Redwood Trust Inc (RWT) 2022 Q2 法說會逐字稿

Hello everyone and thank you for, joining us today for Redwood's Second Quarter 2022 Earning 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 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 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 second quarter Redwood Review, which is available on our website at redwoodtrust.com.

Also note that the content of this conference call contains time-sensitive information that is only accurate as of today. Redwood does not intend and undertakes 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 will now turn the call over to Chris for opening remarks.

Thank you, Kate, and thank you, everyone, for joining us here today for Redwood's second quarter earnings conference call. I'll begin by making some brief comments about our second quarter results, the operating and investing environment and conclude with some commentary around our outlook and continued priorities. I'll then turn the call over to Dash, who will go through the performance of our investments and businesses in more detail, and then Brooke will conclude with an overview of our financial results. We'll then open the line for questions.

As many of you might suspect, the second quarter of 2022 failed to produce many bright spots for us or an industry beleaguered by the impact of inflation, including record spikes in mortgage rates. The ongoing repricing of rate-sensitive assets accelerated during the quarter, impacting the market values of even the safest mortgage-related investments.

Our positioning became decisively more conservative as the quarter progressed, and we willingly ceded flashy volume headlines in favor of our time-tested approach to managing through market downturns. Through that lens, we prioritized pipeline turnover and strong liquidity, knowing there are market forces that play beyond our control.

Before I get more into our positioning, to recap earnings, our book value declined approximately 10% during the quarter to $10.78 per share at June 30, primarily reflecting market dynamics in June that had a pronounced effect on the fair value of our investment portfolio. It's worth highlighting that our overall decline in GAAP book value included $1.02 per share of investment portfolio of fair value changes, but almost exclusively reflect mark-to-market losses in our portfolio due to credit spread widening.

These assets remain on our balance sheet, and we generally expect to hold them for the long-term with the opportunity to recover these losses as markets stabilize. Importantly, we observed very little deterioration in expected future cash flows during the quarter. As such, substantially all of the GAAP losses in our investment portfolio segment were non-cash and are recoverable if market conditions improve. Our portfolio's net discount to par now stands at approximately $3.35 per share.

As we stressed last quarter in our commentary, our investment portfolio, unique in its composition, takes a long-term view on housing credit and is characterized by its demonstrated performance over many quarters, including notably low delinquencies and continued declining LTVs.

The investments in our portfolio have continued to demonstrate solid performance into the third quarter and are delivering consistent cash flows. I'd also remind listeners that a number of our assets have experienced significant home price appreciation in recent years that are well in excess of our original underwriting and purchase assumptions.

Without shying away from our second quarter results, we believe our team's intense focus and total commitment to Redwood stakeholders were exemplary during the quarter. A few examples of this are noteworthy. For instance, we actively managed our jumbo and single-family rental pipelines as interest rate volatility spiked, guiding residential production volumes lower or more rate-sensitive products and adjusting our go-forward SFR pipeline as appropriate for higher rates.

Along with a proactive hedging discipline, this allowed us to significantly mitigate the impact of negative price action in the underlying securities. This meant our adjusted margins for the quarter, while certainly impacted by volatility outperformed most market yard sticks. In our residential business, for instance, margin declines during the second quarter were less than half the underperformance of jumbo loans versus their benchmarks during the same period.

As we get deeper into the third quarter, most market participants remain uncertain around the economy, and we suspect they will stay tethered to Fed actions and the resulting path of interest rates. In keeping, we'll continue to prioritize the path to consistent profitability, which will likely entail lower volume levels in the near term relative to our long-term strategic growth ambitions.

Looking ahead, while we continue to proceed cautiously in light of the market environment, the recent wave of market volatility has created significant opportunities for us to deploy capital at extraordinary returns. The additional capital we raised in early June will be a significant factor in our ability to capitalize on these market dislocations.

In the second quarter, we also demonstrated our continued alignment with shareholders with our decision to repurchase $3.7 million of our outstanding shares at accretive levels. We have tremendous confidence in our team, our portfolio and our liquidity, and we see an opportunity to express that constructively through additional share buybacks in the third quarter.

Just today, we announced a new $125 million share repurchase program, which allows us to buy shares of our common stock in the open market or through negotiated transactions. As we always have, we will balance the attractiveness of near-term investment opportunities with our long-term strategy and what we believe to be in the best interest of our shareholders.

So in such a difficult period for our industry, what will our blueprint look like for the remainder of the year? After 28 years as an industry leader and public company filer, very long time, the answer should sound familiar. Across our enterprise, we'll continue to maintain a patient, long-term investor mindset that stretches well beyond fiscal quarters, we'll aggressively manage risk, and we'll work diligently to enhance our franchise while pursuing efficiencies.

Despite a difficult stretch for our industry, the housing market remains woefully undersupplied, creating a durable technical driver that supports investments in residential credit across a broad array of economic scenarios. In this regard, Redwood's opportunities have never been greater as we work across multiple facets of housing finance, including residential, business-purpose lending, fintech and proptech.

I will now turn the call over to Dash Robinson, Redwood's President, to speak in more detail about our investment portfolio and operating businesses.

