Redwood Trust Inc (RWT) 2020 Q2 法說會逐字稿

Good day, and welcome to the Redwood Trust, Inc. Second Quarter 2020 Financial Results Conference Call. (Operator Instructions) 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.

Thank you, Kate. Hello, everyone, and thank you for participating in our second quarter 2020 financial results call. Joining me on the call today are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Collin Cochrane, 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 is provided in our second 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 our 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 thanks to all of you for joining the call today.

We're extremely pleased with the progress we've made in response to the collapse of liquidity that the nongovernment mortgage sector experienced in March. The COVID-19 pandemic has continued to rage on since then. And as a nation, we are now experiencing a second round of lockdowns after a spike in coronavirus cases during July. So Redwood's story through this crisis will continue to be written, and we are now in a unique position to not only weather the storm but also take advantage of a significant recovery in our business lines, which is now underway.

Before I proceed with the discussion of our businesses, I'll preview our financial results and condition. Our second quarter GAAP earnings were $1 per share as compared to negative $8.28 per share in the first quarter. Our GAAP book value per share increased almost 30% to $8.15 at June 30 from $6.32 at March 31. This represents a retrace of nearly 1/3 of the first quarter book value decline linked to unrealized losses in our investment portfolio. While not uniform in magnitude, asset valuations were materially higher and still possess significant upside to the extent the economy continues to recover.

During the second quarter, we successfully recast most of our secured recourse debt. In aggregate, recourse debt declined from $4.6 billion at March 31 to $1.8 billion at June 30, reducing our recourse leverage ratio from 6.9x to 2.1x. On a pro forma basis, factoring in a new nonrecourse facility we entered into during July, our recourse debt has further decreased to $1.6 billion, and our recourse leverage ratio was 1.9x.

Marginable debt, or that portion of recourse debt that is subject to daily margin calls, represented only about 23% of our recourse debt at $375 million at June 30 on a pro forma basis. When comparing our $529 million of unrestricted cash at the end of June to our marginable debt, our coverage was approximately 1.4x, leaving us with ample room to allocate significant capital to our operating businesses and new investments, as we have begun to do.

Importantly, the evolution of our capital structure has been managed organically without the proverbial need for a crisis-driven dilutive equity capital raise. Not only do we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt at significant discounts, generating $25 million of economic gains. These repurchases provide the lasting benefit of reduced debt service cost and leverage, and some of the gains can contribute towards long-term technological investments we have planned for our platforms. We will continue to opportunistically repurchase our long-term debt or common equity to the extent we believe valuations remain significantly detached from fundamentals.

With our capital structure enhancements largely complete, we paid a second quarter dividend of $0.125 per share at the end of June. Second quarter dividend aligned with the current size of our balance sheet and reflected a sustainable level that we would hope to build upon as we begin to deploy our excess capital and as the economy and our business cash flow stabilize. We remain committed to delivering an attractive dividend to shareholders while remaining well positioned to opportunistically deploy capital going forward.

When taking stock of the extreme market shocks brought about by COVID-19 and our go-forward earnings, we believe it's still premature to look too far ahead as the true impact to the U.S. economy and the mortgage industry is yet to be seen. From a macro perspective, the recovery in financial markets remains meaningfully detached from the continued and, in many areas, accelerating health pandemic. Record job losses and the associated economic contraction has significantly outpaced the Great Financial Crisis in both speed and severity. The spectacular resiliency of the financial markets, as best we can tell, is still buoyed by extreme monetary and fiscal stimulus with the prospect that risk assets can be supported either directly or implicitly by the Fed until a COVID-19 vaccine or effective treatment can be found. While the Fed has not yet indicated support for the non-agency mortgage sector through TALF, significant engagement is ongoing, and we do not believe the ship has sailed.

Discomforted by the prospect of trying to predict and time the outcome of the pandemic and with an election looming in November, we put ourselves in a position to be patient and focused on the long term through what will likely be a volatile next few months. The virtue of patience has had meaningful ancillary benefits to us as we've been able to focus on the strategic evolution of our business model and how our platforms will function in a post-pandemic world. Dash will discuss this in more detail in a few moments.

For now, our Residential and Business Purpose Lending segments continue to operate in a significantly altered landscape. Many aspects of the mortgage process that historically took place in person, such as appraisals and closings, are now done remotely. Residential credit performance has fundamentally deteriorated from the record-low delinquencies the industry enjoyed before the crisis though continues to run better than most expected. As of June 30, we received approximately 96% of our payments due in June for residential loans underlying our Sequoia securitizations. And we received also approximately 90% -- 96% of the payments due in June for the single-family rental loans underlying our CoreVest securitizations. Most of these nonpayments represent loans in forbearance as opposed to serious delinquencies.

