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spk03: Good afternoon and welcome to the Redwood Trust, Inc. First Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. I'll now turn the call over to Caitlin Mertz, Redwood's Senior Vice President of Investor Reactions. Please go ahead, ma'am.
spk00: Thank you, Operator. Hello, everyone, and thank you for joining us today for our First Quarter 2024 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 presentation 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 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 the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this column, 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 first 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. and we 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.
spk01: Thanks, Kate. In February, we delivered our fourth quarter commentary, where our focus was on actions we took in 2023 to lay the groundwork for our long-term positioning. These actions occurred in the midst of one of the worst housing finance markets in decades. More recently, at our March Investor Day, we updated the market on our progress at that point in the first quarter, including the announcement of a transformational new capital partnership. With the first quarter now behind us, we're pleased to be building on the foundation we established, generating significant increases in net interest income, GAAP earnings, EAD earnings, and GAAP book value. As we'll discuss in today's call, first quarter is emblematic of our long-term strategic vision, demonstrates the potential of our platform, to deliver value regardless of the interest rate environment. Our business has been fueled by the strong capital position we've amassed in recent quarters, allowing us to form generational partnerships with banks and other institutions who now lack portfolio capacity for residential mortgages. With April now behind us, we've continued to gain market share, making our trajectory worthy of a second look by macro traders who've been otherwise consumed with the gyrations of the 10-year Treasury. Our residential consumer lock volume was up 50% quarter over quarter, eclipsing our highest level since the beginning of this Fed tightening cycle. Our residential investor business has also found momentum on the heels of the $750 million strategic partnership that we announced with the Canada Pension Plan Investment Board last month. As a reminder, this partnership includes a $500 million joint venture sized to purchase up to $4 billion of residential investor loans in the quarters ahead. But the partnership with the Canada Pension Plan Investment Board is much more than a traditional joint venture. It also provides us with significant corporate liquidity through a $250 million secured revolving facility. Through today, we've already drawn $100 million on this facility as it's well-suited to address the anticipated growth trajectory for our residential consumer business. Leveraging this partnership has reduced our need for additional equity capital thus far in 2024. An extended period of higher rates has also driven the expansion of our home equity product offerings. Closed our first directly originated home equity investment option through our Aspire platform in the first quarter, began the process of rolling out traditional secondly mortgage products through our seller base. As we have for some of our other products, we expect to pursue dedicated capital partners for this asset class in the quarters ahead and scale these offerings over time. Turning to our investment portfolio, Fundamentals remain strong, the vast majority of our investments backed by single-family housing credit, where homeowners continue to build equity. In particular, we've made meaningful progress within our residential investor portfolio, where we saw a sharp reduction in credit-related charges for multifamily bridge loans relative to recent quarters. This eventual flattening was intuitive to us as we made important shifts in our product focus as rates began to rise in late 2022. and we've steered clear of commercial asset classes now experiencing significant stress. Collectively, our progress in the first quarter reflects the unique value that our franchise brings to home buyers, housing investors, banks, independent mortgage companies, and private credit institutions who have come to rely upon Redwood. Our focus will now be on scaling our platforms and growing wallet share at a time when few are capable of doing so. While our business stands to significantly benefit from an eventual Fed easing, the first quarter was evidence that we are well-positioned for growth in an extended, hire-for-longer environment as well. As more banks begin to publicly message their early compliance with the anticipated Basel endgame rules, it serves as an important reminder of the growing need for Redwood's products and services. And with that, I will turn the call over to Dash.