Thank you, Chris. I'll begin my commentary with our investment portfolio. We were active in deploying capital during the quarter, investing in both assets created by our operating businesses and those sourced from third-parties. Excluding our share repurchase and the completion of the acquisition of Riverbend Lending, we deploy over $160 million into new investments during the quarter.

Primarily into CoreVest originated bridge loans and incremental growth in our home equity investment portfolio or HEI. Strong fundamental performance from these 2 asset classes drove an attractive adjusted return on capital for our portfolio. Given our strong capital position, we intend to continue assessing the market and making opportunistic investments where we see appropriate relevant value.

While price action during the quarter drove unrealized fair value losses in our investment portfolio, underlying credit performance is strong and the credit quality and seasoning of our portfolio remain points worth emphasizing. Delinquencies in our book are at or near post-pandemic lows and loan resolutions continue to yield favorable outcomes versus modeled expectations.

Even as home price appreciation begins to temper, our overall portfolio remains enhanced by record amounts of home equity and in the case of our single-family rental portfolio, substantial rent growth. At June 30, 90-plus day delinquencies within our jumbo, SFR and bridge portfolio stood at 1.7%, 2.4% and 2.6%, respectively. And we estimate current loan-to-value on loans underpinning our jumbo and RPL securitizations to now be around 45%.

As expected with the substantial backup in rates, prepayments within our consumer residential book slowed. And while we expect near-term call activity to be muted, continued paydowns bring us closer to unlocking the embedded value in this portion of the portfolio. Prepayment speeds within our securitized SFR portfolio slowed modestly but remained elevated versus expectations, reflecting continued momentum in transactions for stabilized single-family real estate and bringing a handful of more seasoned capital transactions closer to callability.

Within residential mortgage banking, while a historically challenging quarter for jumbo mortgage prices impacted results, our active hedging and discipline around distribution mitigated much of the price action and leaves us today with historically light levels of inventory and the opportunity to lean back in once markets stabilize.

During a period when most competitors were challenged to move risk, the team distributed $1.2 billion of whole loans, all through loan sales and at levels significantly accretive to securitization, where execution continues to be hindered by the overhang of lower coupon pipelines. We purchased $1.1 billion of loans during the quarter and locked $1 billion of loans compared to $2.6 billion in Q1, over 80% of which were for purchase money transactions.

This quarter-over-quarter decline in volume reflected our view of the market, and we believe managed our mortgage banking results to a more favorable outcome than benchmark performance would imply. Given that during the quarter, we estimate jumbo spreads underperform agency mortgages by approximately 100 basis points in spread.

While we are not immune to this price action, we entered Q3 with an unallocated pipeline of $751 million, down 44% from March 31, 2022, and which carried an average coupon above 5%.

As many peers continue their retrenchment, our current risk position provides ample dry power to assertively lean back in when conditions warrant. This could manifest itself in several ways, including impacts from certain depositories repositioning around risk-weighted asset challenges or other market participants finally forced to part with lower coupon inventory. The recent pullback has also left Redwood as one of the strongest hands focused on responsibly underwritten expanded prime loans, an area in which we are continuing to make inroads with loan buyers prioritizing the quality of their partners.

Spread widening also impacted our business purpose mortgage banking results, but the diversity of our product suite, particularly the ability to manufacture short duration and floating rate bridge loans allowed us to continue serving borrowers accretively during the second quarter. We were excited to begin July with the close of our previously announced acquisition of Riverbend, a leading bridge lender with a broad origination footprint.

As we mentioned at the time of the initial announcement, we view this acquisition as highly complementary to our existing CoreVest platform and are excited to welcome the Riverbend team into the family. Earlier a month in, we are already seeing the benefits of their client reach, including as a logical audience for CoreVest's core products. As this acquisition did not close until the beginning of the third quarter, Riverbend results are not included in the performance metrics I will now cover.

Volumes and business purpose lending were flat versus Q1 with a continued trend towards increased bridge production, which represented 60% of the quarter's $923 million of fundings.

SFR production declined quarter-over-quarter as spreads widened and benchmark rates rose, causing many borrowers to opt for shorter duration loans with more prepayment flexibility. We remain very constructive on our bridge production mix in no small part due to the quality of our sponsors and consistency and demand as rates have reset higher.

As noted, bridge loans represented a meaningful amount of our capital deployment in Q2, and our bridge book overall delivered a high teens cash-on-cash return during the quarter. CoreVest successfully issued 2 securitizations backed by $560 million of loans during the quarter, creating important additional capacity for the forward pipeline. We priced the $250 million bridge securitization in May, placing unrated bonds at a blended yield of 5.64%.

Similar to our first deal, the structure includes a 24-month revolving period that will allow us to replenish prepayments with what are now meaningfully higher coupon loans going forward. Our $550 million of total bridge securitization capacity is an important subset of the $2.8 billion of total financing capacity for business purpose lending loans. Business purpose lending capped off the quarter in late June by completing a $313 million capital securitization backed by SFR loans.

The deal priced wider than our prior issuance in Q4, 2021, but we were able to issue bonds accretively down the capital structure that many other issuers in the market were not. We are also able to recapture some of the spread widening through a new pricing methodology that gives us credit for expected prepayments on the underlying portfolio, no small achievement in a challenging market.

