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.

Thank you, Chris. Following a turbulent 2022, we enter 2023 ready to take advantage of current market dynamics and drive accretive results across our operating businesses and investment portfolio. I will focus my commentary on the recent performance of these segments and our current outlook and positioning before turning the call over to Brooke for an overview of our financial performance. Our investment portfolio, which now represents 84% of our allocated capital and remains a key driver of our dividend, continued to deliver strong fundamental performance in the fourth quarter, notwithstanding further unrealized fair value changes that impacted book value. Cash flow durability remained robust across the book, an important input into our ability to realize the net discount and carrying value that Chris referenced. Delinquency rates were stable to improving across the portfolio. For our organically created assets, a book that includes BPL loans and securities, and retained bonds from our Sequoia shelf, quarter end 90-plus day delinquency rates stood at 2%, down from 2.1% at the end of Q3. Elsewhere, delinquency rates on our core re-performing loan positions, what we refer to as SLST, also improved, with 90-plus day delinquencies half a percent lower quarter over quarter. Even with the recent slowing in HPA and modest home price declines in certain markets, equity continues to build in these underlying loans as borrowers remain consistent in their payments. In aggregate, we estimate that the loans underlying our securities portfolio have LTVs of approximately 50%. Results have also been favorable in our Home Equity Investment Option Portfolio, or HEI, the majority of which is either securitized or financed through the warehouse line that Brooke will touch on. Life-to-date speeds on our securitized portfolio have been approximately 20%, and realized returns have been strong, protected in part by an average discount to initial home value of approximately 18%. This allows the holder of the HEI to withstand meaningful downward pressure in home prices before incurring loss of investment. Notwithstanding fundamental performance, fair values in our investment portfolio were once again impacted by spread widening during the fourth quarter in sympathy with trends across the market. As Brooke will describe in more detail, these adjustments continue to be largely unrealized and have begun to reverse meaningfully year-to-date. As Chris referenced, our portfolio's net discount to face now stands at $4.33 per share, the realization of which comes into clearer view with each passing quarter of performance. We remained active in optimizing our capital deployment during the fourth quarter, putting approximately $100 million to work across organic and third-party investments. and repurchases of our near-term convertible debt maturities at attractive discounts. While spreads have stabilized meaningfully year-to-date, we still see ample opportunity to deploy capital accretively across our operating platforms, third-party securities, and our own capital structure. Our operating platforms have quickly turned the page on 2022 with strategic progress in the early weeks of the year, reversing some of the volatility-induced P&L from the fourth quarter. In business purpose mortgage banking, while broad market headwinds persisted through the end of the year, the team knocked some key wins that are already paying dividends in 2023, including advancing the Riverbend integration, growing our whole loan distribution capabilities, and adding a new non-recourse borrowing line for bridge loans that meaningfully enhanced our overall financing flexibility. We originated $424 million of BPL loans in the fourth quarter, down 26% from Q3, but in line with our estimated volume trend for the market overall. Our production mix for the quarter between BPL bridge and term loans rebalanced compared to other quarters in 2022, as more sponsors opted to lock in long-term fixed rates where possible in lieu of shorter-term floating rate bridge debt. BPL term production volume was up 36% quarter over quarter, driven by a significant increase in term multifamily funding. The fourth quarter's fundings rounded out full-year production volumes of $2.8 billion, a record year for the platform that lent increased importance to diversifying our distribution channels to position ourselves appropriately for 2023. We sold $92 million of BPL bridge and term loans during the fourth quarter and over $220 million more in January, recycling capital for a growing go-forward pipeline across our products. Distribution and profitability on new BPL term production has been particularly strong as we complement a best-in-class securitization platform with a deeper whole-loan buyer base attracted to the structure and quality of our loans. Importantly, the overall improvement in sentiment in January carried over to our sponsors, who are once again leaning in on refinance opportunities or taking advantage of more constructive conditions to put fresh capital to work, either through traditional acquisition channels or newer partnerships emerging as a result of dynamics between the for-sale and for-rent markets. Our progress in loan distribution has proven well-timed amidst both improving sponsor demand and significant uncertainty around funding capacity in certain of our competitors. Additionally, we continue to optimize financing on our bridge loan portfolio. Inclusive of the $335 million financing line we completed in December, at year end, 100% of our bridge portfolio continued to be financed on a non-marginal basis, with 70% of the financing also non-recourse. We maintain substantial excess capacity to support new production and future funding obligations on existing loans. Notwithstanding more favorable market conditions and the equity backing our BPL loans, given the overall environment, we continue to expect increased engagement from our asset management team in 2023, including with bridge loan sponsors seeking to refinance and managing earlier stage delinquencies within the term book, which were up modestly at year end. As we have previously highlighted, our overall origination footprint in 2022 focused largely on sponsors with some sort of real estate stabilization strategy. Approximately 90% of originations were either bridge loans to sponsors improving and leasing up single and multifamily properties or fixed rate loans on already stabilized developments. Given our progress in integrating Riverbend in the past six months, we expect to round out that production mix with an increased emphasis on single asset bridge loans. focused on repeat customers of the Riverbend platform with strong liquidity profiles and track records. Importantly, capital markets distribution for these types of loans is relatively mature, and we are well-positioned to broaden our whole-own buyer partnerships and begin leveraging existing accretive financing to keep more on balance sheet. Our residential mortgage banking business maintained its defensive posturing in the fourth quarter, locking $43 million of loans and managing our lowest level of inventory since early to mid-2020. This was by design, as jumbo mortgage rates during the quarter moved off their 7% plus highs down to the 60s, an improvement but not enough to drive purchase money volumes higher in an environment in which refinance demand remains substantially muted. Improved market conditions in January allowed us to reverse much of the fourth quarter's widening of our residential inventory, which at year end stood around $660 million and currently sits at roughly half that amount after several small whole loan sales and the successful completion of our January Sequoia issuance. our first in over a year. Execution on the securitization was indicative of improved market sentiment, with final pricing meaningfully through where the pipeline was carried a year in. In monitoring market sentiment, we believe we will be able to further distribute the remaining pipeline at favorable levels. As Chris mentioned, capital and costs allocated to our residential business have been reduced commensurate with recent transaction volumes. However, we have preserved the optionality to lean back in as conditions warrant, to continue serving our seller base, including through enhanced rollouts of our expanded prime product offerings. The recent exit of one of the largest players in the correspondent market highlights the durability of our partnerships, even after a period of reduced activity. As many of our sellers continue to prioritize capital efficiency and continued right-sizing of costs, they put as much value as ever in our consistent speed and reliability. I will now turn the call over to Brooke to cover our financial results.