spk08: Thank you, Chris. I'll cover the performance of our operating platforms and investment portfolio before handing it over to Brooke to discuss our overall financial performance. As Chris emphasized, the first quarter of 2024 validated the unique opportunity for our residential consumer business to drive volumes and profitability amidst continued pressure on broader industry volumes. We locked $1.8 billion of loans during the quarter, a 53% increase from the fourth quarter. Gross margins were 107 basis points, above our historical target range, on the strength of three accretive securitizations totaling $1.2 billion, a monthly cadence that drives efficient capital turnover at increased volumes. Credit spreads have remained constructive for issuance, and earlier this month we priced our fourth securitization of 2024 at our tightest spreads of the year with robust investor demand. This strength of execution pairs well with our longstanding operational advantages, and our first quarter volume mix reflected increased wallet share across our network of loan sellers. Our lock volume with banks rose, even as overall bank production fell. Meanwhile, our volumes doubled quarter on quarter with independent mortgage bankers, or IMBs. These partners remain a key driver of non-agency volumes in the market and represent a longstanding strategic moat for the business, critical to us continuing to drive market share higher. We also saw increased momentum from bulk acquisitions, which more than doubled relative to the fourth quarter. This is a development we have been planning for, as our enhanced capital position allows us to continue to be more aggressive in this channel and pursue larger, seasoned portfolios that complement on-the-run production. Importantly, momentum in the business continues to grow, notwithstanding the 45 basis point backup in the 10-year Treasury yield we have seen in April alone. Lock volumes in April, once again balanced across our seller base and between bulk and flow transactions, outpaced our average Q1 monthly run rate by 25%. Turning to our residential investor platform, our priorities remain prudently growing top-line revenue, proactively managing credit risk, and returning the business to sustained operating profitability. For the first quarter, we funded $326 million of loans, effectively flat from fourth quarter volumes. Revenue margins and segment profitability improved quarter over quarter, driven by tightening securitization spreads. Volume trends picked up later in the first quarter, and given recent volatility and benchmark interest rates, we built important momentum in less rate-sensitive products, including single-asset bridge or SAB loans. We entered the second quarter with a growing pipeline, as more borrowers come to accept the current rate environment and lock in coupons. Funding volume in April is trending 15% higher than Q1's average monthly run rate, driven in part by the largest month for SAB production since the acquisition of the Riverbend platform in mid-2022. Distribution channels for our residential investor loans remain open and are benefiting from a firmer overall market tone. First quarter bridge production was largely distributed into our Oak Tree joint venture and our three revolving bridge securitizations. With the CPP partnership in place, we are finalizing warehouse financing for the joint venture and expect to begin selling both bridge and term loan production to this new vehicle towards the end of the second quarter. Delinquencies in our term and bridge portfolios remain stable quarter over quarter, and we have continued to emphasize disciplined underwriting and product selection. At March 31st, virtually all of our 90-plus day delinquencies in the bridge portfolio were for loans originated in the third quarter of 2022 or earlier. one of the key junctures at which we evolved our origination approach. Since late 2022, our residential investor production mix has remained predominantly focused on single-family loans, where performance has remained resilient. This trend bears what we are seeing in our broader investment portfolio, particularly in our re-performing loan or RPL book, where delinquencies have hit three-year lows, partly on the strength of steadily improving LTVs. In addition, delinquencies within our securitized Sequoia portfolio remained low, at just 20 basis points. As a reminder, our investment portfolio sits with $2.47 per share of discount, much of which we continue to believe is recoverable with both continued performance of the underlying investments and further firming of risk sentiment, which could reverse unrealized losses from spread widening taken in 2023. During the first quarter, we found attractive pockets of relative value, deploying approximately $115 million of capital into new investments at an estimated mid-teens blended return. This represented our most active investing quarter since the third quarter of 2022, and we anticipate continuing to deploy excess capital accretively in the coming quarters, both in support of our operating platforms and into opportunistic third-party investments. And with that, I will turn the call over to Brooke to cover our financial results.
spk06: Thank you, Dash. We reported gap earnings of $29 million for the first quarter, or $0.21 per share, compared to $19 million, or $0.15 per share in the fourth quarter, resulting in a first quarter gap ROE of 10%. We reported book value per share of $8.78, a 1.6% increase from $8.64 on December 31st. Gap earnings exceeded our Q1 common dividend of $0.16 per share, and we delivered a quarterly total economic return of 3.5% for the quarter. The improvement in gap earnings was driven by higher net income from both of our mortgage banking platforms, as well as positive mark-to-market changes in the investment portfolio. Net interest income increased 20%, or $4 million, in Q1, driven by $200 million of accretive capital deployment over the last two quarters, and improved interest income on bridge loans. This positively impact earnings available for distribution for EAD, which was $11 million or $0.08 per share in the first quarter, as compared to $7 million or $0.05 in the fourth quarter. As has been mentioned, we grew locked volume and maintained healthy margins above our target gain on sale range in our residential consumer mortgage banking segment, ultimately delivering a 17% gap return up from 10% in the prior quarter. We have demonstrated our operating leverage as we rescale the platform, driving down our cost per