Redwood Trust Inc (RWT) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust, Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Kristin Brown, Vice President of Investor Relations. Please go ahead.

Thank you, Cynthia. Good afternoon, and thank you for joining us to review Redwood Trust's first quarter 2017 earnings report. Before we begin, I wanted to remind you that certain statements made during management's presentation with respect to future financial or 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 will 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.

They are included to aid investors in further understanding the company's performance and to provide insight into one of the ways that management analyzes Redwood's performance. A reconciliation between GAAP and non-GAAP financial measures is provided in both our first quarter earnings press release and the Redwood Review, which is available on our website, redwoodtrust.com.

Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, May 4, 2017. The company does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on the company's website later today. For opening remarks and introductions, I will now turn the call over to Marty Hughes, Redwood's Chief Executive Officer.

Good afternoon, everyone. Thank you for participating in Redwood's first quarter 2017 earnings call. Joining me on the call is Chris Abate, Redwood's President and CFO. Following my remarks on our key financial metrics and accomplishments for the first quarter, Chris will discuss the quarter's investment and residential mortgage banking activities and our financial results.

The first quarter was very productive one for Redwood and, thankfully, relatively free of market surprises. We completed 3 securitizations, invested $158 million in capital, which is more than we expected, and made solid progress on our key initiatives for the conduit. In terms of our quarterly financial results, our book -- our GAAP book value increased to $15.13 at March 31, from $14.96 at year-end. Our GAAP earnings per share were $0.42 versus $0.31 for the fourth quarter, and our non-GAAP core earnings per share were $0.36 versus $0.33 for the fourth quarter.

So far in the second quarter, investor confidence remains bullish, volatility is subdued, credit spreads are tight and asset prices remain at or near their recent highs. All of this optimism is despite numerous geopolitical risks and the tepid pace of the economy. No one knows just how quickly or successfully the new administration's policies will be in stimulating growth. Is it going to be great, in the 3% range? Or are we just going to continue to muddle through? So against this backdrop, how do we think about investing and risk management?

First, at our core, we are a pure play credit investor in high quality residential mortgage-related assets. We prioritize long-term cash flow potential of our assets over any short-term price fluctuations, in pursuit of our generating stable and attractive dividends for our shareholders.

Despite the current uncertainty, this is not 2007. The fundamental underpinning for housing is strong. Further, our investment portfolio is backed by high-quality prime borrowers who have both significant reserves and equity in their home. This reduces the risk that a significant shock to the economy would have a material effect on the future cash flows of our portfolio. So overall, we remain positive on the cash flows and returns from our investments.

In terms of new investment activity, we remain focused on creating investments organically, and also look for third-party opportunities with the caveat that it's probably not the right time to stretch for investment yield or to aggressively layer on short-term leverage. Additionally, it's a good time to have some dry powder, if credit spreads widen and asset prices were to decline. Since we do not hedge credit spreads and we carry most of our investments at fair value for GAAP purposes, asset price declines would likely have a negative near-term impact on our earnings and book value. The good news is, regardless of what happens with asset prices, we're bullish on the underlying cash flows to our portfolio. Additionally, it could open up some attractive long-term investment opportunities. Officially deploying our excess capital at attractive returns remains at the forefront of our priorities. We continue to feel positively about our ability to prudently deploy our excess capital in 2017, while managing our interest-rate exposure and keeping our leverage in check.

In addition, our residential mortgage banking business is off to a strong start for the year and should continue to be a driving force in creating attractive long-term investments for our portfolio.

I will now turn the call over to Chris Abate, President -- Redwood's President and CFO.

Thank you, Marty, and good afternoon, everyone. I'd like to begin with some comments on our recent investment activity. We deployed $158 million of capital into new investments in the first quarter, the pace of which exceeded our expectations. Despite competitive asset pricing, we were able to find pockets of attractive opportunities, particularly early in the quarter, including investments in Sequoia and third-party RMBS, as well as residential CRT and agency multifamily securities. We remain confident we'll be able to deploy our remaining excess capital on a disciplined basis and across a broad spectrum of opportunities this year.