I'll round out my comments with an update on RWT Horizons. We made 3 new investments during the quarter, bringing our total number of portfolio companies to 21. We have invested roughly $25 million of capital into the venture thus far and are pleased to see continued maturation of our investments as well as growing strategic partnerships between Redwood and our Horizons portfolio companies.

Several portfolio companies are in the process of raising additional growth capital, and we are evaluating the opportunity to invest incrementally. It has been rewarding to see more synergies emerge through Horizons, including liquid mortgages role as distributed ledger agent on our most recent capital deal, a first for that asset class.

Horizons' remains highly selective in its approach to new investments. And as always, we are focused on early stage ventures with meaningful strategic relevance to our business. We're optimistic that current market conditions are coinciding well with where Horizons is in its own evolution as the network effect provides us access to situations we may not have seen as recently as 6 months ago.

With that, I'll turn the call over to Brooke Carillo, Redwood's Chief Financial Officer, to go into more detail on our second quarter financial results.

Thank you, Dash. On the quarter, we recorded a GAAP loss of $0.85 per diluted share, and our book value was $10.78 per share, a decline of approximately 10% from March 31. Additionally, we paid a $0.23 per share dividend, which was unchanged on the quarter.

As Chris mentioned, our GAAP book value includes negative $1.02 per share of investment fair value changes and change in other comprehensive income on AFS securities that almost exclusively reflect unrealized losses in our investment portfolio. After this quarter's volatility, we own these assets at very attractive forward return expectations, which are now roughly 150 basis points higher than the first quarter to a mid-teens yield on the investment portfolio.

Turning to the drivers of our results relative to the first quarter. Net interest income was down approximately $12.6 million, primarily due to a decline in noncash accretion income on our AFS securities and lower yield maintenance received on capital securities relative to elevated levels in Q1, 2022. We signaled both expected trends last quarter, given their byproducts of higher rates.

It's important to note that changes in accretion of our AFS securities impacts our quarterly run rate of GAAP net interest income, but not book value per share. Given our capital deployment reference this quarter, we see a larger portfolio size and incremental net interest spread expansion of our Bridge assets as positive tailwinds for net interest income going forward.

In terms of non-interest income, our mortgage banking activities net contributed a negative $0.25 to earnings as historical levels of spread winding and interest rate volatility impacted distribution efforts and profitability in both segments.

Despite headline performance for our residential mortgage banking business, we mitigated market conditions with our operational advantages and our loan distribution franchise, which allowed us to move essentially all of our whole loan risk prior to June in the more severe volatility and spread winding occurred in the quarter.

As Dash mentioned, the light inventory of loans that we have carried into the third quarter represents, a healthy risk position today and to benefit our relative margin performance going forward. The loss on business purpose lending activities was primarily attributable to securitization execution for SFR term loans as longer-duration assets underperformed and credit spreads on SFR securitization widened by approximately 60 basis points during the quarter.

Importantly, our cash origination season nearly covered our operating expenses in this segment and the investments we are creating from this quarter's originations are expected to generate a 15% to 18% return, which should drive positive portfolio of earnings going forward. After quarter end, we closed the previously announced acquisition of Riverbend on July 1 for an initial cash purchase price of approximately $44 million at closing.

The purchase accounting related to the transaction as well as Riverbend consolidated financial statements and results will be included in Redwood's third quarter financial statements. On the expense front, we remain highly focused on cost management and have seen continued progress on our goals of further cost efficiencies.

General and administrative expenses were 8% lower in the quarter and over 20% lower year-over-year. While others in the industry are faced with significant headcount management that ballooned over the last 2 years, we have remained nimble and are forced to dramatically scale up or down depending on volumes. In fact, our headcount today, including the addition of Riverbend employees, is on par with where we ended in 2019.

Looking ahead to the remainder of the year, we are prudently maintaining our operating platform presence in the marketplace. We are committed to both efficiency and preserving a franchise that can emerge from this time period immediately ready to capitalize on the many opportunities we're beginning to see.

We believe our efforts to manage the cost and contingent risk of our financing instruments will continue to serve us well going forward. Throughout the first half of the year, we have extended or initiated approximately $3.8 billion in financing facilities, 60% of which are non-marginable and were non-recourse. The overall level of secured debt in the investment portfolio remains relatively low at 1.4x, creating avenue to generate more capital at potentially accretive levels. We are mindful of our intermediate term financing maturities, including our convertible debt maturing over a year from now.

We have a number of tools to address this maturity, including cash on hand, $450 million of unencumbered assets and other portfolio financing optimizations to the extent we decide not to refinance this maturing debt. Our $215 million convertible debt issuance in June was responsible for roughly half of the increase in leverage on the quarter to 2.5x from 2.1x at March 31.

We review the capital raise as opportunistic, providing us additional dry powder to deploy, including within our own capital structure that we believe will be accretive to earnings per share through time. We ended the quarter with approximately $412 million of unrestricted cash and unpledged loans and nearly $200 million of investable capital, which gives effect to the consideration paid for the Riverbend acquisition.

