Redwood Trust Inc (RWT) 2013 Q2 法說會逐字稿

Good day, and welcome to the Redwood Trust Incorporated 2013 Second Quarter Earnings Conference Call. (Operator instructions.)

Management has requested that I remind you that certain information presented, and certain statements made during Management's presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecast and assumptions that involve risks and uncertainties that could cause actual results to differ materially. Management encourages you to read the Company's Annual Report on Form 10-K filed with the SEC, which provides a description of some of the factors that could cause -- 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 and subsequent filings with the SEC, including the Company's Quarterly Reports on Form 10-Q. The Company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Wednesday, August 7, 2013. The Company does not intend to, and undertakes no duty to update the information to reflect future events or circumstances.

Finally, today's call is being recorded, and access to the recording of the call will be available on the Company's website at www.redwoodtrust.com later tonight.

For opening remarks and introductions, I will now turn the call over to Marty Hughes, Redwood's CEO. Please go ahead, Mr. Hughes.

Good afternoon, everyone, and thank you for participating in Redwood's first earnings call. We heard your many requests for us to host a quarterly call, and we are following your advice. In light of the severe volatility in the mortgage markets over the past few months, we decided it was as good a time as any to start our earnings call. Hopefully we'll be able to answer most of your pressing questions. As this is our first call, please be forgiving if we aren't as polished as others. And we will also continue to publish the Redwood Review in an effort to provide you details in written form.

Joining me today on the call are Brett Nicholas, Redwood's President, and Chris Abate, Redwood's CFO, who will get into some of the details when they cover the residential and commercial business activities and the financials.

We continue to make good progress on our business objectives during the second quarter, and we achieved a few milestones, including adding the [hunder] seller to our residential conduit platform, obtaining our seller servicer approval from Fannie Mae to go along with our prior approval from Freddie Mac, continuing to make progress on the buildout of our Denver residential conduit operations center, and completing four residential securitization transactions in the quarter, and two more in July, which brings the 2013 total through July to 10 securitizations totaling $5 billion. And our commercial platform continues to execute on our strategy of originating and selling senior commercial loans.

In a difficult quarter marked by a surge in interest rate, Redwood's book value per share increased by $0.15 to $14.69 at June 30, 2013. We earned $0.71 per share in the quarter compared to $0.69 per share in the first quarter and $0.24 per share in the year-ago quarter. There is an accounting timing difference that benefited our second quarter results, which we estimate will negatively impact our third quarter results by $0.22 a share.

So, let's get right to the discussion that's probably foremost on your mind, which is the impact on Redwood of the recent increase in long-term interest rates and the widening of AAA spreads. First, we would note that we were well-hedged going into this rate move. Our biggest risk exposure to this rate move was our loan pipeline. At June 30, we had a total pipeline adjusted for fallout of $2.3 billion. We have since sold, or contracted to sell, approximately 60% of the pipeline through two securitizations and through bulk whole loan sales. Based on both the pace and pricing of these sales to date, we should be able to complete the sale of the remainder of the pipeline during the third quarter, and we currently estimate that we will earn a small profit after factoring in all our hedges.

All told, given the volatile market conditions we have faced recently, we are proud of how the Redwood team executed. Our risk management efforts have not only helped us protect book value and earnings, but have also enabled us to continue the expansion of our residential platform and investment opportunities.

Let me now turn to the big picture, our business model. We remain confident about the future and the business model we have built to capitalize on our core belief that, in a world awash with excess liquidity, it was necessary to create our own residential and commercial origination platforms in order to source our own investments and generate fees. To date, we have created and retained in excess of $400 million of residential securities and in excess of $300 million of commercial mezzanine investments.

The residential platform we've built allows us to add additional loan products beyond just jumbo mortgages. We're about to enter the agency conforming market later this year, which will enable us to acquire agency-conforming mortgage servicing rights and to participate in risk sharing transactions.

