Redwood Trust Inc (RWT) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust, Inc. Third Quarter 2021 Financial Results Conference Call. Today's conference is being recorded.

I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us. With me on today's call are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Brooke Carillo, Redwood's Chief Financial Officer.

Before we begin, I want to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

On this call, we 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 available on our website at redwoodtrust.com.

Also note that the content of this conference call contains time-sensitive information that is accurate only as of today. The company 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 the company's website later today. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer, for opening remarks.

Thank you, Lisa, and good afternoon, everyone. After our historic first half of the year, our team continued on our path towards transformative growth. After having communicated an ambitious second half of 2021 forecast, our third quarter results still managed to exceed our expectations. The entire organization has been energized to see the durability of our business model as we produce strong financial results and risk-adjusted portfolio returns. Our GAAP earnings were $0.65 per diluted share for the third quarter, and our GAAP book value increased 4.7% in the quarter to $12 per share at September 30. This contributes to an overall year-to-date increase in our GAAP book value of 21% despite having raised our dividend each quarter of the year thus far. And combined, our GAAP book value growth and dividends paid have resulted in a 27% economic return to shareholders year-to-date.

Operationally speaking, you'll hear more from Dash and Brooke on our third quarter results, but suffice to say it was a very strong quarter with several in-house records broken. I'm particularly proud of a series of strategic and innovative transactions across our firm that were both accretive to earnings and foundational for future operating progress. This included the first private label RMBS securitization to leverage blockchain technology, completed in collaboration with Liquid Mortgage and [Early Horizons] investment partner.

We also completed our first ever bridge loan securitization through our BPL platform, which provides a meaningful new distribution alternative to us. Next, our investment portfolio team cosponsored the first ever securitization backed entirely by residential home equity investments. And finally, these deals were rounded out by 6 new venture investments by RWT Horizons in the third quarter.

I'm also pleased that after following strict health and safety protocols, we're able to successfully host our third Investor Day in September, the first since the onset of the pandemic. During the event, we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households. We also unveiled a much bolder strategic vision, become the leading operator and strategic capital provider, driving sustainable innovation and housing finance.

As we showed in New York, our opportunities for transformative scale are clear and now attainable based on the strategic progress we've made in recent years. Our vision is built upon an immense multitrillion dollar addressable market that transcends the traditional mortgage lending space. Thanks to innovations in technology, there are now multiple ways for us to leverage our long-developed and highly regarded expertise in housing credit. We're already attacking antiquated processes in our markets with technology-enabled solutions. And over time, we plan to completely reimagine how the nonagency housing finance market works.

Across the Redwood enterprise, we've cultivated a talented and engaged workforce that, as you might expect, believes in our mission and is inspired to innovate and help us realize our strategic vision and goals. Thanks to a lot of hard work over the past year, our platform is now beginning to command the attention of an industry where the status quo has not only been accepted but also embraced by most.

Our role is not a typical one for a REIT, much less one of the longest-tenured publicly traded REITs in the country. But that should not come as a surprise as we never defined our business by way of our federal tax election. Those who do, risk missing the growth potential of our platform, particularly as we continue to analyze our optimal long-term corporate structure. Rounding the bend toward the end of the year, we remain very optimistic about our business, but we are proceeding cautiously. We see several macro and market risks ahead, COVID-19 variance, rising inflation, central bank tapering and federal debt ceiling strike, to name a few.

More fundamentally, recent trends in unemployment claims suggest that we're still in a recovery phase, and the current economic situation is far from stable, notwithstanding the consistent upward pressure on home prices and rents that we've all observed in recent quarters. Our interest rate, capital and broader risk management posture reflects this view. While we've generated strong earnings thus far this year, we've done so with record amounts of cash on hand, including $557 million at September 30.

Going forward, our stakeholders should expect that we will continue to work to fulfill our broadly conceived mission, focus on the significant addressable market in front of us and run a business grounded in fundamentals and sound analysis, all while nurturing a diverse and talented bench of team members who are engaged and aligned with our values.

Thank you again for joining us today. I'll now turn the call over to Dash Robinson, Redwood's President, to discuss our operating results.

Thank you, Chris, and good afternoon, everyone. As Chris described, the third quarter was another prolific one across our platform, with increases in purchase and origination volumes, complemented by innovative work across technology and capital markets. Our teams are operating at a highly productive and sustainable level as the foundation we have laid drives efficiency gains and demand for our products remains robust. Notwithstanding the recent uptick in benchmark rates, excess capital in the markets is still in search of yield. We remain the partner of choice for whole loan and securities investors alike and continue to expand our distribution channels accretively to our capital efficiency and bottom line.