The nationwide rise in past-due mortgages thus far does not appear to be weakening the single-family housing sector. Thanks to record-low mortgage rates, in some cases below 3% for agency mortgages and trending lower, refinance activity has remained elevated, and home purchases have seen a resurgence in demand.

By way of shelter-in-place orders and broader perhaps secular trends in working remotely, the concept of home has taken on a greater significance for most Americans. Many children are now learning virtually down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states where families look to exit dense metropolitan areas. This is a remarkable shift in consumer preference from even a few short months ago and one that, on balance, is positive for both our residential consumer and rental products, which are predominantly focused on single-family loans.

Our Residential Lending team entered the second half of the year primed for a relaunch with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders had significantly tightened their underwriting guidelines for newly originated jumbo loans due to the prospect of a severe recession and lack of Fed support to the non-agency sector. Additionally, constraints on the bandwidth of loan officers, who have remained largely focused on high-margin refinancings to agency eligible borrowers, has weighed on jumbo origination activity.

Based on our recent engagement with loan sellers and the gradual narrowing of the spread between agency and jumbo mortgage rates, we've begun to see a pickup in lock activity and expect this to grow meaningfully as we head into the fall. Even with this narrowing, we continue to see substantial relative value in non-agency whole loans, a sentiment shared by our loan-buying partners, both current and prospective.

Our near-term focus continues to be on recasting our products and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Though our team's efforts may not yet be reflected in results, tremendous progress has been made, and we're excited about the resurgence underway.

To reach this point, we completed the difficult work of managing through our pre-COVID loan inventory, culminating with the sale of substantially all of those loans and the clearing out of our associated secured debt facilities. As part of this process, our residential team completed our Sequoia MC1 securitization in late June, a transaction that brought the sale of these loans to a close. The deal priced better than we expected and positioned us to safely begin locking new loans in July.

Transitioning to our Business Purpose Lending segment. The recovery was very much underway at the end of the second quarter, and we have much to be excited about going forward. Our BPL team originated $234 million of loans in the second quarter, the majority in late May and June when we reentered the market in earnest after securitizing a significant portion of the pre-COVID single-family rental loans on our balance sheet. Our origination footprint remained largely consistent for SFR loans, and our bridge origination strategy has sharpened its focus on sponsors whose strategy is to ultimately hold and stabilize all or most of their portfolios.

In addition to their institutional caliber, these sponsors often become accretive repeat customers for both SFR loans and fresh bridge financing to support new investments. Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more competition to reenter the space. However, we do believe our operational advantage remains durable.

Our BPL business continued to make great progress in diversifying its outlets to distribute risk in the second quarter and through July. We completed 2 nonrecourse financing arrangements for over 85% of our pre-COVID bridge portfolio, essentially match-funding a book that has thus far displayed solid performance through the pandemic.

Investment demand remains very robust for our SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest to provide private financing. We expect these options to become a reliable complement to traditional securitization. The attractive risk-adjusted returns in the space have kept BPL assets in strong demand, and we continue to receive strong indications from investors in our SFR securitizations.

As we take stock of the year so far and look towards the fall, we're reminded that we are truly living in historic times. We face a pandemic that has created global economic disruption, trade and technology wars are looming. The fight against racism and social injustice is hitting an inflection point at a global scale, and the U.S. Presidential election is a mere 3 months away. All of this presents an opportunity for all of us to examine our values, reset priorities and pause while we rethink how we want our world to function. As times evolve, our corporate mission remains the same: help make quality housing accessible to all Americans, whether rented or owned.

That concludes my prepared remarks. I'll now turn the call over to Dash Robinson, Redwood's President.

Thank you, Chris. Good afternoon, everyone.

Before I get into the review of our operating businesses, I want to begin with providing additional details on the progress we made recasting our capital structure, which includes significant milestones towards how we plan to run our franchise going forward.

In the second quarter, we considerably reduced our recourse debt, most notably marginable secured debt, and entered into key financing arrangements on several parts of our existing portfolio and to support our operating and investing activities going forward. In total, our recourse debt as of today stands at $1.6 billion, approximately $1 billion of which is secured. As Chris articulated, only $375 million of this is marginable. Approximately 80% of our total recourse debt matures in 2022 or later. And as Chris mentioned, we procured nonrecourse debt for approximately 85% of our shorter-term business purpose bridge loans, with the majority of the remainder funded with nonmarginable debt or held unencumbered.