We also believe that our residential platform positions Redwood to capitalize on opportunities from the government's eventual reduction of its role in the mortgage market. Recently, there have been to legislative bills aimed at mortgage market reform, and yesterday the administration called for reform that puts private capital at the center of the housing finance system. In summary, we feel really good about the way in which we managed through the second quarter. Our platforms are creating attractive investments for us, and we believe Redwood is really well positioned to compete in the mortgage market.

Now, I'd like to turn over the call to Brett Nicholas, Redwood's President.

Thank you. Good afternoon, everyone. I will spend a few minutes on our residential and commercial activities. We continue to make good progress in our residential activities in the second quarter despite the interest rate volatility. We completed another four securitizations totaling $1.8 billion, and six whole loan sale transactions totaling $286 million in the second quarter. We added 24 loan sellers, increasing the total to 104 at June 30. We identified $2.5 billion of loans to purchase during the quarter.

Redwood and other mortgage market participants faced significant turbulence in the market in the second quarter and through the first week in July as long-term interest rates surged over concerns related to the timing of the Fed's eventual tapering of quantitative easing. Despite reports that the securitization market was closed, in July we completed two securitizations totaling $864 million, and there were also two other non-Redwood Trust deals completed in the market for another $800 million.

It is also important to note that securitization is not our only exit strategy. As we've mentioned, we've sold loans in both securitized and whole loan form in the second quarter and in prior quarters. We have developed direct relationships with numerous banks across the country who buy loans from us. While we prefer to securitize so that we can add investments to our portfolio, our decision to securitize or sell loans is based on overall best execution.

The other part of the interest rate story is how it impacts our future loan acquisition volumes. Our working premise is that mortgage rates will grind higher over time. Refinancing activity has naturally slowed as mortgage rates have risen, but we believe home purchase activity should remain robust to the extent mortgage rates do not spike significantly higher from their current levels.

When we put it all together, based on our year-to-date acquisition volume, pipeline and the number of additional sellers we expect to add in the second half of the year, we still see a path to achieving our goal of acquiring $8 billion of jumbo residential loans during 2013, but it won't be easy.

As Marty mentioned, we are now approved seller servicers for both Fannie Mae and Freddie Mac, and will be in position to purchase agency loans by the fourth quarter of 2013. Our Denver operation continues to grow and allows us to scale our residential operations. Some have asked us what we were doing in Denver. Our growing mortgage business needs to have access to talent and to compete on an expense basis. The [Bay] area is a wonderful place to have a corporate office, but strategically was imperative that we move our operations to an area that has a large pool of mortgage banking, underwriting, and servicing a talent to allow us to compete effectively.

By having our Denver operations up and running, we are now in a position where we can really leverage the operating model as we expand beyond jumbo to agency business and other new product offerings. We continue to run our business by managing pricing expenses to target roughly 25 to 50 basis points gain on sale margins over the long-term. However, there will be volatility around this number quarter to quarter.

At June 30, 2013, our residential securities portfolio had a market value of $1.3 billion. We added $124 million of securities from our second quarter securitizations, and in July we purchased subordinate securities on newly issued jumbo securitization issued by third parties. Prices for our legacy RMBS portfolio were generally down a few points in the second quarter of 2013. Our portfolio largely consists of older vintage prime and Alt-A securities which outperformed subprime and other lower quality securities during the quarter. Even with the decline in prices, we still have significant unrealized gains of $145 million in this portfolio.

Our commercial team's accomplishments in the second quarter of 2013 were in line with our expectations. We originated 10 senior commercial loans totaling $150 million in the second quarter, bringing the total for the first half of the year to $449 million, which puts us on track to meet our goal of originating $1 billion of senior commercial loans in 2013.

With that, I will turn it over to Chris Abate, our CFO, to run through the numbers.

Thank you, Brett, and good afternoon, everyone. We managed well through the downturn in the mortgage capital markets during the second quarter of 2013. While the effects of the downturn were somewhat undiscriminating with respect to share prices for mortgage REITs, our operating results remained positive, and we were bolstered by our risk management efforts during the quarter.