Our third quarter results reflect continued execution of the strategic goals we laid out at the beginning of the year. As Chris referenced, we are seeing meaningful progress in a number of the initiatives that we presented at our recent Investor Day, both organically and through new investments and partnerships already bearing fruit. In this vein, we strive to innovate daily in addressing the issues facing the housing market, but also look to take advantage of our strategic positioning in the markets we serve to continue to grow profitably and sustainably.

Our progress also underscores important realities about housing affordability and accessibility, themes we focused on at Investor Day. Housing finance needs more creative solutions, driven by technology, a common sense approach to underwriting and most importantly, leadership in bringing market constituents together in pursuit of common goals. During the third quarter, we took important steps in this direction. Our results reinforce this broader backdrop and the opportunity across our platforms to continue serving growing areas in housing. And the recent path of home prices, coupled with the evolution in consumer demand and important trends in industry regulation has created ample room for other creative solutions to help consumers monetize equity in their homes.

Our third quarter results represent another step in the path towards transformative growth that we laid out at Investor Day, with our core operating businesses leading the way and notable strategic progress across the enterprise. The durability and diversification of our business model, coupled with our crisp execution and technological innovation, puts us in a unique position to drive change that benefits all stakeholders. With this in mind, it's important to unpack the key drivers of profitability across our platforms.

Our residential business continued executing in the third quarter, and we believe is well-positioned heading into year-end, facing several market headwinds, including renewed inflation peers and meaningful rate volatility, the team drove margins and volumes higher and once again broke new ground in our Sequoia securitization program. We generated a record $4.7 billion of lock volume during the quarter, making quick work of our prior record of $4.6 million 2 quarters earlier. Overall locks were up 22% versus the second quarter, 59% of which were on purchase money loans. An important statement about the quality of our pipeline and our sellers, given that benchmark rates during the quarter hit lows not seen since February. The volume of choice locks remain steady versus the second quarter, and now the current mortgage rates are approximately 30 basis points higher versus the lows of Q3. It is a helpful reminder that we have locked choice loans with over 100 different sellers thus far this year, important groundwork that we believe will bear fruit as we head into next year.

The depth of our distribution channels was another highlight during the quarter as we sold $2.4 billion of loans alongside our securitization activities. RMBS issuance remained elevated in the third quarter, with September a particularly crowded month. As expected during any substantial uptick in supply, we witnessed more noticeable price tiering from investors across transactions, differentiation that we once again benefited from during the quarter. Our third quarter issuance, Sequoia 2021-6 was $449 million in size and executed well inside competing transactions marketed during a similar period. At time of securitization, the loans underpinning the deal were on average just 1 month old compared to 3 to 4 months for our competitors, a testament to our efficiency and turning inventory.

A key hallmark of the transaction was the first of its kind use of blockchain-based technology within private label RMBs for enhanced remittance reporting for bond investors. Liquid Mortgage, an early partner through Redwood Horizons is acting as a distributed ledger agent, or DLA, on the transaction, providing an added and more real-time remittance reporting option for investors who choose to leverage it. Liquid mortgage has integrated with Redwood subservicer to receive payment information that will be published on the blockchain daily. This is a significant first step towards applying technological advancements and transparency to an area of the mortgage industry that has historically been less advanced. We are excited to be leading the market in this effort and expect to implement this enhanced functionality going forward.

In fact, liquid mortgage is also acting as DLA on our most recent Sequoia securitization, which closed in October and is backed by $407 million of jumbo residential loans. Leveraging technology remains a major organizational focus, and we continue to achieve milestones on our organic technology road map. Rapid funding through which we provide accelerated settlement time lines for sellers, recently eclipsed $1 billion in purchases since program inception 1 year ago.

Our [Redwood live] app has also gained significant traction recently, and we expect seller adoption to increase and allow us to continue growing wallet share with our seller base. The third quarter was also another high point for CoreVest, our business purpose lending platform. The third quarter's $639 million in fundings were the highest since late 2019 and reflected a consistent balance between single-family rental and bridge. SFR fundings totaled $394 million, up 26% from the second quarter. Production that positioned us to price an SFR securitization in early October, backed by approximately $304 million in loans and CoreVest 19th securitization overall.

CoreVest continues to deepen its operational moat. And during the third quarter, we achieved a key capital markets milestone as well in completing our inaugural transaction backed by bridge loans. CoreVest has long been an industry-leading bridge lender, and we expect structures like this to further drive our competitive advantage. The transaction creates $300 million of financing capacity, off of which we sold liabilities representing 90% of the capital structure, procuring additional leverage on a nonrecourse, nonmarginable basis at a cost of funds of less than 2.5% on the issued bonds. Importantly, the transaction was structured with a 30-month reinvestment period for loan payoffs, the longest of its time to date for this type of transaction, making it another important liquidity management tool for the business as we expand originations.