Our capital available for investments is roughly $160 million at March 31, versus $270 million at year-end. This amount does not reflect additional capital we believe we could free up internally through further optimization of our investment portfolio.

During the first quarter, we also sold $27 million of residential securities and $12 million of MSRs, generating $5 million of realized gains and freeing about $31 million of capital for reinvestment. As we have discussed previously, we no longer view conforming MSRs as the core part of our current investment strategy and have been selling down our conforming MSR holdings since late 2015.

We believe redeployment of proceeds into higher-yielding, REIT-eligible investments would be a better use of capital going forward. To that end, we agreed in April to sell substantially all of our remaining conforming MSRs. We expect this transaction to close later this month.

Overall, we were pleased with the performance of our investment portfolio during the first quarter. Residential net interest income increased, driven by capital deployment during the quarter, and the underlying credit performance of our residential investments remained excellent. Our investment portfolio represented $1.6 billion or about 90% of our $1.8 billion of total capital at March 31. The remaining 10% was allocated to residential mortgage banking, which is off to a strong start to 2017.

We completed 3 Sequoia transactions, securitizing approximately $1 billion of loans at margins above our long-term expectations of 75 to 100 basis points. In addition, the average number of AAA investors in Sequoia securitizations has more than doubled since early 2014. We still expect overall purchase volume levels in the $5 billion to $6 billion range in 2017, factoring in anticipated declines in industry origination volumes as a result of rising interest rates and the declining refinance activity.

Our expanded prime Redwood Choice loan program represents the most significant area of growth for our conduit and has now been rolled out to the majority of our sellers. Our first quarter lock volume for Choice loans increased 36% from the fourth quarter and accounted for 18% of our total loan purchase volume in the first quarter, a very positive sign from our perspective. Rates on Choice loans continue to be approximately 100 to 125 basis points higher than rates in our traditional Select loans. Given the more attractive yield profiles and sufficient price discovery, we have recently begun accumulating most of our Choice loans for investment.

Now turning to our financial results for the first quarter. Our GAAP earnings were $0.43 per share versus $0.31 per share for the fourth quarter. This increase reflected the positive mark-to-market impact of spread tightening on our securities portfolio and higher realized gains on the sale of securities, partially offset by a higher tax provision related to our mortgage banking activities. Core earnings for the first quarter were $0.36 per share, as compared with $0.33 per share for the fourth quarter.

Quarter earnings increased due to strong mortgage banking and investment portfolio results, partially offset by the loss of net interest income associated with the sale of commercial mezzanine loans in the fourth quarter. Our GAAP book value was $15.13 per share at the March 31, up $0.17 from December 31. This increase was primarily driven by our quarterly earnings exceeding our dividend and higher fair values in our available for sale securities.

Turning to our balance sheet. Our debt-to-equity leverage ratio was 2.7x at March 31. We exclude $728 million of legacy Sequoia consolidated ABS debt from our leverage calculation, as it is nonrecourse to Redwood. We had $288 million of convertible debt and $201 million of exchangeable debt, due in 2018 and 2019, respectively, at the end of the first quarter. We are actively evaluating our options with respect to these upcoming maturities.

We also continue to fully utilize our $2 billion of borrowing capacity at our FHLB member subsidiary, with a weighted average maturity of approximately 8 years and a weighted average cost of 82 basis points per annum. And that concludes my prepared remarks. Operator, why don't we start with the Q&A?

(Operator Instructions) Our first question will come from Bose George with KBW.

This is Eric on for Bose. Chris, I'm hoping you can maybe expand a little bit on the comments around the secondary market receptivity to the Redwood Choice loans, and if you can share your expected returns in Redwood Choice versus Redwood Select.

Sure. Well, as I stated, the loans are definitely higher in rate. I think they're averaging 100 to 150 basis points higher than our Select loans. And Choice is a big part of our focus today. As I said, the percentage of our production has significantly ramped up. We'd like to target 15% to 20%, and we were 18% in the first quarter. We'd be pleased if that continued to rise. That was on about $1.1 billion of loans purchased.