2 final highlights for the quarter, the first of which relates to RWT Horizons. As we mentioned on our last earnings call, we saw our first material gain on one of our early investments in Q2, amounting to $10 million pre-tax. The second was that our $33 million of share repurchases on the quarter contributed to a positive $0.10 benefit to our book value per share.

Given current trading levels, we view share repurchases as a potentially powerful tool as return on equity is quite competitive with alternatives we see in the landscape. These are strong buying opportunities, not only with a mean reversion to today's book value, but also accounting for the drivers of the $3.35 per share of embedded upside to book value from here.

And with that, operator, we will now open the call for questions.

(Operator Instructions) And our first question comes from the line of Stephen Laws with Raymond James.

I guess first, Chris and Dash, I think you guys both touched on it, but around the business purpose loans, both the bridge and SFR, can you talk a little more quantify kind of how you've moved pricing given the change in the rate environment and where securitization markets are and how you think about return on capital there and interest rate sensitivity or rate sensitivity of those borrowers between bridge and kind of stabilize SFR?

Sure, Stephen. It's Dash, I'll take that. It's a great question. It does speak to the power of the platform in terms of CoreVest ability to offer both of those products pretty seamlessly to borrowers because there has been a decision tree for our sponsors here over the past a few months with benchmarks higher and some of the differences in prepaid flexibility in those products.

And we have as expected, seen over the past couple of quarters, a trend more towards bridge, where bridge loans may be used for portfolios that could qualify for single-family rental just because of some of the prepaid flexibility. But on your questions on rates, just for context, our pipeline -- our funded pipeline right now is probably about 100 basis points or so above the portfolio we securitized in late June.

So that portfolio is in the low 6 is our current rates. We've rallied here obviously, since the end of the quarter, but rates are still in the mid-6% range with some distribution around that depending on leverage and things of that nature. Bridge has been also moved higher, probably on the order of 100-plus basis points as well, if not a bit more. One of the things with bridge, as you know, Stephen, is that book is over 80% floating rate.

So particularly now with another hike from yesterday, the effective coupons on that book are 8% plus in many into the 9s at this point, so that's sort of where we sit. And we really like the financing capacity we've got there. We talked about just the overall bridge ecosystem. The preponderance of that financing remains nonrecourse. We were very happy to get the $250 million RTL deal done, which is that.

Those are fixed rate issuances and our average cost of funds for our securitized securitization is below 4% fixed, so if rates continue to tick up, particularly the short end, those will be very accretive sources of financing for us.

Brooke, and I know you touched on it and Chris as well in the prepared remarks around the stock buyback versus opportunity to deploy capital in new investments. But maybe touch on how you evaluate other parts of the capital stack you could consider repurchasing or possibly buying secure capital bonds and maybe in the market that you think are mispriced or maybe just how you think about the capital allocation across the various opportunities?

Stephen, I'll start and Brooke can chime in. The stock buyback and just where are the stocks traded both on an absolute level relative to book and certainly, on a historical basis versus our historical trading range. And again, we're a 28-year-old company. So we've got a lot of trading history. That opportunity doesn't come across very often. And so, we were the most active we've been in a long time in Q2.

And obviously, the stock is going to move and we'll evaluate it as it does. But we wanted to make sure we've reserved opportunistic capital to take advantage of that opportunity because again, on a relative basis, this doesn't happen very often over the course of 28 years. As far as other investments, certainly there's, opportunities in the convertible space. We've been an active issuer there, most recently last June. That's something we're always looking at.

It's not as much float. There's not as many opportunities as there is in the equity markets, but we pay close attention to it. And we've always got a level for our own cooking. We retain -- that's why we retain most of the subordinated securities that we issue, certainly in capital and Sequoia. So that's definitely on the list as well. I'd say, right now, it was a difficult quarter for the market, but it always breeds opportunities.

And we're finally seeing really extraordinary opportunities to deploy capital. It had been an issuer's market the past few years. We were fortunate to be an issuer, both in the business purpose side as well as the resi side. It's been a tougher issuers market. We've done one Sequoia transaction all year, for example. But that also means it's a great time to be an investor.

And so, we put quite a bit of capital to work in the second quarter, and we're fortunate to have really strong liquidity right now, and we can be aggressive with our markets. So there's, a lot of great opportunities, and I don't think we necessarily need to pick one at this point. There's many that are attractive.

Our next question comes from the line of Bose George with KBW.

First, I just wanted to ask about your liquidity, obviously, is quite high. Just curious how you -- sort of investment with wanting to maintain a level of liquidity given where the market is. So how much of that cable (inaudible) could we deploy?

We talked about it in terms of investment capacity. I'll let Brooke brief you on the numbers. But at a high level, Bose, I think that sentiment is correct. We feel very good about our liquidity at this point. And importantly, I'm not sure that everybody else does. We really planned well here and we spoke about in our scripts just being really mindful with our pipeline management.

And whenever you have large pipelines in this environment where rates are going up, the amount of liquidity capital you need to reserve against those goes up. So we're very deliberate in keeping our pipelines for fixed rate collateral, much lower than they typically run.

That business is turning a corner as well. So we hope to get more aggressive in our mortgage banking businesses. But as far as liquidity goes, you're right, we feel like we've got very strong liquidity. I'll let Brooke touch on some of the specifics, but -- it's a good place to enter the third quarter.