Our second quarter reported earnings were $66 million, or $0.71 per share, as compared to $61 million, or $0.69 per share for the first quarter of 2013. While our reported earnings are in line with our strong first quarter results and reflect our continued progress in expanding our operations, they did not reflect the full financial impact of the rise in mortgage rates and spread premiums on AAA rated residential mortgage-backed securities during the second quarter.

Specifically, our reported second quarter income did not reflect market value declines we expect to recognize through earnings in the third quarter related to residential loans we had identified but not yet purchased at June 30, which is, of course, the cutoff date for second quarter financial reporting.

As of August 1, we estimate about $21 million, or $0.22 per share, of market value declines specifically on residential loans in our pipeline at June 30. We emphasize these particular loans because the associated hedges we had in place for them generated gains that were already reflected in our second quarter results. Setting aside the timing of when the market value declines on the loans and the offsetting hedging gains are recognized for GAAP, we currently expect to earn a small economic profit on these loans as they are sold or securitized during the quarter.

Turning to our commercial mortgage banking results for the second quarter, we generated income of $6 million, which was consistent with the first quarter. Beginning in the second quarter, we now recognize changes in the values of senior commercial loans on our balance sheet through our income statement regardless of when they are sold, which is similar to our accounting for residential loans held for sale. All of the senior loans on our balance sheet at the end of the second quarter were sold in July at levels equal to their quarter-end values.

Net interest income for the second quarter of 2013 was $36 million, a $1 million increase over the first quarter of 2013. This reflected an increase in our investment portfolio from securities we retained from recent Sequoia transactions, as well as more residential and commercial loans held for sale in the second quarter. Our GAAP book value at June 30, 2013 was $14.69 per share, an increase of $0.15 per share from March 31. The increase was primarily driven by our earnings in excess of our $0.20 per share dividend declared and paid in the second quarter, and also an excess of the modest declines in the value of our investment portfolio that Brett mentioned.

As I noted earlier, we currently expect about $0.22 per share of market value declines related to our recent residential loan pipeline activity that is not reflected in our second quarter earnings or book value. This amount will factor into our overall third quarter financial results for GAAP reporting purposes.

Turning to our cash position and our capital, at June 30, 2013, our unrestricted cash was $208 million, and our current investment capacity, which we define as the approximate amount of capital we have readily available for long-term investments, was estimated to be approximately $130 million. Subsequent to the end of the second quarter and through the end of July, we sold $166 million of senior securities, which freed up approximately $49 million of equity capital and resulted in realized gains of $8 million that will be recognized in the third quarter of 2013.

Based on our near-term outlook, we currently believe that our available capital and liquidity will be sufficient to fund our business and our investment objectives for the remainder of '13.

And with that, we're happy to take questions. Operator, please begin the Q&A process.

(Operator instructions.) Steve Delaney with JMP Securities.

Good afternoon, everyone, and Marty, thank you all very much for initiating the call, especially in this time of all this disruption in the market, very helpful.

You went through great pains to explain how the portfolio, the $2.6 billion, or $2.3 billion net of fallout, how it was disposed of throughs securitizations and whole loan sales, and that was very helpful. What I'd like to know, and I assume those -- what you're really referring to, though, there are loans that were priced in a different time in the market, and maybe when spreads were not quite so wide on AAAs.

So, what I'd like to know is, now that everything is, let's say, cleaned up with the prior pipeline, my question is, as you sit here today and you're talking to your correspondent sellers and you're looking at where the banks are originating jumbos, is there new business to do with jumbos based on pricing in the market and where are the AAA spreads? So, are you now moving forward with everything reset, and is there a new pipeline being built? Thanks.

Thank you, Steve. This is Brett.

Hey, Brett.

Yes. we've definitely seen a product shift to more shorter ARMs as 30-year fixed loans, given the wider AAA spreads, they were -- the securitization execution is not as competitive as bank retail lending, albeit that has tightened up over the past few weeks. That's why one of the ways we've been able to sell product and execute and get through this timeframe has been to sell loans to banks and broader product offerings to shorter ARMs for our correspondent lenders that we can then in turn sell to banks.