loan to 37 basis points during the quarter, approaching our run rate target of 30 to 35 basis points, and in line with historical ranges for the business. The contribution from our residential investor mortgage banking segment also improved quarter over quarter, even with slightly lower volumes due to improved securitization economics from spread tightening. On our last quarter's earnings call, we guided the market to another 5% to 10% reduction in G&A from 2023's levels. We made substantial progress towards this goal in the first quarter following recent expense reduction initiatives completed in late March. Our first quarter G&A expenses include $3 million of costs related to these actions. In aggregate, we expect our go-forward G&A to decrease by approximately $2 million quarterly or $8 million on an annualized basis. Our strong liquidity position was further bolstered by two important new sources of corporate capital. The first was the $250 million secured facility, which was part of the CPP partnership, and the second was the $60 million inaugural senior unsecured debt offering in January. As previously described, the CPP financing facility is secured by unencumbered assets as well as by equity in certain of our operating subsidiaries. The facility is structured with revolving capacity, which makes it well suited to address the anticipated growth trajectory of our residential consumer business. Subsequent to quarter end, we completed an initial draw of $100 million and have begun to deploy the capital in line with the mid-teen return targets Dash mentioned. We reported total recourse leverage of 1.9 times for the first quarter, a decrease from 2.2 from the fourth quarter as a result of lower recourse debt at our operating businesses as we successfully completed three Sequoia securitizations during the quarter and reduced our convertible debt by approximately $31 million. Cash and cash equivalents at quarter end were $275 million compared to $293 million at year end, which is notable given the $146 million of capital deployed during the quarter, inclusive of the corporate debt repurchases. During our investor day in March, we took the opportunity to walk the market through our path to higher earnings. Our performance during the quarter serves as a testament toward that goal, and we expect to continue to build on the net interest income we generated in the first quarter. We're committed to growing market share and deploying capital effectively to boost earnings in line with the current dividend level over the remainder of this year. And with that, operator, we will open the line for questions.
spk02: Thank you.
spk03: We will now conduct our question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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.
spk02: One moment please as we poll for questions. Our first question comes from the line of Rick Shane with JP Morgan.
spk03: Please proceed with your question.
spk11: Hi guys, thanks for taking my question this afternoon. When we compare The bridge loan maturity schedule from the fourth quarter to the first quarter, it looks to me like about $165 or $170 million of the pending first quarter maturities have been extended into the second and third quarter. Is that about right?
spk06: Yeah, that's right. We had about 155 million of extensions on the quarter that were, you know, anywhere between about six to 12 months, I think around eight months on average.
spk11: Got it. And last year, you guys provided sort of a pie chart showing the outcomes of 23 maturities, and you broke out what percentage were extended, what percentage were extended with additional commitments. of that $155 million, was a high percentage extended with additional equity commitments, or how should we think about that?
spk08: Somewhere, Rick. You know, a lot of those were shorter-term in nature, so we always, you know, we don't extend a loan without, number one, procuring economics, and number two, ensuring that, you know, our equity position, you know, remains sufficient. So in certain of those cases, yes, you know, we did ask the the borrower to re-up, but in many cases where we feel like we have sufficient equity position and the borrower just needs, you know, a few more months, you know, the house is on the market and they're just looking to sell it, we don't always require it, but we always obviously pull down a fresh appraisal and ensure that our equity position is sound.
spk06: And those fees are in other income, right?
spk11: I'm sorry, Brooke?
spk06: Sorry, I was just noting that the associated fees are in other income that Dash mentioned.
spk11: Got it. And as we move through 24 under current market conditions, reasonable to assume, you know, sort of a roughly 50-50 mix between payoffs and extensions at this point?
spk08: We would actually probably expect extension activity to drop a bit. You know, just for context, you know, since the beginning of the year through today, the end of April, we've had about $250 million in payoffs in the In the full bridge portfolio, about 80% of that was from 2022 vintage or earlier. So you're starting to see, you know, a little bit better, you know, velocity, particularly as the single family market remains strong and people are starting to move inventory, you know, a little bit more efficiently sort of, you know, to consumers as single family markets remain strong. So we would, historically, we've generally seen a third or so. And going forward, we would expect this number to trend back closer to that.
spk01: Hey, Rick. Just to make sure we don't bury the lead, we thought that the performance of the bridge book this past quarter, certainly from a credit perspective, was substantially improved. When you dig into the numbers and you look at the slope of delinquencies and credit, there was a significant flattening, which I don't think we've observed across the sector. So we're actually really, really pleased with...
spk11: know our asset management team and and you know how we've sort of evolved that book um but i'm sure all of that will be evident in the review yeah i know uh and look we certainly certainly see that on the bridge book 20 basis point increase um quarter over quarter versus 260 the quarter before or 160 the quarter before um so that that second derivative is very favorable there's no question I'm just trying to understand sort of how the dispositions work.
spk02: Yeah. Thank you.
spk03: Our next question comes from the line of Bose George with KBW. Please proceed with your question.
