Redwood Trust Inc (RWT) 2022 Q1 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust, Inc. First Quarter 2022 Financial Results Conference Call. Today's conference is being recorded.

I would 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 First Quarter 2022 Earnings Conference Call. With me on today's call are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Brooke E. Carillo, Redwood's 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 first 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.

Thanks, Kate, and thanks to all of you for joining us today. On our fourth quarter earnings call in February, we approached our commentary with a cautious eye on changing market trends in the mortgage sector. Fed has signaled its plan to raise rates, the conflict between Russia and Ukraine was just beginning to be a headline and markets were reacting with fear over anticipated uncertainty and the volatility ahead.

As a point of reference, markets were estimating 4 to 5 rate hikes this year back in February. Today, many market observers are expecting 9 rate hikes. Additionally, the 10-year treasury rate has risen over 120 basis points since year-end and the spread between the 2-year and 10-year has collapsed from 80 basis points to 0 by the end of the first quarter. Mortgage rates may soon eclipse 6%, the highest level in over a decade. All of this has remarkably occurred in the span of just a few months.

In these markets, there is truly nowhere to hide, and it's times like these that help differentiate competitors in a way that can't be easily seen during periods of extreme Fed accommodation. That's why we're so pleased with our performance during the first quarter, which included GAAP earnings of $0.24 per diluted share, representing an annualized ROE of 9% and book value of $12.01 per share, effectively flat since year-end. This is despite fixed income markets turning in their worst performance in over 40 years.

We also paid a $0.23 per share quarterly dividend, unchanged from the fourth quarter and are generating strong cash flows and earnings to sustain or grow that dividend going forward. All told, the resiliency of our mortgage banking businesses, coupled with another quarter of very strong fundamental credit performance across our investment portfolio has resulted in balanced financial results in an otherwise lopsided quarter for the broader mortgage sector.

What has become clear early in 2022 is that this will be a year of great transition for the industry. In addition to the rise in benchmark rates, the Fed, which has effectively become the world's largest agency mortgage REIT, has signaled they may begin aggressively paring back its $2.7 trillion of MBS holdings. Navigating those dispositions will be an ongoing challenge for market participants, particularly those who benefited the most from the Fed's accumulation of MBS over the past few years.

As a company with over 27 years of public company performance, we pride ourselves in our ability to perform across cycles. We structured our business with complementary diversified strategies to help manage against volatility, while enabling us to continue providing solutions for our partners and durable returns for our shareholders.

For instance, our 2019 partnership with CoreVest solidified our presence in the business purpose lending market and has to date far exceeded our expectations, both quantitative and qualitative. The investments we've created in business purpose lending helped to turbocharge the modernization of our investment portfolio. We are now a leader in both single-family rental and bridge lending with the ability to offer our clients a breadth of product options after needs evolve.

Despite the rapid rise in interest rates, we have seen a continued uptick in demand from BPL borrowers and a desire for additional products that address their evolving needs.

This is why we're very excited today to announce the acquisition of Riverbend Lending. Riverbend is a leading bridge lender that provides financing to experienced real estate investors who acquire residential and multifamily transitional properties. This acquisition is a step forward in solidifying our market-leading position and reflects our conviction around the strength of our business purpose lending platform and its prospects for future growth.

Housing inventory remains at historic lows, most notably the inventory for turnkey housing stock, which eliminates the execution risk of making a home moving ready for prospective homebuyers. As a reminder, our bridge loans carry a short duration, typically 12 to 18 months, they generate current income and they have conservative leverage points, all compelling traits for investors in today's market. Following the closing of the acquisition, Riverbend will be integrated into CoreVest and will add incremental scale, geographic footprint and its client network to CoreVest's existing platform.

Our team at CoreVest has done a remarkable job scaling the business into the market leader it is today, and we remain committed to continuing to grow organically through product development and expansion of our client base in a market that is maturing but remains fundamentally fragmented. The current macroeconomic backdrop provides an opportunity to lean in further to our BPL business and Riverbend, an emerging leader in its own right, represents an important step towards furthering these growth plans at a safe but enhanced pace. Riverbend is led by a phenomenal team that we are excited to have joined the Redwood family.

I'll let Dashiell into more detail around the transaction, but I wanted to emphasize how it fits into our playbook and positioning our platform for the long term through incremental scale, best-in-class products and attractive investments for our portfolio, all of which drive value for shareholders.

And turning to our investment portfolio, it was a big contributor to our book value stability in the quarter despite severe moves in many asset classes. The fares repeating our portfolio is different. As we have long emphasized, our investment portfolio has been uniquely constructed over time with assets that take a view on housing credit fundamentals and are less sensitive to some of the whipsaw moves we see in the interest rate markets. And our outlook on housing credit remains strong, given rising home equity, low unemployment and record low housing inventory.