Okay, the banks want the ARMs. Now, on the -- for the shorter paper for their portfolio, but the outlet there for which you're bringing through the jumbo -- the conduit, it sounds like you're not pricing loans currently in contemplation of securitization. Did I hear you right, which your pricing is what you believe you can sell to banks?

No. We are pricing today 30-year fixed, and really the other main products is 10-year. And we are pricing for either a securitization execution, in which we're expecting and pricing in where we expect to have a gain on sale of 25 to 50 basis points, but we may, from time to time here, also do whole loan sales. But, our securitization activity is still up and running. We did two transactions during the quarter, post-quarter in the month of July after the worst of the crisis.

Right. Well, Marty, can you comment -- I mean, we read from Bloomberg and different reports that these spreads, the fixed rate spreads I guess that were five-year swaps had blown out to, like, 280 basis points. Understand they've come in some. Can you comment at all on where you see current spreads on the 30-year fixed rate jumbo product, the AAA spread?

Yes, Steve, it's Brett again. It's really hard, and we try to discourage investors to focus on that spread, because it's all depending on -- for a number of reasons. We change our loan pricing inter-day. We have numerous loan level price adjustments. Our sales can go through RMBS or through whole loans. Spreads are really dependent on what coupon and what part of the curve, so every deal is different.

Also, quoted spreads may not actually be where things are being transacted. So, even though there was a feeling, and yes, we read media reports that the market was dead in the second week of July, it didn't mean we were transacting at those levels on that front.

And also, our hedging strategies are very dynamic. They change constantly and updated as market conditions change.

And I think a good thing is to just look at where the pipeline -- where we believe we will sell the pipeline at a small profit, if you were to just focus on spreads alone, you would come to a very different conclusion. And it's where pre-pricing on the curve, what are spreads, what are hedges, all goes into the mix.

Joel Houck with Wells Fargo.

Thanks, and again, thanks for having the call. It's very helpful. So, maybe to just clarify what Steve asked, it sounds like -- well, I guess you are going to turn a small profit on loans. The market moved against you. But, going forward, the 25 to 50 basis points should hold up, given that you're obviously pricing in a new environment. Is that the right way to think about it?

Yes. So then, I mean, it's dynamic, so once there are price moves in the marketplace, we would reset pricing.

Okay. And what would -- I mean, it's just a natural assumption that you're pricing loans in real-time. On a different note, the book value held up very well, and some have asked us a question, the equity interest in these securitizations as a long duration asset, and rates move up, there's perhaps some sensitivity. Can you talk about the lack of -- I should say the book value holding up well, and do you guys have any offsetting hedges against the securities portfolio, and what would hypothetical 100 basis point increase from here, from June 30, what would the sensitivity of the securities book look like?

This is Chris Abate. The securities portfolio, as you know, is all non-agency, which held up relatively well during the quarter. Most of the investments we're creating through the Sequoia platform and retaining are really credit-sensitive. The investments that happen to be very interest-rate sensitive that we retain are actually the IOs, the interest-only securities, which were up significantly during the quarter.

It's also important to note that we've got very modest leverage on our securities portfolio. Most of it is funded with long-term debt without recourse or equity. So, overall, the portfolio is down two to three points, I think about $38 million, and we followed our normal mark-to-market process, worked with our auditors. I believe we got more than three-quarters of the portfolio. We got broker marks from dealers. So, we feel very good about the overall mark.

And also note, Steve -- I mean Joel -- that we have a limited amount of leverage, so you should expect results, (inaudible) declines, that we should decline less than some of the others who may be levered six, seven, eight times. And it's just the discount securities, just the way they're priced in the marketplace, were less sensitive to the rate fluctuations as opposed to premium agency securities which got hurt pretty bad.

Paul Miller with FBR.

Yes, thank you very much. On the securitizations that you did do, the $1.8 billion, on the subordinated pieces that you kept, was that roughly around 7%, 8%, and did you keep some IO strips along the way?