spk09: Hey, everyone. Good afternoon. I wanted to ask, at the investor day, you guys mentioned accretion from the JV. I think it was 25 to 27 cents over, I think it was a three-year period. And the 15 cents that was mentioned in the review today, is that over sort of a shorter time frame? And then we sort of grow into that, you know, the higher numbers over the next three years, or just yet trying to figure out the cadence?
spk06: Yeah, we were really just reiterating what we had said on Investor Day, so it remains the same. It's a 15-cent annual number for the joint venture in terms of accretion over where we are with our standalone business as it's financed today. As you saw with us in Oak Tree, it will take a quarter or so. We're actively working on financing facilities for the joint venture. We're seeing a lot of very robust appetite from lenders to finance this facility, as you might expect, which is really going to help us further with our deployment. So we're excited about it, but this will be a later in Q2 deployment as we get those lines established.
spk09: Okay, great. Thanks. And then in terms of deployable capital, you know, how should we think about that now? You have, I guess, with $274 million of cash, but, you know, you've got obviously more flexibility with the JV, and the review mentions unencumbered assets that you could lever up. So just trying to think and put the pieces together and think about, you know, how much sort of flexibility you have.
spk08: We think our flexibility is really good, Bose. It's a great question. At the moment, you know, in terms of liquidity on hand, we think we have about $175 million of deployable capital. That does not include, you know, further optimization of unencumbered assets, obviously inclusive of the ability to draw, you know, on the CPP line further. That, by the way, is net of the July 2024 convert maturity, so we're backing that out. We have just over $100 million of remaining outstandings under that issuance. So net of that, today we have about $175, and that can go up by another $125 plus or more between further draws on CPP, which as a reminder includes unencumbered assets as well as equity in certain of our operating subsidiaries. So definitely... you know, net asset value there that's not otherwise easy to monetize, you know, we can borrow against. And then we have other securities, which we could encumber if we wanted to, you know, in more sort of run-of-the-mill repo. So we feel really good about our deployment. You know, it's a big part of the NII walk, you know, which was up 20% quarter-on-quarter, and where we see future growth, we have some information in the review. this quarter about that. A lot of that is linked to this deployable capital and just our ability to go on offense and continue deploying that like we did in the first quarter.
spk09: Okay, great. Thanks.
spk03: Thank you. Our next question comes from the line of Doug Harder with UBS.
spk02: Please proceed with your question. Doug, you might be on mute.
spk10: How about now, Kate, can you hear me?
spk00: We can hear you now, Doug.
spk10: Perfect. Another question on the bridge delinquencies. You know, last quarter you gave us a little bit of a, you gave us a breakdown kind of where, whether, how much of it was multi versus, you know, single asset. Just wondering if you could update us on kind of that mix of those delinquencies. And then, you know, kind of on resolutions, have you, know kind of how are the resolutions uh trending and kind of where any um you know liquidations that are happening and and kind of what the recoveries are there relative to to your loans sure we do we do still have that information um it is in our excel tables this quarter we it's out of the body of the review so it's table 16 in our excel tables um i would say the trends are
spk08: Similar. One thing I would note is, you know, we, you know, as Rick pointed out, we have about 4.7% 90-plus, you know, at 331. You know, Chris talked about the flattening of that curve. Since the end of the quarter in April, you know, we have resolved about 1.3% of the portfolio. So that 90-plus number is now in the threes. That's not reflected in the review. Those are all as of 331. But we were able to continue momentum you know, with resolutions during the month of April and year to date. In terms of outcomes, we've been pleased, you know, on the bridge portfolio, most of the severities have been zero. They've averaged high single digits in terms of what we've resolved, which, you know, in terms of where we have the position marked, we feel very, very good about, you know, those outcomes and resolutions. You didn't ask about term, but I'll mention it. You know, we've continued to see good momentum there. Realized severities have been very low in that book, you know, sub 1% in terms of the loans we resolved in the first quarter. So like we've talked about before, you know, we're not altogether surprised at some of the delinquencies, but we're pleased that they're headed back in the right direction. And obviously, ultimately, it's about the loss of content as we resolve. You know, Chris talked about, you know, how the asset management team is doing. So we've been pleased with the ultimate outcomes there so far.
spk06: And also just note you saw that in NII as well, Doug. You know, our non-accrual loan bucket declined by about $70 million on the quarter, which contributed about $2 million positive to an interest income for the portfolio. So I think we try to be pretty conservative about placing loans on non-accrual status, even in advance of them rolling 90 days delinquent and don't really take them off until kind of we're all caught up by the borrower. So just wanted to note that, too, that it made its way into NII.
spk10: Appreciate that. And can you give us an update on how book value is trending so far in April?