Volatility leads to entry points, and we will continue to opportunistically add to our portfolio where we see strong return potential. Our residential business, a foundational piece of Redwood's core strategy established itself as a true leader in the space over 3 decades, that's product offerings, speed to purchase, securitization and distribution. This leadership set on top of prudent risk management has set our residential team apart, both over time and particularly in the most recent quarter as we were able to quickly and efficiently distribute our fixed-rate loan inventory as mortgage rates rose dramatically.

Because of our positioning, we're able to continue to lock loans competitively throughout the quarter, while they step back from the market, resulting in a residential lock volume declining only 7% from the fourth quarter of last year versus industry-wide projections of a 25% or greater total decline for the period. We did this while preserving our gross margins at levels near our long-term historical range.

Suffice to say, we're extremely pleased with how our residential business performed relative to what we suspect was one of the worst quarters for the industry in many years. As Dash will touch on, our ability to refresh and expand our offerings earlier this month further demonstrates our leadership and ability to address the constant evolution of consumer needs.

I'll now transition to RWT Horizons, a venture that we launched in early 2021, which has become a crucial part of our overall investment strategy.

In about 14 months, we've made 21 investments in 18 early-stage fintech and proptech companies that have a direct nexus to our business and are innovating across multiple facets of today's housing market. These investments have put Redwood in a unique position to be a first call for many technologists looking to turn their innovations into thriving business opportunities. Already, we are seeing the progress of this initiative, which has begun contributing to the bottom line well ahead of schedule.

At quarter end, we had $25 million of capital committed to our Horizons investments and 2 of our smaller investments completed follow-on raises at significantly higher valuations during the first quarter. And in April, another one of our early Horizons investments completed a new funding round that is expected to result in a pretax gain on our investment thus far of approximately $10 million. We expect to recognize that income as part of our second quarter GAAP earnings.

Before I hand the call over to Dash, I'd like to reiterate that current markets offer important opportunities for us to further differentiate our business, particularly as we position Redwood for new chapters of growth.

While each of our business lines address different facets of the housing market, taken together, Redwood offers shareholders a comprehensive and highly durable non-agency strategy that cannot be easily replicated.

And with that, I will turn it over to Dash, who will take us through the operating businesses and our investment portfolio.

Thanks, Chris, and good afternoon, everyone. As Chris mentioned, in a quarter characterized by substantial volatility, Redwood delivered solid financial results, supported by disciplined risk management and uniquely diversified revenue drivers, now further enhanced by the addition of Riverbend to our franchise.

As Chris mentioned, we believe this is a great acquisition for our company and another step forward in solidifying our leadership position in BPL. Founded in 2017 by principles with whom we've had a long working relationship, Riverbend has established itself as a top financing provider to sponsors seeking to redevelop and sell both single and multifamily properties. Their product suite is highly complementary to CoreVest's unique mix of bridge and SFR lending products.

Riverbed lends in 33 states with a particularly deep footprint in California and the Pacific Northwest, fertile territory for growth in BPL lending. The platform originated $1 billion of loans over the 12 months ended March 31. With a loyal client base, we believe we can serve even more deeply with our full complement of loan products.

Riverbend has historically originated for sale, developing deep distribution channels and keeping a portion of their economics on the run in alignment with their whole loan buyers, a valuable distribution channel that we intend to utilize going forward.

Brooke will comment in a moment on the acquisition's expected accretion to our earnings over the near to medium term. We look forward to working with the Riverbend team and welcoming them into our family of companies.

As Chris referenced, momentum and demand for business purpose lending products has remained strong, even with the move higher in benchmark rates. CoreVest delivered another quarter of record volumes in Q1, funding $920 million of loans, up 25% compared to Q4.

The first quarter's funded volumes were split close to evenly across term and bridge products with an increase in multifamily across both asset types.

Across both single and multifamily, we estimate a total addressable market for BPL of approximately $100 billion, a powerful statement as to how many potential BPL borrowers remain underserved. We get asked frequently about competition in this space. And while certainly the past few years have shown an increase in the number of market participants, CoreVest continues to set itself apart with its product suite, speed of service and deep client base, all strengthened with Riverbend coming onboard.

BPL's first quarter mortgage banking results reflect robust growth in origination fees, offset by the impact of spread widening since year-end. In keeping with volume trends, fee revenue grew 25% during the quarter, and we were able to distribute over $300 million in whole loans prior to much of the market volatility.

While continued spread widening through quarter end is estimated to impact execution on our SFR loans and inventory, we believe the market has begun to find its footing, particularly for loan products with compelling credit attributes, including cross collateralization and extension risk mitigated by maturities more analogous to fixed-rate CMBS loans.

BPL assets, both bridge loans and subordinate SFR securities remain a growing part of our portfolio capital allocation and contributed to the stability of our book value amidst the volatility. We frequently refer to our investment portfolio overall as one that is hard to replicate, and this remains the case today, both in terms of credit quality and value stability in shopping markets.

Over 70% of the investments in our portfolio are organically created for which we control the credit process from day 1 and have held the securities for the long term. These include the subordinated bonds issued off our residential and SFR shelves, whose loans have an average seasoning of over 4 years, with delinquencies now trending consistently around 2%, reflective of their high-quality underwriting and the substantial additional equity that has built up through amortization and home price appreciation. This durability of our investment portfolio also applies to the recent backup and benchmark rates.