Yes and Bose I'll just add to that. We disclosed the mix of our deployment on the quarter, I know it's really spread fairly evenly between the organic assets we're creating on the bridge side that Dash mentioned in his prepared remarks, are mid to high teens forward return. We really like the profile. And as you've seen for our volumes this quarter, demand has been resilient there.

Third-party opportunities are beginning to look more attractive to us too, just given the amount of the dislocations we've seen in the market and then throw in the strategic M&A, we announced this quarter and the buyback. We have a number of opportunities in the kind of 12% to 18% ROE range. So that's why you've seen our deployment go up. And consequently, we're also reserving liquidity for those opportunities that we see.

We've been patient with respect to the last month or so of the quarter. And so, we're sitting on $200 million of investable capital, and that's holding aside what we think we need in terms of this market, just elevated risk-based capital and working capital for our business. So plenty of liquidity to take advantage of those opportunities. And then more importantly, we think we have some room from a leverage perspective too.

We did see leverage tick up a bit this quarter, but we're still about 30% below where others in the industry are and low for ourselves on a historical basis. And particularly given a lot of the evolution we made with respect to the composition of that leverage being non-marginable and/or non-recourse, I think we feel like we have some room there in the financing capacity to do it to fund a lot of growth here going forward.

Okay. And then I don't know if you said this, but can I get your book value here quarter-to-date?

Yes, we did disclose over here up about approximately 2% on the quarter.

Okay. And I have one another quick one. Just on the Riverbend acquisition, was there any goodwill created?

Yes, we will be disclosing it both in the third quarter that acquisition didn't close until the 1st of July. So we're going through the purchase accounting now. And so we'll have an update on goodwill and intangibles when we announce next quarter. So more to come on that front, but I think just -- given the market, we feel pretty good about both the structure and the overall value of this deal, both for ourselves and our new partners from Riverbend and I think it's very reflective of where markets are today.

Our next question comes from the line of Donald Fandetti with Wells Fargo.

Can you talk a little bit about what you did with the proceeds from the convertible? And also, I guess, if mark-to-market comes back, what's the logic of doing to convert because you may have raised above or below book value in that scenario?

Well, as far as the logic of the deal goes, I think we're thinking about the stock and the business over the long run. And it's a lumpy deployment business, and sometimes you need to be opportunistic about when you raise capital. There's market conditions. There's factors that we're aware of that the market is not aware of with respect to portfolio opportunities.

And so we spent a lot of time thinking about where to strike that. And ultimately, I think -- I don't think too much time went by before the market sold off significantly, and I think it's kind of validated the timing. But the deployment opportunity is well north of the 775 coupon for those converts are very, very vast right now. There's, great opportunities across the spectrum. We think there's great M&A opportunities that we're seeing today. There's, definitely great deployment opportunities through our traditional channels, both in resi and BPL.

We've created a lot of great bridge assets this year. And as Dash mentioned, those are floaters and keep going up in coupon. So the convert, we felt great about the opportunities to deploy that accretively. We'll continue to evaluate the options there, but we're still looking at our stock that's well below book. I've noticed across the spectrum that still looks pretty attractive based on where others may be trading. So we're very confident that we'll get that capital deployed as we typically do in an accretive manner.

Okay. And Dash, what is or your or Chris, as you look at the housing market, what are your thoughts in terms of HPA and also rents as you think about your business purpose business, just given the move in rates and the current environment?

Sure I'll start with HPA and Dash and I like the tag team, resi and BPL, so I'll let him chime in as well. HPA slowing, but the technicals driving housing haven't changed. There's still a major supply issue. We spend a lot of time in Washington focused on access to housing, which is the center piece of our mission. That includes lower-cost homes as well as high-cost pumps in areas that we do a lot of business in.

So credit wise, if you look at our book, and you look at our delinquency trends today versus even a year ago, we'll publish more of that with the 10-Q, but everything has looked better or flat. And so I think that's a reflection of strong HPA to-date, but also underwriting assumptions relative to where current LTVs are today. I think the go forward, we're obviously going to see a slowdown in home price appreciation.

That's a given when mortgage rates go up and purchasing power goes down. But I also think that we're pretty confident that we're not staring down the barrel of what we saw in the great financial crisis. We're just in a fundamentally better position in terms of underwriting, in terms of consumer debt profiles, just really robust with respect to borrowers and their ability to pay. Dash, do you want to cover rents?

Yes, absolutely, just quickly as it relates to rents, obviously, Don, as you know, we've seen double-digit year-on-year rent increases here. And while we don't necessarily expect that particular number to continue, we certainly see room for continued rent growth. Just as a reminder, we underwrite our business purpose loans. We tend not to trend rents. We don't price in rent increases necessarily.

So it's -- we do have cushion in our underwriting, but a couple of things. As mortgage rates have gone up, at some level, that does create or enhance the support level for rents, particularly as Chris referenced, for a big cohort of consumers, accessibility from an ownership perspective is certainly harder than it is today than it was 3 to 6 months ago, and so that is a natural support for rents.