spk01: Book, we estimate, as of effectively today, is flat to down 1%. Great.
spk02: Thank you. Thank you.
spk03: Our next question comes from the line of Crispin Love with Piper Sandler. Please proceed with your question.
spk13: Thanks. I appreciate you taking my question. So just first, with banks pulling back on Jumbo, can you just speak to some of the competition that you're seeing in this space? Are you seeing any new entrants coming in, whether they are mortgage players, asset managers? Just curious on the competitive landscape here, banks are pulling back, and who could be competing with you for share now, and who might enter the space going forward?
spk01: Sure. The competitors that we've seen more or less over the past year or so have largely been the Wall Street banks, the broker-dealers. I think our bank strategy is pretty differentiated because most banks, their first choice is to sell loans to banks. So if you're looking for a capital partner, we're kind of like Switzerland in that regard. You know, our business operates a lot like the GSEs where we don't service mortgages, we don't originate mortgages. We truly are. So from that standpoint, the competitive landscape hasn't changed that much. And, you know, we've used this period of time where transaction activity in the housing market has been very low just to deepen these relationships. We keep adding banks to our seller base. We've actually gained a significant amount of share with the independents as well. So, you know, I think just being capital efficient and being a great partner has enabled us to really build our business. And I think we're pretty excited about the growth trajectory of consumer residential. You know, we're printing, you know, results there with CAGRs that reflect that. So, ironically, obviously, you know, I think the market views, you know, an easing of rates as extremely positive for our business, and that's true. But as rates sort of hang out at these levels, every day it's compelling another bank to think about a capital partner. So from that standpoint, ironically, it's been very positive for the relationships that we're building. And hopefully we can continue to do that through the course of 2024.
spk13: Great, thank you. I appreciate all the color there. And then just on the bridge book, On the quarterly funded volume side, it's decreased, but not as much as some other players in the space. So how would you expect funded volume to trend across the bridge and term portfolios? You think you could be reaching a bottom here? Are you seeing opportunities? And are the additions pretty much all in SFR? And is there any multifamily or just very little?
spk08: Yeah, that's a great question, a few things. So as we said in the prepared remarks, you know, April's run rate, will be about 15% higher than the average monthly run rate for Q1. There are a few reasons for that. I think the one we're most excited about, frankly, is the growth in the single asset bridge funding. You know, that's a business that, you know, we are very committed to. You know, last quarter, as you saw, was about 16% of our fundings. In April, that will probably double or probably be 35% of our fundings in April. You know, that's a single-family strategy, largely an area where we feel like we can compete, you know, really strongly with the market, with our sales team and our fulfillment, but also, frankly, our distribution. You know, our distribution across our businesses, but certainly in residential investor at this point, is probably in as good a spot as it's been in quite some time. When you marry securitization demand, obviously the joint ventures, you know, with CPP coming online next to Oaktree, And also demand for whole loans remains really robust, particularly for those smaller balance single asset bridge loans. And we've used that to our advantage to really grow volume there, take advantage of the funnel. So that's one piece. And term volumes are trending in the right direction as well. Even with benchmark rates higher, securitization spreads have tightened. We've been able to use that to our advantage to build a pipeline there. And also, frankly, we're in a situation where I think a lot of borrowers are wanting to get out of bridge loans that are you know, very high single, low double-digit rates and, you know, are willing to accept the somewhat higher term loan rates, you know, as it relates to where benchmark rates are at this point. So all of those are tailwinds for the business, you know, but it really starts with the right funnel and obviously distribution. You know, to address your question on multi, you know, I think we're, you know, we're remaining very selective there. You know, as we said last quarter, You know, there were a lot of multifamily deals over the past four or five quarters we could have done and, you know, are glad we didn't. So I think we're going to be more opportunistic there. There's a bit of an analog to the bank story in Jumbo, which you asked about as well, which is an area we are definitely focusing on, you know, where a lot of really, really good sponsors that have gotten low loan to cost loans from banks over the years are not going to be able to be served by those depositories anymore. You know, multifamily sponsors, that's definitely an opportunity for us. where, again, we have this distribution on the other side, you know, stronger than we've had in quite some time. So those pieces need to come together in terms of, you know, NOIs and just, you know, the thoughts on multifamily broadly. But, you know, at a macro level, the pieces are there for that to potentially grow as well.
spk02: Great. Thank you. I appreciate all your answer to my questions. Thank you.
spk03: Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.
spk12: Brooke, just to clarify, the $100 million drawdown on the CPP facility, am I thinking about it correctly? You're going to use that to essentially fund residuals of residential credit production? Is that how I should think about that?
