unique story to Redwood, with many of our competitors exiting their non-agency portfolios in response to the pandemic. Though we can't predict the pace or extent of a broad-based economic recovery, we believe our portfolio's values still have room to run, with the book currently yielding low-to-mid double-digit economic returns. As we focus on growth opportunities ahead, we believe the secular trends supporting our housing thesis are not just intact, but accelerating due to the COVID-19 pandemic. The nationwide push towards single-family housing, whether rented or owned, is no longer a nuanced data point. It's front page news as families look for more space to live socially distanced and continue to work and learn from home. As the shift unfolds, densely populated cities continue to see home prices and rents stay relatively flat or decline, while neighboring suburbs enjoy robust demand and home price appreciation, in many cases exceeding 10 to 20% over prior year levels. Of over 65% of single family homes having three bedrooms or more, compared to only 11% of apartment units, We expect the trend towards single-family living to continue and to be fueled by ultra-low interest rates. Overall, we're very pleased with our market positioning and expectations for growth, but it's incumbent upon us to aim higher and lead our sector in innovation in order to realize our full potential. The high standards we have set for service to our customers are already well-established, but it's critical for us to maintain an infrastructure that can preserve this standard while allowing us to scale profitably and safely. Doing this well will require a renewed commitment to technology, something we were very focused on before the pandemic hit earlier this year. Our business has recently completed an updated technology roadmap that we're excited to begin communicating out to our stakeholders. We've identified significant opportunities to provide technology-enabled solutions throughout our network that aim to disrupt traditional private sector workflows and ideologies that have scuttled automation in the non-agency sector. Non-agency residential loan purchase workflows and timelines is one such opportunity. Today, we announced the pilot launch of Redwood Rapid Funding, a technology-enabled platform that will permit qualifying originators to transact with us on a significantly accelerated purchase timeline, in many cases faster than they currently achieve through Fannie Mae and Freddie Mac. Our delegated process allows originators to control their closing timelines, and adding the rapid funding feature will enable them to free up capital more quickly and de-risk their balance sheets. Our program will also create opportunities for faster settlements to our loan buyer network, particularly depositories, which should ultimately lead to better outcomes for borrowers. To wrap up, we are entering the next era of housing finance, and we are prepared to lead the way. In that sense, we would characterize our third quarter as a transition or bridge to the future. Our business platforms serve different parts of the housing market, Our core mission unifies them, and that is to make quality housing accessible to all Americans, whether rented or owned. We finance build-to-rent communities in the Midwest, workforce housing in the South, and high-balance residential mortgages on the coast, to name just a few. Our mission speaks to the role we play in our communities and motivates us to advocate for and advance inclusion and diversity initiatives across our industry. By focusing on financing solutions for all types of borrowers not served by government loan programs, we're confident we can make a positive impact for our communities, employees, and shareholders. If done well, our businesses stand to generate higher returns and more durable cash flows than we previously thought possible. That concludes my prepared remarks. I'll now turn the call over to Dash, Redwood's president.

