Redwood Trust Inc (RWT) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust, Inc. Third Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's third quarter 2022 earnings conference call. With me on today's call are Christopher 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 and 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 cause actual results to differ from those that may be expressed in forward-looking statements.

On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our third quarter Redwood review, which is also available on our website at redwoodtrust.com.

Also note that the content of today's conference call contains time-sensitive information that's only accurate as of today, and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.

Finally, today's call is being recorded and will be available on our website later today.

I will now turn the call over to Chris for opening remarks.

Thanks, [Kait], and welcome, everyone, to Redwood's third quarter 2022 earnings call. Before I hand it over to Dash and Brooke to discuss our operating results and financial performance, I want to begin by framing the quarter in light of the broader market conditions we've been facing. I'll also comment on how we plan to navigate the myriad challenges facing the mortgage market.

But before we proceed, let me first summarize our headline results. Redwood's GAAP book value declined to $10.18 per share at September 30th, a 5.6% decline from $10.78 per share at June 30th. As was the case in the prior quarter, mark-to-market adjustments of negative $0.50 per share on our investment portfolio were the primary driver of our $0.44 per share GAAP loss for the quarter.

As many of you know, market swings like we've seen recently create volatility in our quarterly GAAP earnings due to the accounting elections we apply. That said, the credit backing of our investment portfolio and its associated cash flows remained rock solid during the quarter, and we remain confident in our ability to recover mark-to-market declines in future quarters.

As a means to isolate our operating performance from these short-term fluctuations in market prices, we've reintroduced a non-GAAP metric this quarter, earnings available for distribution. For the third quarter, earnings available for distribution was $0.16 per share. This compares to a loss of $0.11 per share in the second quarter when applying this metric. We also declared and paid a $0.23 per share common stock dividend, which is unchanged from the previous quarter. As you might suspect, Brooke will have much more to say about our quarterly financial results in her prepared remarks.

While markets need to normalize for operating businesses to return to their optimal levels of performance, both our residential and business purpose mortgage banking platforms rebounded from the second quarter and successfully navigated the markets to near breakeven levels, as we continue to leverage our deep network of whole loan buyers and our securitization capabilities to distribute loans. I say this in the context of a market, where distress and significant realized losses are now testing both the viability of many residential originators, as well as the book value perseverance of many mortgage investors, particularly those more exposed to a volatile and inverted yield curve.

Our credit-focused investment portfolio, while impacted by mark-to-market volatility continue to demonstrate fundamental strength and relative outperformance consistent with the long-term thesis we had when constructing the portfolio.

All told, while today's market remains humbling for all participants, our results reflect a degree of resilience that has manifested into solid book value performance relative to the broader mortgage sector. As the market is absorbing this [earning] cycle, conditions subsequent to quarter end have remained challenging, and we estimate our book value at October 26th to be down roughly 3% to 4% since quarter end. With more volatility expected, as the Fed works to combat inflation, our emphasis on robust liquidity, strong investment cash flows and conservative market positioning in mortgage banking will likely carry through into the first quarter of 2023.

Regarding our liquidity. As a reminder, we ended the third quarter with $297 million of unrestricted cash on hand, which represents roughly 3x our view of potential risk capital needs based on the liquidity of our assets and how they are financed. Our debt has been enhanced dramatically in recent years with approximately 90% of our investment portfolio debt stack being non-marginable and/or non-recourse at September 30th. We continue to see very healthy bank demand to finance our products and maintain sufficient excess capacity to grow and scale our business with approximately $3.8 billion of available capacity through existing warehouse lines at September 30th.

Preserving operating flexibility also requires the ongoing rationalization of our cost structure, something we've been focused on, in addition to maintaining lower overall loan inventory balances and more nimble loan distribution strategies. We're especially conservative with respect to the consumer residential mortgage sector as industry volumes continue to be affected by rapidly accelerating mortgage rates. This, along with record home price appreciation in recent years, has pushed home purchase affordability to new lows and home refinance incentives even lower.

Just this week, the MBA announced that mortgage applications had decreased to the lowest level in 25 years. Meanwhile, the largest buyer of mortgage-backed securities, the Federal Reserve has fully exited the market, while money center banks and overseas sovereign investors have also pulled back significantly. This has resulted in very low market liquidity and for securitization issuers such as ourselves, formidable risks associated with aggregating large volumes of loans for future deals.

