Redwood Trust, Inc.

Good afternoon and welcome to the Redwood Trust, Inc. Third Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, Matt.

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's Third Quarter 2022 Earnings Conference Call. With me on today's call are Christopher Abate, Chief Executive Officer, Dash Robinson, President, and Brooke Carillo, 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 and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report in Form 10-K. which provides a description of some of the factors that could have a material impact on a company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we might 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 third quarter Redwood review, which is also available on our website at redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that is only accurate as of today, and we do not intend and undertake 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 welcome everyone to Redwood's third quarter 2022 earnings call. Before I hand it over to Dash and Brooke to discuss our operating results and financial performance, I want to begin by framing the quarter in light of the broader market conditions we've been facing. I'll also comment on how we plan to navigate the myriad challenges facing the mortgage market. But before we proceed, let me first summarize our headline results. Redwood's gap book value declined to $10.18 per share at September 30th, a 5.6% decline from $10.78 per share at June 30th. As was the case in the prior quarter, mark-to-market adjustments of negative 50 cents per share on our investment portfolio were the primary driver of our 44 cent per share gap loss for the quarter. As many of you know, market swings like we've seen recently create volatility in our quarterly gap earnings due to the accounting elections we apply. That said, the credit backing of our investment portfolio and its associated cash flows remained rock solid during the quarter, and we remain confident in our ability to recover mark-to-market declines in future quarters. As a means to isolate our operating performance from these short-term fluctuations in market prices, we've reintroduced a non-GAAP metric this quarter, earnings available for distribution. For the third quarter, earnings available for distribution was 16 cents per share. This compares to a loss of 11 cents per share in the second quarter when applying this metric. We also declared and paid a 23 cents per share common stock dividend, which was unchanged from the previous quarter. As you might suspect, Brooke will have much more to say about our quarterly financial results in her prepared remarks. While markets need to normalize for operating businesses to return to their optimal levels of performance, both our residential and business-purpose mortgage banking platforms rebounded from the second quarter and successfully navigated the markets to near break-even levels. as we continue to leverage our deep network of whole loan buyers and our securitization capabilities to distribute loans. I say this in the context of a market where distress and significant realized losses are now testing both the viability of many residential originators as well as the book value perseverance of many mortgage investors, particularly those more exposed to a volatile and inverted yield curve. Our credit-focused investment portfolio while impacted by market-to-market volatility, continue to demonstrate fundamental strength and relative outperformance consistent with the long-term thesis we had when constructing the portfolio. All told, while today's market remains humbling for all participants, our results reflect a degree of resilience that has manifested in the solid book value performance relative to the broader mortgage sector. As the market is absorbing this winning cycle, Conditions subsequent to quarter end have remained challenging, and we estimate our book value at October 26th to be down roughly 3 to 4% since quarter end. With more volatility expected as the Fed works to combat inflation, our emphasis on robust liquidity, strong investment cash flows, and conservative market positioning and mortgage banking will likely carry through into the first quarter of 2023. Regarding our liquidity, as a reminder, we ended the third quarter with $297 million of unrestricted cash on hand, which represents roughly three times our view of potential risk capital needs based on the liquidity of our assets and how they are financed. Our debt has been enhanced dramatically in recent years, with approximately 90% of our investment portfolio debt stack being non-marginable and or non-recourse at September 30th. We continue to see very healthy bank demand to finance our products and maintain sufficient excess capacity to grow and scale our business with approximately $3.8 billion of available capacity through existing warehouse lines at September 30th. Preserving operating flexibility also requires the ongoing rationalization of our cost structure, something we've been focused on, in addition to maintaining lower overall loan inventory balances and more nimble loan distribution strategies. were especially conservative with respect to the consumer residential mortgage sector as industry volumes continue to be affected by rapidly accelerating mortgage rates. This, along with record home price appreciation in recent years, has pushed home purchase affordability to new lows and home refinance incentives even lower. Just this week, the NBA announced their mortgage applications had decreased to the lowest level in 25 years. Meanwhile, the largest buyer of mortgage-backed securities, the Federal Reserve, has fully exited the market, while money-centered banks and overseas sovereign investors have also pulled back significantly. This has resulted in very low market liquidity and, for securitization issuers such as ourselves, formidable risks associated with aggregating large volumes of loans for future deals. Given this dynamic and our conservative outlook for volumes, We've continued to reduce our capital allocation to residential mortgage banking, which is down almost 60% since the beginning of the year. By design, we have tremendous uses for the freed up capital, however, including compelling investment opportunities and residential credit made possible by the market downturn. Through that lens, the diverse nature of our businesses, particularly our ability to act as either a securitization issuer or an investor as market forces dictate, remains a key competitive advantage for Redwood. As we head into the fourth quarter, the fundamental story underlying our balance sheet remains very strong, and our investment portfolio continues to generate durable cash flows through a return profile that is not overly levered to the shape of the yield curve. I'd like to illustrate this by focusing on our $1.2 billion securities portfolio, which looks quite a bit different than more typical portfolios investors have become accustomed to seeing in our sector. In our portfolio, mortgage-backed securities are not held at net premiums, as is often the case for mortgage REITs, nor are they held at record-high multiples, as we've seen recently for mortgage servicing rights. To the contrary, our securities portfolio is held at an aggregate $458 million discount to principal value, or just over $4 per share, at September 30th. This translated to a weighted average holding price of approximately 69 cents on the dollar on our balance sheet. Why does this matter? For starters, it means we're entitled to 100 cents on the dollar for assets we currently own at 69 cents. It also means the underlying loans can absorb significant credit losses before we lose any of our capital. Depending on your perspective, this either represents significant downside protection to our current book value or significant upside potential to our future book value based on your outlook for the economy. But in these unique times, there is actually more to the story than that. In the aggregate, the loans backing our securities portfolio, the true engine behind our earnings upside potential, had an estimated current LTB of 50 at September 30th as a result of significant portfolio seasoning and record home price appreciation that we've experienced over the past few years. That implies that an average borrower can now withstand an extreme decline in home price Thank you for joining us. This is due to an environment where macro views on the path of interest rates and assumed distress have overwhelmed the fundamental narrative across our sector. After 28 years as a public company, we've seen this before and we've amassed empirical and operational data to help us make sense of such rare divergences. And our analysis shows a compelling opportunity to invest in our own publicly traded shares as well as our convertible debt outstanding. We've already expressed this view by repurchasing close to 60 million of common stock over the last five months, but we anticipate doing much more in the near to medium term and have ample capital to do so. I'll now hand the call over to Dash Robinson, Redwood's president, to further discuss our operating results.