Thank you, Dash. In my comments today, I will provide an overview of our GAAP and non-GAAP results for the year and quarter ended December 31, 2022, and discuss select quarter-to-date metrics relating to the first quarter of 2023. We reported GAAP book value of $9.55 per share, reflecting an economic return on equity of negative 3.9% for the fourth quarter. The primary drivers of book value were a $0.40 loss in basic earnings per share and our dividend of $0.23 per share. Gap earnings were impacted by negative investment fair value changes of $0.21 per share, which continue to substantially reflect unrealized marked market changes. Earnings available for distribution was negative $0.11 per share in the fourth quarter, as compared to $0.16 per share in the third quarter, driven by a loss of $0.28 per share for mortgage banking. due to credit spread widening on both the residential and BPL inventories. More specifically, our lower marks on our inventories reflected a lack of activity and available distribution channels at year end, a trend, as noted by Chris, that has reversed thus far in the first quarter. Overall, GAAP net interest income decreased from the third quarter due to lower mortgage banking inventory as volumes and average balances declined in the fourth quarter, while our cost of debt increased partially offset by higher average coupons for our bridge loans. As Dash mentioned, during the fourth quarter, we closed a new $150 million borrowing facility for HEI investments, which contributed to the increase in interest expense. Importantly, economic net interest income was nearly $6 million higher than GAAP, primarily due to higher average balance of economic investments from capital deployment. Liquidity was solid as of year-end and has been building. unrestricted cash and equivalents increased by $141 million to $400 million from December 31 to February 7. This is a function of various activities already covered, such as a $70 million preferred stock offering, as well as full loan sales, securitization, and financing optimization efforts. As we noted in the review, we also see incremental opportunities to generate over $100 million of liquidity beyond our existing cash position by financing a portion of our $300 million plus of unencumbered assets. While our total recourse debt balance of $2.9 billion was unchanged quarter over quarter, the decline in tangible equity drove a modest increase in leverage from 2.6 to 2.8 times. Given the financing and capital markets activities we conducted thus far in 2023, our estimated total recourse leverage ratio fell to 2.2 times at February 7th. This decline in leverage is also attributable to our repurchase of nearly $60 million in of convertible debt since the end of the third quarter, contributing both to reduce interest expense and realize gains for our shareholders. With respect to the term structure of our liabilities, we have $1.8 billion of recourse leverage maturing in 2023. As financing markets remain orderly, we foresee no issues rolling these facilities in normal floors. To further illustrate, during 2022, we renewed or established 18 financing facilities, representing $6 billion of total financing capacity. In terms of our outlook, we are currently estimating book value to be up 2% through February 7th and both GAAP and EAD earnings to re-approach our dividend level for the first quarter. We see several factors that support the return to more normalized return levels for the business throughout 2023. With the mark-to-market changes we've experienced, we are carrying the investment portfolio at a forward yield of approximately 15% and credit spreads affirming. Across both mortgage banking platforms, we have largely cleared the inventory overhang from last year, which further improves our gain on sale and volume outlook. Furthermore, in business purpose lending, we are building on our origination volumes from 2022 and are seeing profitable execution fueled by improved distribution alternatives. Our nimble capital allocation has underscored the diversity of our revenue streams and our ability to optimize the business dynamically based on where the best risk-adjusted returns are in the market. We have a variable cost-driven model, which has allowed us to reduce operating expenses at the residential mortgage banking segment by 40% year over year, reduce capital allocated to the business by 70%, yet preserve the optionality of a flagship platform that has historically generated ROEs in excess of 15%. Given the changes we've made, even with a smaller opportunity set, maintaining our historical market share and margins are sufficient to generate normalized returns for this business. And finally, in response to the challenging market conditions we face this year, we've been focused on rationalizing our overall operating footprint. General and administrative, or G&A, expenses increased slightly from the third quarter, primarily due to employee severance and related transition expenses. However, for the full year 2022, G&A expenses were down 20% relative to the prior year. Pro forma for expense reduction initiatives completed since September 30th, We currently expect 2023 run rate G&A expense to be 5% to 10% lower than full year 2022 comparable levels, in line with our guidance on last quarter's earnings call. We expect these changes to our cost structure to lead to improved profitability in 2023. And with that, I will turn the call over to the operator to open the line for Q&A.