In addition to these completed initiatives, incremental work on further reducing our recourse and marginable debt remains underway. Our work in the second quarter positions us to fund the vast majority of our residential and business purpose loan inventories with nonmarginable debt. While this new debt financing comes with a modest increase in cost of capital, we believe the associated benefits, including longer durations and a lower required amount of risk capital over time, will allow us to continue to achieve attractive risk-adjusted returns on our portfolio for the long term.

During the quarter, we also completed the sale of nearly all residential loans held for investment and completed the sale of nearly all of our remaining pre-COVID jumbo loan inventory. While we continue to carry exposure to standard representation and warranties from loans sold, our estimate for this exposure was not material at June 30, 2020.

With this work complete, we entered the third quarter in a unique position of strength with the ability to allocate significant additional capital through our operating businesses and new investments. Importantly, to emphasize Chris' earlier point, the organic management of our balance sheet was achieved without the need for a dilutive capital infusion or equity-linked options for our lenders.

Within our portfolio of securities investments, fair values improved in the second quarter though still remain well below pre-pandemic levels. The more pronounced increases were seen in Agency CRT, Sequoia subordinate securities and other third-party securities. However, we saw positive price movements in substantially all portions of the portfolio.

Our second quarter Redwood Review provides more detail on value change by asset type. We estimate that as of June 30, approximately $3 per share of the unrealized losses recognized in the first quarter of 2020 remained outstanding. It is also important to keep in mind that even our December 31 marks reflected a significant discount to face value in certain parts of the portfolio, reflecting potential upside as the underlying structures delever, something that happened at an accelerated pace in the second quarter particularly for our subordinate prime jumbo securities.

I'll now move on to a discussion of our business segments. Given changes in the composition of our portfolio over the last several months, in the second quarter of 2020, we combined our Third-Party Residential Investment and Multifamily Investments segments into a new segment called Third-Party Investments. Our Residential and Business Purpose Lending segments continue to represent vertically integrated platforms, while our Third-Party Investments segment is comprised of other investments not sourced through our core mortgage banking operations, including reperforming loan securities, CRT securities, our remaining multifamily securities and other housing-related investments.

Our completed initiatives in the second quarter have allowed us to more fully lean back in to our operating activities. As technicals have improved and overall market supply and housing credit remains tepid, we believe our operating advantages position us perhaps better than ever before. Our core competencies of controlling production quality and being closest to the asset remain valuable to market participants seeking to delayer on risk but can't otherwise access it. This discipline not only shines through in asset performance, which I will touch on in a moment, but also through a diversity of revenue streams that will be increasingly important in what is likely a longer-term new normal.

The behavioral shifts we are seeing as a result of the pandemic, in our view, are bringing the market in our direction. Demand for detached single-family homes is increasing with the migration from densely populated areas to the suburbs as consumers seek additional interior space, more private access to the outdoors and other amenities commensurate with spending more time at home. This shift in sentiment could very well be structural and supports the underlying business drivers of both our residential and BPL businesses.

Against this backdrop, our platform has made great progress in the second quarter. With new financing facilities in place, our Residential Lending business is locking loans at a measured but accelerating pace. Demand for housing credit has strengthened in both the whole loan and securitization markets particularly since the end of the second quarter, with demand for securities remaining high and spreads continuing to tighten as demand outstrips supply.

As Chris mentioned, while at the same time originators have largely prioritized their focus on conforming loans, we've begun to see a pickup in lock activity and expect this to grow meaningfully as we head into the fall. A hallmark of our Residential Lending platform has always been the diverse channels through which we distribute risk. Our current view of the market indicates strong demand for both Sequoia issuances and whole loan sales as well as additional structures through which we can distribute risk in a durable fashion and turn our capital efficiently.

During the second quarter, the Residential Lending segment generated $33 million of net income driven primarily by positive investment fair value changes in our subordinate Sequoia securities. The whole loan sales described earlier benefited our cash position, recourse leverage and marginable debt ratios but reduced net interest income in the second quarter.

We purchased $55 million of loans during the quarter, largely in May and June as the significant slowdown in the jumbo market gradually began to thaw. Lock volume has picked up substantially in July as we established fresh momentum.