Operating momentum in the bridge business means we will likely use these types of structures and others like it going forward as third quarter fundings totaled $245 million, an increase of 14% from the second quarter. As competition ramps up across the BPL market, product development remains a key priority. We continue to expand our channels in BPL through a combination of direct lending and sourcing loans from third-party originators. To that end, during the third quarter, we made key progress in our correspondent loan business and further capitalized on our strategic investment in Churchill.

Our technology initiatives also continued to advance in the quarter, furthering this expansion. We launched an initial release of our refreshed client portal with strong initial feedback and remain focused on creating more efficiencies at the front end of the underwriting process. The fourth quarter has traditionally been our most prolific for BPL originations, and we feel confident about our capacity to manage higher volumes entering 2022.

Our investment portfolio remained in step with our operating progress and continue to generate strong returns with our securities book appreciating in value by approximately 2% during the third quarter and our bridge portfolio helping to drive net interest income higher. As Brooke will discuss in more detail, we believe there remains significant value to be unlocked from our investments based on the remaining discount in the book, coupled with continued execution of our call rights strategy.

As Chris noted, our portfolio team delivered its own first-of-its-kind transaction during the third quarter, cosponsoring a securitization backed entirely by residential home equity investments, completed in partnership with [Point Digital], a fintech originator. The hallmark transaction is backed by a product that enables consumers to monetize equity in their homes without having to sell or incur additional debt. Of the $34 trillion in total estimated U.S. home value that we mapped out at Investor Day, approximately $23 trillion is in home equity, either backing existing debt or held for cash by a growing cohort of 0 LTV borrowers.

While Point and others have made progress in unlocking a small portion of this value, the opportunity demands additional product creativity and flexible capital. In parallel with the securitization, we reupped our flow purchase arrangement with Point, providing us with a continued acquisition source and the opportunity to explore adjacent products. Point and Liquid Mortgage were 2 early Redwood Horizons investments and are now part of a growing suite of portfolio companies that we believe will be a driver of long-term value creation for Redwood.

Horizons continued its strong investment pace during the third quarter, completing 6 investments in total. The go-forward pipeline is highlighted by an array of technology solutions, including several opportunities in climate analytics, a particularly busy area as firms attempt to evolve traditional methods of predicting how climate change impacts property valuation, insurability and overall credit performance. With the direct nexus to our firm-wide ESG work, we expect to continue dedicating focus to this area.

With that, I'll turn the call over to Brooke Carillo, Redwood's CFO.

Thank you, Dash. Our efforts to drive scale in our current businesses while executing on initiatives to innovate and reimagine the industry drove another strong quarter of financial results. We reported GAAP earnings of $0.65 per diluted share, representing a 27% annualized return on equity for the quarter, which significantly outpaced our dividend. As a result, book value increased $0.54 or 4.7% to $12 per share in the quarter. We've had an outstanding 2021 to date and are pleased to have built on the momentum from the first half of the year. We delivered our third consecutive dividend increase, up 17% to $0.21 per share, ahead of market expectations.

We have consistently generated annualized economic returns in excess of 20% over the last 5 quarters. Our economic return spotlights not only the evolution of our dividend, but more importantly, the expansion in our book value. Our results reflect the operating leverage of the platform. In the first 9 months of the year, transaction volumes in our mortgage banking businesses have already surpassed the average annual volumes of the past several years. On a combined basis, our operating businesses generated an annualized after-tax operating return of 31% in Q3. They utilized roughly $450 million of average capital or 30% of our total allocated capital that produced 2/3 of our adjusted revenue for the quarter.

As a reminder, these earnings can be retained in the business, driving the differential between the nearly 5% increase in book value and 2% increase contributed from the investment portfolio. This underscores our ability to create organic capital, which we've been continuing to convey to the market. The residential mortgage banking team generated a 26% after-tax operating return on capital during the quarter.

Income from mortgage banking activities net was $12 million higher than the second quarter as loan purchase commitments of $3.3 billion increased 20% from the second quarter, and our gross margins improved approximately 25 basis points, which is above the high end of our historical range. Margin expansion was attributable to improved execution on securitization during the quarter and hedge outperformance into a rising rate environment. We saw continued strength from our business purpose mortgage banking operations, which delivered a 43% after-tax operating return on capital. Spreads continue to tighten in Q3, but the pace moderated, resulting in a lower increase in the price of loans and inventory at the beginning of the quarter relative to second quarter's change.