Thank you. And ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Steven Laws with Raymond James. Please state your question.

Hi, thanks. Good afternoon. I guess first I want to touch on the conduit business. I don't remember a year where we've seen it kind of move like it did as volatile through the year. As you look forward, what do we need to see to kind of see more stabilized margins there and solid profitability, although obviously on lower volumes? And from what you've seen in the first Sequoia deal and some other transactions in the market year to date, You know, do you feel we've turned the corner there? Kind of what's your outlook on margins and margin volatility as we move through 23?

Hey, Steven, it's Chris. Good question. You know, I think for Rezzy in particular, obviously it was a really tough year for mortgage banking and volumes. And there's pretty well-known reasons for that. You know, as far as turning the corner goes, you know, I think the first thing that we got done this year was the Sequoia deal. We saw a much, much greater demand for the issuance. That was the first deal that we'd done in over a year. And I think that as demand returns in the PLS markets, that will create greater confidence, certainly for aggregators like ourselves, to begin acquiring and leaning in on rate. Now, that said, we're still, I think, a ways off in rate as far as where... you know, most people would be interested in refined homes, uh, versus, you know, where current rates stand, um, north of six and some cases, 7%. So I think we're, um, you know, we're cautious in, in declaring victory here in the first quarter, as far as things fully stabilizing. Um, but we've, we've built some optionality. As Brooke said, we've, we've taken a lot of capital out of the business. And, you know, one of the great things about Redwood is, um, you know, we're a 29-year-old business and we've got the ability to shift capital and resources to their highest and best use. And so I think, you know, when it's not a tremendously, a great time to be issuing, it's usually a good time to be investing. And so, you know, I think we've created a lot of optionality there to be an investor in Resy. And so I think, you know, in 2023, we're going to proceed cautiously. You know, hopefully we can continue issuing. We'd like to issue another securitization here at some point in the coming months. But in the meantime, I think we're focusing on growth areas across the business. And Dash had a lot of comments on the BPL business earlier on. And I think that for a lot of reasons, that business is something we're going to focus on the first couple quarters of the year.