Thank you, Chris. Our third quarter results reflect the hard work and discipline of our experienced team. With a fortified balance sheet and enhanced relationships with business partners old and new, Our platforms are operating at full strength and capitalizing on a unique market opportunity. We entered the quarter optimistic for significant volumes in improved operating margins for our residential and Corvus businesses, and both platforms exceeded expectations. Continued improvement in the broader financial markets also benefited our investment portfolio with further tightening in non-agency spreads. Coupled with strong financial results from our operating platforms, this drove gap book value at September 30th higher, to $9.41 per share, an increase of 15% from the second quarter. Critical to our success in driving scale is the health and flexibility of our balance sheet. During the past several months, we further improved balance sheet and operating capacity by reducing our recourse and marginable debt, expanding our non-recourse borrowings, and growing non-marginable warehouse capacity. We remain focused on efficient use of our working capital. including new structures that we hope will disrupt traditional aggregation warehouse financing. Before I go deeper into the business, I want to share observations we are seeing in the markets we serve. As Chris mentioned, the secular trends we laid out at the beginning of last year are accelerating as demand for single-family homes, whether rented or owned, is increasing. Recent reports show the health of the housing market is strong. Total household equity now exceeds $20 trillion and continues to trend higher. a result of a persistent supply-demand imbalance and record low costs of borrowing for homebuyers. The migration from cities to suburbs we observed over the past several months is also expected to continue in some form, as evidenced by recent housing search data showing over 50% of property searches in the top 100 metros were for suburbs outside metro areas. House price depreciation is also driving some homeowners toward lower-cost areas with the expectation they will be working from home at least part-time, Indefinitely. Industry research indicates that in June, 42% of Americans reported they were working from home, with 60% of those surveyed expecting to be able to work from home as the new normal. While we don't expect the recent exodus from urban centers to persist at its current pace, these trends nonetheless point towards a more structural evolution in housing demand in which consumers, whether homeowners or renters, continue to prioritize the benefits of single-family detached housing with less surrounding population density. The markets in which we originate and purchase mortgage loans stand to benefit from all of this. Refreshed pockets of consumer demand have been supportive of jumbo volumes. Of our third quarter locks, which I will elaborate more on shortly, on a pull-through adjusted basis, almost 50% were for purchase money loans, notwithstanding the substantial uptick in broad refinance activities. Another clear beneficiary has been the single-family rental market, which comprises over 10% of single-family housing stock and growing. SFR occupancy rates now stand at over 94%, the highest they have been in over 20 years, and overall rental collection rates have remained steady, notwithstanding the lapse in stimulus over the summer. Turning to our operating platforms, the third quarter represented an interesting juncture in the jumbo market, one that favored the nimble and those with the wherewithal, financial and otherwise. to prudently rescale their operations. In the quarter, our residential lock volume, not accounting for potential fallout, was $2.1 billion, the highest quarterly level source through our residential loan seller network in five years. This is fruit born from efforts across our residential team to reengage with sellers after the severe market dislocation we saw in the spring, a process that takes time and benefits from years of relationship and trust. As of today, We have locked loans with over 80 discrete sellers since June. This volume growth is notable in that the industry remains focused on what is, for now, a highly profitable refinance business for government-sponsored loans. In our view, there is potential for the market to unlock significantly increased jumbo volumes. Driven by evolving consumer demand, the potential for jumbo rates to reconverge towards those for conforming borrowers, and the natural ebb of the agency refinance opportunity. And as Chris mentioned, with fewer players participating in the non-agency space, we see the time is right for us to deepen our foothold and gain market share. Also worth mentioning is that this strength in volume was almost exclusively in Redwood Select, our traditional prime jumbo offering. In the several quarters leading up to the pandemic, our expanded prime offering, Redwood Choice, represented as much as 44% of lock volume. We expect to see more momentum with our sellers in Choice, as the market dynamics I mentioned continue to play out. We completed another key milestone for the residential business, as Chris mentioned just this morning, closing our 108th Sequoia securitization and the first back predominantly by