And then also just specifically to our sponsor cohort that CoreVest serves, a lot of times, what we believe is that in many cases, we are lending against below market rents today. In many cases, our sponsors in the interest of keeping their portfolios rented well -- many times increase rents at a slower pace than what the market may be just to ensure consistent cash flow, things of that nature.

So even as rents continue to trend up, we expect a well, it's important to note from an underwriting perspective, we remain conservative. And in many cases, our sponsors favor cash flow consistency versus necessarily marking a rent to market at every opportunity. So that's our general view there.

Our next question comes from the line of Rick Shane with JPMorgan.

Look, we certainly understand the mark-to-market on the investment portfolio. But when we look at the resi banking business and the business purpose banking, over half of your overhead, and I'm excluding loan acquisition costs, but G&A is in those 2 businesses. When we think about those 2 businesses for the remainder of the year as you're pulling back on volume and the markets remain volatile, what do you need to do to be able to at least break even in those businesses? Is there an opportunity to reduce G&A costs or are you going to need a rebound in the market either in terms of volume or margin to see -- not have that be such a tremendous drag?

Sure, Rick, great to hear your voice. Starting with resi, what happened in the second quarter, I would say, is quite idiosyncratic. And we had a very, very acute rise in mortgage rates that really sort of shocked the system. And what ended up happening was there was, a lot of locked loans across the sector at really low rates.

And as is usually the case when borrowers have blocked a rate that's lower than where mortgage rates have headed the pull-through sort of goes up to close to 100%. And so, the industry got really long collateral that very quickly aged. And so the POS markets found themselves really long supply with a major supply overhang of coupons that were aged and were nearly reflective of current coupons, which are -- and the AAA POS market today are probably 4.5%.

Mortgage rates are 5.5%, 6%, 6.5%. And so that supply overhang has continued to need to work its way through the system. And that made it really, really difficult to manage pipelines in the second quarter for everybody, and I'm sure you'll see that play out through earnings season. But that dynamic is not a normal one for our business, and volumes at, $1 billion for a quarter is not normal for us. That was very deliberate.

So a gradual return of even average volumes, let alone high volumes, we were a business that was doing $5 billion to $7 billion of volume in recent years. And last year, we kind of blew that out of the water. We don't need to blow it out of the water. We can do very well and be very profitable with more historical volume levels in the $5 billion to $7 billion range. So on a quarterly basis we need to be marginally higher than where we were.

And we need those margins to stabilize. And the good news is we've started to see that as recently as a deal in the market, the price today, a bank you're familiar with, the demand there was the best we've seen in quite some time. And we're really starting to see the tone shift in the market.

There was a great industry conference that Structured Finance Association puts on that happened in July, extremely well attended, great sentiment there. So we're turning the corner here with some optimism headed into the fall. I'll let Dash comment on the BPL POS space and rates. But I think there's a similar dynamic at play there as well.

On BPL, I would say similarly, a very unique quarter just from a spread widening perspective, certainly in the single-family rental space. We are certainly seeing an improvement in tone for demand, not only for securitizations but also whole loan buyers for CoreVest products.

From a business diversity perspective, I'd also just point back to what I mentioned to Stephen's question, the ability for our BPL platform to pivot from a product perspective to serve the borrower regardless of appetite and product type and interest rate environment. We're only -- we're that much stronger now with Riverbend in the fold product-wise and geographically.

For BPL, one metric out of several we look at quite closely is our net cost to originate, which basically measures G&A of that particular segment versus fees earned. So nothing to do with gain on sale, just actual cash fees and we were basically flat in Q2 in BPL, which I think is really important when you think about where the market is and just the ability for that business to continue to sustain margins as even in tough times.

So if you net out the mark-to-market, we were really pleased with the performance. Like I said, we've reset coupons 100, 150 bps higher across SFR and bridge and those things are all helpful. So similar market dynamics as what Chris referenced and because, obviously in BPL, we're a direct originator there's important economics we capture, which makes the overall cost structure analysis pretty different.

Got it. So if I were to really summarize this, it would be 3 things. One is that the pull-through rate went through the roof, which makes sense, which means that you're modestly under-hedged. That creates interest rate risk decline. 2, because everybody was facing this, you had a huge supply-demand in balance, which pressured pricing? And then 3, we went into a risk-off environment. So even if you didn't have a dis-equilibrium, you would have had pricing pressure. So when we think about -- if that's the right way to characterize it, help us understand where we are right now in terms of each one of those 3 dynamics?

Well again, we'll tag team this. One thing I'd note is our pull-through wasn't reflective of the industry. So one of the things we've tried to convey was while others were sort of bulking up on -- with their pipelines early in the year and consequently locking mortgage rates that turned out to be much lower than they are today, we had a different posture. And so it's important to note that we -- our volumes were down deliberately.

And we control our rate sheet and we're very aware of where the market is. And if we want to dial up volumes, we can do that at any time. We didn't feel like that was appropriate in the second quarter, but we're starting to see signs that we like to focus on to be more aggressive in the third quarter. But I think the dynamic that ultimately is going to stabilize the market is the path of interest rates.

