Yahoo Finance Redwood Trust, Inc. (NYSE:RWT) Q1 2024 Earnings Call Transcript
Redwood Trust, Inc. (NYSE:RWT) Q1 2024 Earnings Call Transcript April 30, 2024
Redwood Trust, Inc. misses on earnings expectations. Reported EPS is $0.05 EPS, expectations were $0.09. Redwood Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 Kaitlyn Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead.
Kaitlyn Mauritz: 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 Carillo, 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 that 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 could 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 third quarter Redwood review available on our website, redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that are accurate only as of today. 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.
Chris Abate: 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 a 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, putting 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, while 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 continue to gain market share, making our trajectory worthy of a second look by macro traders who've been otherwise consumed for the gyrations of the 10-year treasury. Our residential consumer locked 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 to 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 second-lien 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 for 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 rate 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 homebuyers, 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 Baseline Game Rules 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.
Dash Robinson: 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 season portfolios that compliment 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 Oaktree 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 remain low at just 20 basis points. As a reminder, our investment portfolio sits with $2.47 per share of discount, much of 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 investment 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 Brent to cover our financial results.
Brooke Carillo: Thank you, Dash. We reported GAAP 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 GAAP ROE of 10%. We reported book value per share of $8.78, a 1.6% increase from $8.64 on December 31st. GAAP 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 GAAP 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 box volume and maintained healthy margins above our target gain on sale range in our residential consumer mortgage banking segment, ultimately delivering a 17% GAAP 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 basis points to 35 basis points in line with historical ranges for the business, 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 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 times 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.
Operator: Thank you. We will now conduct our question-and-answer session. [Operator Instructions] Our first question comes from the line of Rick Shane with JP Morgan. Please proceed with your question.
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