Redwood Trust, Inc.

Good afternoon and welcome to the Redwood Trust Incorporated fourth quarter 2022 financial results conference call. Today's conference is being recorded. I will now turn the call over to Caitlin Moritz of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's fourth quarter 2022 earnings conference call. With me on today's call are Christopher Abate, Chief Executive Officer of Dash Robinson, President, and Brooke Carrillo, 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 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 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. Our reconciliation between GAAP and non-GAAP financial measures are provided in our fourth quarter Redwood review, which is also available on our website at redwoodtrust.com. As a reminder, the company's financial statement audit for the year ended December 31st, 2022 is not yet complete, and the results we are reporting today are unaudited and may vary from the company's audited financial results for the year ended December 31st, 2022, presented in our annual report on Form 10-K for 2022. including due to the completion audit procedures related to the valuation of our deferred tax assets at December 31st, 2022. The company's 2022 annual financial statement audit is scheduled to conclude on schedule in late February in advance of our Form 10-K filing. Also note that the content of today's conference call contains time-sensitive information that's 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'll now turn the call over to Chris for opening remarks.

Thanks, Kate, and thanks to everyone for tuning in this afternoon. We're excited to have the opportunity to speak with you today in our fourth quarter results and also update you on our performance in the first month or so of 2023. We'll also touch on how we view the opportunity in front of us for the remainder of the year. As you probably suspect, I'll cover off on the high points And then Dash and Brook will handle our business and financial performance in greater detail. The fourth quarter rounded out a year that brought about sudden change to the mortgage markets in a manner that was markedly different than we'd seen through previous downturns and past housing cycles. In 2022, the Federal Reserve's efforts to curb inflation led to the most pronounced jump in rates in over 40 years, largely freezing mortgage refinance activity and profoundly affecting consumer behavior in the housing market. Significant increases in rates, severe spread widening, and ongoing bouts of volatility characterized much of the second half of the year. While our results during this period certainly didn't meet our expectations, we focused on prudently protecting our book value, managing risk, and positioning our company for the path forward. As we all know, long-term focal points such as these are sometimes only fully appreciated in hindsight. With such a challenging year now behind us, we resolved to break the huddle in early January and quickly build momentum towards our 2023 priorities. That's exactly what we've done, realizing a welcome uptick of activity and a few accomplishments worth noting that have helped to improve our gap book value thus far in 2023. Already this year, we've completed a preferred stock offering, reopening a segment of the market that had seen little activity last year, while expanding our balance sheet to an alternative source of capital. Next up, we completed a sale of $213 million of business-purpose lending, or BPL loans, to a top institutional partner at accretive terms for both firms. The sale of this pool of loans was a bellwether of sorts for us. It created forward momentum for the platform that has positively impacted our new loan pricing and reaffirmed our BPL business potential to build from last year's record volumes. In tandem with our BPL loan sale, in late January, our residential team completed our first Sequoia securitization, in over a year. Once again, this deal helped reset the market and has now influenced a significant expansion of the RMBS issuance calendar by other sponsors, a good fact for all market participants. Investor demand for our securitization was the strongest we'd seen for any private label deal in over a year, and it allowed us to increase bond prices and boost our GAAP gain and sale. Through these actions, as well as other optimizations across our balance sheet, We grew our unrestricted cash position to just over $400 million at February 7th. This robust liquidity puts us in a strong position when considering our future debt maturities will allow us to proceed opportunistically in our markets, including through M&A and other accretive investments. Accompanying this boost in available capital has been a significant reduction in our go-forward operating expenses. As Brooke will touch on, the primary focus here has been to reduce costs that can flex with loan volumes. We've been very strategic in this regard, managing costs while preserving full optionality to take advantage of market conditions as opportunities arise. As we think about capital allocation going forward, we expect consumer mortgage volumes to remain challenged as the majority of homeowners are not financially incentivized to refinance their existing home or move to a new one with the prospect of assuming a much higher mortgage rate. In response, we have reduced working capital allocated to our residential mortgage banking business by about 70% throughout 2022. We acknowledge that January brought about some much-needed stability to the market, which was partially due to a modest decline in mortgage rates. It's simply too early to tell, however, if this is the start of a trend or simply pent-up demand following a slow fourth quarter. In the meantime, the strategic focus of ours remains tending to our seller base and ensuring we have products that meet their needs as the market evolves. This includes refinement of our expanded prime products as well as investor products that cater to consumers who own second homes or are looking to finance a single rental property. Despite our belief that consumer mortgage volumes will remain under pressure in the near term, there remains heightened demand for BPL products in a sector that is very much still in growth mode. BPL borrowers, unlike consumers, aren't locked into low 30-year rates and are therefore not content to sit on the sideline. They are transaction-oriented, executing on business plans, and require liquidity from our loan products to fuel growth. With demand for rentals still elevated, we continue to see investors actively seeking the range of solutions we offer. The rental market has been tasked with providing more alternatives for households, including multifamily, built-for-rents, and workforce housing. Our focus remains on originating BPL loans secured by assets with strong fundamentals and quality sponsors. That's why we remain particularly bullish on our BPL business, even when faced with the prospect of a potential recession in 2023. Perhaps the overall positive market sentiment to start the year matters most with respect to our investment portfolio, as it remains a primary driver of our book value. While the fourth quarter mirrored much of 2022, with further credit spread widening, Thus far in 2023, the story has been different. Market prices for securities have begun to firm up, reflecting lower mortgage rates, increased housing market activity, and positive deal flow and securitization markets. I'd like to continue emphasizing that the vast majority of mark-to-market declines we incurred on the portfolio in 2022 remain largely detached from the underlying cash flows, with the book continuing to display strong credit fundamentals and low overall delinquencies. With a weighted average year-end carrying value of $0.62 to principal face value and a projected four loss adjusted yield of 15%, our investment portfolio had approximately $500 million or $4.33 per share of net discount at year-end that we have the potential to realize through earnings over time. While the path of home prices and its impact on mortgage credit remains the critical question for 2023, we believe our portfolio construction with many seasoned assets and significant HPA realized to date, makes it resilient to a wide range of downturn scenarios for the economy. With our strong cash position, we remain intentional about steering capital and resources towards markets that we believe perform better in this environment and assets we believe to be undervalued, including Redwood's corporate debt and equity. We repurchased $88 million of our own securities in 2022 and continue to be active in doing so in 2023. We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our upcoming 2023 convertible bond maturity and remain opportunistic in repurchasing elsewhere across our convertible Fed stack. While uncertainty is likely to linger well into 2023, we believe we're in the late innings of this Fed cycle, remain confident in our ability to navigate further challenges with the pillars of our diversification, strong balance sheet, and most importantly, our people. Our platform offers a compelling opportunity and a unique access point to invest in a very dynamic housing market. And with that, I'll turn the call over to Dash Robinson, Redwood's president.