Thanks. And moving to follow up on one of the options on the resi side, you know, the home equity investments, seeing the deck, you know, new financing facility put in place in the fourth quarter. You know, can you talk about the opportunities there? Is that an area you view as attractive now? Or kind of how do you, you know, force rank your options for the investment side as far as new capital being deployed?

Yeah, I think it's very exciting. You know, that's a great example of some of the optionality that we've built into the platform. Certainly, if people are not incentivized to move or refinance their homes, they'd like to extract trapped equity within their homes. And anybody that's bought a home in the last two or three years is sitting on quite a bit of equity by and large. And so, you know, our HEI initiative is really meant to sort of modernize the home equity And, you know, we'll have a lot more to say about it, I think, in the coming months, but certainly we see strong demand. We've completed a securitization in the past, and Brooke's team completed a financing, a warehouse financing of that product very recently. So we're excited about things starting to institutionalize there, and, you know, we expect that to be a big focus area of ours in 2023. Great.

Appreciate the comments this evening, Chris.

Thank you. Our next question comes from Rick Shane with JP Morgan. Please state your question.

Thanks, everybody, for taking my question. I'd love to talk a little bit about how to think of the residential mortgage banking income line and the loss in the fourth quarter I'm assuming that because of the execution, that some of that was marked to market from pipeline from the third quarter. And I'm wondering with the Sequoia sale in the first quarter, if some of that's sort of been reversed. I'm just trying to understand the locks and the purchases and the fundings and the timing of everything.

Sure, Rick. It's Dash. I can take that. You're right. It was largely the resi mortgage banking outcomes for Q4 were largely a result of the mark-to-market on the book we held at 930. As we noted, we locked a little over $40 million of loans in Q4, so the position did not move meaningfully between 930 and the end of the year. So the revenue outcomes for resi mortgage banking were really a result of just spread widening In the market you're right, you know and some of some of Brooks commentary You know on book value also includes, you know an improvement and in the carrying value of the pipeline here In January or in the early part of the year half of which has been realized through the Sequoia deal that we executed So the the position since 930 has been fairly easy to trace just because we did we added to it Barely in q4 And you're right, much of that has reversed thus far in January with the Sequoia execution and the prospects, as Chris said, of doing another one.

Got it. And again, looking at the loan sales in the fourth quarter, it was only $131 million. So there was presumably a realized loss on the 131, but the remainder, whatever the outcome is on the Sequoia transaction, we'll see in a few months.

Yeah, I mean, whether it was mark-to-market adjustments or realized losses, we reflected the value of that pipe at December 31st, and I think that is the right way to think about it. Since then, things have firmed up quite a bit in resi. We anticipated that, and we prepared to issue that transaction right out of the gate. So, it was a successful deal. And those, again, are some of the green sheets we did see in that space, you know, with investor demand, especially back for AAAs, to feel confident to really lean into our rate sheets. Because ultimately, we control the volumes. It's just a matter of all the pieces coming together around inventories and, you know, volatility.

Got it. Okay. Thank you. Look, there are are a lot of moving parts here, but at the end of the day, the economics at Redwood are really determined by credit performance. You've alluded to, you know, related to the securities portfolio, no deterioration, no variance versus model. Can you talk a little bit and provide some additional insight in terms of what you are seeing, pockets of strengths, pockets of weakness in residential mortgage credit at this point from a credit perspective?

Yeah, I mean, I'll touch on consumer resi quickly and then Dash can touch on BPL because, you know, at the end of the day, all of our businesses are, as you said, somehow tethered to resi credit. You know, our consumer resi book, which is our traditional jumbo, our expanded prime and our RPLs, our re-performing loan book, just continues to perform remarkably well. Delinquencies have been essentially flat and in many cases declining. These are largely season loans, most of which have participated in significant HPA over the past few years. Just looking at some numbers, our select book, our estimate for average HPA-adjusted LTV is under 40, choice is around 40, just over 40, and the RPL book is in the mid-40s. So when you think about our embedded discounts there, which again for select is $28 million Choice is 34 and RPL is 278. You know, they're sitting on significant, significant home equity before any of these positions incur meaningful losses. So we continue to feel very, very good about, you know, where the book is positioned. Certainly, including, you know, with some downside scenarios with a recession. And, you know, I think we're, you know, our job is just to keep maintaining monitoring the book and managing credit. But why don't I let Dash speak to BPL, which is the other piece of the puzzle.