loans sourced since the onset of the pandemic. Execution was particularly strong, notably our print on the AAA-rated securities, which replaced with a deep base of investors. On the business-purpose lending side, Corvus continued to press its significant market advantage. Origination activity remained robust in the third quarter, providing us with a virtuous combination of strong underwriting coupled with higher margins. We saw record segment contribution of $52 million through third quarter originations and an increase in fair value of both SFR securities and loans held in inventory at June 30th. The securitization Corvettes completed during the quarter was $293 million in size and backed largely by newly originated SFR loans. The offered bonds were met with extremely high demand, with the AAA-rated tranche pricing at a coupon of 1.36%. Blended credit spreads were better than the execution we achieved in our final transaction of 2019, well in advance of this spring's volatility. Our origination pipeline for both term and bridge loans remains robust, and it is powerful to observe, even after years of market leadership, how much more room to run the Corvus platform possesses. Across both large institutional sponsors and those investing in a smaller handful of geographies, substantial amounts of fresh capital continue to enter the market for single-family help for rent. And while the nationwide participants grab most of the headlines, they still represent only 2% of the overall market. Through Corvest, we serve a distinct segment of the market made up of professional real estate investors that typically own between 50 and 300 homes. These borrowers make up about 15% of the overall market, which has historically been underserved by traditional balance sheet lenders. The ultimate measure of durability, of course, is asset performance, which continues to be a bright spot for our BPL portfolio. 90-plus-day delinquencies have ticked up only slightly across the book, and within our securitized portfolios stood at 2.5% at September 30th versus 1.8% at June 30th. That said, overall delinquencies in that book are lower versus the prior quarter. reflective of fewer borrowers rolling into delinquent status and others curing after missing a payment or two. Additionally, we continue to see healthy overall repayment rates within our bridge portfolio, driven by successful refinances into term products, in many cases ours, or dispositioned by the sponsor. While the overall strength in housing is certainly a key input, the performance reflects the thoroughness of our underwriting, strength of loan structure, and careful selection of product mix, which we continue to refine in response to borrower needs and market dynamics. While the BPL space is once again competitive, particularly in certain segments of bridge lending, we feel confident that our speed to close and first mover advantage will remain a strategic moat. At Corvast, technology and data architecture have long been hallmarks of the platform's advantages in client acquisition and retention. The culture of consistent iteration of the technology suite, particularly in the proprietary use of leading cloud-based systems to automate workflow management, keeps the platform's first mover advantage fresh. This client-centric approach keeps customers coming back, as evidenced by an approximately 50% repeat borrow rate, but also positions us to win even bigger as this area of the market continues to grow. Turning to our investment portfolio, fair value increased 10% as asset values generally continue their recovery. The fair value increase was driven in part by our re-performing loan securities, most of which were able to re-securitize during the quarter into a non-recourse, non-marginal structure, the first of its kind for these types of bonds. Elsewhere in the portfolio, we saw an acceleration in prepayments as qualified conforming and jumbo borrowers were quick to capitalize on historically low borrowing rates. This has the impact of deleveraging the bond's capital structure and leaving us with thicker subordinate investments. Similar to dynamics I described in our BPL portfolios, at September 30th, 90-plus state delinquencies in our Sequoia portfolios stood at 2.4%, still well below market averages, while overall delinquencies were lower quarter on quarter. Investment opportunities in the secondary market remained scarce amidst limited new issue supply and a large quantum of deployable cash market-wide. We continue to see the best investment opportunities emerging from our operating businesses, and as such, we anticipate allocating increased working capital to our platforms to ensure our growth trajectory is realized safely. Looking ahead, we believe we are positioned for significant growth through our market-leading brands. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We are delivering customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms and whole-loan distribution activities. We are leveraging our first-mover advantage to take share while ensuring continued success through the innovative use of technology. As we execute, we will remain disciplined, focused on managing capital prudently and calibrating our risks and opportunities. And with that, I'll turn the call over to Colin Redwood, CFO.