Aside from this, BPL mortgage banking results benefited from a 22% increase in funding volume as well as strong execution on the securitizations completed in the quarter. Next, I'll turn to the investment portfolio, which has been a consistent source of value creation in 2021. Following the $95 million of investment fair value changes we booked through the second quarter, we had another $26 million in Q3 from further improvement in credit performance and spread tightening, particularly in our third-party reperforming loan and retained CoreVest securities.

Additional positive fair value changes were realized through the first ever securitization of home equity investments. Separately, during the quarter, we settled call rights on 2 Sequoia securitizations, acquiring $66 million of seasoned jumbo loans at par, which had a small benefit to book value. Portfolio net interest income increased by roughly $9 million, driven by lower interest expense on bridge loan financing and increased discount accretion income on our available for sale securities. The increase in accretion was driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, benefiting our cash flow forecast and effective yields for those investments, but it is important to note that there is no impact to book value from these changes.

Looking ahead, net of our third quarter gains, there remains potential upside of roughly $3 per share in our portfolio through a combination of accretable market discounts and call rights that we control. We estimate $1.2 billion of loans to become callable across [Cappel] and Sequoia through the end of 2022. Should current market conditions persist, these callable loans can generally be sold or resecuritized well above their par value.

Retaxable income increased to $0.14 per share from $0.11 in the second quarter due to higher net interest income. Our taxable REIT subsidiaries earned $0.32 per share in Q3, up from $0.27 in Q2. We recognized a lower income tax provision compared to the second quarter from the release of a valuation allowance on a portion of our deferred tax assets, partially offset by an increase in state taxes. Our balance sheet and funding profile remain in excellent shape with unrestricted cash of $557 million, which equates to over 75% of our outstanding marginable debt. We also had investable capital of $350 million to deploy into new investments.

During the quarter, we added $350 million of financing capacity to support growth of our operating platform. We also completed the bridge securitization and a new $100 million nonmarginable term financing, collateralized by retained capital securities in our investment portfolio. Each of those, which contributed roughly a roughly 20 basis point reduction in the cost of funds of our business purpose lending segment. Our recourse leverage was unchanged at 2.2x as we incurred additional warehouse borrowings to finance higher loan inventories while rotating certain financings into nonrecourse debt and experiencing appreciation of our equity base.

One central tenet of our strategic plan is to continue enhancing our capital and operating efficiencies. During the third quarter, we maintained cost per loan for our residential mortgage banking operations of 28 basis points compared with our historical average of 35 basis points during 2013 to 2019. Our business purpose mortgage banking operations also delivered improved efficiencies with a lower net cost to originate relative to the second quarter. Even with higher general and administrative expenses in the quarter due to increased variable compensation tied to our strong year-to-date financial performance, various efficiency ratios such as pretax margin or operating expense as a percentage of GAAP net income demonstrate very positive trend lines in our efficiency gains.

And finally, we are embedding sustainability across our operations and investment strategy. We are committed to transparency and further integrating ESG into our financial reporting going forward. We recently provided a comprehensive ESG review at our Investor Day event in September, including new disclosure of human capital metrics and programs and an overview of our key priorities and top commitments over the near to intermediate term.

As Dash mentioned, we are analyzing opportunities within Horizon, which will aid our valuation of various environmental and social impacts and risks within the portfolio. This has the potential to further evolve our risk management policies and build our operational resilience. 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 comes from the line of Bose George with KBW.

This is actually Mike Smyth on for Bose. Just a couple of policy questions around the mortgage bank. First, is there anything in either the 2 bills that could negatively impact the housing market or the demand for BPL capital, maybe changes to operating profits, real estate capital gains, depreciation, things like that.

We're obviously looking at that, Mike. Thanks for the question. I think our preliminary sense is that it probably will not have a huge impact on those things. And obviously we'll have to see how those evolve. But at the moment, we're not anticipating any material impacts.

Yes. There is a contemplated corporate tax change, which could impact our tax rate effective for our tier assets and which would be expected to be a small impact. And we do have deferred tax assets there that could have a small benefit. But it is something that we're still monitoring at this time.

Great. That's helpful. And then a lot of nonbank lenders have raised their conforming loan limits ahead of the FHFA announcement later in November. Has this had any impact on 4Q volumes? And then just as a follow-up to that, could a larger-than-expected increase in the conforming loan limits have any impact on your jumbo guide for 2022?