Sure. Thanks, Chris. I would say similar to the consumer part of the book, the empirical performance within BPL remains really, really good. Bridge delinquencies were down from where they were earlier in the year, now just over 2%, very strong level. The single-family rental book, which is largely securitized, as I mentioned in my prepared remarks, we saw a slight uptick in early-stage delinquencies in that book at year-end. That has been trending in the right direction already year-to-date, just with our asset management team, as they always are, just engaging very directly with borrowers. Just as a reminder on the bridge portfolio, the vast majority, around 90% of what we finance, are in some shape or form a rental or stabilization strategy. So while the durability of the cash flows remain really, really good, what we do is look around the corner and try to anticipate where the areas of stress are going to be. And we try and guard for that up front with our underwriting. Our multifamily loans are typically underwritten to close to a 9% debt yield or higher. We're very careful about how we trend rents. And all of that's overlaid with focusing on the most sophisticated sponsors with the best liquidity options. I think the reality, Rick, even as rates have come down, the 10 years sits right now probably 55 basis points below its peak from Q4. The reality is across the bridge space, there will likely be sponsors that need to come out of pocket by a few LTV points to refinance into an agency loan, et cetera. Our focus is making sure we're with sponsors that have the capital to do that and they're executing on their business plans. We have a lot of bites at the apple, as I think you know, in terms of our draws and ensuring that reserves are rebalanced and we're revaluing properties. And so as more and more of those data points come in, we're more and more heartened by how those sponsors are executing. But that's the area, as you can imagine, of increased focus here. Rental growth has obviously tapered a bit. We expect that. But we're still seeing strength in average hourly earnings, which is a direct input into how we think the underlying tenants are going to perform. So again, the empirical performance has been really, really good, but all that stuff that I just mentioned is really top of mind for us for the next few quarters. Great. Chris, Dash, thank you very much.

Thank you. Our next question comes from Eric Hagan with BTIG. Please state your question.

Hey, thanks. Good afternoon, guys. Hope you're well. I think I have three questions, so just bear with me here. I mean... How would you say the return on capital and securitizing both the jumbo and BPL compares, say, now versus a year ago when spreads were at some of their tightest levels? And then is the capital that you have in the jumbo segment more or less kind of the minimum that you envision, just given where the market is? Is there any scale that you can achieve with the capital that you have there if origination volume improves? And do you see Wells Fargo at their exit from the correspondent channel being an opportunity? And then on the originations in BPL, how often would you say agency funding is a viable takeout for those loans? I think I just heard you mention that in some cases it is. Like, is there any connectivity to the fact that G fees have risen for those loans? And in cases where it's not an agency loan which does supply the takeout, what is the source of capital that typically does? Thanks. Thanks a lot.

Well, we'll try to divide and conquer here. On the resi front, spreads obviously were quite a bit tighter a year ago. But I think the bigger story is what's happened in the past few months. And in early December, mid-December, prime jumbo AAAs were trading two to three points back of agencies. You know, now it's closer to one and five-eighths or so. So there's been a big snapback, which has, you know, significantly improved the economics of securitization. Again, for us, you know, that's a very good sign. But, you know, running that business, you know, and leaning in on rate involves a lot of different moving parts, one of which is, you know, you've got to carry, you know, fixed-rate mortgages with an inverted yield curve. You're incurring all of the spread volatility So getting up and down in the securitization requires additional risk, frankly. So I think what we're trying to do is continue to get more efficient with that business. And we mentioned that we lowered the capital by 70% over the course of the year. As we look to distribute our remaining sort of last year inventory, we think that capital number can go down further, probably go down to something closer to 50 million. And really what that does is it creates a nice base case to lean back in when we're ready to go. And that money doesn't disappear. It can be redeployed. And all of this sort of pencils out into the 400 plus million of unrestricted cash that we've amassed here in the last few weeks and months. So all of that can be deployed. It can be invested. It can be used to buy back debt, buy back stock. So I think the goal of the fourth quarter was, in some sense, a modest restructuring to get us in a position to kind of go back on offense, which is exactly what we've done to start the year. On the Wells front, which I think you referred to, I think that's a tremendous, tremendous long-term opportunity for us and for our long-term-minded shareholders. That's somewhat of a bellwether of sorts. I would say Wells, by and large, has been the largest correspondent aggregator in non-agency, particularly jumbo, since the great financial crisis. So exiting that space really is a profound opportunity for us and potentially others. So it's not an overnight shift, but I think, again, for a company that's Heading into its 29th year, our business is the resi business. And as things evolve here, we expect that to significantly support our competitiveness in the space with a major, major force like Wells stepping back. So I do think that's very notable and potentially a very big long-term tailwind for us. But in the near term, the real emphasis is the Fed. its stability and rates, and particularly in housing and the economy that we're most focused on.