Yes, we kept all of the securities below AAA, and we did keep some IOs. I believe $32 million of the $124 million of securities that we created during the quarter were interest-only.

Okay. And then, the $0.22 that comes from -- I guess that's a timing issue that's going to move into the third quarter. How do you want us as analysts to treat that? Do you want us to subtract the $0.22 and do, like, an operating [accord] from this quarter, or subtract the $0.22 from estimates in the next quarter? How do we treat that?

Well, economically, it occurred in this quarter. So, the reason for the difference is due to GAAP. So, if you think about our $2.3 billion pipeline fallout adjusted, about half of that was on balance sheet and another half we had identified the loans but not yet purchased them. We plan on purchasing them. We're in the process of purchasing them subsequent to quarter-end. We did, however, have a decline in the value of those loans, and that decline will be realized in the third quarter.

The reason why we highlighted the difference is because, for GAAP, all of our hedging activity is realized -- was realized in the second quarter, so we were actually hedging the entire $2.3 billion. Obviously the hedges were up significantly in value, I think $50 million for the quarter. Part of that was offsetting the market value declines that we're not going to realize until the third quarter.

Mark Patterson with NWQ Investment Management.

Hi, I'll pile on, Marty, Brett, and Chris. Thanks for the call, and you're better at it than you thought you'd be.

Follow-on on the $0.22. So, the simple way to look at this is the GAAP overstated $0.22 if you wanted to bring the economics into Q2. So, the Q3 will be understated by $0.22, all other things equal, and if someone wanted to take a $0.71 number and say it was 49, then if all other things were equal, which we know they're not, and Q3 was a 49, it would be on the surface a 27.

That would be one way of looking at it. I'd like to emphasize, the $0.22 is an estimate at this point. And really what it is, just to try and put a little more color on it, when we mark our derivatives or our -- what are our hedges, we have to mark for those that are protecting loans in inventory and loans that we have made a commitment to buy.

No, that's great. I understand that. I think you guys have explained it well. I wanted to ask, on the risk sharing efforts that maybe you guys are interested in, we know that Freddie did their $500 million, and I guess Fannie did some stuff with an MI. But, can you kind of talk about that, your future participation in those types of activities?

Yes. We participated in a transaction. We think it is a great first step on the GSEs in selling risk out to the private sector. We look forward to more. I would expect over time the structures to change. But yes, we are really looking forward. We're glad they were successful and over-subscribe.

Daniel Furtado with Jeffries.

Good afternoon, everybody. Thank you for the opportunity. A couple questions here. The first, I think the real story here is the success on the hedging side. I just want to kind of talk a little bit about that from the standpoint I get the correlation between a jumbo prime IO and the whole loan itself. How should investors think about the correlation between, say, a jumbo prime MSR and the subordinate securities in terms of the basis risk as we look forward into the future?

This is Brett. We don't run our portfolio looking at it that way, Danny. The MSR is an asset, and the subordinate investments we make are credit sensitive. You're right, a IO with a PO is a nice match, but in this case, they can have significantly different average lives.

Understood. That's fine, Brett. I appreciate that. Now, how about the other, I think, interesting thing in the quarter was your purchase of third-party subordinates in the market. Can you just kind of, I guess without naming names or anything, just kind of help investors explain that opportunity and how you see that potentially developing as we move forward?

I would say that was opportunistic this quarter, and that that will be -- the third-party opportunities are going to be -- are going to come from a growing securitization market. And to the extent that we have more participants that run a securitize and distribute model, there'll be more opportunities to purchase those assets. And as Marty said, we are looking forward to significantly more transactions coming out of the GSEs.

Yes, it's (inaudible), Danny. About 50% of what we bought were securities that were securitized by others. We have more competitive advantages through Sequoia in creating our own, and it's obviously our own [cooking]. But, if we can get comfortable with the credit governance on subordinate securities originated by -- or securitized by others, yes, we look forward to buying them.

Stephen Laws with Deutsche Bank.