The expansion of our housing thesis in recent years, most notably into BPL assets and securities backed by reperforming loans has meaningfully changed the convexity profile of our book and reduced underlying extension risk. Our BPL investments consist of shorter duration, predominantly floating rate bridge loans as well as securities backed by call protected cross-collateralized SFR loans with a 5- to 10-year term.

Our RPL securities, predominantly our SLST security structured in partnership with Freddie Mac represent close to 30% of our portfolio's capital allocation and are backed by loan season 15 years or more. The SLST securities we own were originally underwritten to single-digit prepayment speeds with actual performance significantly outperforming modeled expectations due to both natural housing turnover and credit caring of the underlying borrowers. Due to their seasoning, our subordinate credit investments overall now represent a fit percentage of their respective capital structures with stable credit profiles, able to sustain the potential slowdown in HPA as a result of the rapid increase in borrowing costs.

While certain parts of our investment portfolio naturally underperformed during the quarter, most notably CRT, -- this was partially offset by our interest-only securities, including Sequoia MSRs that outperformed into the interest rate back up. The market for new issue securitizations was challenged during the first quarter as credit spreads began to move in sympathy with benchmark rates.

We often comment on the importance of having both well-established securitization shelves and a deep network of whole loan buyers that values our track record of quality underwriting. The first quarter was no exception. While we completed 1 Sequoia securitization early in the first quarter, backed by approximately $700 million of loans, achieving attractive execution, the remainder of our distribution was in whole loan form.

The durable whole loan sales strategy requires end-to-end coordination across the business, a hallmark of both our residential and BPL platforms. Collectively, during the first quarter, we sold over $2 billion in jumbo and SFR loans to a broad array of institutional investors, many of them repeat partners attuned to our high level of service. This allowed us to come into the second quarter with lower loan inventory, aided by our ability to process and fund loans more quickly than our peers. Ultimately, our distribution and execution allowed us to successfully move risk while others became weighed down by inventories, struck a coupons well below prevailing market levels.

We have already distributed the vast majority of this type of production, including through whole loan sale executions in April at levels we estimate to be significantly accretive to securitization. The speed of our execution remains a clear differentiator for both of our operating platforms. We often process loans 3x to 5x more quickly than the competition. This time decay increases market risk, which in this environment has, in our view, forced many competitors to reevaluate risk appetite and product mix, opening a window for us to continue gaining market share safely and profitably when the time is right.

As always, we will evaluate the most efficient course of distribution and expect both securitization and whole loan sales to remain key parts of the equation. This distribution balance allowed our residential mortgage banking platform to log a productive quarter amidst unprecedented challenges in the consumer mortgage space overall.

As Chris articulated, gross margins were maintained near our historical long-term range on near consistent volumes versus Q4. Purchase money loans in Q1 increased to 65% of locks versus 59% in the fourth quarter. The purchase money percentage has continued to increase into April, consistent with the strategic rationale behind our rollout earlier this month of new expanded prime products to complement our core offerings. These new offerings include a unique bank statement program with terms and underwriting criteria designed to meet the CFPB's qualified mortgage definition, among other things, an important driver of securitization profitability.

Since the onset of the pandemic, the number of self-employed borrowers has increased substantially, and we believe these new programs will translate into better pricing for our sellers and more affordable loans for borrowers. With loan officers no longer able to rely on GSE refinance volumes and the industry well underway in rightsizing capacity, we see these new products as a key avenue to increasing our market share by providing additional options that one officers can use to service their customers.

Reinforcing the unique diversity of our revenue drivers enterprise-wide, RWT Horizons just completed an important quarter in its evolution, including the appointment of a full-time Chief Investment Officer. In addition to direct return on our investments, a critical benchmark for Horizon's success is the impact of the underlying technology on our broader business.

Building off of our momentum and leveraging its technology to put remittance information from Sequoia deals on blockchain, we were pleased to see liquid mortgage recently consummate a partnership with Canopy, another early Horizon's investment to leverage blockchain and reducing redundancy in the loan due diligence process. We also recently completed a data sharing and licensing agreement with another portfolio company, focused on providing analytics to the single-family rental market. This progress foreshadows real change to accepted practices and ways in which we use data to underwrite risk more nimbly.

While RWT Horizon is only a year old and speaks for only a small percentage of the firm's capital, we've established ourselves as a leading investor in the FinTech and PropTech areas, validating our thesis that technology entrepreneurs value strategic thought leadership, not just capital and picking partners.

I will now turn the call over to Brooke Carillo, Redwood's Chief Financial Officer.

Thank you, Dash. As Chris highlighted, we reported GAAP net income of $31 million or $0.24 per diluted share in the first quarter, representing a 9% overall annualized return on equity for the quarter and covering our $0.23 per share dividend. Most notably, our book value per share proved resilient, declining less than 0.5% to $12.01 leading to an economic return of plus 1.5%.