Thanks, Dash, and good afternoon, everyone. As Chris and Dash discussed, our third quarter earnings and book value benefited from strong results at both of our operating businesses, as well as further increases in the fair value of our investment portfolio, contributing to gap earnings of $1.02 per share for the quarter and helping to generate a 17% economic return on book value for the quarter. As our business continues to evolve, we are continuing to evaluate a revised core earnings metric that will be most relevant in assessing our operating performance in the future. and currently expect to launch new metrics for 2021. After the payment of our 14-cent dividend, which was 12% higher than our prior quarter dividend, our book value increased to $9.41 per share. This represents a 15% increase for the quarter that was primarily driven by our strong earnings and also benefited from the repurchase of approximately 3 million of our outstanding shares for $22 million. which we repurchased at a 25% discount toward September 30th book value. At September 30th, we had $78 million of capacity remaining under our repurchase authorization. Closing in on some of the operating results within the business, our residential mortgage banking team achieved a significant increase in volume during the quarter, with loan purchase commitments of $1.2 billion and gross margins of 95 basis points, generating $11 million of mortgage banking income. At Corvett, we originated $261 million of business purpose loans, including $196 million of SFR loans and $66 million of bridge loans. These originations, in combination with our $380 million of SFR loan inventory at the end of the prior quarter, both benefited from the very strong execution on Corvett's September securitization that Dash discussed, helping to generate $49 million of mortgage banking income for the quarter. In our investment portfolio, net interest income decreased slightly as we experienced a full quarter of elevated borrowing costs from some of the new financing transactions we entered into during the second quarter, along with lower average balances. We note that while these facilities came with somewhat higher borrowing costs, they do not include any dilutive equity-linked features, and as they pay down or get refinanced as we head into 2021, this will give us the opportunity to lower our funding costs. During the quarter, we deployed 73 million of capital into new investments, including 13 million of net deployment in BPO bridge loans, 16 million of SFR securities retained from a Corvette securitization, 28 million of multifamily securities retained from a securitization issued through our multifamily joint venture, and 16 million of CRT and other third-party investments we purchased. The capital deployment was largely offset by paydowns of existing assets and sales during the quarter. Our investment portfolio experienced a continued recovery during the third quarter, including a 10% increase in our securities portfolio, driven in large part by recovery in the value of RPL securities. We estimate that at September 30th, approximately $168 million, or $1.50 per share, of the unrealized losses we reported in the first quarter of this year remained outstanding. Shifting to the tax side, we had re-taxable income of $0.07 per share in the third quarter and $0.31 per share of taxable income out of TRS. Given our year-to-date net loss at the REIT, we currently expect the majority of our dividend payment in 2020 to be return to capital for tax purposes. Turning to our balance sheet, we ended the third quarter with unrestricted cash of $451 million, providing ample liquidity and available capital to point to our operating businesses and to pursue opportunistic investments in the near term. During the third quarter, we continued to optimize our financing structure, further reducing our recourse debt and bringing our leverage down to 1.4 times at the end of the quarter. This was achieved through the completion of two new non-recourse debt transactions, financing a portion of our bridge loans and our re-performing loan securities. Additionally, we completed two new non-martinal loan warehouse facilities, which brought our total capacity up to $600 million for residential loans and $1.1 billion for business purpose loans. which in aggregate was comprised of more than 85% of non-marginal facilities. We also expect to have further non-marginal capacity for residential business in the near term. As a result of these changes in our financing structure, our $2.1 billion investment portfolio is now what we believe to be conservatively levered at just around one time, with over 90% of non-marginal borrowings. This direct leverage is effectively supplemented by our long-term corporate unsecured debt of $661 million. Although we delevered our investment portfolio during the quarter, we expect our overall leverage ratio to increase going forward as we continue to build back up our residential loan inventory. All else being equal, with a stabilized residential loan inventory, we'd expect our leverage to increase to the 2 to 2.5 times range. Finally, I'll note that in this quarter's review, we reintroduced a revised non-GAAP measure of economic net interest income for our investment portfolio. This measure utilizes a historical cost methodology to calculate an effective yield based on estimated future cash flows that takes into account discount and premium on our investment assets. This results in a more stable, longer-term view that reflects our current outlook for our investments. Given our portfolio is relatively stable for the quarter, we expect that this quarter's results will provide a good baseline to build off of. And as Chris mentioned, our portfolio is currently generating attractive returns in the low to mid-double-digit range. As we look forward, we expect economic net interest income can grow through net capital deployment, both in investments created organically through our operating businesses and through opportunistic deployment into third-party securities. And further, we also expect to bring down our financing costs, as I previously discussed. Further, our investment portfolio continues to include a significant embedded discount, which provides further upside if spreads continue to tighten. And with that, I'll conclude our prepared remarks. Operator, please open the call for Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Your first question comes from Steven Laws with Raymond James. Please go ahead.

