Redwood Trust, Inc.

Ladies and Chairman, good afternoon and welcome to the Redwood Trust, Inc. Third Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. I will 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 our Third Quarter 2023 Earnings Conference Call. With me on today's call are Chris Abate, Chief Executive Officer, Dash Robinson, President, and Brooke Carrillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentations today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions and involve risks and certainties 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 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. Our reconciliation between GAAP and non-GAAP financial measures are provided in our third quarter Redwood review, which is available on our website, redwoodtrust.com. Also note that the content of today's conference call contain time-sensitive information that are only accurate as of today. We do not intend and undertake no obligations 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 welcome everyone to Redwood's third quarter earnings call. There's no question that our markets are in a state of transition, impacted by the final throws of a hyper-aggressive Fed policy, ongoing geopolitical strife, and proposed regulatory rule changes that will usher in a new era of housing finance. In the third quarter, the gravitational pull of an inverted yield curve continued to take its toll on the mortgage sector, particularly on the market values of fixed-rate portfolio investments. Redwood's gap book value is down 5% for the third quarter, largely on mark-to-market adjustments directly attributable to the rapid rise in the 10-year Treasury that took place in the final month of the quarter. Since quarter end, we estimate our gap book value to be down approximately 2%. For those in our sector who have already reported their third quarter results, gap book values have been down 8% on average. Trying to make sense of this market and see through the fog of 8% mortgage rates is difficult for any of us, especially given the prospect of an extended period of higher for longer benchmark rates as the economy continues to outpace expectations. With housing affordability at the lowest levels we've seen since the 1970s and transaction activity at multi-year lows, many market participants have simply retreated to the sidelines. In fact, as we head towards year end, we've already started to see the same diminution of market activity that we observed a year ago. That's why it's so important for us to keep our shareholders apprised of the transformational changes that we expect to become prominent in the coming months. Our perspective is informed by 30 years of cycles and market turns and learnings from things we've gotten wrong or missed in order to best position our company for the future. And to summarize our view, We expect a major secular shift in how mortgage-related assets will be owned and financed in the years ahead. Particularly in the non-agency mortgage space, we have long stood as a critical provider of liquidity. In fact, we believe the option value of our franchise has never been higher than it is today. To contextualize our thinking, we expect a convergence in how both agency and non-agency mortgage markets function with a large percentage of non-agency loans getting distributed to match-funded private credit institutions, largely in securitized form and away from bank balance sheets. In the agency mortgage market, Fannie Mae and Freddie Mac were created for this purpose, to provide liquidity to banks and other lenders by aggregating and securitizing their residential loans for distribution to bond investors. In the non-agency mortgage space, similar intermediaries must emerge to provide that liquidity, and reminiscent of Redwood's founding thesis, there is no one better positioned than us to do so. We are a natural, non-competing partner to our loan sellers, allowing them to preserve their customer relationships while maintaining liquidity in an otherwise illiquid market. As we previously mentioned, our near-term production will remain risk-minded given the challenging market backdrop. we will not be scaling volume at any cost. Instead, we'll be focused on growing wallet share with large banks, many of whom have not needed a capital partner since the great financial crisis ended. The aftermath of that crisis, we would remind shareholders that the last time that regulatory rules significantly changed for the mortgage sector. In this sense, we're neither predicting nor in need of a major boost in industry-wide transaction volumes to achieve our near-term objectives. Instead, we're focused on further solidifying relationships and providing much needed liquidity to our new and existing partners with the goal of realizing transformative and durable market share gains as the yield curve normalizes. As you may recall, our second quarter earnings call in July took place just hours after the Federal Reserve released newly proposed risk-based capital rules for the U.S. banking system. Our thesis at the time was that while the final rules would likely evolve, Bank management teams have looked to comply with the spirit of the rules well in advance of their passage. Three months later, our thinking has thus far been validated and our progress has been well-timed with the emergence of fresh demand for our products from new sources of capital complementary to our traditional distribution channels. As Daschle outlined in his remarks, the results and leading indicators we are tracking are pointing green with a response from regional and other banks that has exceeded our expectations. Without the safety net of zero-cost, unlimited deposit capital, the asset liability mismatch that owning mortgages proposes for banks is inherently risky. We realize that large banks face a high degree of uncertainty and are naturally pushing back against the proposed risk capital rule changes. Our response will be to help our partners approach these changes constructively. We believe it's possible for banks to preserve lending footprints including for first-time homebuyers with the right capital partner. Our team has honed a degree of operational excellence in the non-agency mortgage market over decades, allowing us to support our bank partners with more than just a rate sheet. Many banks have understandably not had to flex their loan sale muscles in many years, creating uncertainty. Our ability to swiftly onboard and educate our lending partners provides incredible value to banks as they work to pivot from net buyers and portfolio lenders to net sellers on a forward flow basis. Besides the long-term opportunity, we estimate that banks have over $1.4 trillion of jumbo loans held on their balance sheets today before considering ongoing production. We further estimate that around 50% of the jumbo origination market, a number which could represent 100 to 150 billion or more of annual volume, could pivot to an originate-to-sell model. Leading indicators suggest that the shift is now underway. We believe our third quarter mortgage banking results are indicative of how banks and other financial institutions will look to finance their mortgage production going forward. Given the changes we foresee for our markets, We have begun thinking more holistically about the Redwood platform and believe that evolving our capital structure and procuring long-term private capital partnerships must be a top priority. As I have emphasized, we continue to observe a transition occurring with the roles of banks, private credit institutions, and specialty finance companies such as Redwood rapidly evolving. In particular, regulatory cross-currents are redefining the most efficient holders of real estate-related assets, as well as those who will finance and service them. As evidenced by the joint venture that we announced this past summer, the value proposition that platforms like ours offer institutional credit investors has grown dramatically over the past few years, with investors seeking out the assets we create. These investors include the likes of pension funds, life insurance companies, sovereign wealth funds, and other nonpublics who have accretive capital but lack the origination or sourcing capabilities that we offer. They also possess patient capital, a key advantage when holding less liquid non-agency investments such as ours. In keeping with these trends, our long-term strategic focus will be to further position our mortgage banking franchises to meet this unprecedented market opportunity with ample working capital and access to a deep set of products. Our investment strategy will naturally evolve in kind. The continued focus on deployment of our organically created assets to third-party capital partners in lieu of traditional direct investing. This includes a strong internal focus on the next frontier of non-agency investing, which is credit risk transfers on bank portfolios where significant risk capital can be freed up at a relatively low cost. We expect progress on these efforts and partnerships to continue to play out in the coming quarters and look forward to keeping our shareholders current as we proceed. I'll now turn the call over to Dash.