Given this dynamic and our conservative outlook for volumes, we've continued to reduce our capital allocation to residential mortgage banking, which is down almost 60% since the beginning of the year. By design, we have tremendous uses for the freed-up capital, however, including compelling investment opportunities in residential credit made possible by the market downturn. Through that lens, the diverse nature of our businesses, particularly our ability to act as either a securitization issuer or an investor, as market forces dictate remains a key competitive advantage for Redwood.

As we head into the fourth quarter, the fundamental story underlying our balance sheet remains very strong, and our investment portfolio continues to generate durable cash flows through a return profile that does not overly levered to the shape of the yield curve. I'd like to illustrate this by focusing on our $1.2 billion securities portfolio, which looks quite a bit different than more typical portfolios, investors have become accustomed to seeing in our sector.

In our portfolio, mortgage-backed securities are not held at net premiums, as is often the case for mortgage REITs nor are they held at record high multiples, as we've seen recently for mortgage servicing rights. The contrary, our securities portfolio was held at an aggregate $458 million discount to principal value or just over $4 per share at September 30th. This translated to a weighted average holding price of approximately $0.69 on the dollar on our balance sheet.

Why does this matter? For starters, it means we're entitled to [$100] 22:38 on the dollar for assets we currently own at $0.69. It also means the underlying loans can absorb significant credit losses before we lose any of our capital. Depending on your perspective, this either represents significant downside protection to our current book value or significant upside potential to our future book value based on your outlook for the economy.

But in these unique times, there's actually more to the story than that. In the aggregate, the loans backing our securities portfolio, the true engine behind our earnings upside potential had an estimated current LTV of 50% at September 30th, as a result of significant portfolio seasoning and record home price appreciation that we've experienced over the past few years. That implies that an average borrower can now withstand an extreme decline in home price, a decline well in excess of what we typically saw during the great financial crisis and would also need to stop making monthly payments before any of our principal on the underlying mortgage was at risk.

Usually, the story would end there, and it would be a very good one when we think about the inherent fundamental strength of our securities portfolio and by extension our book value. But it's hard not to also acknowledge that our common stock has been trading near its largest discount to book value since the great financial crisis. This is due to an environment, where macro views on the path of interest rates and assumed distress have overwhelmed the fundamental narrative across our sector.

After 28 years as a public company, we've seen this before, and we've amassed empirical and operational data to help us make sense of such rare divergences. And our analysis shows a compelling opportunity to invest in our own publicly traded shares, as well as our convertible debt outstanding. We've already expressed this view by repurchasing close to [60] million of common stock over the last 5 months, but we anticipate doing much more in the near to medium term and have ample capital to do so.

I'll now hand the call over to Dash Robinson, Redwood's President to further discuss our operating results.

Thanks, Chris. While macro themes from the first half of the year remained key drivers of overall market activity in the third quarter, performance across our businesses and investment portfolio was a testament to our long-term positioning and our ability to successfully navigate this extended period of market volatility. The abrupt move [hiring] rates has impacted all corners of the financial markets and is perhaps now felt most acutely in residential mortgage volumes with some industry estimates pegging overall year-over-year activity down 50% or more.

Our residential business remained conservatively positioned in the third quarter locking $461 million of jumbo loans, while distributing $612 million of loans, all through sales to 8 discrete whole loan buyers. Importantly, profitability on these third quarter sales was in line with our historical target gain on sale range. As a reminder, our most recent Sequoia securitization was executed in January of this year. And in 2022, overall, we have now sold $3.7 billion of loans and continue to track the securitization market, notwithstanding the challenges that Chris referenced.

At September 30, our net undistributed loan inventory was $712 million, down 5% from the end of Q2. We have continued to incrementally reduce our inventory thus far in Q4. The relatively high average coupon of our inventory has allowed us to create investment profiles that whole loan buyers find attractive. This active pipeline management allowed us to reduce our capital allocation to residential mortgage banking to $150 million, bringing up valuable investment capacity, as Chris mentioned earlier.