Our book value performance for the full quarter was in line with the move we indicated through the end of January on our fourth quarter call, which is particularly notable given the historic volatility experienced during February and March. Given the strong relative performance of our book value during the quarter, I want to begin by highlighting that the stability was attributable to the diverse characteristics and quality of the assets within the investment portfolio.

Returns on our investment portfolio held up relatively well. We saw less than $0.10 per share decline quarter-over-quarter in the investment in fair value changes and other mark-to-market income that drive EPS.

Our negative duration assets, namely our MSRs and IO securities act as a natural hedge and provided book value protection as interest rates increased significantly in the quarter and prepayments slowed, offsetting fair value declines from our Sequoia subs and seasoned jumbo loans.

Strong carrying continued strength in overall credit performance offset generally wider spreads and drove a 16% return on invested capital for the investment portfolio segment. We have seen this resiliency continue into the second quarter as we currently estimate our book value is down between 0.5% to 1% in the month of April, bringing the total year-to-date book value estimated change to be inside of 1.5%. Same with the investment portfolio, we deployed $128 million of capital with bridge loans representing about 50% of the total and home equity investments largely being the balance. We also made a $25 million commitment to an investment vehicle that serves the mission of providing quality workforce housing opportunities in key Bay Area urban communities. Delinquencies in the investment portfolio remain near post-pandemic loads, portfolio LTVs have moved lower and home equity is at historic highs.

Moving on to our operating results relative to the fourth quarter. Net interest income was up $3 million as we experienced a full quarter benefit of the investment portfolio deployment in Q4, specifically bridge and follow-on investments and seasoned mortgage servicing rights, and we received $8 million of yield maintenance payments on capital securities as underlying loan prepayments increased. This partially offset a $5 million decline on the quarter and accretion of our available-for-sale securities given the higher rates and slowing prepayments impacted the near to intermediate prospects of calling those securities.

In terms of our noninterest income, our mortgage banking activities net declined by $20 million collectively during the quarter as spreads widened for both securitization and whole loan sale execution and rate volatility increased throughout the quarter. Relative to the fourth quarter, G&A decreased by $4 million, driven by lower variable compensation commensurate with our GAAP earnings, which led to a relatively durable efficiency ratio despite lower volume quarter-over-quarter.

The residential mortgage banking segment generated a 10% return on capital during the quarter, which was unchanged from Q4 on similar themes. We saw continued pressure on our gain on sale margins as our pipeline was impacted by widening spreads and hedging costs significantly increased quarter-over-quarter. However, our operational excellence and conservative approach allowed us to maintain a lower inventory of loans than would be typical otherwise.

Turning to our business purpose mortgage banking segment. As Dash mentioned, CoreVest had another record quarter for volume, up 25%, capitalizing on the momentum from late last year. While fee income from bridge was higher in the quarter, the single-family rental pipeline was more heavily impacted by rate -- interest rate and spread volatility. Despite the significantly lower contribution from BPL mortgage banking, the bridge assets that are organically created from our platform were highly accretive to the investment portfolio, generating a 17% annualized economic return. Accordingly, we will continue to allocate more capital to bridge production and the addition of Riverbend to our platform enhances our ability to do so.

Following up on Dash's commentary, we expect the platform to generate attractive returns for our shareholders. Given we do not expect to close the acquisition until later in the second quarter to obtain necessary change of control approvals, we expect the Riverbend platform to contribute between $0.15 to $0.20 of earnings as a run rate by 2023, which translates to a mid-teens expected ROE, inclusive of the full consideration paid for the platform.

We maintained excellent strength in our capital and liquidity position during the quarter. We ended the quarter with over $400 million of unrestricted cash and $140 million of investable capital compared to $150 million at year-end. Leverage came down in the quarter from 2.4x to 2.1x on lighter residential mortgage banking inventory I mentioned previously.

Looking across our debt maturities, we renewed facilities representing $2 billion of capacity in the first quarter with only $550 million rolling later this year, and we maintained $2.3 billion of excess capacity in our loan warehouse facilities, which sufficiently addresses our financing needs. We also have no corporate debt maturities upcoming in 2022.

We had a highly productive quarter as we renewed 4 residential loan warehouse facilities and initiated 2 additional lines. In business purpose lending, we renewed 1 facility, amended 2 others and liquidity to finance our BPL production remains robust.

A consistent theme across our financing activities that we saw favorable terms, either through procuring lower cost of funds, increasing advance rates or adding more product flexibility. Throughout the quarter, we were able to seamlessly transfer $81 million of bridge loans to our first fixed rate RTL securitization, bringing up incremental capital.

As we move through the second quarter and 2022 more broadly, we remain on track with the long-term goals and objectives we laid out at our Investor Day last September. Near-term interest rate volatility is impacting the time line given the significant repricing of all financial assets that's transpired under the new rate regime. While, of course, the environment is uncertain, we believe that our current capital and future earnings profile position us well to continue supporting business growth ahead.