Thanks for the question. At this point, we're not giving any specific guidance for guidance on volumes for 2022. But we do expect a very significant increase in conforming loan limits, anywhere between 15% or 20% for many metros, possibly higher. For us, those are very much statistically driven, and we worked with loan limits for many, many years. We don't expect it to significantly impact our business. That's really a reflection of the growth in the housing market and something that I think the entire market has been grappling with affordability and just accessibility for homes. So overall, we're certainly expecting a very large increase and planning for that. But at this point, we haven't had or experienced any meaningful effect on volumes.

Our next question comes from the line of Stephen Laws with Raymond James.

Dash, maybe I want to start with Choice. One of the slides from the Investor Day a month ago that I thought was interesting was how underserved the 660 to 720 FICO bracket is versus the amount of volume that was done in that FICO range even just 5 years ago. Can you talk about what you're looking at to get more uptake there and the opportunity that's ahead with that product?

Sure. Thanks, Stephen. We like that slide a lot too, because we think it tells a pretty powerful story about the opportunity. Choice was about 10% of our locks this quarter. I would say that our flow volume in choice was up about 25% quarter-on-quarter from Q2, which I think is a helpful thing to note because it reflects the fact that from our perspective the adoption was beginning to pick up. Like I said in my prepared remarks, we have locked choice loans with over 100 sellers at this point. There is still, from a residual perspective, certainly some things that loan officers have been focused on, obviously, not owner-occupied loans have been a big story as well in terms of the suspension of those caps. And we think the adoption is going well. It just is going to take some time.

Clearly rates have ticked up here, and we expect Choice adoption and demand to continue to go up. We're ready for it, which is the most important part. Given how many sellers we've locked loans with at this point. And we're optimistic about the prospects. And like I said, the increase in flow purchases for choice quarter-on-quarter is something that we are pretty pleased with.

Great. And then, Brooke, I want to touch on financing costs. You guys have really done a great job growing interest income, almost 20%, right at 20% from a year ago. And your interest expense is roughly flat. You've been able to lower that. And I think you talked at the Investor Day about finding ways to turn loans faster. What -- how much more room is there to increase the efficiency of financing and really expand that NIM from a net interest income standpoint?

Yes. It's a good question. So thank you for noticing. We had guided last quarter that specifically we thought there was some room, particularly in the bridge asset class within our BPL business. We did execute our first securitization of that asset class this year or this quarter, particularly, which definitely improved our terms both on a cost and advanced rate basis. In addition to that, we are focused on our warehouse lines and our other facilities, and that, in aggregate, lowered our cost of funds, particularly for BPL by 20 basis points, which we mentioned, that had about a $2.5 million improvement in our overall NIM on the quarter. We continue to find and explore innovative financing structures across our business, but in general, looking across our recourse debt with a 3% cost of funds. We feel pretty good about where our financing stands relative to the health of the capital markets more broadly. And then Dash, do you want to add anything to that?

I would just say that the benefit of the bridge securitization that Brooke articulated, that closed late in the third quarter. So there will be some incremental benefit there as well. And we do expect to use structures like that more and more going forward. That deal has a pretty unique feature that allows us over a 30-month period to replenish. So it's efficient in and of itself. But as the business evolves, we expect to use more of that going forward. And for the fourth quarter, that particular structure will have more of an impact because we closed it so late in the Q3.

And Chris, I'll save the hard question for you, but a lot of things going on and a lot of ways you guys have been able to move the needle, whether it's the call gains or lowering the financing costs. You've now got the HCI that was talked about. I could list another dozen things. But when you sit back and think about what the big opportunities are in the next 12 months, if you were to take that 1-year time frame, which is kind of how we look at the stock, what are the things you're most excited about that you think can be accomplished in the next 12 months?

Well, I think across the platforms we've got great momentum. We spoke about a plan in September at our Investor Day. And we're very focused on executing that plan. When you look at resi, Dash mentioned Choice. When we think about our operating margins and how much more efficient we are now than we were even a year ago, we plan to carry that momentum into the next year, which should hopefully continue to result in durable margins. I think with HEIs, that's a very exciting evolution of our business. That's a purely non-agency space where we can really, I think, lend a lot of expertise from a structuring standpoint and from a scaling standpoint, to these originators, particularly Point.

And we layer in BPL, which continues to be a significant area of growth for us, a best-in-class platform, both bridge and SFR volumes have been very strong. Closings have been strong. And unlike the residential business where the fourth quarter you typically see some seasonally slow volumes across the industry. In BPL it's a big quarter. It's a big quarter for us and for the team. So we plan to carry that momentum into next year and really execute on the plan, as I said, that we laid out. But we're going to continue to innovate. We're going to continue to be first movers in our markets. Horizons will continue to grow and be a bigger part of what we do. So it's -- we've got a lot in store for 2022.