Given the continued slowdown in capital markets activity, we believe that many market participants are grappling with large inventories of lower coupon loans, and we have also seen certain large depositories meaningfully reduce risk appetite for non-agency loans, especially through their correspondent channels. Additionally, FHFA's announcement earlier this week to reduce fees for certain mission-driven loans ultimately represents a tailwind for private capital, as markets normalize. Given the expectation that GSEs will rise for other parts of the GSE footprint within which issuers like ourselves, have historically been competitive. In combination, these may represent important competitive tailwinds for us when the market begins to turn, as our hallmarks of speed and reliability are more critical now than ever.

Turning to business purpose lending, our team made important strategic progress in the third quarter through several key distribution wins as well as significantly advancing the integration related to the Riverbend acquisition, which closed at the beginning of the third quarter. The revenue diversification from our BPL business continues to play out amidst the new interest rate and policy regime. As affordability remains challenged, there is continued demand for rentals, driving low vacancy rates and healthy cash flows on our loans.

Borrower demand during the quarter continued to skew heavily towards the bridge loans even on stabilized portfolios [at] homes, as many sponsors were reticent to lock in higher rates for more than 2 years to 3 years. All in, Corevest funded $570 million of new loans during the quarter, over 80% of which were floating rate bridge loans. The quarter-over-quarter decrease in production was in step with our estimates for overall industry volumes and for us was largely driven by reduced SFR volumes, as sponsors grappled with higher rates. Bridge originations were down only 16% versus Q2.

We were successful during the third quarter in distributing BPL loans through both securitization and whole loan sales. Our team completed a $274 million private SFR securitization with a large global institutional buyer at the end of the quarter, and we sold $85 million of loans, including SFR loans to an existing institutional buyer and single asset bridge loans produced by Riverbend to a handful of whole loan partners. As expected, market dynamics are causing overall borrower demand to evolve with many housing investors taking a more cautious approach due to higher financing costs and uncertainty about the near-term path of home prices.

While the fourth quarter has historically been a very busy one for BPL originations, with sponsors often seeking to complete transactions by year-end, we would expect the recent slowdown in lending activity to continue in some capacity, as transaction flow [ebbs] and borrowers not facing near-term maturities wait for more favorable conditions. That said, there remain opportunities to write loans at compelling risk-adjusted returns, including lower leverage refinancings of bridge loans into SFR loans and loans to support construction of single-family homes for rent and markets still seeing meaningful supply shortfalls in quality rental housing stock.

Additionally, as is the case in the consumer residential space, constrained market liquidity has had a meaningful impact on many smaller BPL originators, presenting us with an opportunity to prudently gain market share as others continue to pull back. Growth in home prices and rents in the past several years represent important tailwinds for our BPL borrowers and currently leave ample headroom to refinance maturing debt. But the reality of higher borrowing rates is leaving many sponsors with less excess cash on hand post refinance, creating opportunity for us to think creatively about complementary product offerings that may offer a compelling risk-reward for future capital deployment for lenders like ourselves with the requisite structuring expertise and capital flexibility.

Turning to our investment portfolio. Credit fundamentals remained strong during the third quarter as evidenced by continued durability of cash flows and low overall delinquencies. At quarter end, borrowers 90 days or more delinquent, represented 2% across our organically created residential and BPL investments, a book that comprises approximately 70% of our total portfolio and includes $13 billion of loans across our Sequoia and Corevest securitization shelves and unsecuritized bridge portfolio. This compares to 2.4% at the end of the second quarter, reflective of continued accretive work by our asset management team on loan resolutions.

As we have mentioned before, a significant portion of our investment portfolio is underpinned by loans with at least 5 years of seasoning, providing them with important cushion as home prices and rent growth trends begin to abate from their recent peaks. Like we saw in the second quarter, however, valuations continue to decouple from fundamentals as spread widening, particularly later in the third quarter, was the dominant factor in the financial performance of the portfolio, resulting in further non-cash unrealized fair value marks.

Overall, we deployed $235 million of capital during the third quarter, largely split between organic BPL investments, third-party investments and the completion of the Riverbend acquisition in addition to the share repurchases that Chris referenced. With observed delinquency rates in our books still very low, we remain focused on drivers of potential future borrower stress, including ongoing debt service and refinance risk. Our BPL bridge portfolio remains an area of strategic focus, given borrower preference for shorter-term debt with more prepayment flexibility. Bridge loans now represent 27% of capital out of our investment portfolio and delivered a cash-on-cash return during the third quarter of approximately 18%.