Yes, hi, thanks for taking my questions. I appreciate you guys hosting a conference call this quarter. I guess, first, can you maybe talk about any risk, both upside and downsides, [have into] your $8 billion volume forecast? I think there was a lot of concern during the quarter the increasing jumbo coupons would really put a stop to all the refi volume, and that was a majority of jumbo originations. But yet, you guys still remain confident in that $8 billion forecast. So, can you maybe give some comments around your comfort there and any risk of what could cause that to be lower, or potentially higher?

Yes, so we affirmed the $8 billion. I think we said it's obviously going to be more challenging than we thought it would be a quarter ago. But, just to give some context, through the end of June, we had acquired just over $5 billion of loans. Our pipeline at the end of June was another billion, or just over $1 billion. In July, we identified just over $300 million of loans for purchase. So, with respect to the $8 billion, that leaves a few billion to go for the last five months or so of the year. Based on July activity, we feel comfortable with the $8 billion, but at this point, given the volatility in the market with rates, it's tough to say with any greater certainty if it'll be significantly greater or lower than that amount.

Great. I guess you reported earlier still retaining all of the securities below AAA. Can you maybe talk about any changes you've seen in interest from investors or pricing as far as the double-A, single-A, even BBB securities? Do you still feel like you're going to be retaining those for the foreseeable future? And what type of returns, I guess a little bit of leverage, are you generating kind of on the bottom I guess 7% to 8% of the stack that you're retaining?

We are not currently levering to a significant amount the subordinates. The mezzanine bonds that you mentioned, we think the yields reflect some sense of liquidity. We've been holding them for investments. Going forward, we'll probably -- I think we had about $250 million. We'll probably look to some type of leverage of some form. And we'll continue to think about whether or not we want to retain them or sell them. But, at this point, we have continued to hold all of the subordinate securities.

Bose George with KBW.

Hi, guys, just wanted to follow up on the question about jumbo volume. Do you think the jumbo market will be the same size as you thought it was a few months ago, or does your $8 billion suggest that your share's probably going to get a bit bigger?

Well, as a percentage of the overall market, the jumbo should remain the same. With higher rates impacting -- jumbo borrowers are generally more sensitive to interest rates and are quicker to move down into hybrid products shorter [than] the curve, which are generally sold to banks. So, that's where we're seeing a big product shift. And we'd just like to remind everybody that the $8 billion [is] on the jumbo, and we have given zero guidance on volume for our future GSE business.

Yes. I'd also like to add that we again, thinking more long-term and just extrapolating what's happening at a specific point in time sometimes doesn't get you the best result. And especially when you have a situation where the banks are incredibly progressive right now for their portfolios, I'm not so sure that if we truly are in a rising interest rate environment that, over time, you are going to have a continued aggressive bid for a potentially very long duration asset that's going to bear a return below longer-term rates. So -- but it's a factor now, and that's why it's just hard. It could change, and the markets are very fluid.

Okay, that makes sense. And then, actually just switching to the commercial side, just curious how the trends are in that market now.

Actually, the commercial mortgage-backed securities market held up very well, and the amount of supply, the market is absorbing it with, frankly -- with limited spread widening. Our commercial team is executing on their plan. They're doing a great job, and had a great quarter, and contributing our senior loans into CMBS transactions.

Okay, great. Thanks. And nice job in a really tough quarter.

Thanks.

(Operator instructions.) Matthew Howlett with UBS.

Hi, guys, thanks for taking my questions. What are the expectations, or what can we reasonably -- how long will it take to reasonably assume that you're going to build a REIT with your own credit enhancement or your own self-created [securities]? How long does it take to rotate out of the legacy assets you purchased over the last several years and into sort of new issue production? And what can we reasonably assume the initial booking or accrual yields are in those assets? I mean, I think historically, Redwood's always been very conservative the way they recognize income on those assets.

Yes. As some of you may know, over the past few years, our investment portfolio's been significantly made up of senior residential securities that we acquired post-crisis opportunistically. Those securities continue to make up the bulk of the portfolio, but they are declining at a fairly accelerated pace at this point.