Hi, good afternoon and congratulations on a very nice third quarter. Chris, I want to start with really a comment from the first paragraph in the review. It talked about jumbo rates versus conforming rates and seeing some lower jumbo rates potentially drive higher volumes. Can you maybe talk to where those rates are in that spread today and what metrics you're watching to push those jumbo rates lower to drive higher origination volumes and refinance activity on the portfolio?

Hey, Stephen, it's Ash. I can take that. Jumbo rates are still lingering above conforming probably 20 to 25 bps or so, depending on how the market is situated on any given day. The average gross coupon of the jumbo loans that we're locking are still right around 3%. We continue to feel, even at that level, frankly, that there's a significant in the money nest to a lot of borrowers that just haven't been served yet just due to natural capacity constraints given the volume of conforming. And so we do feel that there's a lot there as we sit with rates as they're currently situated. And obviously if jumbo rates trend lower and converge more on conforming, we would expect more and more to open up. We are hearing from sellers that capacity constraints are starting to ease a little bit as we've gotten through the past several months, we're starting to see loans delivered to us on the jumbo side more efficiently, which reflects better capacity with our sellers. We remain optimistic on just the refi side that we'll continue to see over the next quarter or two that continue to pick up. As Chris alluded to, the service level we provide with our sellers continues to be really, really important in terms of speed to fund and, of course, the flexibility we always provide them. So that will continue to be important.

Steven, I'd add the AAA spreads have come in quite a bit as well. That's been a really nice story and that will definitely help us compete effectively here going forward. We started to see that at the beginning of the quarter and just completing a securitization actually today. We feel really good about funding costs and our pipeline and being able to price loans competitively and profitably.

Thanks for the color there. And to follow up on that, you know, as I also saw in the review, you know, can you talk about your expectations for additional securitizations this quarter given the size of a locked pipeline, which, you know, even after fallout should lead up to some pretty strong purchase volume. But I saw you also have entered a couple of forward sale agreements, one in, you know, prior quarter and one in October. Can you maybe talk about the decision to do that and what the deal pipeline looks like on the Sequoia front?

Yeah, Stephen, we'll see in terms of between now and the end of the year, but certainly we're beginning to lay plans for the first quarter to continue to execute Sequoias. You're right. The forward sales that we executed, some of which are settled this week and which will continue to settle between now and the end of the year, we did capitalize on some unique opportunities there in terms of bank demand, which, as you know, continues to be robust just given the overall pressures on NIMH. with depositories broadly, and so we were able to put on some attractive forward sales, you know, between now and the end of the year. So we'll see about Sequoia between now and December, but certainly for the first quarter, again, we would expect to recommence in some shape or form.

Yeah, and Stephen, you know, you need inventory to complete the deals, and so, you know, as we're selling more loans forward, you know, we're actually, you know, the inventory's, you know, building at a slower pace, which is a good thing. So to us, You know, the faster we can transact, recycle capital, or at least neutralize risk, that's what's really going to push this business to the next level and get us operating, you know, and hopefully, you know, sustainably higher volumes going forward. Great.

And final question, and I'll break you, but, you know, can you talk about the unrealized loss, unrealized marks on assets you hold now versus now? versus year-end, kind of where does that stand today as far as what potentially could be recovered? And when you think about that, you know, book value plus that number, you know, how do you think about stock buybacks from here? I know you're buying back stock at a little bit lower levels, but, you know, stock buybacks versus putting money into new investments right now.