Over 95% of our bridge portfolio was directly originated by Corevest per our proprietary underwriting guidelines, which are consistently reassessed and have become more conservative in light of the overall lending environment.

Average loan to cost on our 2022 bridge portfolio is approximately 78% with an average as stabilized loan-to-value of approximately 65%. Over 90% of our bridge lending supports a sponsor strategy of acquiring and stabilizing single or multifamily real estate rather than traditional shorter-term rehab and sales strategies. This has an important impact on the profile of our portfolio.

The distribution of maturities is relatively smooth over the next 24 months, with only 35% having a contractual maturity within the next year. Additionally, a substantial portion of the book is structured as lines of credit, where we benefit from the structural benefit of writing one loan backed by a broader portfolio of homes.

As Chris mentioned, we will continue to deploy capital strategically knowing that while we are seeing many compelling opportunities, including within our own capital structure, investing in these markets requires important discipline and balance. As such, we expect to maintain a defensive posture until the market finds a firmer footing.

And with that, I'll turn the call over to Brooke Carillo, Redwood's Chief Financial Officer, to cover our financial results in more detail.

Thank you, Dash. As Chris mentioned, our GAAP book value was $10.18 per share or 5.6% lower than $10.78 per share at the end of the second quarter. The $0.60 decline was driven by negative $0.57 of primarily unrealized fair value changes on our investments, our dividend of $0.23, partially offset by $0.07 per share of other comprehensive income and a $0.12 benefit from our $24 million of share repurchases in the quarter.

Consistent with evolving industry practices, we have reintroduced a non-GAAP measure to provide the market insight into our run rate operating and investing margins called earnings available for distribution or EAD, which was $0.16 per share in the third quarter as compared to negative $0.11 per share in Q2. The measure adjusts GAAP net income for realized and unrealized gains and losses, the change in basis of our investments as well as certain periodic expense items. We believe this measure will aid our stakeholders' valuation of our long-term performance and our relative performance given it is a more consistent measure across peers and GAAP net income.

Earnings available for distribution should not be considered an indication of our taxable income or what is required to be distributed by the IRS. Our Redwood Review provides a reconciliation of EAD to GAAP. The key drivers of our EAD results relative to the second quarter were higher economic net interest income from our investment portfolio, which benefited from higher asset yields, accretive deployment and improved mortgage banking results. These improvements were partially offset by long-term interest expense from a full quarter impact of our June convertible debt issuance.

Our mortgage banking platforms rebounded significantly from the second quarter. BPL mortgage banking activities saw a $26 million increase versus Q2 as spreads stabilized for SFR loans on positive underlying credit trends. Income from residential mortgage banking activities was $20 million higher as margins recovered on improved distribution execution, but overall profitability remain impacted by lower volumes.

As previously mentioned, investment fair value changes continue to have a measurable impact on GAAP earnings and were negative $58 million compared to negative $88 million in the second quarter, reflecting further credit spread widening during the quarter in several of our investment classes, most significantly within our reperforming loan securities portfolio. These fair value changes largely reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs remained stable across our portfolio. The negative fair value changes were partially offset by fair value increases on our interest rate hedges, MSRs and floating rate bridge loans, which benefited from rising interest rates.

On July 1st, we closed the previously announced acquisition of Riverbend for an initial cash purchase price of $44 million. Based on our purchase price allocation, we reported $37 million of new goodwill and intangibles.

General and administrative expenses or G&A increased from the second quarter, primarily related to employee severance and related transition expenses, which are excluded from EAD. Additionally, G&A included transaction expenses from Riverbend and the operating expenses associated with the addition of the platform. Other expenses increased slightly from the acquisition-related intangible amortization expense. Both our continued focus on cash management initiatives and the alignment of our compensation structure with shareholders have resulted in an approximate 20% reduction of operating expenses year-to-date versus the comparable period in 2021.

We expect run rate operating expenses to decline another 5% to 10% from year-to-date annualized levels, as we head into 2023 and expect to further address our go-forward cost structure, as our outlook for 2023 continues to take shape.