I don't have the specific percentage, but our holdings of subordinate securities that's a percentage of the total portfolio have more than doubled over the past year. We expect a similar pace, going forward. And I would say, over the next few years, the subs, if you will, will be the dominant holding in the portfolio.

We generally -- each security is priced independently, and they all have their own independent assumptions with respect to discount rates, prepayment speeds, and credit losses. I'd say, overall, 10% to 12% GAAP yields are in the ballpark for where we initially record these on a loss-adjusted basis. That number's highly variable, though, based on the specific security, and it also -- it includes prepayment assumptions with upside. So, if prepayments were to go up at some point in the future, obviously we believe that our prepayment assumptions are reflective of the current market environment, but if they were to go up, the yields on those securities would also go up, assuming we're making good credit investments.

Right. The other side of that is credit. You assume a fairly meaningful reserve inside those securities you put in the portfolio? Is that still the case?

Yes, it is. We disclose that in the Redwood Review, which we released today. And that also is security-specific, and we do assume losses. We've been fortunate at this point with the investments we've created since we restarted the platform. We have yet to endure a credit loss on those subordinates, Sequoia Securities. At some point, we're not assuming that that lasts forever, but we are expecting or providing for losses.

Daniel Furtado with Jeffries.

Hi, thanks for the follow-up. I had a question on the Denver facility. How big is that location from a full-time employee perspective, and what percent of the facility is currently mapped for the conforming strategy? Thank you.

(Inaudible) and triple. We're actually taking the call from Denver.

Yes, we are in Denver. We have capacity -- we're probably only using a third of the current capacity of our office space. And we would have ample ability to grow that capacity here.

At June 30, we had 134 employees. Just over 50 of them were in Denver, to give you an idea.

Got you. And do I think about Denver as it's the conforming strategy location, or will you operate -- or is that not the correct paradigm to use?

Oh, I would think of Denver as all of our mortgage operations, all of it, including IT infrastructure and others, going forward. As I mentioned in the prepared remarks, it's just a much deeper labor pool for us to allow us to -- we plan to operate a company with much, much higher volumes than where we currently are in the jumbo side, and we need that capacity in the labor force here.

Understood. Thanks again for the answers.

Ken Bruce with Bank of America Merrill Lynch.

Thanks. Good afternoon. Congratulations on your first earnings call, very nice step forward. You touched on this earlier, and I -- been very interested in kind of your general thoughts around the potential within the agency space. You've always operated the Company on a long-term basis, and going into that sector is obviously kind of a different direction for the Company. Can you maybe elaborate on what your plans are there in terms of either size and scale, volume potential, how you're thinking about that in terms of originate to distribute, or how you would be operating that business on the back end?

Yes, I think it fits nicely. I mean, in general, the new Redwood post- the big crisis was to create a platform that sits in between sellers and capital sources. And we intermediate between those two, and we get fees and we get investments. On the jumbo side, hopefully we get a gain on sale, and then we have the opportunity to invest in potentially the IO, the servicing, and the subordinate securities, and maybe even some of the mezzanine securities, depending.

I think the agency business fits in there, and again, it's fee-generating. We can leverage the platform that we have, and there our investments will be in servicing. And we think it's a great time in the cycle to the extent that we're on the upswing over time in interest rates, which should lead to hopefully extended duration for servicing. It's actually a great time to be investing.

And especially the last part would be, to the extent that we can have risk sharing through those relationships, we also think that's a fantastic opportunity. We're willing to try in any way that we can get exposure in investing credit risk at this point in the cycle with credit that we're comfortable with, it's a great opportunity. So, I think it dovetails pretty well together, Bruce.

That concludes today's question and answer session. Mr. Hughes, at this time I will turn the conference back to you for any additional or closing remarks.

No. Again, everybody, thank you for attending. We'll try and do better the next time. But, we're just trying to listen to you and be as transparent as possible, and thanks. And if there is any follow-up questions, Mike McMahon is always around to help out with any of the details you missed. Thank you very much.

And that does conclude today's conference. We thank you for your participation.