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

So the increase in net interest income from investments, I think the resi investment of almost $9 million quarter-over-quarter. Is there a way to tease that apart, what drove the increase? You may have said it in your opening remarks, Brooke, but what was onetime? And what's a good depiction of the yield in the portfolio at this point?

Sure. So the various components of NIM that drove that $12 million increase, that $9 million which you're talking about. Approximately $5 million of that was related to resi, just in terms of the higher discount accretion income on our available-for-sale securities. And those were all Sequoia related because those are what constitutes our AFS securities. And so going forward, we expect that to be of similar magnitude.

As I mentioned in the prepared remarks, we are running those securities to call rather than maturity for near- to medium-term calls for which we have had high visibility around them, which will really just bring our GAAP yield more in line with our expected economic yield over the rest of the anticipated life of those securities. And so we will see that at least in terms of being run rate for the next number of quarters.

As I mentioned, we have $1.2 billion of calls expected for 2022. And so you'll continue to see that accretion realized. It might be a little bit higher heading into the beginning of next year when a lot of our call activity is concentrated and then trailing off as we head into 2023. So that you can anticipate as kind of run rate in NIM. And then same with the lower cost of funds, some of our commentary there, part of that is related to more BPL side than resi.

And the rest was really related to higher loan and inventory to head into the quarter, which is reflective of volume. And just given our projection setting, not necessarily for the fourth quarter, but heading into 2022, I would say it's fair to include that as run rate as well. The other thing that impacted resi specifically in terms of NIM this quarter was hedge outperformance, and that will vary with the market.

Got it. That's helpful. Can you guys share how the profile of loans that you're sourcing from Churchill are different from what CoreVest sources organically?

Sure, Eric. I can take that. Like we've talked a bit about before, the -- that particular channel, at least for now, has been focused on some of the smaller balance types of loans within bridge or single-family rental. As you know, our core products that we originate directly through CoreVest on the single-family rental side tend to be a little bit larger in nature across collateralized 5 and 10 year maturities. Our bridge suite of products is very differentiated, includes build-to-rent, cross-collateralized lines of credit for larger sponsors. That particular acquisition channel certainly may evolve.

The market is very vibrant, as you know, and things are really evolving. But we're focused there on generally smaller balance bridge loans backed by maybe 1 to 2 homes. And then single-family rental loans, which tend to be 30-year maturity, so a little bit of a different structure than what we typically produce directly through CoreVest. There's great capital markets demand for those, and those have been really nice complements to our core direct production. And allows us to acquire those rent more efficiently where we can outsource some of the fulfillment, still do all the underwriting, of course. But it's been a good complementary channel so far.

Our next question comes from the line of Steve Delaney with JMP Securities.

Congrats on a strong third quarter and also a great Analyst Day back in September. Dash, I guess this goes to you. When you look at your 2 primary platforms and the loan products that you now have available, is there -- in the sort of -- in the non-agency world, are there any nonattractive opportunities out there in terms of other specialty loan products that you guys have not tackled yet using your kind of existing platform but just different products.

It's a great question, Steve. I think it's -- at some levels probably more variations on the -- focused on.

Yes.

Multifamily has been an increasing focus of CoreVest footprint, both shorter-term and more stabilized type loans. We expect to be able to do more of that going forward, potentially larger loans, things of that nature. A lot of that is driven by increased client penetration. We've become much more efficient about how we can finance some of those loans. And so those are things we're very, very focused on.

And with resi on the consumer side, I think it gets back to Stephen's question, continuing to drive opportunities and expanded prime in choice, figuring out what sorts products are out there. I would touch as well on the home equity investment piece as well. That's much earlier stage for us. But clearly the partnership with Point and the ability to securitize those as efficiently as we did, plus just the massive addressable market. We feel some variations on that theme will be a part of the picture. But again, that's earlier days.

Yes. Yes. And I'm sure there's -- reverse mortgages have been so controversial over the years, but if you can come up with a better mousetrap for that, you really will have something, I think. And I guess just talking in addition to the products, when you think about -- and for now, I want to focus more on the resi platform. When you think about your seller base and what it had been, and I know I'm dating myself, but I can remember when it was roughly 175 sellers, I'm sure it's broader than that now. But we're seeing these newly public residential agency originators, they're struggling with refis down.

And several have started talking about doing more nonagency products. And I'm just curious, in general, what the opportunities are with your seller base on the resi side? And if any of these fairly large agency originators could be a source of loans as they look to originate, especially the wholesale channel, they look to do more non-agency business to fill the void.