And what you've seen with equities recently is there's a growing belief that there's some clarity in what the Fed needs to do from this point forward. I think the market is starting to sense that there could be some finality to the hiking regime in the coming months or quarters. The markets are very forward-looking. So that breeds confidence and helps to stabilize the rate markets. And that's ultimately what we need to see.

We talked a lot about it. We wrote a lot about which we'll see our G&A. And obviously, our overhead -- our operating expenses were lower quarter-over-quarter. Ultimately though, we serve an incredibly important function in the non-agency mortgage markets and our customers, which are loan sellers, hundreds of loan sellers, originators, loan purchasers, bond investors, ancillary businesses along the way.

We are a major liquidity provider to the sector. And so, we need to keep the lights on and we need to keep the open sign on the door. And so, we're always going to be locking loans. We're always going to be managing pipelines. But ultimately, how aggressive we are is determined internally. We're not facing share.

So I think the -- we're starting to see what we need to see. We feel good about our expense base. We feel good about our workforce. And our stable volume levels are much higher than we saw in the second quarter, but also very, very achievable. So it's somewhat iterative, but we don't feel like the second quarter was a new normal for us by any stretch.

Our next question comes from the line of Douglas Harter with Credit Suisse.

Can you talk about the non-QM market and the dislocations we saw with a few originators kind of shutting down during the quarter, kind of whether that presents opportunity or kind of how you view non-QM going forward?

Yes, we do see opportunities there, and we're in the midst of pursuing them. I think non-QM, which is closer to the bleeding edge on credit has probably hit the hardest during the quarter. Those -- the POS bonds that were issued struggled. And so made it really, really tough for some of the dedicated originators, and we saw some didn't make it. But I do think there's a strong need for those products.

We rolled out a bank statement product recently. We've got a QM flavor to that, but we've also got some non-QM options as well. For us, we've been very, very patient on the resi side, certainly with respect to M&A. When you look at our M&A recently, it's been really zeroed in on BPL. And a big reason was you saw the specs in the past year, 1.5 years and where some of the resi platforms were traded just didn't make sense to us. But now one of the reasons why we've been very patient with our capital is to be in a position to either take share organically, which we see a path doing immediately, but also be open for business on investing in other platforms or partnering with other strong originators.

So I do think that, that opportunity is in the process of opening up. The rate moves in the second quarter weren't good for any product and certainly any fixed rate product for any type of credit. So that market is challenging for everybody. But as things start to stabilize, we're really excited about the opportunities in non-QM.

Our next question comes from the line of Kevin Barker with Piper Sandler.

Given the negative gain on sale this quarter on BPL and residential mortgage banking, it would seem like, obviously, there's a lot of rate volatility that you're dealing with. It's hard to hedge that pipeline with that type of volatility. Could you just maybe give us a little more detail on what the average seasoning of the portfolio was for the residential mortgage portfolio and then maybe the BPL portfolio that you sold this quarter versus what you sold in 2021 -- were there certain portfolios that you saw like bleed into the second quarter that you just -- had to move on with?

I think the seasoning was probably pretty consistent. Kevin on average, we were able to move the risk on loans usually between 45 and 60 days and residentially through securitization or whole loan sale. We continue to sell a lot of our production forward as well. I think the magnitude of the rate move was sort of a big deal. I mean, in terms of where we sit today again, we have an unallocated pipeline in residential, about $0.75 billion with a gross WACC just over 5%.

That coupon is well in excess of -- we're pretty confident of where a lot of our peers are carrying coupons right now. But it also is 100 bps above the weighted average coupon we were carrying at March 31, which, as you know, is just reflective of the speed with which rates picked up. So it was less a seasoning thing than just continuing to move rest judiciously and the ability to sell $1.2 billion of loans in Q2 and not have to do with securitization, I think was a pretty big deal.

In terms of how margins in resi performed versus benchmarks, I think hedging was actually a big alpha in residential this quarter. We saw jumbo spreads on average, as I mentioned, probably 100 bps on average versus agency mortgages, just reflective of where we were in the environment. And agencies underperformed benchmarks a little bit, but it was a very rough quarter for jumbo. And when you think about 100 bps in spread versus where our margins came in.

I think there was an increment amount of -- also added by the team, not only through hedging, but also through just speed of distribution. So the seasoning was similar. It was just -- it was making sure that Chris' point, we were prudent with turning our capital over and our ability to do that allows us to be relatively or very light today, which is a good place to be. With BPL, as you know, managing that pipeline is a little bit different.

There's not really the same sort of fallout risk in terms of when we locked coupon to that borrower. So that one was really just credit spread widening. I would say in Q1, when there was more concerns about duration in the market, the credit curve flattened mostly because AAA has widened.

So if you had few at large whole loan portfolios, which were pipelines, which we didn't -- the AAA price action really impacted gain on sale. In Q2, the credit curve steepened fairly dramatically -- which really was the thing that impacted the SFR pipeline and resulted in the P&L there it really was not hedging in BPL.

Got it okay. And then if we were to see similar rate volatility, would you be more likely to hold some of those loans on balance sheet or would you continue to recycle through them with the same strategy today?

One thing I would say is just on -- in terms of where our capital allocation has trended -- our 630 capital allocation reflects $100 million lower from residential mortgage banking we deployed back into the investment portfolio, and that's just a byproduct of our view on the relative value of bridge today.

