Redwood Trust, Inc.

Good afternoon and welcome to the Redwood Trust first quarter 2023 financial results conference call. Today's conference is being recorded. I will now turn the call over to Kate Moritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Thank you for joining us today for Redwood's first quarter 2023 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. A reconciliation between GAAP and non-GAAP financial measures are provided in our first quarter Redwood Review, which is also available on our website, redwoodtrust.com. Also note that the contents of today's conference call contain time-sensitive information that are 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 has been recorded and will be available on our website later today. I'll now turn the call over to Chris for opening remarks.

Thank you, Kate. Good afternoon, everyone. I appreciate you joining us today for Redwood's first quarter earnings call. I'll begin with some introductory remarks about our first quarter performance and the market opportunities in front of us before handing the call over to Dash and Brooke to discuss our operating and financial results. Overall, it was a very productive first quarter for Redwood. In light of continued stress in the mortgage sector, we were pleased to end the quarter with a positive economic return for shareholders. Our gap earnings were $0.02 per diluted share for the first quarter, and our non-gap earnings available for distribution were $0.11 per share. Our gap book value per share was $9.40 at March 31st, down about 2% quarter over quarter. Since March 31st, we've continued to protect book value and estimate our current book value as flat from quarter end. The notable improvement in first quarter earnings was largely driven by healthier mortgage banking activities, including almost one billion in whole loan distributions across our residential and business purpose lending platforms. These dispositions freed up meaningful capital, left us with relatively light inventories, particularly in residential mortgage banking, where we've chosen in recent quarters to be very conservative with our capital and market positioning. This is in light of the rapidly rising rates and subsequent volatility the market has endured over the past year. In step with the reduced capital allocation, we took further steps in the first quarter to reduce costs, allowing our operating platforms to run more efficiently going forward. With continued low leverage, strong financing, and robust liquidity, our balance sheet today remains strong and will allow us to be flexible and capitalize on market opportunities. As a result of our actions in the first quarter, We boosted our cash and cash equivalents by approximately 60% from year end 2022. We've also made significant progress in developing private capital partnerships that we expect to greatly enhance our liquidity and production opportunities going forward. Away from Redwood's results in the first quarter, conditions within the broader financial sector warrant attention, particularly as these conditions lend themselves to investing opportunities. As you know, extreme disruption and dislocation in the banking sector has dominated financial headlines since March. A reckoning is now underway amongst the regional banks, something we expect to reset the competitive landscape in mortgage finance in the coming quarters. This will benefit both our residential and business purpose lending businesses, as well as create third party opportunities for portfolio investing. As a non-bank mortgage aggregator, A residential business has operated since the mid-1990s on the belief that 30-year fixed rate mortgages should be matched funded through securitization or other prudent asset liability strategies. As a result of extremely accommodative Fed policy in recent years, some banks chose to effectively ignore the interest rate risks associated with owning mortgage loans by funding them with deposits, often unhedged. The resulting asset liability mismatch for banks which has not been seen since the S&L crisis, helped to fuel below-market mortgage rates when the Fed started hiking and immediately proved difficult to replicate in the private securitization markets. This created a headwind for non-bank constituents with a key rationale behind our conservative posture in residential mortgage banking in recent quarters. But the music has now stopped for many depositories. With the dust far from settled, we can offer a few early takeaways to the spectrum of efficient markets. One, bank cost of capital is rising. Two, liquidity remains at a premium. And three, reliable counterparties such as Redwood are positioned to emerge as leading mortgage finance partners to banks. Over time, we expect the market to function more rationally as it had prior to the extremely accommodated Fed easing cycle we experienced through the COVID pandemic. Our residential platform has competed as an aggregator that has served a deep bunch of investors reliably buy our RMBS bonds and whole loans. When nothing changes overnight, we are seeing early but definitive signs of fundamental shift in bank asset allocations that we believe will anchor our go-forward residential conduit strategy. We expect an increased appetite by certain banks to sell newly originated loans, which would otherwise be held in their portfolios. This may also lead to more strategic dispositions that present us with scalable investment opportunities. As always, the reliable and user-friendly relationships we've developed over time will be invaluable as this channel evolves. In addition, so long as credit risk can be priced appropriately, liquidity concerns for regional banks are likely a tailwind for our BPL platform and provide an opportunity for us to diligently gain market share as we customize products to serve our best customers and identify areas where our liquidity will be at the highest premium in coming months. As changes unfold in how mortgage debt is financed, we also remain focused on the evolving landscape and underlying homeowner equity. Over the last several years, we have steadily grown our investment in HEIs, our home equity investment options, which allow consumers to tap into this store of value without adding to their monthly debt burden. With first mortgage rates still elevated and access to second lien financing largely constrained to the best credits, consumer demand for HEI remains very, very strong. In our minds, this marketplace as currently situated is not fully equipped to meet the moment, putting Redwood in a unique position to truly institutionalize the product to better align consumer and investors. Looking ahead, we see a number of compelling opportunities in front of us that support our long-term vision. Our strategic positioning across both of our operating platforms, as well as our investment portfolio, will likely evolve as we progress through 2023 due to the shift in the markets that began in March. We believe that the diversification of our model, the ability to rotate nimbly between our role as an issuer and an investor remains a competitive advantage, as does our experience navigating complex market conditions over many cycles. With that, I'll now turn the call over to Dash.