Additionally, during the second quarter, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of investment securities from a $271 million Sequoia securitization we completed during the quarter, which was comprised of our remaining pre-COVID jumbo loan inventory. During the quarter, we also completed a nonmarginable warehouse facility that we are utilizing to finance existing loan inventory.

As we move forward, our residential team is focused on a handful of key strategic priorities including, as Chris mentioned, continued investment in technology to improve efficiencies and operations and to refine how and how quickly we can purchase loans in a safe and sound manner.

Meanwhile, our Business Purpose Lending segment is capitalizing on a unique market opportunity. Fueled by an increase in demand from the rental market for high-quality single-family homes, our origination pipeline for both SFR and bridge loans remains robust. During the second quarter, the segment contributed $46 million of net income driven by positive investment fair value changes, net interest income from investments and an accelerated pace of originations.

In the second quarter overall, we originated $176 million of single-family rental loans and $58 million of bridge loans. We remain able to command higher coupons, lower LTVs and other structural enhancements for our BPL loans. And while a level of competition has reentered the space, our speed to close, even amidst the impact of the pandemic on our traditional workflows, remains a durable competitive advantage.

Bridge lending remains a key strategic focus that drives long-term value for our Business Purpose Lending segment, including through attractive risk-adjusted returns for our portfolio and sponsor conversion rates into adjacent products. Our second quarter Redwood Review contains more detail on this part of our portfolio and our approach to client acquisition, highlighting a strategy that is unique in several important ways. Chief among these is a more concentrated focus on experienced sponsors with a longer-term approach to real estate investing. These sponsors make strong long-term clients that we have observed will utilize several lending products that our platform offers, a key reason we prioritize a customized lending approach that we believe leads to stronger credit performance through time.

This has been borne out in the recent performance of our BPL portfolio overall. On a blended basis, 90-plus day delinquencies in our BPL book totaled 2.4% at June 30 and have increased only modestly since the onset of the pandemic. In particular, delinquencies in the bridge portfolio are less than 1% higher than in March and stand at just over 4.5% overall.

Paydowns in the portfolio totaled over $90 million in the second quarter and are exceeding $50 million in July alone, indicative of strength of sponsor strategy and overall robustness of the housing market, particularly the average price point we find. In May, we completed a $221 million single-family rental loan securitization consisting of loans we held at the end of the first quarter, from which we retained a $20 million block of securities.

Our Third-Party Investments segment contributed $77 million of net income during the second quarter as a result of positive investment fair value changes and net interest income driven by a rebound in agency CRT investments and other subordinate securities. We have considerably reduced the amount of marginable debt used to finance our third-party investments and expect to reduce it further going forward.

During the second quarter, we sold $53 million of third-party investments, including $35 million of residential subordinate securities and $19 million of CRT securities, and we deployed $10 million primarily into new CRT securities. Net of these dispositions, our investments in reperforming loan securities are an increased proportion of our third-party investment portfolio. As a reminder, these investments are backed by seasoned mortgages, whose underlying borrowers have gone through some sort of modification over the course of time.

The bonds we own comprise approximately 25% of the capital structure and are subordinate to senior securities wrapped by Freddie Mac, an attractive source of nonrecourse term financing. Performance in the underlying portfolios has been stable relative to current market conditions, with overall delinquencies approximately 4% higher than earlier in the year and overall cash flow velocity reflecting strong borrower engagement.

Overall, as the market has become more orderly during the past month or 2, the credit curve remains steeper than before the onset of the pandemic. And while the dearth of supply and more subordinate securities has deepened the associated market debt considerably over the last several weeks, we believe that attractive capital allocation opportunities will emerge.

And with that, I'll turn the call over to Collin, Redwood's CFO.

Thanks, Dash, and good afternoon, everyone.

As Chris and Dash discussed, our second quarter earnings and book value benefited from a significant rebound in asset pricing, which primarily drove our $1 of earnings per share for the quarter and helped to generate a 31% economic return on book value. While the majority of these earnings were driven by positive fair value changes on our investment, as Dash mentioned, we also saw improvements in our operating businesses and recorded $25 million of gains on the repurchase of convertible debt. Of note, the gains from extinguishment of debt are excluded from our diluted earnings per share in accordance with GAAP. Our basic earnings per share, which include these gains, were $1.41.

