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.