During the third quarter, we prioritized liquidity and deepened our financing options. Recourse leverage at quarter end was 2.6x, essentially flat to June 30th as lower debt balances in our operating businesses were slightly offset by lower tangible equity due to portfolio fair value changes and share buybacks. The level of recourse debt in the investment portfolio remains relatively low under 1x and creates opportunities to generate an additional $75 million to $100 million of capital by optimizing existing financing.

We also estimate that we could generate an incremental $250 million of liquidity in excess of our current $297 million of cash by encumbering or financing currently unlevered assets. We believe this is more than sufficient to cover both opportunistic capital deployment and upcoming corporate debt maturities. So far in 2022, we have renewed, extended or established $5.5 billion of lines across 14 facilities.

In Q3, we successfully increased or extended warehouse lines with new and existing domestic depositories, representing $300 million of capacity for the residential mortgage banking business and initiated a new $500 million warehouse line for our business purpose mortgage banking operations and completed a facility upsize.

We have maintained nearly 90% of our total investment portfolio debt in non-marginable and non-recourse financing, which aided our liquidity during a volatile market, resulting in a net return of cash to Redwood from total margin activity on the quarter, as the benefit from hedging activities outweighed additional margins to our financing counterparties. The borrowing costs have gone up. The portfolio remains well matched in terms of the assets relative to debt with a floating rate coupon payment.

And with that, operator, we can open up the line for any questions.

Thank you. (Operator Instructions) Our first question is from Doug Harter of Credit Suisse.

As you mentioned, you're looking to be a little bit more active in deploying into your own capital structure. Can you just talk about the attractiveness of common versus kind of handling the upcoming convert maturity early and kind of how you're weighing the various parts of the capital structure?

Sure, Doug. This is Chris. We, at this point, feel very good about our capital position across the board. We're aware of the August 2023 convert maturity, but when we look at our capital, both in place today as well as what can be freed up or optimized within the book, we think we have ample room to do a significant amount kind of both on the stock and debt if we choose. Obviously, that dynamic is constantly changing.

I'd be remiss not to say, as I mentioned in the opening remarks that the common is trading at a discount that we rarely see. We've seen it only a few times over the course of the company's history. So that definitely has our attention as well as being opportunistic across the businesses. I think it's difficult in mortgage banking today, but there's somewhat of an inverse relationship between issuing and investing, which means it's a great time to be an investor. So we're definitely opportunistic, as far as investing in our business, as well as investing in third-party assets.

And Brooke, you mentioned the ability to kind of get additional financing from the portfolio. Is that something that you guys are actively looking or actively working on today? Or would you kind of wait or are you waiting until you actually need it? Just how to think about that liquidity source.

It's a good question. I think it's a -- the answer is a bit of both. I think we have -- we ended the quarter with $300 million of cash on hand. And so given rising cost of capital, we're not in a hurry to raise all of that $300 million of potential capital that we cited in our prepared remarks at once, as we want to make sure we're creatively deploying it. But there are tangible near-term opportunities that we see for both the amount of financing that we mentioned, the $75 million that's kind of more optimally financing some of our assets that have financing in place, but have delevered over time. And so they're much lower effective advance rates than we could get out there from other financing counterparties, and then also from financing currently unlevered assets at attractive rates. So it's a bit of both. But you likely won't see us do it all in one quarter.

The next question is from Jay McCanless of Wedbush Securities.

The first one I had, I know that SG&A went up from 2Q to 3Q because of the Riverbend acquisition, but I guess how much of that increase was onetime? And what should we expect for that line going forward?

It's a good question. So as you mentioned, G&A was up $8 million, about $2.5 million was from the addition of Riverbend to our platform, and then we had another, call it, $1 million of transaction expenses that were onetime and excluded from our earnings available for distribution. We had a few other onetime items that were associated with expense streamlining of $4 million. So that will continue to be a onetime item. And then there was another adjustment relative to last quarter for a onetime benefit relative to a payroll tax.

So I think in terms of run rate going forward, we had roughly, I would say, about $6 million of onetime expenses that were non-recurring. And I made a couple of comments in my prepared remarks around run rate expenses going forward. But if you take the 5% to 10% of the expense cuts that I cited and what our run rate has been thus far, that's about $160 million kind of total OpEx run rate for us.