As was the case last quarter, we did not disclose non-GAAP core earnings for the second quarter. We are continuing to evaluate a revised core earnings metric that will be most relevant in assessing our operating performance in future periods. After the payment of our $0.125 dividend, our book value increased $1.83 per share in the second quarter to $8.15 per share. This increase was primarily driven by a $1.78 per share of fair value changes on our investments, representing the recovery of approximately 1/3 of the unrealized losses recognized in the first quarter of 2020. As Dash mentioned, we estimate at June 30 that approximately $3 per share of the unrealized losses recorded in the first quarter remained outstanding.

Shifting to the tax side. We had a taxable loss of $0.50 per share in the second quarter at a REIT, which was primarily driven by a timing difference related to recognition of hedge losses that were incurred in the first quarter but not realized for tax until the second quarter. Exclusive of these amounts and gains from extinguishment of debt, REIT taxable income from the quarter was $0.14 per share. Given our year-to-date net loss at the REIT, we currently expect the majority of our dividend payment in 2020 to be return of capital for tax purposes.

Turning to our balance sheet. We ended the second quarter with unrestricted cash of $529 million. As Chris and Dash discussed, in recent months, we have repositioned our secured recourse debt structure, significantly reducing overall recourse debt and shifting substantially to nonmarginable debt. Additionally, we have utilized new nonrecourse structures to finance 4% of our investment portfolio.

Using our pro forma recourse debt of $1.6 billion at June 30, adjusted for new nonrecourse financing we entered into in July, we estimate our recourse leverage ratio will be 1.9x. We expect this leverage ratio to rise as we begin to increase our accumulation of loans at our operating businesses for sale or securitization and begin to deploy our available capital into new investments. As we mentioned, we expect to utilize nonmarginable debt facilities to finance our loan inventory and new bridge loan investments, and we expect to remain judicious in our use of marginable debt to finance other investments.

I'll close with our outlook. Given the continued uncertainties surrounding the future economic impact of the pandemic, we are continuing to refrain from providing earnings guidance at this time. What we do know is that we entered the second half of this year with a strengthened capital structure and a significant cash balance that we believe provides us the optionality to play offense and defense as we navigate through the ongoing pandemic. Our in-place investment portfolios are generating strong cash yields to our current basis that continues to include a significant embedded discount, which provides a strong foundation for earnings growth as we begin to deploy our excess capital and our operating businesses return to profitability.

On the expense side, general and administrative expenses decreased during the quarter primarily due to a reduction in our workforce that we implemented in late April. While we expect some incremental savings from costs specific to these and other activities in the second quarter, we also anticipate an increase in variable loan acquisition costs as the volume and revenue at our operating businesses continues to improve. As we begin to gain more clarity on the operating environment and the pace of recovery from the pandemic, we'll be better able to assess the new baseline for platforms and evaluate the opportunities to begin redeploying an appropriate portion of our substantial cash position to generate incremental earnings.

And with that, I'll conclude our prepared remarks. Operator, please open the call for Q&A.

(Operator Instructions) Our first question comes from Eric Hagen of KBW.

Is there both a yield and a blended cost of funds that we should think about in the portfolio going forward? And then I realize the loan portfolios are marked to fair value, so it's maybe a little bit more challenging to tease apart what would ordinarily be a loss reserve. But what are the loss rates that you expect in the business loan portfolio and the Sequoia Choice portfolios? In other words, if you were required to post a reserve for those, what would those numbers look like?

Eric, it's Dash. I can take those. Thanks for the questions. As to your first question, from a yield perspective, on our subordinate securities, to Collin's point, based on our basis and where we're originating loans to, we are seeing yields to our basis well into the double digits. In some cases, mid-teens or higher for some of the more subordinate securities that we hold.

On the whole loan side particularly in Business Purpose Lending, before those loans get financed just on a raw asset yield basis, those yields are anywhere from 5% to 6% for SFR loans and then higher single digits for bridge loans, 8% to 9% or higher.

From a cost of funds perspective, we detailed this in the review, so you can take a look at that as well. But our recourse debt blended cost of funds is about 4.7% now, which includes our unsecured converts. It ticks up a little bit higher than that when you blend in some of the nonrecourse financing that we procured during the quarter. So that's how you can think about those. So there's still good access spread particularly in the bridge portfolio. And obviously, when we securitize our SFR loans and our jumbo loans, we're availing ourselves of a more permanent cost of funds which is far lower than that in the securities market.

From a loss perspective, like I said, we haven't provided any formal guidance on that. We've continued to see delinquencies overall really remain quite stable. They've ticked up a bit clearly over the past few months, but in general, we've been really, really hardened with the overall trend in delinquencies, particularly with -- in terms of the loans in forbearance and Sequoia. That range remains in the 6.5- to 7-point range in general as a percentage of the overall book. About half of those borrowers are current. And as we mentioned during the prepared remarks, we will see over the next several months how those borrowers perform as they roll off of forbearance.