Sure. So we did continue to recover, you know, some of the unrealized loss from the end of the first quarter. Um, we probably got around a third or so of it, uh, remaining, which I think is Colin articulated, um, in about a dollar 50 a share, you know, to retrace, um, everything remaining back to 1231. Um, you know, through that lens, even as always, we're going to remain, you know, flexible on the stock buybacks. Obviously we were purchased about 3 million shares in the third quarter, which was about 3 cents creative to book. So that's always going to be on the table, but I would probably reinforce that, um, you know, it, You know, the real priority strategically remains earmarking more operating capital to the businesses to ensure they can grow safely and, of course, remaining opportunistic, not only for what we see from third-party markets, but obviously remaining flexible and nimble to retain or distribute the pieces that we see fit, you know, from Corvest and from our residential business.

This is Steve and I to Adam, good color commentator today. The stock still, in our view, is undervalued, certainly with our Q3 book at $9.41. So that's definitely something we'll continue to focus on. As Dash alluded to, we think we've got pretty good opportunities to deploy capital away from that. But we're not pleased with where the stock sits today relative to the inherent value of the book. And so we'll continue to focus on that and monitor it. particularly as we go through this period of volatility that's already started with the election and certainly with, you know, the escalation in COVID cases, just how the markets respond. Great. Thanks for the color. I appreciate that.

Have a good afternoon. Thanks, Stephen.

Our next question comes from Doug Harter with Credit Bliss. Please go ahead.

Thanks. Can you help us think about, you know, kind of a normalized level of kind of mortgage banking income for the BPL business, you know, and kind of how much of this quarter was because of the kind of the spread tightening that happened during the quarter?

Sure, Doug. Yeah, so the number was certainly a little bit outsized this quarter just based on the inventories that we were carrying at 630. A little more than half of the revenue was because of that, but I also think the third quarter had a unique set of circumstances in terms of the loans that we produced over the summer. We were able to securitize those with particularly low benchmark rates, which was very, very helpful to us. Those are some of the elements that drove revenue. that drove the number higher. So on average, our margins were, you know, if you look at simply the total revenues over volume, easily a few points higher than you'd expect to see them normally for those reasons.

Got it. And can you help us kind of frame, you know, kind of, you know, for the BPL, what, you know, sort of how you exited the quarter in terms of volume and you know, and kind of where you are, you know, in terms of, you know, kind of getting to kind of full speed and, you know, in terms of production volume?

Yeah, I would say we exited the quarter a little bit lighter in inventory than we entered it, but we've obviously, you know, had a very active October, and so those balances have come back up significantly. The pipeline remains really robust. Certainly the rate environment with benchmarks as low as they are is accommodative. We have the, much like Chris referenced on the Sequoia side, we have the significant tailwinds from the recent execution on the Corvus securitization at our back, which is meaningful. We continue to see significant opportunities across what I would consider the bread and butter SFR loans that we originate and securitize, but also in the pockets of the of the bridge book, which I think, you know, the platform is really unique in executing things like build to rent, you know, other types of portfolio strategies for more sophisticated sponsors that we hope will ultimately stay with the platform when they get termed out.

Yeah, you know, and I would add, you know, although we're not providing guidance this quarter, you know, seasonally, the fourth quarter has been historically a very strong quarter for the PPL business. You know, the borrowers. You know, unlike the residential business, you know, where things sort of, you know, slow down during holiday season, some of these are more commercial-oriented borrowers and are actively looking to get loans closed ahead of year-end. So, typically, December is a very busy time for this business. So, as things really ramp back up, you know, we're looking forward to, as we indicated, closing out the year on a high note.

Thanks. Your next question comes from Boze George with KBW. Please go ahead.

Hey, guys. Good afternoon. I just wanted to follow up on Mr. Doug's question just on the sort of how to think about the operating earnings this quarter. You know, the $107 million of gain that is in the mortgage banking segment, is a component of that was obviously driven by valuation changes, but is there a piece of that that's also sort of operating in the sense that that would have been there, even if spreads did not improve?