And then next question I had, I guess, any commentary post quarter about delinquencies in either the bridge portfolio or the SFR and what, I guess, is the appetite? I think you guys, you talked about on the -- in the prepared comments about the appetite being maybe a little more hesitant. But just any color you can give us around delinquencies there or if you think the marks might get worse on some of those assets?

Jay, it's Dash. No, delinquencies have -- are still in that 2% range across that part of the book across the residential and BPL organic investments like we talked about. That piece of the story for us, I think, has been a really good one. And we're obviously, like I said in the prepared remarks, very focused on maintaining the durability of the cash flows.

So while I want -- to your point on mark-to-market, like we said, from our perspective, there's been a decoupling of mark-to-market and fundamentals, which continued in Q3. So it's hard to comment necessarily on the mark-to-market part of the book. But from a cash flow durability perspective, we continue to feel really, really good. There are great loans to do in BPL right now.

We think we've got obviously the great competitive footprint. We're in an environment, where other lenders are clearly stepping back. And we continue to have really strong conviction about our borrower base and our products. It starts with the strength of the sponsor and then goes into how we size the loans. We've always been appropriately conservative in terms of how we think about stressing interest rates and the takeout on our bridge loans and that continues to serve us very well.

Our bridge loans in general are a little bit different than a lot of the traditional sort of smaller balance "fix and flip loans" that a lot of other lenders do. We certainly do some of that. But most of our loans are to larger sponsors and allow us to get back to the table with them a lot throughout the life of the loan. They're very well reserved for interest coverage. There's ongoing covenants around leasing, cash flow coverage, et cetera. So those things give us not only high confidence when we size those loans, but also the opportunity to make sure we're very high touch with those borrowers throughout the life of their project and that's proven a tailwind to performance to-date, and we expect it to be going forward.

And then just one other housekeeping thing. When you were talking about the bridge portfolio, you gave a couple of stats, and I couldn't write them down fast enough. I think you said it was 78% loan to cost and then I missed the LTV stat on that.

It's about [65%].

[65%].

Our next question is from Eric Hagen of BTIG.

Going back to the liquidity for just a second. Can you describe what's included in the unencumbered asset pool?

Sure. It's a mix of our assets that are all unlevered today. That includes things like our home equity improvement options, some of our subordinate securities, it's a mix of things that are in our third-party and organic securities that we own on our balance sheet. CRE -- CRT is unlevered.

And then on the sales of the BPL loans in the quarter, can you talk about the execution that you got there and what the gain on sale look like there? Can you also say with your unfunded commitment in the BPL portfolio was at the end of September?

Yes. For the execution, the loans we sold were largely single asset bridge loans, where we're keeping a net strip of anywhere between 25 basis points and 75 basis points (inaudible) average was about [50 or 60] on the quarter. The average unfunded commitment is just under $1 billion, which we expect to sort of play out over the next couple of years. The vast majority of that is in longer-term build-for-rent projects that we expect to fund over the next sort of 6 quarters to 8 quarters. So just provide some context, but that's the current number.

Our next question is from Steve Delaney of JMP Securities.

First, applaud the EAD decision. I think it's very timely. And the -- it's very similar to the distributable EPS measure that the SEC mandated for the commercial mortgage REITs, and that's been widely accepted by investors. So hopefully, you don't get any push back. I think you'll find a lot of support with the analysts on that. Also, bridge loans are the topic tonight. Your fundings held up well. You funded -- by my math, you funded [$470 million] and only sold [$48] million. To me, that suggests that you're thinking about doing another securitization, you did one in the second quarter for [$250 million]. Is -- are you -- is the difference between the origination volume and the whole loan sales of [$48 million], is that indicate -- is that accurate that you hope to hold those and be able to securitize them as a permanent investment on your books rather than selling them off?

We certainly have the flexibility to do that. We did -- part of the [$570 million] is single-family rental overall that we did, and we did a -- like I said in my remarks, a $275 million SFR securitization as well in Q2, which was -- Q3, excuse me, which is -- which was very accretive. We have the optionality to do either one, Steve. I think our intention is to probably do a mix of whole loan sales that we are comfortable with the gain on sale. A good chunk of the bridge book is already financed non-recourse and non-mark-to-market. We have about [550 million] of bonds out there through 2 securitizations. We have another facility bilaterally, which is non-recourse and non-mark-to-market. And cumulatively, that capacity is over $1 billion, which is obviously very valuable.

