Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Redwood Trust Inc (RWT, Financial) achieved approximately 50% growth in residential consumer lock volumes for the second consecutive quarter.
- The company realized a 20% reduction in fixed costs, improving operating efficiency.
- Earnings available for distribution increased by 70% from the prior quarter, reaching $0.13 per share.
- Redwood Trust Inc (RWT) saw an 80% quarter-over-quarter growth in bank lock volume.
- The company maintained a robust cash position of $276 million at quarter end, effectively unchanged from the first quarter.
Negative Points
- GAAP earnings decreased to $0.10 per share from $0.21 per share in the first quarter.
- Book value per share slightly decreased from $8.78 at March 31 to $8.73 at June 30.
- The company experienced higher reserves on bridge loans, impacting performance.
- Net interest income from the bridge portfolio decreased due to a smaller portfolio size.
- The delinquency rate in the bridge loan portfolio saw a modest uptick, largely driven by multifamily loans.
Q & A Highlights
Q: Can you talk about the bulk pipeline, and also can you discuss just the economics of the bulk business, like was there any financial impact from the acquisitions this quarter, or is that when it's disposed? Yes, how that differs in any way from the regular full volume?
A: Sure, Bose. It's Dash. I can take that. In terms of the prospects for bulk, I think we remain really optimistic that the transaction we talked about that we expect to settle later this month is the first of several. Obviously, those are a little bit more episodic conversations with banks versus our sort of point-of-sale flow business. But if you look at the dynamics, number one, with rates, obviously with this recent rally, we're getting much closer to a point where dollar prices may make sense for certain banks looking to dispose of seasoned collateral. Obviously, the dynamics with Basel, banks looking to manage overall balance sheet sizes, continues to be a dynamic that we see a lot, and we think is a tailwind for availability of bulk. So those are all positive tailwinds. And oftentimes, including this situation that we talked about, it involves being around the loop with these banks and constant dialogue, whether that's being active on the flow side already or simply being in with the C-suite of these banks with the decision makers and being the first phone call when they decide to sell those portfolios. So, obviously, a bulk pipeline looks and feels a little bit different than flow, just given how episodic it can be, but we feel like there are a lot of tailwinds, including being able to get one done. There's always a lot of learnings, particularly with seasoned portfolios that really matter. In terms of the economics, I think we are appropriately conservative in terms of how we thought about the economics in the second quarter of the pool. As I mentioned, it was scheduled to settle later this month. We'll intend to execute that in the third quarter. So there's hopefully some incremental upside there. And like we talked about on the call, the fact that it's hybrids, I think, is meaningful. As you know, hybrids are not commonly securitized. They've historically been a bank product. Sometimes they do trade bank-to-bank or maybe even with insurance companies. But we're really excited to control that production because we think it's differentiated in terms of what the market is buying, and I think also sets us up well to potentially do more hybrids on the run as well.
Q: Can you talk about the decline in revenue margin this quarter? How much of that would you attribute to the competition you mentioned versus the volatility in TBA and securitization spreads?
A: This is Chris. On margins overall, there's a lot of forces at play. There's a lot of issuance activity that's picked up. A lot of it has to do with the mix of the collateral. But what I would say is, we continue to become more efficient. And so, we're controlling what we can control. I do think that we're still projecting historical ranges for margins. That's 75 to 100 in jumbo, for instance. We still like where that sits, mostly because there's pushes and pulls in the market. And as margins go up, you see more competitors, which we have seen very recently. And when there's a glut of supply, deals widen and competitors leave, and margins trend back to the range. So I think it's part of the noise of the business. But I still think the historical ranges that we speak to are the right way to think about the economics.
Q: Can you talk about the HEI product a little bit, which saw a big pickup in revenues in the quarter? What drove the pickup? There was primarily just valuations there. And also just HEI in the area, you're bullish on near term what rates are and how you do the outlook.
A: Yes, it's a great question. The main driver of those at work, you're correct. And then, the portfolio in terms of its overall valuation was that those were really fair value changes on the portfolio. A lot of what we have in terms of income on that portfolio is almost think about it as like recurring accretion. Those underlying options are struck at a discount to appraise value, and so almost act like a bond instrument in certain ways that a lot of our return from the underlying option is accreted through time. In excess of that accretable return every quarter, we did see a modest pickup in the fair values also from both an improvement in HPA throughout the quarter, as well as a small improvement in the forward forecast for HPA.
Q: Can you just also just speak to your current thoughts on the dividend? And if you and the Board think you are at the right level at $0.16 when you look at GAAP EAD, and then also the rate outlook with the Fed likely to begin cutting in the coming months. And then, what you might need to see to get back to covering the dividend with EAD?
A: Yes, I'd say high level and Brooke can color commentate. We feel very good about the current level of the dividend. And we feel like starting with our March Investor Day, we're tracking towards EAD covering the dividend at $0.16, EAD was $0.13. I think more importantly, though, in the big picture, there is the prospect of a rate cut. And we talked about the macroeconomic environment for our sector has been very, very challenging the past few years. As that environment shifts, that should definitely be a tailwind behind us, not only in our ability to lower funding costs and generate incremental net interest income, but the book, the portfolio, we have a lot of longer duration fixed rate assets that have been impacted by rising rates over the past few years. And to see that start to recover, that's another facet of earnings generation on the GAAP side that is quite meaningful in how we think about the dividend going forward.
Q: Can you talk about whether or not you think Fed cuts could help some of the bridge loans get further refinanced out, and when you think that delinquency rate might peak?
A: Good question, Don. I think there's a few things going on. I think there's the math of an explicit cut, where certainly floating rate debt burdens will come down if SOFR goes down in the second half of the year. That's a math equation that will help incrementally. But I think maybe the overlay there is just what's happening with the sentiment in the market and the fact that I think the market has much more clarity at this point on potential timing of the Fed cutting, and when we're going to go into a more accommodative cycle. And I think we're already seeing that make a difference, kind of like I mentioned in response to Bose's question. It's already making a big difference in how capital is flowing in the space. Not only are you seeing the lending markets open up, not only like in conduit land, but also private lenders that were probably more willing to step up and refinance loans
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