Eric, to take your questions around BPL, if you sort of divide the bridge portfolio into three areas, multifamily, built for rent, and then the single-family stabilization strategy, I would say in the majority of cases, on the multifamily side for a sponsor that wants to hold on to the property and has the capital tenor to do that. Plan A would likely be most of the time an agency or a HUD takeout. Some of that, as you know, is going to depend upon the nature of the underlying tenants, the affordability angle, things of that nature. Agency and HUD takeouts, we see that very commonly to the extent the sponsor wants to stay in the investment and Many of our multifamily sponsors, I'd say most, do focus on tenants where the GSEs and HUD are actually in a spot of continuing to lean in around housing affordability and things of that nature. So those have historically led to more favorable execution outcomes, and we would expect that to continue, notwithstanding your point around the GFE, just given where the mission footprint is with the GSEs. We have often, you know, refinanced. Multi into our own term product which we securitize That tends to occur When the GSEs hit their caps which they have annually as you know We also can do that when a sponsor is stabilized and views it as more efficient to refinance private label as opposed to waiting the number of months of seasoning required by the GSEs at certain stabilization levels so we do we do see opportunities like that on the bill for rent side Some of those are eligible for agency. That depends upon how the property is parceled. And then typically for single family bridge stabilization strategies, it's a win-win for us to be the takeout. That's a huge source of our term business, which we securitize. It was our bridge book where sponsors refinance with us into a longer term fixed rate loan.

That was really helpful detail. Thank you guys very much.

Thanks, Eric. Our next question comes from Derek Summers with Jefferies. Please state your question.

Hey, good afternoon, guys. With Wells exiting correspondent and some other smaller non-QM lenders hitting some speed bumps, do you see that as more of a volume opportunity or a margin opportunity in the near term or a combination of both? And then just to tap into the capital allocation to the mortgage lending? You know, I know you guys said you reduced it by 70%, but how flexible is that capital allocation on the flip side on a quarter-to-quarter basis when you want to dial it back up? Thank you.

Well, as I noted, you know, I think it's most fair to characterize the Wells exit as a long-term opportunity. You know, frankly, you know, Wells and other money center banks remain very competitive on the retail side, on the branch side, in mortgage. So that piece of the puzzle hasn't meaningfully changed. But I do think as things stabilize, it could be quite a game changer for us in particular. You know, as far as the flexibility of the capital, you know, I think it's very, very flexible. You know, I think we've put ourselves in a position where we can be very nimble with allocating capital. And we've got a workforce that's pretty attuned to operating in an investment capacity as well as an issuance capacity. So moving the capital around and optimizing it is one of the hallmarks of the platform. And I think what our goal is in residential mortgage banking is to preserve full optionality. We focused on variable costs But as far as the integrity of the platform, the relationship of the seller base, the technology, we continue to make investments in technology. You know, all of that is something we focus on on a day-to-day basis. So as far as leaning in, again, you know, we control the rate sheet. So the points at which we feel comfortable from a risk standpoint, getting more aggressive, we will. I do think that we need to see a little bit more here in the first quarter and potentially into the second quarter to really get that flywheel turning as rapidly as we'd like. But like I also mentioned, we've got a lot of uses for the capital, and growing them right now is a big, big focus of ours.

Got it. Thank you.

Thank you. And our next question comes from Doug Harder with Credit Suisse. Please state your question.

Thanks. Can you talk about how long you think kind of aggregation periods are now, you know, whether that's to securitization or to whole loan sale and, you know, kind of what you might be able to do to even shorten that time further, just kind of given the volatile period that we just went through?