spk06: Yes, we can use it to fund residuals of securitizations as we go forward. We also have a number of residuals that are unfinanced today that represent that $370 million of our unencumbered basket. So I think Dash mentioned the revolving nature of it, and we did in our prepared comments as well. I think that's probably the most interesting feature of the facility, just because our working capital needs of the residential mortgage business flex, you know, even intra-month as we're securitizing at this cadence once a month. And so it really allows us to accordion with those working capital needs. But, yeah, it allows us to finance a number of different types of assets between our residuals from all the securitizations that we do as well as some of our other assets within the investment portfolio.
spk12: Got it. And then in terms of EAD covering the dividend, I guess you mentioned that's going to happen this year, probably driven by NII continues to march higher, and then you've got some cost saves. Is that sort of the best way to think about it?
spk06: Yeah, that is. If you think about our, you know, our earnings available for distribution increasing from $0.05 to $0.08 this quarter, $0.08 really would have been $0.10 if, you cost structure that we'll have in Q2 marching forward. So the incremental six cents towards the dividend is really somewhat driven by the capital deployment that Dash mentioned, but also the April trends that we're seeing in the business. We mentioned a 25% increase in locked volumes for the residential business, a 15 to 20% increase in the investor pipeline as well. And so a couple of pennies of that walk was from increased but reasonable growth assumptions in the near term for mortgage banking really underscored by what we're seeing in the pipeline today.
spk02: Got it. Thanks.
spk03: Thank you. Our next question comes from the line of Steven Laws with Raymond James. Please proceed with your question. Hi.
spk14: Good afternoon. Brooke, Dave, you kind of hit on it, and from Dash's prepared remarks, the 25% kind of run rate April volume versus the monthly average in Q1 on Jumbo. And I think, Dash, you mentioned something that's interesting. You said even as bank production was down, you're, I think, getting a higher share of that. You know, can you talk about, you know, how you view the market share opportunity to continue gaining that? And as you look out, you know, 12 or 18 months in the future, what type of quarterly volumes do you think – you know, these relationships in the market, you know, and your platform can support if you get a little cooperation from rates moving lower, say, in 25?
spk08: Yeah, it's a great question, Stephen, and we really wanted to focus on our strong April, you know, given the backup. And, you know, the point is that even if the market, you know, remains constrained, you know, there's a lot of room to the ceiling from a wallet share perspective. You know, we feel like we're currently in that 4% to 5%. market share range for Jumbo. You know, we talked about the doubling of IMB volumes quarter-on-quarter, which, you know, it's a really big deal because, as you know, that's been a huge historical moat for the business. You know, that crowd is always going to be, you know, an originate-to-sell model, you know, with potentially a couple of exceptions. And so just being on the screws with that cohort is important, but You know, the bank opportunity is really the big one. It's the big ocean, so to speak, in terms of where volume could go. And we're really just getting started there. You know, bank volume was up quarter on quarter, like you said, even though, you know, depository volume was down. The big thing with banks, and we've talked about this before, is, you know, from a wallet share perspective, you know, once you're in, you're in. You know, the vendor management and these setup processes of banks, they do take time. You know, they... Because a lot of these banks are coming back to the market for the first time in a while, it has been a process to get each other switched back on. And that's a really deep moat, right? Because to the extent we're in there locking loans with them now, it's unlikely they're going to run out and go through another several-month vendor management process again, right? And so that's a big piece that I think is really, really hard to replicate and something that we really want the market to understand is that these relationships you know, take time to stand up, certainly personally, but also operationally. And we really think we're in the early innings of the bank volume, and that could be a huge driver going forward.
spk14: I definitely agree there and appreciate the comments. Can you touch on the, you know, gain on sale margin was quite strong for Q1. Can you talk about the margin on the April securitization? I may have missed the comment there, but curious if those strong margins continued into April.
spk06: Yeah, our pricing on our April securitization was actually even stronger than our March deal. So we continue to see really strong margins. I think part of the commentary that we wanted to make sure came across today is just the durability of what we've done in terms of some of the changes to how we're efficiently financing the business that's come through in net interest income and also to margin on the business this quarter and also some shifts in our hedges as well. So I think that's definitely helping from a margin perspective.
spk14: Great. And then lastly, You know, I noticed, I forget if it was the release or the deck, but, you know, talked about the first directly originated HEI investment and launched a closed-end, you know, closed-end second product through your, you know, resi consumer seller network. Can you talk about kind of uptake and outlook for these products and maybe the competitive landscape around those type, the new products you're launching here?