Yes, Steve, it's -- I think, we mentioned in our materials, we're purchase-heavy on the resi side, which is a very good place to be heading into the market that we're in. So we're not overly reliant on refi business. Our seller base isn't -- is actually a little smaller. We've called the base a little bit versus where we were pre-COVID, very focused on quality and relationships there. I do think that as things transition and the market turns, more of these agency originators will try to move to nonagency. It's a very logical evolution. I think we're talking to all the right people there. And we're a great outlet for them.

And there's still -- the nonowner-occupied business continues to evolve. There's some big announcements last quarter. I think that volume will slow down in PLS, but not go away because, frankly, there's -- some of these larger agency originators have now established issuance platforms on the PLS side which continue to present opportunities for us. So it's -- there's a lot that's happened over the last few months in the mortgage space. And I think the fourth quarter is a good quarter to take stock of these evolutions. We'll have greater clarity with the direction of the FHFA. We'll get November more clarity on loan limit increases, and we'll do some planning for 2022.

Our next question comes from the line of Ryan Carr with Jefferies.

Congratulations on another great quarter. So in terms of what you're seeing on the rate side, just curious to hear your perspective on -- or potential outlook on 4Q volumes and how that might be impacting potential burn out scenario going into the fourth quarter?

Well, obviously, rates have been volatile. Today was a very volatile day in the markets. And one thing we try to consistently say is when rates are volatile, our hedging costs typically go up candidly. So from that standpoint, particularly on the resi business, which is much more sensitive to the rate market than BPL. We're actively managing our pipeline and our exposure. Overall, I think seasonally, on the resi side, as I mentioned, it's typically a slower volume quarter for the industry.

I think that's -- that will be the case this year again. It was the case in Q4 of last year. And I think we're as well-positioned as we can be. Our book is turning over, I think, faster than anyone else in the industry at this point on the resi side. You look at the average loan age of our books, it's well inside many of our competitors across the landscape. So we're -- from a current coupon perspective, we're well positioned. We can reprice every day. And I think we'll be in a good spot to finish the year strong.

On the BPL side, as I mentioned, it's a very busy quarter. And we haven't offered any specific guidance, but we're off to a strong start there. And again, seasonally, when you look at past years, we've gotten a lot done as we close out the year. I think overall, we're mostly focused on finishing out the year strong. It's been an extremely good year. A lot of hard work by the team. So that's the near-term focus, and we'll start to set our sights on 2022.

And then quickly on the Horizons portfolio. Any material updates in terms of fair value changes at this point that you're seeing?

No, no material update. Just given the seasoning of our deals, it's still pretty early in their lives. But that -- no material uptake again.

Congrats again on the great quarter.

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

I just want to follow up on your capital base. The amount of available capital jumped up there with -- I believe it's $350 million and really doubled quarter-over-quarter. Is there anything in particular that you see in the near-term to redeploy that capital or what your expectations are for putting that capital to use?

Thanks for the question, Kevin. And yes, that obviously was partly a result of some of the accretive financing transactions we did during the quarter, which we were pleased with. I think consistent with prior quarters, it's -- a lot of it is making sure that the operating businesses have the right depth of operating capital to continue to grow, making sure we're running those businesses with the right margin of error, so to speak, in terms of risk capital and obviously capital required to fund more loans, hopefully through the pipelines. So that's probably job one, frankly.

Brooke also referenced the increased volumes recently in bridge, which do represent sort of chunkier opportunities to put money to work as well, which is obviously highly strategic given CoreVest's footprint there. Currently we have seen slightly more opportunities in the third-party space here more recently. We'll see where credit spreads go but it is heading into the year.

Historically, it has been valuable for us to keep excess capital on hand to be able to react to the extent that spreads create an opportunity to put more capital to work. So I think we're pleased with the position here in very late October heading into the end of the year. If there are things to do, we'll be ready to capitalize on them. And then as always, we're looking at some opportunities off the screens, sort of more customized partnership based investments, which we'll hopefully be in a position to talk more about early next year.

Okay. And then in regards to your securities portfolio, it seems pretty compelling that you have about $270 million of discount to par value potential recapture, I guess, over time, that book value or [raise free cash] to par. Can you give us some specific examples of like the largest portfolios that have -- that are sitting in a discount of the par? And then what your cost basis may be on those specific portfolios?

Sure. So about $174 million of our accretable discounts action are reperforming loans portfolio, which is about $517 million in terms of fair value on our balance sheet at the end of the quarter. And about 90% of our RPL securities we actually own the entire substack with about $2 billion of underlying collateral where we own the call rights. And so that is where the vast majority of that discount lies, which gives us more visibility around how and when we can potentially call those deals. So again, I think I mentioned this back at Investor Day, but that's not included in the $0.68 a share of premium from potential calls that we put out to the market. So that would be in addition to. I don't have the number off hand, I think it's the high 70s in terms of the dollar value on securities today for an average dollar price. Yes, 77.