Yeah, I mean, we, again, we can speak to both businesses. On the resi side, I think the way, you know, what we've most focused on is clearing out some of the 2022 inventory. And we were very fortunate to stay on top of it and not be a forced issuer, if you will, as others were. We took a year off, essentially, between securitizations. So when the moment was right, we were able to hit the market pretty quickly, and we did a few weeks ago. That spoke for a substantial amount of our inventory. And as we've mentioned, we're hoping to do another deal here in the coming weeks or months. But going forward, I think capital turnover is going to be important because of the shape of the yield curve. So pricing in a healthy margin as far as the rate sheet goes is going to be important just to factor in the extra hedging costs. I also think focusing on quote-unquote mini-bulk And selling loans as smaller bulk pools to investors is going to be an emphasis of ours. So I think there's ways to manage it, but ultimately, you know, what we really like to do is get back to kind of the regular way aggregation, you know, that we've seen the past few years.

We just, you know, we're just proceeding cautiously.

Thanks. And then can you just talk about kind of how you envision your capital structure? You obviously have the converts coming due this year. Is it the preferred, you know, kind of what you see the optimal mix of the capital structure?

Thanks, Doug. It's a good question. You know, we probably saw from our materials that through the first quarter and the fourth quarter, we bought back about $55 million of our 23s and 25s. Since we started buying back our converts, we've actually seen our capital structure tighten in quite nicely, which I think was also aided by our preferred equity offering that priced inside our convertible debt stack as well. I think we did a small inaugural issuance of preferred intentionally. It is expensive, but relative to the cost of convertible and other unsecured forms of debt, we think that for perpetual capital, it actually has a nice place in our capital structure and you know our future issuance we expect to be tighter on the follow of that. So we and you also probably noted from our materials and prepared remarks that we have done a nice job continuing to raise cash on hand. We sit with 400 million. We have 300 million in total unsecured that matures through 2024. So we will likely see us continue to either repurchase that at discounts or to seize it. If you even think about the level of cost that we have in our 2023 maturity, you can cover that interest expense with six-month T-bills today, which is quite amazing. So I think we will continue to address our term maturities while balancing it nicely with other accretive forms of capital in the capital structure.

Thank you.

Thank you. And our next question comes from Don Fendetti with Wells Fargo. Please state your question.

Yes. Brooke, could you talk a little bit about how you're thinking about net interest income in Q1 and then maybe some of the pluses and minuses as you work through the year?

Yes. It is a good question. I think what you've seen out of our net interest income line item is stability in the fourth quarter. We reached what we really viewed to be a good run rate. We've had a lot of more one-time season income that have come into net interest income over the course of the year, and those represent upside from the levels we saw in the fourth quarter. But items such as yield maintenance have been as high as four to five or seven million in different quarters throughout the last year. That was essentially flat in the fourth quarter. And so we think GAAP net interest income in the fourth quarter represents a good run rate, as I mentioned. You know, we are continuing to deploy capital into Bridge, which continues to be a nice tailwind for NIM. Actually, it's contributed a positive $4 million to net interest income on the quarter. It generated a 27% return on the capital for the quarter. So in terms of deployment opportunities, especially with the amount of cash that we're sitting on, Today, that continues to be an area of focus. We actually saw that was driven not only by volume, which was actually done on the quarter, but weighted average coupons on Bridge Breaks were about 50 basis points higher than cost of funds increases. I would really point you to economic net interest income as we head forward. That was $6 million higher, as I mentioned in my prepared remarks, than GAAP net interest income. That's driven by some discount accretion and also effective interest on certain assets that aren't captured in our gap net interest income, but rather through investment for value changes. But those are run rate, you know, that is run rate income for us. So, you know, I think we will do a better job highlighting economic net interest income. But we see tailwinds for economic NII to continue to grow, both from deployment and certain of those assets whose effective yield will continue to be realized through it. I would also just note our financing costs, they were up about 100 basis points last quarter, but they've really stabilized. So with the projected front ends of the curve and also spreads on renewals, we've seen really stabilize. We have been seeing spreads widen a bit on financing lines throughout kind of the mid-second half of the year, and those we viewed to be very stable. We continue to have more floating rate exposure on the asset side of our portfolio than on the debt side of the portfolio, so any further increases to rates should actually be a tailwind.

Okay, great. Thanks for the detail.

And our next question comes from Boza George with KBW.

Please state your question. Bose George, your line is open.

Please go ahead.