So we do have the ability to sort of keep those outside of a traditional securitization context and feel very good about the returns and the match funding and the lack of contingent liquidity risk given how those deals are structured. But we're always exploring a bunch of different avenues. We could look at a broadly distributed deal. There's great interest in the loans that we make certainly because of where the return profiles are in no small part because they are floating rate, obviously SOFR is higher. So it will be a mix of things. But I do want to underscore that the current financing apparatus we have are compelling as is. So we don't feel like our hand would be forced.

Thanks, Dash on that. The BPL whole loans, I mean, obviously, when you were back in the days when you were selling prime jumbo loans, the banks had a pretty good bid there. When you look at BPL whole loan sales, is the buyer there a private fund, private debt fund? Or I know -- obviously, you don't want to be specific, but what's the nature of the end buyer, the end investor in that product?

It's a great question. It's probably a mix of certain insurance vehicles or insurance companies that have appetite and sort of an expertise to deploy into the space. It's certainly traditional funds, money managers. The securitization we did in Q3 was placed with one investor, sort of a very large global institutional investor with a few different sleeves of capital.

And so I think one big upside to continuing to grow the BPL business is just continued whole loan buyer education. I think there's a relatively orderly whole loan market for BPL. It's not as efficient as jumbo as when markets are more orderly than they are today. And so that's a huge upside for us. It's traditionally not the banks, which is, as you know, Steve, part of the reason we love the business. It's just (inaudible) efficiently...

There's no cheap money coming into that particular sector like the banks normally flood.

That's right.

Well, lastly, the reallocation of capital away from the origination building rather than trying to bang your head against the post to make that happen on a volume basis, I applaud that and you've proven you can be an opportunistic investor over the years. And I know there's strong relationships that allow you to make that happen. So all the best for the fourth quarter and closing out the year.

Our next question is from Bose George of KBW.

Actually I wanted to ask about the funding markets. I mean they sound solid, but just can you talk about any trends there? Are you seeing changes in terms of advance rates or the number of lenders active in the markets, et cetera?

Hi, Bose. So far, it's [been there] orderly. I mentioned in my prepared remarks that we've rolled about $5.5 billion of lines across 14 facilities, all with domestic banks. And we've had really a lot of stability in terms of our advance rates. We are -- have recently seen a little bit of increases on spreads, just given everyone's cost of capital has gone up. And but as most of these facilities that we use are for our mortgage banking inventory, where we're resetting those coupons live with the market. So that's why you continue to see durability from our net interest income in terms of our ability to cushion that impact.

Yes. Bose, I'd also add that the collateral quality remains high, and it's a collateralized lending business. And I think there's big differences today versus 10 years or 15 years ago after the great financial crisis, I think lenders are pretty confident in the collateral and the performance to-date, so that keeps the markets open.

And actually, switching to the -- thanks for the EAD disclosure. In terms of the returns from the discount assets, as they run off, I assume that isn't captured in EAD, right? Is that going to just be like in book value or...

No, we actually are -- we are trying to capture the concept of accretion through our change in basis of investments, which I know our material just came out here shortly before the call. But we do outline in detail what those add-backs are. We only have a very small portion of our assets that are held for sale assets just are like $140 million, which are effective yield. So we're trying to capture that principal portion of our income by effectively recapturing some of our effective yields back through income.

And then actually, could you just repeat what you said earlier about the goodwill from the Riverbend acquisition?

Yes. We have about $37 million of goodwill and intangibles from the Riverbend acquisition based off our $44 million purchase price.

Our next question is from Stephen Laws of Raymond James.

Dash, a lot has been covered on the BPL side, but one question on kind of pricing, and I guess, really across bridge and SFR, but how much has -- now that rates, I don't want to say stabilized, but we don't have this rapid pace of increase or maybe we're getting a month or a few weeks, how quickly you're able to get pricing reset? Have we seen that flow through? Or is there still some catch-up across products? And have you been able to kind of maintain or increase your spreads, as you think about this cost of financing for the new investments increasing?