Boaz, how are you doing? This is Colin. I'll just clarify that that $107 million is the full mark-to-market across our entire, you know, investment portfolio. So that's within, you know, RESI, BPL, and third parties. So that is, you know, the full mark-to-market. You know, there is some portion of that that, you know, you know, is related to the change in fair value securities that, you know, can be, you know, the amortization of premium or some small amount that is kind of recurring and implicit in the portfolio. But the vast, vast majority of that is, you know, spread-driven, particularly this quarter, you know, as we discussed, relates to some of our investments, particularly the RPL.

Yeah, if you follow Bo's discussion There is some spread tightening, though, particularly related to loans that were closed in the third quarter that appreciated prior to certainly securitization in both businesses. So there's always going to be a spread component to our mortgage banking results. We were fortunate this quarter. It was significant tightening. So it contributed to our mortgage banking income. But as Colin indicated, most of it certainly on the BPL side, had to do with June 30th inventory.

Okay. Okay, great. That's helpful. And then just wanted to go back to the comment about the expected economic returns, you know, the low to mid teens. You know, so should we think about, you know, the book value is where it is and the return based on the portfolio plus mortgage banking, you know, gets you, you know, the book at 941, you know, that suggests you know, returns, whatever, $1.25 to $1.50. Is that kind of what your, you know, what those numbers would suggest?

Well, I'll just clarify a couple of things on that. The numbers that Chris referenced and I also referenced in my script were really specific to the investment portfolio. So that's away from the operating businesses. And we did update the numbers there to, you know, the low to mid-double digits. As we saw an increase in the book value of the assets in our investment portfolio, the map there just causes some downward push on the yield. So the yields you referenced is what we discussed last quarter. We saw some appreciation in the portfolio. Those came down a little bit as we realized that appreciation in book value.

And we've also both, you know, we've tried to – call out that we have this non-agency portfolio that seems to be pretty unique at this point. I think some of our competitors have moved on or sold their positions. And so I think the story and the significant appreciation or recovery in our book perhaps hasn't tracked with the industry. I think it continues to be a good story. Certainly, I think we said we've got about a third of that industry unrealized loss that we took in March that hasn't been recovered. As far as what we'll recover going forward, that's going to be dependent upon market forces. But at this point, absent another major downturn with respect to COVID or something else in the economy, we feel pretty good about the prospects of recovering more of that in the next few quarters. Okay, great. Thanks. You can also get your book value for your debate and change it there. No significant change. We don't expect that it's down, but no significant change higher. Okay, great. Thanks.

Our next question comes from Kevin Baca with Piper Sandler. Please go ahead.

Hi, good afternoon. In regards to the mortgage banking outlook on the jumbo side, could you talk about some of the puts and takes you're seeing in the near term? I know the market's loosening up. You're starting to see better spreads. You're starting to see a little bit more capacity come to the market. And you definitely saw a much better revenue line. Can you help us maybe size up the ramp in that as we go into early 21, just given the current market dynamics?

Sure. Dash and I can tag team this, but a lot of it has to do with our sellers coming back online and actually offering Jumbo products again. There's been such a great opportunity in the agency side with the Fed effectively supporting the market that the easy money has clearly been an agency, and it's only been in the past few months where Jumbo's really started to take hold again with originators. So a big opportunity for us is just getting our sellers back online. And as Dash said, we had 80 distinct sellers contribute over the past quarter or quarter to date. We've typically had 185 to 200 sellers. So we think there's a great opportunity there. We've seen very little focus on Redwood Choice, which we expect to change significantly over In the coming quarters, that's a great purchase product and we're still seeing over half of our flow as purchase related. So there's things unique to Redwood that we feel confident in. We alluded to that, I think on the last call. So we certainly observed it. I think we'll continue to observe it. As far as the market goes, the convergence back towards agency mortgage rates continues to occur. We expect that to continue. We expect that the banks will slowly refocus on jumbo and there'll be some competitive forces. But really, we're extremely well positioned right now as a team, as a network. And I think that for those looking to build at this point, we're up and running. We're kind of full steam ahead. And I think we're very focused on taking share and really growing the business in the next few quarters.

