Redwood Trust, Inc.

Good afternoon, and welcome to the Redwood Trust, Inc. Second Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone, and 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 Brooke Carrillo, 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. A reconciliation between GAAP and non-GAAP financial measures is provided in our second quarter Redwood review and investor presentation, both 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 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 good afternoon, everyone. Though we are closely monitoring the latest Delta variant of the coronavirus, the entire organization has been energized to see the reopening of the economy, continued strength in the housing market, and exceptional performance and growth in our business. Strong operating income and rising portfolio valuations drove exceptional financial results for the second quarter. including gap earnings of $0.66 per diluted share, well in excess of our $0.18 per share dividend for the second quarter. This contributed to a 6.5% increase in our gap book value to $11.46 per share at June 30th. The results we've generated thus far in 2021 are reflective of a business that can expand profitably while successfully serving its mission of making quality housing accessible to all American households. As you know, this mission emphasizes borrowers whose needs are not well served by government loan programs or potentially not at all. Our residential and business purpose lending teams together target the non-agency mortgage market, a segment of the market that many have recently ignored, in large part due to the absence of Federal Reserve stimulus. The non-agency market represents the residential mortgage universe outside of government-backed mortgage programs. By targeting this market rather than a specific borrower profile as we had in the past, our business is not tied to the direction of the home ownership rate. Instead, Redwood now offers a comprehensive product mix that serves both non-agency consumers and housing investors alike. And it's a big market. Many have forecasted residential non-agency origination volumes to significantly increase in 2021 from the 435 billion of originations in 2020. And that's only beginning to reflect the potential from a regulatory pullback for non-owner occupied loans something that could provide a significant tailwind to our sector going forward. Our results remained strong in the second quarter despite market conditions that were significantly more challenging than they were in the first quarter. Rising interest rates reemerged in the residential lending space, largely the result of uncertainty on whether the Fed will alter its support for the agency mortgage market. The sharp competitive forces that arose as a result, along with a corresponding decline in refinance activity, triggered a contraction in margins across the industry. Exaggerating the effects of strong competition were signs of procyclical and supply chain inflation with a shifting yield curve driving significant hedging and execution costs for those managing large mortgage pipelines, including for us. Against this backdrop, in the second quarter, we still locked close to $4 billion of jumbo loans at margins in the high end of our historical target range. The business purpose lending market also became more crowded in the second quarter, with new competitors using the rate sheet to buy their way into the space, particularly for lower-balance bridge and rental loan products. The shift out of apartment living and towards single-family detached homes is a trend that has shown no sign of ebbing, despite the recent reopening of most major metros. This has led to a shortage of high-quality homes with aggressive demand from both investors and consumers alike. In many regions, rent growth has been significantly outstripped by home price appreciation, highlighting the scarcity value of quality housing and the multiple constituencies focused on acquiring single-family homes. Leveraging a well-earned reputation as a nimble and reliable lifecycle lender, Corvest, our BPL platform, eclipsed $500 million of fundings for the quarter on a balance of single-family rental and bridge originations. The sustained performance through this challenging backdrop showcased our strategic foundation and is the essence of what makes Redwood unique. Our mortgage banking businesses offer highly complementary products that drive durable earnings streams. And our investment portfolio continues to offer significant upside as the economy recovers. Our credit discipline and ability to create our own assets remain key differentiators. Our strategic foundation has facilitated returns that are significantly outpacing our growing dividends. In the first half of 2021, approximately 70% of Redwood's adjusted revenue was driven by our mortgage banking operations. with the remaining 30 percent from our investment portfolio. We expect mortgage banking and, by extension, our taxable subsidiaries to continue to be a strong earnings driver going forward. The revenue generated through mortgage banking is nearly double the percentage contribution of recent years and highlights the ongoing shift in our business model as we adapt to changing market conditions. It also supports continued expansion of book value over time, with retained earnings acting as a zero-cost avenue for capital formation. that has reduced our marginal need for funding and stands in contrast to how others in the space manage their balance sheets. By continuing to reinvest in our infrastructure, both organically and through partnerships, our path to realizing transformative scale is clear. Across our enterprise, we've cultivated a talented and inspired workforce, and we have embraced technology to serve our customers more quickly than ever before. One great example of this approach is last quarter's launch of our early stage investment platform, RWT Horizons. This is something Dash will touch on in more detail. As we look ahead, we continue to raise our game, invest in our people and infrastructure, and attack our markets with a service standard that continues to separate us from our competition. We're excited by recent changes in the regulatory landscape that have made the nonagency mortgage market more relevant than it's been in many years. Our goal is to build a business that serves an important public mission, can scale profitably, and generates a very attractive return profile for our shareholders. And with that, I'll turn the call over to Dash Robinson, Redwood's president, to discuss our operating results.