Yes. We have much like on the resi side, we refresh our pricing daily. I think with bridge loans, that definitely is a more sort of loan-by-loan analysis based on sponsor quality, leverage, geography. So we always have -- no great optionality there. So I think Stephen, for the fixed rate SFR loans, we don't actually lock those loans until right before we fund. So that's a little bit of a simpler pipeline management tool than with the -- with traditional jumbo pipeline.

I'd say, yes, we do have pricing power. Clearly, the fact that SOFR is now at 3% has sort of moved the effective floating rate coupon into the very high single, low -- very low double digits, which is appealing. We still compete on every loan. But I would say the -- our overall pricing power is in a good place. And to your point, we do have the ability to be very nimble in terms of how we adjust our prices versus what we're seeing in the market.

Thanks, Dash. Chris, you've touched on this a couple of times. You mentioned third-party securities. I think talking to Doug and Steve brought it up as well. 10 years, 11 years, 12 years ago, you guys bought a pretty material amount that you've been sold over the following years at some pretty attractive returns. But I think that, if I remember correctly, maybe the rest of your capital stack wasn't so cheap. So kind of thinking about how you view the relative attractiveness of buying something back in your stack and retiring it versus buying third-party securities that you can sell later and maybe recycle that capital back into the, say, origination business if it returns at that point.

Yes. No. Great observation. We did a lot of this after the great financial crisis. And I'd say securities aren't quite as cheap as they were back then. I do think they're probably getting cheaper. In the consumer resi market, for instance, there's not a lot of securitization getting done right now other than age collateral. It's sort of been the story for the year. It's somewhat of a distressed area right now, where if you don't need to be securitizing, at least certainly in jumbo, you're probably not. So eventually, these warehouse lines that are full, this collateral will come to market. It may not come to market until Q1. But it will, and there should be some extremely compelling opportunities to put capital to work. So I think it's kind of a timing issue for us.

The one thing we have great line of sight in is obviously share repurchases. And so that's something that we can affect immediately, which is obviously is going to be a focus of ours. But I do think we're starting to see really good opportunities. And of course, one of the great parts of the BPL business is we can continue to organically create these investments.

When you look at the profiles of the investments we're putting on the books today, they look extremely attractive to me and by controlling the credit and the underwriting, we feel really good about the quality of the book and certainly across a range of scenarios based on what's going on with the economy. So overall, I think it's definitely an investor's market. And hopefully, you see some virtuous combination of both here in the coming quarters.

And lastly, just some comments on Horizons. Can you provide maybe an update on your portfolio there in this environment, any outperformers, any underperformers highlight? And then from a new investment standpoint, certainly, valuations in the public markets have moved a lot. Have you seen similar moves in the private market? Are those valuations catching up? How does the new pipeline on Horizons look?

Thanks for the question, Stephen. It's -- I would say we've become, as you might expect, even more judicious around capital deployment in Horizons. Horizons has always had a very specific investment thesis around trying to marry durable technology solutions with needs for our business or our markets. So it's always been sort of a rifle shot approach. And I would say even more so today, obviously, given where the markets are.

The book, we're generally very, very pleased with. We did on a net basis write-up on a small amount the overall Horizons investments this quarter. There's no bellwether like further, further opportunities for the underlying portfolio companies to raise capital. So in Q3, [Q4] of the portfolio companies and Horizons actually did raise incremental capital. We participated in 2, one part -- one led to a small write-up and the other -- the other 3 were basically non -- unpriced deals that were basically flat to the prior raises, which is great because it allows them more runway without the dilution risk of the prior investors, including ourselves. So I think we've been really pleased with that.

But look, the market is -- the market overall is challenging. Obviously, these companies, as you know, are largely very early stage or seed round that we're investing in. So you don't see the daily price action, obviously, like you do with the publics. But it's clearly made its way in to more at the top of the funnel, I would say, in terms of the earlier stage companies.

And ultimately, we feel like it will create more opportunity for us. We're still focused on business models, which are more acyclical and more sort of serving inefficiencies in durable markets, whether it's solutions from landlords and tenants, blockchain, use cases that are more durable through cycles and [they are] not cyclical to volumes. And I think we've been well served by that so far, but more to come for sure.

There are no further questions. And with this, today -- concludes today's teleconference. Thank you for joining us. You may now disconnect your lines.