Sorry, I was on mute. Hey, guys. Just wanted to ask about returns on the investment opportunities or the best investment opportunities that you're seeing and how returns compare to that 15% enforced yield on your existing portfolio.

Hey, Bose. It's Dash. I can take that. The organic creation largely through BPL is just articulated in that mid-teens context or better. for both bridge as well as the residual pieces that we can create through securitizing SFR loans are very much in that context too. Obviously some of this is aided by the fact that we're in a higher total rate of return environment with benchmarks and also our lending spreads have certainly widened in sympathy with the market over the past year or so, although they have tightened up given the market dynamics the past few weeks. Away from that, as Chris articulated earlier on the call, given market dynamics, we're definitely seeing more interesting opportunities on the third-party side as well. We've been a regular investor in agency CRT securities. Those have certainly tightened in this year, but those potentially remain interesting. There's some other shorter-dated opportunities as well, more senior non-rated cash flows that others are issuing that you know, we're focused on, you know, as well as other types of return profiles. We won't be investing in mortgage servicing rights, but obviously with the potential for, you know, certain banks to be divesting of those, there might be some interesting opportunities there as well. So in general, these will chin the bar, you know, with that mid-teens or higher still based on where we see the market right now.

Okay, great. Thanks. And then actually just going back to the resi mortgage banking business, in terms of getting back to normalized returns, do you need to see some pickup in refi activity or, you know, as sort of industry capacity gets pulled out over time, you can sort of get to normalized returns that way?

Yeah, it's kind of all of the above. You know, I think the first and most important thing is stability in rates. I think that rate volatility has kept a lot of consumers on the sidelines with respect to buying homes, obviously refinancing homes. But the business can function in high-rate environments. I think the demand in the housing market has picked up in January, and we'll be heading into the spring selling season here. So I think the capacity... issue is a real issue. It's a bigger issue, I think, for mortgage originators than it is for us. If anything, with the Wells announcement, you know, there's going to be fewer players. So that piece is a positive. But I think the real answer is rate stability because it not only drives consumer behavior but also demand for our bonds. And I think, you know, once we, you know, we've had a really good January, frankly, And if we can continue the momentum here, I could certainly see, you know, the economics penciling out much better for the business in the coming months and certainly in the coming quarters.

Okay, great. Thanks a lot.

Our next question comes from Steve Delaney with J&P Securities. Please state your question.

Thanks. Folks, hi. I was a little late getting on, but I wanted to ask you, if you haven't already covered it, Your January Sequoia deal, the Prime Jumbo deal, if you talked about that, did you mention what the – we see the 5% coupon on the notes sold. Did you mention what the WAC was on the loan pool?

Yeah, it was about five and a quarter gross, a little bit above that, Steve.

Okay. So pretty tight, and was that – I've heard both of you mentioned sort of this mid-teen kind of target hurdle. Was that deal, the execution there, did that get you there, or was there something unique about that that you needed to clear those out, get those permanently financed? But at the margin today with current loans that you're – you know, do you think that 15% ROI hurdle is doable on this loan product?

Yeah, so the portfolio we securitized, you know, was probably among the more seasoned that we've ever securitized. Someone else asked the question. I think it was like we typically securitize jumbos within a month or two. As you can probably glean by the coupon, these were a bit more seasoned than just, you know, we saw a market opportunity early January and securitize them. And as you recall, Steve, the pieces that we keep from those Sequoia deals tend to be a lot thinner. And so, yes, the piece we kept was sort of in that low to mid-teens context. But it was sort of 1% or less of the capital structure. And if you look at where current coupon is, I think Chris sort of hit on it. Yes, if you look at the model, mid-high sixes, note rates, you know, just from a term perspective, you know, should be able to guess you're there. The challenge is, you know, with the rate stability and all of that and the consumer demand just getting to actually be able to do that.

Yeah, it makes sense. And I appreciated Chris's comments about, you know, this volatility and people just decide, okay, let's wait it out. But, you know, we get into the spring, people need houses. You know, I think the purchase side will pick up and It's nice that you've tested the waters here. Everybody knows the SMT brand, and we'll see what the rest of the year brings. But I hope we'll get some more momentum in the purchase market for sure. Thanks for the comments.

Thanks, Steve. Thank you. And, ladies and gentlemen, that was our final questions for today. That also concludes today's conference call. All parties may now disconnect. Have a great evening.