Yes, Eric, this is Chris. I'd also add, when you think about reserving, and we don't book reserves in that sense as you noted, there's incidence and there's severity. And I think on the incidence side, the book has performed better than our expectations given where the economy has gone to. On the severity side, you have to look at the single-family housing sector. And I really think it started to detether from not only commercial but multifamily. The housing markets remained very strong, and sales are up. So I think from a severity perspective, just given the average LTVs of the book, we're in pretty good shape.

Yes. That was good. That was really helpful. And understood that you guys are starting to get your footing back in the jumbo origination side. But what do gain on sale margins look like right there in that market right now? And how much origination volume do you think you could support on that channel until you do get up and running in the fall?

Well, the margins are -- liquidity is still building in the market. So certainly, we're seeing margins recover. We ended June essentially having cleared out our entire inventory. And at this point, we're locking loans, but the ramp has been pretty impressive.

And as far as what we can support, we're in a place where we can support precrisis levels. The team is in place. And I think really the story there is going to be the pace of recovery in jumbo. And based on what we've seen even these past few weeks, we've got -- we're pretty optimistic heading into the fall, you're going to see a pickup in activity.

Did you guys say what your book value was through July?

We didn't. It's up modestly. We didn't cite a number, but it's up maybe a few percent.

The next question is from Stephen Laws of Raymond James.

I guess I want to start with the investor -- the BPL side, specifically the single-family rental loan portfolio. Demand for that asset class seems to be extremely strong. We're seeing those stocks of SFR managers are certainly working well. Curious -- I know, Dash, I believe it was your prepared remarks, mentioned some other capital in that space. Can you talk about what the competition is like? Is it institutional capital trying to provide financing? Is it more local, hard money lenders that have been recapitalized? Or where is that competition coming from on that front? And how do your yields or your coupons you're able to get today compared to where you were doing at the similar SFR loans, say, in January and February?

Sure. Thanks, Stephen, for the question. I would say that if you think about SFR specifically, the barriers to entry, by our estimation, are significantly higher than with other types of business purpose lending like bridge. There's a deeper group of bridge lenders largely, however, who focus on different products than we focus on, traditionally the more single asset versus a lot of the products that I articulated that we tend to focus on there.

But yes, it's a bit of both. We have seen some of the traditional specialty finance competitors reenter the space who typically fund themselves with some amount of third-party capital in terms of their production. Those are the folks we would see probably on the smaller loans, including smaller balance SFR loans and certainly some bridge.

Then as you get into larger loan balances, specifically our single-family rental where, as you know, we can do loans as large as $40 million to $50 million or higher but tend to be in that sweet spot of $3 million to $5 million. For the larger loans, we continue to compete with some banks and insurance companies as well. There is a lot of demand from certain insurance companies that understand the asset class there. But our sweet spot, that $2 million to $5 million or so, remains pretty uncrowded, frankly, which we're thankful for.

And as it relates to how we continue to manage our risk going forward, there are a lot of private debt structures that we can avail ourselves of to complement securitization, which could be a very interesting complement to how we finance the business going forward. A lot of insurance capital and other capital in the space that could be a direct lender also was potentially interested in partnering on some venture as well, which could be a nice diversifier for us going forward. So there's definitely a lot of demand for it.

From a coupon perspective, we are easily 75 to 100 bps or so higher in rate than we were earlier this year. And that's taken into account the fact that benchmarks are lower as well. We recognize that as markets normalize that, that could come in a bit. But for now, that's where we are, which we're obviously very pleased with.

Great. And then you touched on the financing side a little bit. You've got SFR, you've got the securitization. The Redwood Review is great. It's a lot to get through ahead of the call, but I think as it said on the bridge side, you've got -- is it 2-year committed financing facilities that are, I believe, nonmarginable now in place for the $600 million or $700 million of bridge loans? Is that correct?

Yes. We termed out almost 90% of the bridge book in -- not only in nonmarginable but also nonrecourse fashion. Those are 2-year arrangements which effectively match fund. There is a little bit of replenishment capability in there, which is nice to support some of our go-forward production. But from a -- from an overall capital allocation and capital management perspective, it was a great achievement to be able to get the vast, vast majority of that book termed out nonrecourse in the second quarter, which is what that's referencing.