Based on expectations for current returns were seen in today's market that meet our risk tolerance, we expect adjusted ROE for our business to range between 8% to 12% in the near to medium term and over time, turn back to the 15% blended return we spoke about at Investor Day. We continue to exclude the potential upside from Horizons, other strategic investments and any subsequent M&A from our ROE outlook.

Looking ahead, we see potential growth in ROE to come from the same tools we've utilized in the past, including capital efficiency and operating leverage as our mortgage banking business is scaled. Our investment portfolio utilizes a modest 1.3 turns of leverage today with opportunities to optimize in several key areas, including bridge and RPL. Over 70% of our bridge portfolio is financed with warehouse debt, which we have the potential to improve through higher advance rate nonrecourse financing structures. In addition to these, we see ROE potential from the fact that we have over $1.1 billion of floating rate assets, nearly 40% of which are owned for cash were financed with attractively priced fixed rate debt and a rising rate environment provides an earnings tailwind for our business.

Furthermore, net of first quarter gains, there remains a potential upside of roughly $2.15 per share in our portfolio through book value upside from discount securities as underlying performance continues to improve.

And with that, I'd like to turn it back to the operator to open the call for Q&A.

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

Actually, the first question, just can you talk about where coupons are on the loans at CoreVest? And then just how you kind of manage the risk with the big move up in rates and spread widening relatively quickly this year?

Sure, Bose, it's Chris. I think Dash and I will tag team this. As far as the move up, we were really deliberate to start the year in getting out ahead as best we could of what seemed like a big rise was coming in rates. And obviously, that occurred. We moved our first securitization to the very front of the deal calendar for the year in residential. That turned out to be a very good decision because deals have progressively priced worse since right up through today. And we really were very intentional in leveraging our whole loan distribution. To think about securitization, one of the reasons why we only did 1 during the quarter was because you need to go through an accumulation process and basically bulk up to get to a critical mass. With our whole loan channels, we're able to move risk more quickly and stay as close as we could to current coupon.

So that was really the story in the first quarter and potentially others approached it differently. But I think we had about as good of an outcome as we could have, and it's positioned us really well going forward even though we still expect a fair amount of volatility.

On the coupon side, Bose, it obviously does vary by product and overlay. But for jumbo, I would say coupons are probably in the low to mid-5s, maybe a bit higher right now, depending on the specific product. And for bridge, they're still in the higher single digits. The vast majority of our bridge book is floating rate. And so depending on the path of LIBOR, those rates would continue to tick up.

And then for the term single-family rental, the 5- and 10-year product, it's higher 5s potentially touching 6%. We've had a bit of a net rally here in the past few days, but that's the general ZIP code for where coupons are right now.

Okay. Great. That's helpful. And then just given the continuing volatility in the second quarter, can you just talk about sort of similarly managing risk? Is it sort of the same kind of playbook in terms of more cash sales, et cetera?

Yes. I think for now, it's going to be a similar playbook. One thing I'll say is because we were able to protect book value so effectively in the first quarter, it's positioned us potentially to get a little bit more aggressive. We'll see -- I think we, like most are looking and hoping for some stabilization with respect to rates. But we'll take whatever comes our way and we continue to lock loans each day. And as the market sort of corrects, we plan to stay out ahead of it. So I think it's going to be a similar approach. But I also do think we're through the worst of it. The market is correcting to Fed policy faster than ever. And so I think that we get through another Fed meeting soon, and hopefully we start to see some good opportunities to wagon further.

Okay. Great. And good job protecting book value this quarter.

Our next question is from Don Fandetti with Wells Fargo.

Yes. I guess on your BPL mortgage banking, it sounds like the -- it looks like the margins were impacted by spread widening on the inventory. Can you talk about the near-term profitability of that segment? And then also, can you talk about the gain on sale margin expectations near term for the residential mortgage banking?

Sure. For BPL, you're right. A lot of the story in the first quarter was just the move in spreads. We were able to get a couple of large whole loan sales off at levels that we felt were accretive to securitization at that time and before the increased volatility set in, but spreads did continue to widen throughout the quarter. But we've adapted. As Chris said, we're very nimble with our pricing and our rate sheets. And we think where we're currently pricing, particularly in the SFR book, the risk is certainly responsive to where we sit today. And we are at really all-time wide from a spread perspective, particularly at the top of the capital structure for securitization, and that's why we're continuing to make sure we remain balanced between securitization and whole loan sale. There is some real scarcity value in our mind to -- on the SFR side, the quality of that product, no one really else is producing it in scale. And so that's a lot of the reason why we've had really good success working with whole loan partners in addition to the traditional securitization route.

The other big thing about BPL margins is just really the emergence of bridge over the past few quarters. We had another record quarter for bridge. There continues to be real macro demand and tailwinds for that product from our sponsor group. Chris touched on it. Those are great for fee generation and carry a little to no actual duration. And we continue to innovate on ways to finance those going forward, which will be accretive to NII and ultimately, margins as well.

