Redwood Trust, Inc.

Good afternoon and welcome to the Redwood Trust Inc. First Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I would now turn the call over to Caitlin Moritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's first quarter 2022 earnings conference call. 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 today 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 are provided in our first quarter Redwood review, which is available on our website at redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is only accurate as of today. Redwood 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 for opening remarks.

Thanks, Kate, and thanks to all of you for joining us today. On our fourth quarter earnings call in February, we approached our commentary with a cautious eye on changing market trends in the mortgage sector. Fed had signaled its plan to raise rates. The conflict between Russia and Ukraine was just beginning to be a headline, and markets were reacting with fear over anticipated uncertainty and the volatility ahead. As a point of reference, markets were estimating four to five rate hikes this year back in February. Today, many market observers are expecting nine rate hikes. Additionally, the 10-year Treasury rate has risen over 120 basis points since year end, and the spread between the two-year and 10-year has collapsed from 80 basis points to zero by the end of the first quarter. Mortgage rates may soon eclipse 6%, the highest level in over a decade. All of this has remarkably occurred in the span of just a few months. In these markets, there is truly nowhere to hide, and it's times like these that help differentiate competitors in a way that can't be easily seen during periods of extreme Fed accommodation. That's why we're so pleased with our performance during the first quarter, which included gap earnings of $0.24 per diluted share, representing an annualized ROE of 9%. and book value of $12.01 per share, effectively flat since year end. This is despite fixed income markets turning in their worst performance in over 40 years. We also paid a $0.23 per share quarterly dividend, unchanged from the fourth quarter, and are generating strong cash flows and earnings to sustain or grow that dividend going forward. All told, the resiliency of our mortgage banking businesses, coupled with another quarter of very strong fundamental credit performance across our investment portfolio, has resulted in balanced financial results in an otherwise lopsided quarter for the broader mortgage sector. What has become clear early in 2022 is that this will be a year of great transition for the industry. In addition to the rise in benchmark rates, the Fed, which has effectively become the world's largest agency mortgage REIT, has signaled it may begin aggressively paring back its $2.7 trillion of MBS holdings. Navigating those dispositions will be an ongoing challenge for market participants particularly those who benefited the most from the Fed's accumulation of MBS over the past few years. As a company with over 27 years of public company performance, we pride ourselves in our ability to perform across cycles. We structured our business with complementary yet diversified strategies to help manage against volatility while enabling us to continue providing solutions for our partners and durable returns for our shareholders. For instance, Our 2019 partnership with Corvus solidified our presence in the business purpose lending market and has to date far exceeded our expectations, both quantitative and qualitative. The investments we've created in business purpose lending helped to turbocharge the modernization of our investment portfolio. We are now a leader in both single family rental and bridge lending with the ability to offer our clients a breadth of product options as their needs evolve. Despite the rapid rise in interest rates, we have seen a continued uptick in demand from BPL borrowers and a desire for additional products that address their evolving needs. This is why we're very excited today to announce the acquisition of Riverbend Lending. Riverbend is a leading bridge lender that provides financing to experienced real estate investors who acquire residential and multifamily transitional properties. This acquisition is a step forward in solidifying our market-leading position and reflects our conviction around the strength of our business purpose lending platform and its prospects for future growth. Housing inventory remains at historic lows, most notably the inventory for turnkey housing stock, which eliminates the execution risk of making a home move-in ready for prospective homebuyers. As a reminder, our bridge loans carry a short duration, typically 12 to 18 months. They generate current income, and they have conservative leverage points, all compelling traits for investors in today's market. Following the closing of the acquisition, Riverbend will be integrated into Corvest and will add incremental scale, geographic footprint, and its client network to Corvest's existing platform. Our team at Corvest has done a remarkable job scaling the business into the market leader it is today, and we remain committed to continuing to grow organically through product development and expansion of our client base in a market that is maturing but remains fundamentally fragmented. The current macroeconomic backdrop provides an opportunity to lean in further to our BPL business, and Riverbend, an emerging leader in its own right, represents an important step towards furthering these growth plans at a safe but enhanced pace. Riverbend is led by a phenomenal team that we are excited to have join the Redwood family. I'll let Dash go into more detail around the transaction, but I wanted to emphasize how it fits into our playbook and positioning our platform for the long term. their incremental scale, best-in-class products, and attractive investments for our portfolio, all of which drive value for shareholders. In turning to our investment portfolio, it was a big contributor to our book value stability in the quarter, despite severe moves in many asset classes. It bears repeating, our portfolio is different. As we have long emphasized, our investment portfolio has been uniquely constructed over time with assets that take a view on housing credit fundamentals. and are less sensitive to some of the whipsaw moves we see in the interest rate markets. And our outlook on housing credit remains strong, given rising home equity, low unemployment, and record low housing inventory. Volatility leads at entry points, and we will continue to opportunistically add to our portfolio where we see strong return potential. Our residential business, a foundational piece of Redwood's core strategy, established itself as a true leader in the space over three decades, That's product offerings, speed to purchase, securitization, and distribution. This leadership set on top of prudent risk management has set our residential team apart both over time and particularly in the most recent quarter as we were able to quickly and efficiently distribute our fixed rate loan inventory as mortgage rates rose dramatically. Because of our positioning, we're able to continue to lock loans competitively throughout the quarter while they're a step back from the market. resulting in our residential lock volume declining only 7% from the fourth quarter of last year versus industry-wide projections of a 25% or greater total decline for the period. We did this while preserving our gross margins at levels near our long-term historical range. Suffice to say, we're extremely pleased with how our residential business performed relative to what we suspect was one of the worst quarters for the industry in many years. As Dash will touch on, our ability to refresh and expand our offerings earlier this month further demonstrates our leadership and ability to address the constant evolution of consumer needs. I'll now transition to RWT Horizons, a venture that we launched in early 2021, which has become a crucial part of our overall investment strategy. In about 14 months, we've made 21 investments in 18 early-stage fintech and prop tech companies that have a direct nexus to our business and are innovating across multiple facets of today's housing market. These investments have put Redwood in a unique position to be a first call for many technologists looking to turn their innovations into thriving business opportunities. Already, we are seeing the progress of this initiative, which has begun contributing to the bottom line well ahead of schedule. At quarter end, we had $25 million of capital committed to our Horizons investments And two of our smaller investments completed follow-on raises at significantly higher valuations during the first quarter. And in April, another one of our early horizons investments completed a new funding round that is expected to result in a pre-tax gain on our investment thus far of approximately 10 million. We expect to recognize that income as part of our second quarter gap earnings. Before I hand the call over to Dash, I'd like to reiterate that current markets offer important opportunities for us to further differentiate our business, particularly as we position Redwood for new chapters of growth. While each of our business lines address different facets of the housing market, taken together, Redwood offers shareholders a comprehensive and highly durable non-agency strategy that cannot be easily replicated. And with that, I will turn it over to Dash, who will take us through the operating businesses and our investment portfolio.