spk01: Sure, Stephen. I'll... weigh in. Clearly there's a lot of excitement brewing around, certainly the second lean products in the market. I think private capital is really crowding in there. I think it's so lucrative that even the GSEs want to be involved, which is interesting. But I think our business is well suited to source that product. We're kind of in the midst of rolling all this out to our seller base. It does take time, you know, with the training and with the guides and the process, as Das mentioned. But we're quite excited about it. We think we've got great institutional capital partners that are interested in working with us, you know, from a distribution standpoint. I think that, you know, HEI's time is coming. You know, you saw a great Case-Shiller print today And as you head out in the horizon and think about the trajectory of HPA from here, I think HEI is going to continue to grow. And to the extent we can help institutionalize the product, make it safe, make it transparent, that's a huge TAM for this business. So I think we're very focused on both. I think the home equity product front is going to be – the storyline for us, you know, over the next few quarters.
spk14: Great. Appreciate the comments this evening and perhaps a nice start to the year.
spk02: Thank you.
spk03: Thank you. Our next question comes from the line of Eric Hagen with BTIG. Please proceed with your question.
spk07: Hey, how we doing? Hey, so looking at the capital utilized in the quarter in the jumbo segment, it looks like it was 160 million. Looks like you took it up, you know, ended the quarter around 200 million. Would you say that's a pretty steady level of capital at these mortgage rates? Do you see that maybe moving around much in the near term? And then can you also share what the return on capital is for the retained tranches from like a jumbo securitization right now and maybe how that compares to levels in the past?
spk08: Sure, Eric and Sash. I think you could certainly see capital allocated to that business going higher. We have talked about you know, again, utilizing the CPP facility, you know, to support that. But, you know, certainly as volumes hopefully continue to trend up, I think you could see it, you know, hang out in the 200 to 250 range or something like that. That level of capital would support, I think, a run rate at or in excess of our April run rate that we talked about. So that's the thinking there. In terms of return on the retained pieces, it's You know, low to mid double digits at this point, you know, largely on the subs and depending on some of the, you know, the senior, you know, the AIOS piece that we typically keep, that's the return profile right now.
spk07: Got it. Okay, that's helpful. Can you share how big the unfunded commitment is in the bridge book at this point? Can the CPP funding be used to support unfunded commitments or is it only for, you know, really new loans? And you guys don't have a CISO reserve for the portfolio because you're marking everything to market, but if there was a loss assumption that you could share for the portfolio just for benchmarking purposes, that could be kind of helpful.
spk06: Sure. We had about $513 million of unfunded commitments at the end of March. Just for context, we only had $80 million roughly of draws on the quarter. This number has come down as you're tracking this. over time, and so our payoffs have significantly exceeded our draws. And so that will probably be more of a source of self-financing. You know, BridgeNet used no capital on the quarter between the capacity we had in our RTL facilities as well as, you know, our joint ventures and our payoffs. And so, you know, we will likely not – all capital is fungible, but that's not the intention of utilizing the CPP facility. Just in terms of your commentary on our marks, you know, we have about 150 basis points across the bridge portfolio of essentially reserves, given where it's marked at 331. That varies, you know, between certain cohorts. We have about 300 basis points across the entire multifamily portfolio, and, you know, our non-performing loan cohort was you know, about 10 points of reserve.
spk02: Okay, that's helpful. Thank you, guys.
spk03: Thank you. Our next question comes from the line of Steve Delaney with Citizens J&P. Please proceed with your question.
spk04: Hey, good afternoon, everyone, and congratulations on the nice start to 2024. I'd like to go back and talk a little bit about the IMB, the mortgage bankers. Curious if you could just give us some general information. Approximately, you know, how many, how has that grown over the past year? Are you focusing at the very, the largest players in the space? You know, just from a standpoint of, you know, efficiency and risk return. Just curious about how that has emerged here. Not something that I recall talking a lot about in the past. And your thoughts about, you know, how big this might become. Thank you.