So just the balance of bridge and the depth and of course, onboarding Riverbend and the ability to add another $1 billion plus a year potentially of production to the mix is really exciting for us. So we position ourselves accordingly from a product mix perspective. And of course, as Chris said, just the nimbleness of being able to reprice the risk as frequently as we're able to.

On the jumbo side, we were really pleased with where margins came in, in Q1, essentially at the low end of our historical range. We do see them going forward consistently there this quarter, a lot of it will be indexed again to just the strength of the whole loan distribution. But the other point is when you look at securitization execution and jumbo, it really is sort of a tale of 2 cities. There's still a lot of our competition that is trying to flush out the lower coupon mortgages, which obviously have a very, very different convexity profile than the current coupon production that we're able to flow in. We talked in the prepared remarks about how efficient we've been at really clearing out the lower coupon. And so when we think about securitization and jumbo or whole loan sale for that matter, it's important to recognize that the product that we have is a very different cash flow profile for investors, whether it's AAAs or whole loan buyers. And that is a very helpful buttress for margins, particularly given what rates have done so quickly.

Got it. And then I have a quick accounting clarification for Brooke. Let's just say on your residential loan portfolio because you fair value of the loans, what liabilities do you also fair value it? Is it only if it's securitized Sequoia where your fair valuing the loans and the debt, and so that leaves loans that aren't securitized you with fair value, but there's no offset from the debt financing, do I have that right?

Yes. The vast majority of our residential securitizations, we fair value both under the CFD election. And then just in terms of the impact of fair valuing these, all of the hedge loss or benefit is also captured within the mortgage banking that flows through our GAAP P&L as well.

Our next question is from Steve Delaney with JMP Securities.

Congratulations folks on just an amazing performance in what was a crazy market across the entire mortgage universe. So props to the balance sheet, props to you guys.

A lot of things have been covered. Riverbend -- and I'm curious about the bridge. I think a great addition, obviously, the floating rates and those products generally. Well, I guess it depends on your securitization and whether you do gain on sale, but obviously, the commercial mortgage REITs on those flooding rates, they don't do any mark-to-market when they finance with CLOs. Maybe that's a question in its own right for you guys on when you think about bridge going forward. But I was really going to ask Dash is you obviously have your kind of your resi bridge, your renovate resale product. You've probably got some small multifamily. But does Riverbend also move into other small balance commercial property types as well given their geographic breadth, et cetera?

Yes, it's a great question, Steve. In general, what's really exciting about the acquisition, obviously, besides the people and the cultural fit is really 2 things. #1, the products that Riverbend is in and the geographies where they are deepest are areas where we are just not as deep. And so sort of the first order accretiveness is just the products that they have very little overlap and product type and borrower frankly, to CorVest current footprint. And then geographically, they're just deeper in areas that we think are really attractive.

The second order effect, which frankly is not included in some of the accretion numbers that Brooke articulated is being able to serve that client base more deeply than Riverbend brings to us. They are doing some smaller ticket transitional multi. We would expect as a combined enterprise, that would continue to grow. There's a ton of demand there from borrowers and some really attractive opportunities. But there's other stuff as well. As CoreVest's bridge platform is very unique in terms of the products that it focuses on versus maybe the rest of the traditional lending community built for rent lines of credit, things like that, just products that serve different needs for sponsors. And so pushing those products out to the Riverbed network in addition to the single-family rental, we think it's going to be particularly accretive and exciting.

So the direct answer to question is yes, we would expect more small balance multi. Elsewhere in commercial, probably not, but that's an area that Riverbend already is in, and we would expect them to do more of now.

And Steve, I'd also add, these are great portfolio assets. So --

Yes, that's what I was thinking, from a risk management standpoint, yes.

Yes. So these are a big reason -- these BPL investments are a big reason why our book has been so resilient with a huge run-up in rates. So that's -- Riverbend is a great whole on distribution platform today, but having the opportunity to put more of those assets in our balance sheet is pretty attractive.

Yes. And I mean, just on my initial comment about CLOs, I mean, you've been selling a lot of that product on the bridge product, but do you envision that, if you were to do that at scale on your balance sheet, do you envision that that would ultimately involve a nonrecourse securitization structure around that on the financing side?

Yes, it's a very good point, Steve. So we have sound sheeted most of our bridge loans to date, we have about $1.2 billion of loans on balance sheet. We did do our first bridge securitization back in the fourth quarter in October, and it's certainly been a highly accretive fixed rate financing that we continue to have revolving capacity to place more of the floating rate loans as we've been originating an increasing portion of our overall mix within bridge.

And one thing I would note, too, 30% of what Riverbend has originated and 30% of what we did too in the first quarter was on the multifamily side. There's a lot of accretive type of nonrecourse financing structures there that we continue to represent in some of that capital optimization that we referenced in our prepared remarks. So we do fair value -- just to circle back to your point earlier, we do fair value all of our bridge loans, but they do sit at the REIT and have been, as Chris mentioned, a very nice ROE earner for us.

Our next question is from Doug Harter with Credit Suisse.

Can you just talk about the competitive dynamic in the various origination mortgage banking businesses kind of how competitors might have fared in the more volatile period and whether that puts you in a better competitive position or the same competitive position kind of going forward?