The ultimate returns for Choice, from an investment perspective, will depend on the manner in which we invest. We're certainly exploring the opportunity to complete a Choice-only securitization. The upside there would be a much larger credit investment to Redwood, likely at more attractive returns, although, at this point, we'd have to complete a transaction to know exactly where the market would be. But we can also hold those loans. We can hold them at our FHLB subsidiary. We can hold them on balance sheet. So as things progress, and as Choice continues to ramp, we'll have a little bit more detail on what the ultimate long-term return expectation is.

That's a very helpful answer. Are there any updates on new structures that you're working on to invest in the credit risk transfer market?

No. Nothing proprietary that we're focused on at this point. We've been very active in the capital markets programs from both Fannie Mae and Freddie Mac. So we invested quite a bit in CRT in the first quarter. I think we're going to continue to be active there, but at this point we're not focused on proprietary transactions.

Sorry if I missed it in the opening comments, what was the investment in CRT, first quarter?

$44 million.

And our next question will come from George Bahamondes with Deutsche Bank.

Two quick questions. I was wondering if you could provide any color on [investment] opportunities quarter-to-date. And I have another question on -- I understand that the conforming MSRs going to be wound down. I noticed that net servicing fee declined slightly quarter-over-quarter. I was wondering if you could just provide any color on that business as well.

George, this is Marty. We didn't catch your first question. I'm sorry, could you repeat it?

Any color on quarter-to-date investment activity or what you're seeing in the market, what looks attractive?

Sure. Quarter-to-date, we've invested about $62 million, an additional $16 million in CRT, $28 million in multifamily and $18 million in RMBS. I think each one of those areas remains attractive to us. We are conscious that asset prices are high, so we're looking very closely at long-term cash flows. We continue to see opportunities to invest. And volume in the private label securitization market in the first quarter exceeded most people's expectations and we're hoping for additional activity in the second quarter. So we are -- we feel good about our ability to deploy our remaining excess capital. On the MSR side, we're going to free up just over $40 million to $44 million of capital with that sale. There's not much to comment on the spreads. It was a pretty uneventful quarter. So I don't think there's anything specific -- unless you had a specific question about servicing revenue, there wasn't anything that jumped out to us, at least with our portfolio.

(Operator Instructions) Our next question will come from Max Maier with Wells Fargo.

First, around the Choice program, given the solid reception and the higher rate that you all can get, have you considered maybe, in the future, opening up the credit box at all? And then also, second, could you give us some color around potential securitization of Choice loans?

Sure. With Choice, we'll stress, it's an expanded prime product. We don't have any plans at this time to enter into subprime products. So I think as we've said in the past, the loans generally have -- can have higher LTVs. I think they've averaged about 7 points higher; credit scores maybe 30 points lower; potentially fewer liquid reserves. None of those in combination, per se. But it really just represents the full prime universe to us, where our Select program is more of the traditional super-prime loans that have been extremely liquid the last few years.

And in terms of securitization, what we really need to do is to get sufficient flow so that we can do a number of transactions because it's difficult to set up shelves and to get it done. We probably need somewhere around $100,000 -- $100 million a month, is what we'd be shooting for. And towards the end of the first quarter, we were getting close to that rate.

Okay. That's helpful. And then, just one other question. I've been on a number of mortgage REIT calls today. There seems to be a warmer outlook or reception for agency investment or agency MBS. I'm curious, if spreads were to widen further, at what point would you consider maybe going into that incrementally?

The agency MBS opportunity isn't part of our core strategy. We're much more of a credit-oriented investor. And we largely try to avoid a lot of interest-rate exposure. So I wouldn't expect us -- we'll certainly explore it, but I wouldn't expect us in the near future to enter that space. I think we're going to remain more focused on the private label securitization market and credit risk transfer opportunities with the GSEs.

Like we said before, we're really a pure play credit investor, as opposed to investor with an ABS strategy where they're just trying to earn a NIM spread.

Okay. So I mean, absent some significant blowout in spread, it sounds like you're kind of rooted to the credit strategy?

Yes, we are.

And there are no further questions at this time. This concludes our conference. On behalf of management, we very much appreciate your taking the time to participate in our earnings call.