spk08: Sure, I can start there, Steve. So our total seller base, banks and non-banks, about 190 discrete institutions. Of that, about 115, 115 are non-banks. And as you obviously know, we've grown the bank piece of that to about 75, particularly over the past few quarters. But like we talked about, IMBs have always been a core foundation of our volumes. We lock loans regularly. As you can tell, with a wide variety, there's a lot of the biggest household names in that list. We talked a little bit about this last quarter, but it's worth underscoring, which is just the diversity of our overall volumes across the seller base. We had a $1.8 billion lock quarter. We had a big April. Generally, no one seller is more than 5% or so of production, and you can sort of see that when our Sequoia deals are in the market, just the you know, the distribution there. And that's really important because we have really broad reach, you know, which we're really proud of. As you know, Steve, that's years of building this network, you know, particularly on the IMB side. So, you know, it's interesting in terms of volumes. You know, a minute ago we talked about the banks, and obviously that's, you know, there's a huge runway there for us to do more. But, you know, over the past couple quarters, well, really the last several years, I suppose, as you well know, you've seen IMBs become a more meaningful part of overall production. They were there when a lot of the banks stepped back last year with some of the volatility in the banking sector. So things will move around a bit, but we remain very bullish on the IMB opportunity, and we're thrilled we have those relationships because we've been at a point the past year where, frankly, they have continued to take share, and we've been there now to provide liquidity to them.
spk04: I think they've invested in the technology. They're way ahead of the banks. The banks have the consumer relationships, but they just don't have the infrastructure, if you will, that the IMDs have, for sure. Just one quick one to follow up on bulk. There's an old saying, who's got all the money? Well, it's the bank. So who's got all the mortgages would be the bank, too. When we hear about bulk, Is it working directly with banks or possibly with Wall Street brokers who might be representing smaller banks that you don't have a relationship? Just curious where the flow is coming from on the bulk packages. Thank you. That's my last question.
spk08: It's definitely all of the above. You know, there are some IMBs that execute in bulk fashion, and, you know, that was a part of the story. In Q1, certainly, you know, partnering with with larger Wall Street banks that have platforms akin to ours is something we've done a lot of over the years and have continued to do. I think we are really just scratching the surface probably in the batting practice zone in terms of getting bulk packages off of bank balance sheets. I think Chris said it well, as rates hang out here, even if some of those sale prices are a little bit out of the money, it is going to compel banks to come to the table. I think, more quickly. And so that remains just a huge opportunity that we're, you know, excited to hopefully partner with flow relationships going forward with them.
spk01: Yeah, I'd say, Steve, a few things. We are, you know, as we partner up with some of these very large institutions like CPP Investments, Oak Tree, others, you know, I think we continue to become more formidable as far as, you know, our ability to, you be aggressive both in terms and size. So I think over time we should continue to see more bulk transactions. I do think it's worth noting that things like CRT and even bulk, one of the challenges with portfolio lenders who haven't been attuned to distributing to the capital markets is you still have the same challenges. You've got the loan files. They've got to be order a lot of these for CRT they need ratings so for bulk whether it's you know whole loans or securities there's still a lot of work that goes into those transactions I think the efforts that we put in to you know to work with these banks on the flow side I think will pay dividends over time on the bulk side and and We're now just starting to see that, you know, bulk was a pretty meaningful part of our Q1 volume, and, you know, so we're very open for business to do more on that front.
spk04: I appreciate all the comments. Thank you.
spk02: Thank you. Thanks, Steve.
spk03: Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
spk05: Hey, good afternoon. Thanks for taking my questions, kind of to follow up on Steve's. Obviously, we don't know what that line game is going to look like in the end, but nevertheless, it sounds like banks are already preparing in terms of reducing mortgage exposure. And obviously, that's a huge opportunity. But on the other side, have you seen any sort of incremental capital formulation to take advantage of banks exiting? Or have you seen basically any changes in the competitive environment on the other side besides banks leaving?
spk01: Nothing overly formidable to this point. One thing I will say that I think is meaningful is you did, starting with this earnings call cycle, you did start to hear certainly the large banks voice that they expect to be compliant with the endgame rules. So as they do that, other banks will follow, and then over time, you know, banks who aren't messaging early compliance will sort of be in a different category with concerns that they can't comply currently. So I do think that was a really positive sign and validation that, you know, large banks expect the rules to change. So we've been obviously way out in front of that. We've talked about how, you know, regulatory changes really drive the cycles in our business. And I think we're just going to keep on building these partnerships. Certainly over time, I think there's great interest in things like CRT. There's a lot of private credit funds out there that would love to be involved. There are challenges to getting CRT off the ground, certainly regulatory challenges, but also just operational challenges, as I laid out a few minutes ago. You know, we are quite differentiated there because we do have the capacity to help walk banks through that process. And so hopefully, you know, there's certainly going to be, you know, capital that is demanding these types of transactions, you know, outside of the walls of Redwood. But I do think, you know, we're arguably better positioned than anyone at this point to take advantage of it.
spk05: Very helpful. Great. Thanks for answering my question.
spk01: Thanks.
spk03: Thank you. And we have reached the end of the question and answer session, and this also concludes today's conference, and you may disconnect to line at this time. Thank you for your participation.
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