Yes. I would say overall, we expect to be in a much better competitive position, particularly in residential. What's happening in residential is there was a lot of new issuers, many of them originators who entered the space very recently. And obviously, with this type of volatility and such a rapid rise in rates, the outcomes for the sector in the first quarter were very, very challenging. So we would expect some degree of shakeout candidly, and we see it every cycle. We've been in the business for many, many years. And I think the number of issuers will decline significantly over the course of the next few quarters, certainly over the next year, which should really help us from a competitive standpoint in resi.

And BPL, it's still a very nascent space, and we've started out as the leader in the space, and we continue to be. And with the acquisition of Riverbend, to some extent, we're just expanding our footprint. And I think a lot of people are attracted to the space, but there's just so much to do. We think it's a $100 billion annual origination market across products. And so there's just significant upside there, and the loans take a lot of skill and strong relationships to do well. And those relationships have proven to be very durable from a client perspective. So we feel very, very good about the competitive landscape. And if anything, these difficult periods really help us in just solidifying our place and we certainly expect that to play out over the course of the year.

Our next question is from Stephen Laws with Raymond James.

Brooke, question on the potential securitization call gains. Can you talk about the current environment? And I don't know if it's prepayment slowing, so maybe some deals are paying down more slowly or if it's the market to look at kind of refinancing some assets. But can you talk about the outlook for securitization call gains and maybe timing on how we should think about those rolling into the numbers?

Yes, it's a good question. We still have -- we've put out updated disclosure on the amount of call activity that we could see. We still have over $2 billion of additional loans that become callable that we're modeling in the next 2 years. We have just given that we've seen consistently higher prepayments and the kind of environment that we're more broadly steering into, I think we've pushed out some of the timing for when we could realize those calls of about $600 million of loans that we think will become callable through the end of the year. So there's still a really healthy potential in terms of book value upside of $0.34.

And when we look at the weighted average coupons that are underlying those near-term calls are still competitive with where we see current coupon today. So I think we're just monitoring the opportunity a little bit more cautiously than we have in the last few quarters. And so with that, we did have about a $5 million decline in our net interest income from the accretion on those calls. And that's something that you could continue to see decline over the next 1 or 2 quarters as we push out the timing of those gains.

Chris, kind of looking bigger picture, you've covered most of my questions on the BPL side, but as we think about the residential side, I know Dash mentioned some bank statement loans. And in past calls, I think we've talked about kind of the expanded credit or near prime and maybe some home equity products just given the home price appreciation. But can you talk about some other products that you guys maybe think there's an opportunity on or what you're seeing on the residential side of the business instead of the BPL side?

Sure. Well -- certainly, we've been very interested in home equity, and it's something we've talked about in past quarters. I think we'll have a better update when we talk again in the summer. But that's an area where the portfolio has been very focused.

We did just relaunch our product suites sort of to the market in April on the residential side. We refreshed choice. And then you're right, we did launch a bank statement product. One of the interesting things there is we're focused on QM and loans that meet the standard. We've spent a lot of time with various stakeholders to make sure that those are structured appropriately with the right number of months of verification and things that we need to securitize those well because we think that the QM product will really boost the liquidity of the space and how those execute in the PLS markets should benefit everybody.

We also have been focused on hybrids and ARMs, just really expanding the playbook and being responsive to the market. So I think we're really in a good position in resi, and we're getting great response rate from our seller network. There's tremendous interest in training and learning about the products. And I think what the market really needs in residential is just some rate stability at this point. When you look at the TBA markets, certainly, when you look at CRT, and then obviously, prime jumbo -- it's just hard for investors to know what the right price is to pay for bonds. And as long as that dynamics in place, some of these rollouts will take time. But the interest is there, and we certainly feel like we're leading in the space. And so I think we're going to have a lot of really interesting and potentially surprising results, positive results from these rollouts to talk about in the coming months. But we're still in a -- the market is still in a spot where it just really needs some guidance from the Fed and just to know where that current coupon should be. Is it 5.5%, is it 6%? Is it higher? So those questions will be answered in the coming weeks and months. But I think we're -- what we're investing in now is just the products and the infrastructure to really continue to take share. And that's one thing that we're very proud of in the first quarter is when you look at our lock activity, it was very similar to the fourth quarter where the market declines, we expect to be very, very significant. So hopefully, that keeps up and we can continue to grow the business.

Our next question is from Eric Hagen with BTIG.

I'm jumping on a little late here. A couple here. In the CoreVest SFR portfolio, can you say how much rental increase is embedded in the value of the assets just roughly? And then do you guys see a risk that -- forgive me if you addressed this already, but do you see a risk that lenders adjust haircuts or margins on warehouse loans? Or do you guys feel like there's enough supply of capital out there and leverage across the system is, I guess, stable enough where that really isn't an issue right now?