Great. And then last question for me. What kind of -- I know you got some originations done there May and June. What type of volume should we look at kind of go forward? And is it more constrained by the ability to securitize more? Or is it more constrained by finding loans that meet your characteristics? Or kind of what's the -- or just you're not willing to put your foot on the gas yet? What's the outlook for near term and then maybe a medium-term origination volume on the BPL side?

Sure. I would say we did over $400 million in the first quarter, if I recall, which was down from about $0.75 billion in the fourth quarter of last year. I would say that we expect to build significantly on what we did in the first quarter and probably hopefully build towards numbers closer to that Q1 number here over time.

The constraint is in some level just the workflows. As I mentioned in my remarks, it is -- it sometimes is taking longer to complete loans because of internal appraisals, procuring title, things of that nature. Some of this is just taking longer than it has in the past. And so that's probably from a volume perspective. Really the most meaningful headwind is just trying to get through some of those process elements, which the team has done a really fantastic job of doing. We have leaned back in to these products in a real way. We picked our spots a bit more in bridge. And we'll see how those markets reemerge.

But from a sponsor perspective, for the reasons we articulated, a lot of our sponsors are very eager to put more capital to work here because of these trends that we're seeing. And so we expect our existing sponsors to go deeper with their business models but also fresh capital to come in as well. So we're optimistic that the Q2 numbers will grow meaningfully here over the next 2 quarters.

The next question is from Steve Delaney of JMP Securities.

First, congratulations on the -- all the hard work and the results in terms of tightening up the balance sheet. There was a lot accomplished in a quarter, so props on that. I'd like to try to get some clarity. The $3 per share figure kind of jumps out at me, about $350 million of value that can be recovered further beyond what you were able to do in the second quarter. Just trying to focus or help me focus on sort of -- I know you've got multiple specialty buckets. But just kind of looking at your balance sheet, $8 billion of loans and then $1.2 billion of other types of securities and investments, can you maybe help me focus in on the $350 million, what the 2 -- 1 or 2 main asset classes that -- where you see the greatest potential for recovery? That would be helpful.

Sure. So yes, Steve, just to clarify, as you noted, that $3 per share is versus the 12/31 mark, which, as I mentioned, it also has some embedded upside and just based on the natural credit convexity of our portfolio. But I would say the areas that drive most of that number are reperforming loan investments, those securities that we own beneath the Freddie Mac term financing as well as our organically created subordinate securities both in Sequoia and then with CoreVest securitization.

There are some other elements to that number, but that -- those 3 areas are the majority of it. As we hopefully continue to see solid performance across those books, there's, as we mentioned in the call, definitely, from our perspective, potentially some much more upside in those discounts.

Okay. So that's -- I mean those are your big asset classes, obviously, Sequoia and single-family rental. And I guess what you're telling me is when you -- while those generate NIM for you, you also -- on the retained bonds, you have a fair value. I think of those as just permanently locked and loaded, loans on the left side, securitized debt on the right side. And what I'm hearing is, yes, what that is, but you're fair valuing the structures as well. Is that correct?

That's right. Both in Sequoia and in our CoreVest securitizations in CAFL, we sell a decent amount of premium into the market either through IO securities or P&I bonds. And that -- the offsetting discount is largely embedded in our subordinate securities, which is where all that credit convexity profile comes in. So like when Sequoia's prepays pick up significantly, you start to see those structures delever, and some of that optionality starts to unlock itself over time, which is definitely something we saw in the second quarter.

Understood. Okay. Well, that helps a great deal, and I'll follow up with Collin on that later. When you begin -- you did speak a little bit about being in a position where you can start thinking about playing office -- offense. In terms of the initial capital allocation, should we think about that largely in the third-party segment as opposed to -- it sounds like you're still at a point where you're more in the ramping in terms of needing capital for any significant volume of Sequoia or CoreVest securitizations.

It's Chris. We're -- good to hear from you. We're -- on offense, first and foremost, it really is in the operating platforms, accumulating loans, originating loans, really getting the teams doing what they're great at.

On the third-party side, we're opportunistic. But when you think about some of the opportunities out there, there's been a pretty significant rally in credit. And so there, I think we're picking our spots, but there's still -- the CRT is still very active, and the GSEs are active. So there's opportunities there.

But I think the big capital needs are going to be from the business lines. And we're well on our way with CoreVest, and the volume started picking up halfway through the second quarter. And on the residential side, we're now starting to see it, and all signs point towards a significant pickup in activity here heading into the fall.