And so just in terms of where we have -- a lot of the comments we made around interest rate volatility -- those bridge assets are 12 to 18 months assets in general and didn't experience the same level of that of -- spreads that we saw in the term book.

And so as we sit here today, a lot of our pipeline in terms of what we'll hold is because it's a bridge asset that is a nice earner from a NIM perspective, we like to have it on balance sheet. We do tend to -- we securitized our bridge portfolio and a few transactions, but it also works from an economic perspective to warehouse on balance sheet.

Yes, Kevin, on your question on rate vol, I mean our -- again our pipeline -- our current pipeline puts us in a really unique position, I think, to be able to lean in. But the discipline of ensuring that we can move efficiently where we're pricing our risk is really sort of ingrained in the business. And certainly, we're never going to want to put ourselves in a position to be a forced seller, but I think the discipline of turning the portfolio, turning to capital and being able to recycle the position. Put us in the position we are today and that's a discipline I'd expect us to continue.

Our next question comes from the line of Trevor Cranston with JMP Securities.

Most of my questions have been covered. I guess one follow-up to your outlook for the housing market. When we look at the figure you guys give the $3.35 per share discount on the portfolio relative to par, can you not talk about when you incorporate the current economic landscape and how the outlook into your model, how much of that discount is -- what you would expect to realize in losses as we've been today and if the expected loss level has changed meaningfully over the last few months?

I wouldn't say it's changed materially, Trevor. I think a lot of that is just, again, because of where the book is situated from a seasoning and an LTV perspective. We talked about the mid-40s loan to values on average for jumbo and RPL. And in our BPL book the SFR again, just the tailwinds of double-digit rent growth the last couple of years and then what I mentioned earlier about the fact that a lot of our sponsors are probably in at below market rents with our tenants.

And so I don't think it's moved materially. I think our outlook obviously is influencing how we think about our guidelines and particularly for BPL stressing the takeout on our bridge loans and looking at leverage and then obviously, in residential focused on net income and the things we always focus on.

So I think no real meaningful move in loss expectations again, just based upon the seasoning of the book. But obviously, where we see things going forward, as always, is going to influence our underwriting guidelines going forward.

Our next question comes from the line of Eric Hagen with BTIG.

I'm coming in a little late, so apologies. I think I just have 2. The first one is just what are the core sources of liquidity you think you might use as a home base, if you will, on some of the debt that comes due next year? And then secondly, can you remind us how the business purpose loans are serviced and whether there's any obligation to repurchase loans from securitization trusts and such?

Eric, we covered this a little bit at the beginning, let me expand on it and see if I address the question in terms of source of liquidity. We ended the quarter with $371 million of unrestricted cash. And in addition to that, we had another $40 million of loans, that we couldn't finance, so it just had been financed over quarter end, so $412 million of pro forma cash. And then we add another $450 million of unencumbered assets.

This was the emphasis for a lot of the comments we've had around better financing optimization. We only have about 1.4 turns of leverage on our investment portfolio in general. And so, we see a lot of areas of the portfolio that we can more obviously finance to create organic capital. One thing we didn't mention on this call is that in more normalized markets, we've created a decent amount of organic capital just from the cash flows of our mortgage banking and fees.

We have about $2.7 billion of unused warehouse capacity to fund incremental growth from here. And one thing that we don't put in our financials, but something that has been a really nice tailwind for us, we have about $500 million-ish capacity under RTL facilities that are evolving just given the amount of payoffs -- paydowns that we see on those assets. It's a nice natural source of liquidity for us to continue to finance that business. And given the weighted average cost of debt on those facilities, it's a nice tailwind given where we have coupons today.

And Dash, I'll let you comment on the second half of the question.

Sure. For servicing, Eric, we from -- payment collections, basic collections third parties do on our behalf. We have a full asset management team within CoreVest that's very actively involved, particularly on the bridge book. When an SFR loan gets securitized into REMIC, there are certain rules of the road around loss met efforts.

So I wouldn't say actually, and we put this out, but CoreVest actually procured a rating from DBRS Morningstar recently to be a special servicer on potentially go-forward transactions. So that's a very exciting development for us. Can bring some of that work in-house, recapture some economics and allow us to be that much more incrementally involved on the SFR side, but always very actively involved in bridge I think you know.

And then on the securitizations, there's no obligation to necessarily repurchase. Obviously, this is setting aside the standard rep in warrant construct of any securitization, but there are triggers which we're currently well below, above which if we don't buy out loans, delinquent loans, the deal does go into amortization, we're well below those at this point. That's typically how those work.

Very helpful. Go ahead.

Oh no, I'm just going to say if I may give a shout out to our asset management team. Our -- the 60, 90-day delinquencies on our capital book in general, fair really well to the market. And we've seen even with the nice numbers that we posted for quarter end, we've seen a -- rather 25% reduction subsequent to quarter end in our 60-day delinquency book on the term side and had a nice quarter in terms of positive resolutions in our very small REO book. So that continues to be a nice competitive differentiator for us, and the credit quality of that underlying portfolio remains very strong.

And we have reached the end of the question-and-answer session, and this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.