Thanks, Eric. I'll take your SFR question and let Brooke address your question on the warehouse piece. In terms of how we -- I mean, to move it to the front of the funnel, when we actually size and underwrite SFR loans, we are pretty conservative about how we think about rents. We tend not to think about rental increases as part of the underwriting or loan sizing picture. And so when we size loans, there's -- obviously, the increases that we've seen have been -- have certainly been tailwinds to value, but they're not part of the base underwriting process for us. And the portfolio has performed really, really well, frankly. And it doesn't need to see the rent increase that we've seen in the past few years to have hung in there. Our average LTV is still in the high 60s. So it's clearly part of how a lot of our sponsors think about things and particularly with higher rates, just making sure that that math still pencils for the combination of home price appreciation and rental growth than just what's going on with cap rates in general and single-family rental. But from our perspective, as a lender, as you know, we're underwriting to get paid back, right? And we don't tend to price in rent increases into that analysis for the SFR book. And then Brooke, do you want to --?

Yes. And on the financing front -- Eric, it's a great question. I think we had a lot of good anecdotal evidence around this in the first quarter because we did have a $2 billion of facilities that we renewed. And so, I think it's probably a combination of, yes, we do feel as good about liquidity in the system from our financing providers. I think also just Redwood specifically, probably speaks to the strength of our capital base, especially our risk performance during this time and our ability to have structured our debt and the way that we have as we think have significantly protected us in an environment like today. So we still have -- we're sitting with about over 1/3 of our financing is committed. We have a significant amount, 100% on the business purpose lending side that's financed with non-marginable debt that is continued appetite that we see from our financing providers. In general, over 80% of our debt is either non-marginable, term nonrecourse or both. And we have considerable excess capacity today. So we have about $2.3 billion.

So I think as we sit today, we just feel really good about the position of our book as it relates to how our debt is structured. And overall, our leverage continues to be very low and has trended downward, as I mentioned in our prepared remarks.

Our next question is from Kevin Barker with Piper Sandler.

I just wanted to follow-up on the $10 million pretax gain that you're recognizing from an investment in RWT Horizons. Can you give additional color on like what your cost basis was on that investment? Was it an exit of a business and then see if there's any other investments that you see out there that could be monetized?

Sure. I don't think that we have or will provide cost basis detail at this time. What I can say is it was 1 investment and it was a $10 million -- approximate $10 million pretax gain. The total allocation of the total deployment provisions at quarter end for all of the investments was $25 million. So I can confirm it was a single investment of the total. That was another valuation round. So it was not a monetization. But we didn't expect necessarily to start seeing these types of rounds this quickly. So that's been a very positive development and really validated the investment thesis, frankly, on why we started with Horizons. And a reminder, it's sort of a dual benefit. We expect to make money on these investments, certainly, but we're also supporting with capital technologists that have an ability to disrupt our sector. And so if our sector is going to be disrupted, we want to be the disruptor and the person supporting those initiatives. And so we've been very picky and very selective about the partners that we work with, but they all do have an excess to what we do. And we think that -- frankly, the return potential here is very significant, and there's great potential option value to growing this portfolio as part of our broader investment strategy.

Okay. And then maybe a follow-up on one of those investment strategies, liquid mortgage. You did a securitization on the blockchain late last year. Could you just provide any color? Are you looking to do further securitizations on the blockchain with liquid? And then also, is there any third-party interest in potentially executing securitizations on the blockchain with liquid?

Yes. So Kevin, it's Dash. We have done since the first Sequoia deal, we work with liquid mortgage on. We've put all subsequent Sequoia deals on there. So we have a number of them, I think, close to half dozen at this point that leverage that technology for remittance information. We are working as well as you might imagine, in parallel for the CoreVest securitizations to leverage the same technology. We think that will be an exciting development for that part of the market.

And the second answer to your question, definitely, a big part of the value add for the partnership is when we sort of put a stake in the ground and do something other people certainly take notice and we've been certainly actively working with liquid to help them engage others from our perspective, the more adoption for stuff like this, the better. And as we've talked before, having the remittance information on blockchain really is just step one. I talked in my script about the partnership with Canopy, which we think will meaningfully evolve how due diligence works for whole loans. So we're still in the really early innings here. And yes, from our perspective it's about the ecosystem, and the more we can help other people adopt in, we think the better things will be.

Great. Are you seeing additional demand from investors for this type of delivery mechanism, just given the performance that you've seen from the Sequoia platform?

Yes, we are. We've gotten a ton of interest. The liquid mortgage platform is just -- it's a pioneering platform. And I think the intrigue about how transformational we can be to the securitization space is really excited, Sequoia investors in particular. We get a lot of feedback and interest. People like ourselves just curious about what the next round will look like. And in quarters like the first quarter, that's not going to be the headline. The headline has been the rapid rise in rates and the associated bond math with fixed income investments. So that's certainly on investors' minds. But folks that have been with the platform for many years, know our bonds, know Redwood. They're really looking past that and thinking about how these innovations are going to impact the shelf. And those are really great conversations to have. And I'd say the excitement level around what liquid could do has never been higher, frankly.

Ladies and gentlemen, there are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.