So I think we'll be funding loans, and we've kind of transformed the balance sheet to put ourselves in a position to have access to nonmarginable facilities. So we feel pretty good about where we're at with capital.

And I'd also say one of our biggest uses of capital in the second quarter was repurchasing convertible debt. That's sort of a risk-free asset to us, at least the way we think about it. So those returns were instant. And we still -- where we see those prices today, they're still significantly detached from par. So that's something we'll monitor. Obviously, we have a buyback authorization. So we feel good about where we can deploy going forward. But primarily, we're focused on the operating businesses.

The next question comes from Doug Harter of Crédit Suisse.

This is actually Josh on for Doug. I know you just touched on it briefly, but wondering if you could talk about your appetite for additional debt repurchase and if you're thinking about equity repurchases as well, and if you could remind us if you have a common share repurchase authorization.

Yes. We do have an authorization, $100 million, that's been in place for a while. We have essentially unlimited ability to repurchase debt. And we'll be focused on both of those markets. I think what we said in our review was focusing on the fundamentals versus market values. And we're very focused on any way possible to deliver value to the shareholders. So that's definitely something we'll monitor.

I also -- as I mentioned before, we're seeing a growing need for capital in the go-forward business. We -- not only are we deploying capital in new investments, but we're actually investing in the platforms themselves. We're making some technology investments and other -- we're growing. We started adding staff. So I think we're pretty optimistic that we can realize some run rates here going forward that look -- start to look more like they did precrisis.

That said, the next few months we also mentioned could be pretty rocky. We are heading into a Presidential election, among other things, and we've had somewhat of a resurgence of the virus. So monitoring the economy and the financial markets is going to continue to be a primary focus for us.

The next question is from Kevin Barker of Piper Sandler.

Just a follow-up on the capital question. Could you stack rank your capital allocation priorities between buying back stock, buying back converts, reallocating that capital into certain investments and what you see as the most attractive today given where your stock trades or where your debt trades and the opportunity set that sits out there today?

It's a pretty fluid dynamic at Redwood. We don't think about it ideologically. We're constantly looking at relative value. And certainly, earlier in the second quarter, the most detached piece was the convertible bonds. We were able to buy back a significant amount at really healthy discounts. That had the double effect of realizing some economic gains but also reducing our leverage and improving our leverage ratios. So on a relative basis, that was very attractive last quarter.

Obviously, we've seen a big jump in our book value as of the release today. We'll continue to monitor the stock. We do have the authorization. So that's something we'll follow. But I think where we're most focused, as I mentioned, is in the operating platforms because we're seeing growing demand for the loans we buy or originate. The business feels much healthier today, and we want to make sure that we've got the capital in place to fuel those businesses and, as I said, get back to doing what the teams do well. So I think it will continue to be fluid, but all of those are big opportunities for us.

So I mean you mentioned you had $300 million of unrealized gains -- or I'm sorry, losses that could potentially be recouped depending on the market dynamics. I mean do you feel like you can recapture those? And if so, it would appear that your equity is trading -- and possibly your convert as well, is trading at significant fair value to what your book value may be. I mean when you think about that investment, I mean, it would seem that the return on equity or return on investment might be a little bit higher in buying back the stock versus reinvesting it elsewhere.

Could you help -- like help us explain like the difference between how you think about the return on investment on new initiatives or where you see opportunities versus where you see it in your own company or your own equity for that matter?

Yes. I mean the one thing -- the one caveat with the stock is there's some practical limitations both on the amount you can buy back, the time line that you can buy it back during open periods. And then of course, we're constrained by whatever our Board authorization is. So there are some practical limitations there, which could evolve, but certainly, it's not as straightforward per se as buying back debt, more retiring debt. So I think the sizing of the opportunities is one thing.

The operating businesses, right now, it's very important, as we turn the page here, to make sure that we're focused on the long run. So we like the upside from a recovery and book value of the unrealized losses on the existing investments, but it's very important from a market presence perspective and a long-term perspective that we're leading in these markets and not abandoning the markets. So we're going to continue to face the markets and rebuild the platforms and make sure that we're active and very engaged.

But I think we can do all 3 very well, I really believe, in addition to third-party investments. We were active today in third-party investments. So I think we're -- we've got a lot of coverage. And as I said, the decisioning is very fluid. We're meeting constantly. And if we see relative value emerge in any one piece, I feel like we've got the capacity to take advantage of it.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.