Okay. It would seem that the higher home price -- higher home prices that you'd be able to quickly recapture that discount. Do you have an estimate? I mean, obviously, and your portfolio has done very well. Is there anything in particular that would accelerate the recapture of that discount?

Yes. In general, I would just say [speeds of success on that cohort from] -- they were running around 5 to 7 CPR kind of mid-single digits to now they're mid-teens. And so steady prepays will help accelerate those, which is driven by nice HPA, combined with solid fundamental performance. We saw another 1% to 2% increase in our improvement in the amount of 90-day delinquencies we had on that cohort of our portfolio as well. So we saw 90-day delinquencies kind of spike to around mid-teens during COVID. And they're back down to single -- high single digits to around 10. So as the economy grows back in the future [summer] we expect to continue to recover that value.

The other thing I'd add, Kevin, just quickly, is that our -- the call right sort of come in 2 different flavors, as you know, some of them have to do with pool factors and how quickly pools amortize away, which to Brooke's point, obviously those have been coming into the money much more quickly with HPA and speeds. The reperforming loan securities that we own are more time-based.

The first of the 2 larger investments we have actually becomes callable towards the end of next year, there's a slight call premium associated with that, but it may still be accretive to us to call. But as Brooke said, those numbers in the RPL part of the portfolio are not included in the $0.68, but they're more time based, and we can make an assessment at that time based on other execution alternatives, whether it makes sense.

Okay. Do you anticipate the expiration of various forbearance and foreclosure moratoriums to potentially impact the recoverability of that discount? And do you anticipate that those moratoriums expiring also to impact potential opportunities as we go into the new year?

It's possible. I think more of the impact would probably be in the reperforming loan book. Our forbearance numbers in Sequoia are de minimis at this point. Clearly, we're in a very different situation than 10 or 12 years ago from a supply perspective and just the overhangs in the market and some of the execution challenges that that created over a couple of years. Clearly we're in a much different situation fundamentally.

I mean the expiration may speed up a little bit some of the resolutions, but those reperforming loan investments are on conforming loans, loans that used to be pulled into Freddie securities and then were repurchased out. So they are pretty strict guidelines by the servicer for loss mitigation and things like that. Those loans are subject to the Cares Act. So we're not pricing in any particular major impact of the expiration. The fundamentals of those portfolios continue to improve. Prepay speeds are higher than we modeled. And that's probably more where we're focused on this point and assessing the future cash flow.

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

Just thinking about the amount of capital you need for the BPL mortgage banking business, the fact that you can have done a securitization with the reinvestment period. Does that reduce -- ultimately reduce the amount of capital you need for that business and therefore improve the returns?

The short answer is yes, apples-to-apples, yes, it will. We certainly expect to continue allocating more capital in that direction based on, hopefully, growth of the business. But for context, the 90% of liabilities that we sold are on average about 10% to 15% higher from an advanced rate perspective than the nonmarginable bilateral warehouse lines that we've usually used to finance bridge loans. And obviously, the securitization is essentially match-funded, non-recourse and nonmarketable. So very attractive on a couple of fronts. But yes, at the margin there is an ROE pick up there and additional capital freed up.

Got it. And then just as you think about one of the goals has been turning over the kind of the originations quicker to kind of maximize or minimize the amount of capital there. I guess, where would you say you are in that process? And is there more room for improvement? I'd say we've made great progress. A couple of data points. Our most recent securitization was the first one that we use blockchain on. The average loan age at the time of securitization was 1 month compared to 3 to 4 months for the rest of the industry.

From an overall funding turnaround time perspective, we touched on rapid funding. But even outside of rapid funding, we're probably around 2 weeks at this point to fund our sellers, which compares very, very favorably to the competition. So even with record volumes, record locks, we've continued to grind in our time lines, which really is a testament to the team and frankly the relationships that are required to do that work more quickly. That's a huge intangible which we've talked about before, but it's worth emphasizing. Particularly against the backdrop of what Chris was referring to with rates, a great hedge to that, obviously is speed and the ability to fund so quickly and then securitize or sell is a very big part of that.

Yes. I'd just add that overall the plan is to continue growing these businesses, as Dash mentioned, which means allocating more capital but doing it profitably, not because we're slowing down or just not funding quickly enough. I think the efficiencies and the operating margins in the businesses reflect great progress, especially this year. And so hopefully if we're growing those businesses and allocating more capital, it's because the ROEs are extremely strong, and it's the best marginal use of our money.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Okay. Thank you, everybody, for participating in our call, and we look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.