Do you think volume is going to drive most of the increase in mortgage banking in the jumbo side, or do you feel like it's going to be more driven by spreads or the execution you get in securitization?

Right now, it's both. We've got great... trajectory on volumes, certainly as we bring more sellers online. And as I mentioned, we've got some strategies, some technology focus to take share, take wallet share. But spreads continue to tighten. There's great demand for securitized products right now. Pricing on AAAs has been very strong, both on the capital side and the Sequoia side. So to the extent we continue to see demand in in the PLS space, that really drives a lot of the industry-wide pricing. So I think in the near term, there's certainly a strong likelihood that we'll experience both. I'd caveat that statement with the near-term volatility that we all know is kind of headed our way as a country over the next few weeks.

Are you seeing term times accelerate now than they were in the past? or do you still feel like you have room to accelerate the turn times that you typically would have?

Just to clarify, Kevin, do you mean turn times on and off of our balance sheet or in terms of how we settle with our sellers? On and off your balance sheet. Yeah, I think we continue to improve that, but there also is room to improve. The sooner we can purchase loans from sellers, the sooner we can either securitize or sell them you know, to the ultimate end user. We've talked about that a couple times on this call in terms of, you know, that pilot initiative, which we're very excited about. And it does speak to just continuing to deepen the outlets and continuing, frankly, in some ways to try and, you know, disrupt the traditional securitization process and the lead time. And, of course, you know, standing up new partnerships with loan buyers that, you you know, that want to get to the net interest margin more quickly. You know, we talked about the banks. You know, we're definitely seeing an increased demand for them, and everyone is aligned, you know, to get loans, you know, to their final spot more quickly, and there's more for us to do there, but I think we've come a long way over the past year or so. Thank you for taking my question. Thanks.

Your next question comes from Trevor Cranston with J&P Securities. Please go ahead.

Hi. Thanks. Most of my questions have been asked, but I was curious when you were talking about sort of sellers coming back online with Prime Jumbo products. You know, when you look at the expanded Prime products, can you share some thoughts on sort of how far away you think we are from, you know, more originators starting to work on that product and originating expanded Prime products again and, you know, you guys more formally? relaunching in that space?

Sure. Good question. We expect the product to begin ramping as soon as this quarter. It's going to take some time to get back to choice becoming 40% plus of our quarterly volume. But the demand for the product exists today. The inhibitor is capacity. So You have a limited number of loan officers, a limited amount of capital, and there's, frankly, just easier loans to underwrite. But as our reports show, there's a huge drive towards the suburbs. There's a lot of purchase activity going on in the market, and choice is very much relevant in the purchase space, helping people get into homes, getting to a yes position. Warm body underwriting, that's all we think very much still in demand. It's just a function of focusing loan officers on a marginally more difficult underwrite, more time-consuming underwrite.

Okay, that's helpful. And can you say, like, when you evaluate that market and where you're seeing securitizations priced, kind of where you think margins would potentially be for that business? um, just generally relative to kind of where they were sort of pre COVID.

A little tricky to say at this point, Trevor, just because it is so nascent. And I think there's a lot to discover in terms of, you know, the coupon that, you know, a choice borrower is going to take at this point. Um, and you know, the relative coupon spread versus our select loans. I think there's a lot more discovery from in the middle of doing right now. Um, And, you know, standing the securitization apparatus back up will, you know, we expect to do. But there's some more price discovery there. But to Chris's point, you know, the first step is engagement on the product. And, you know, as he said, the view from the ground, you know, continues to indicate, you know, incrementally more and more direct LO engagement on non-agency broadly and choice and specific because there is a borrower need. There's no question about that. It's just it is a capacity issue, as Chris said. But You know, if you talk to our business development team, they would tell you that the LO engagement continues to increase every day, you know, for the products that we're focused on, including Choice, which is obviously where we need to start. Okay. Fair enough.

Thank you.

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