Good afternoon, and welcome to the Redwood Trust, Inc., First Quarter 2018 Financial Results Conference Call. During management's presentation your line will be in a listen-only mode. At the conclusion of management's remarks, there will be question-and-answer session. I will provide you with instructions to enter the Q&A queue after management's comments. Today's conference is being recorded. I'll now turn the call over to Lisa Hartman, Redwood Senior Vice President, and Head of Investor Relations for opening remarks and introduction. Please go ahead.

Thank you, James. Hello, everyone. Thank you for participating in Redwood's first quarter 2019 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 will 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. They are included to aid investors in further understanding the company's performance and to provide insight into one of the ways management analyze Redwood's performance. A reconciliation between GAAP and non-GAAP financial measures is provided in both our second quarter earnings press release and Redwood Review available on our website. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, May 8, 2019. 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 and introductions.

Thanks, Lisa, and good afternoon, everyone. Our first quarter results reflected both strong operational performance and improved market conditions. Mortgage industry began 2019 focused on the prior year's volatility and concerns over rate hikes and low refinance activity. As quickly as the reckoning was to begin, revised signaling from the federal benchmarks and mortgage rates precipitously lower. The much anticipated corporate earnings season yielded strong results, and the IPO market became quite active. Closer to home, lower mortgage rates coincided with the spring selling season to provide a much needed boost to the housing market. All told, we view the current market sentiment as markedly improved versus where we started the year. That said, we are managing the business with cautious optimism acknowledging that rates can move quickly, and that there is continued volatility in the broader markets in response to news from the Fed and current trade talks. While we closely monitor the macro environment, the first quarter was an especially busy one for us as we continue to execute on our strategic initiatives. Our GAAP book value increased to $16 per share in the first quarter, primarily driven by strong GAAP earnings that exceeded our dividend. Our Non-GAAP core earnings of $0.36 per share were down slightly versus the fourth quarter as variable compensation normalized, and we work to deploy the proceeds of our first quarter equity offering. So like GAAP, our quarter earnings also comfortably exceeded our quarterly dividend. At our second annual Investor Day held in March, I laid out a bold vision for the company, the essence of which is the following. Residential loans change hands away from government supported entities, we participate profitably in some form or fashion. This vision has informed our strategic initiatives, the key ingredients of which include the following: one,…

Thank you, Chris and good afternoon, everyone. We continue to make meaningful progress executing on our strategic initiatives aimed at expanding our platform to serve growing areas of the housing market. We remain focused on efficiently allocating our capital into underserved areas of housing finance that we believe will deliver strong risk adjusted returns for our shareholders. To this end, the first quarter of 2019 was highlighted by the closing of the acquisition of 5 Arches, a key milestone for Redwood. As Chris noted, 5 Arches is a leading originator of what we call business purpose real estate loans. Namely loans made to investors and single family and small ticket multifamily real estate. As a complement to our core residential mortgage banking activities, we view the competencies of the 5 Arches platform as particularly relevant in a housing market that continues to be categorized by uncertain trends in the homeownership rate, and an acute supply demand imbalance at more affordable price points. While the integration is still underway, we are already seeing the 5 Arches platform contribute positively to our overall mortgage banking results and accretive credit investments for our portfolio. Of note, we expect to continue purchasing 100% of the platform single family rental production, and have begun allocating more capital to short-term real estate bridge loans that 5 Arches originate. Turning to our residential mortgage banking business. First quarter results reflected the benefits of improved market conditions, but also the impacts of seasonality and higher mortgage rates at several points during the quarter. Residential mortgage banking volumes for the first quarter totaled $1 billion and during the quarter we executed one select and one choice securitization. Notwithstanding the volume decrease mortgage banking revenues for the first quarter were up versus the fourth quarter with strong gross margins in…

Thanks, Dash and good afternoon, everyone. Summarize our financial results for the first quarter, our GAAP earnings were $0.49 per share, compared with negative $0.02 in the fourth quarter, and core earnings were $0.36 per share, compared with $0.41 in the fourth quarter. Increasing GAAP earnings in the first quarter was primarily driven by a recovery in the value of our portfolio investments, driven by spread tightening and improved market conditions. Core earnings was supported by solid mortgage banking results and measured progress in economic net interest income growth, but declined quarter-over-quarter primarily due to higher variable compensation expense commensurate with higher quarterly GAAP earnings. Of note this quarter for investment portfolio we saw a decline in GAAP net interest income and an increase in non-GAAP economic net interest income. This dynamic was accentuated this quarter we experienced continued pay downs in sales available for sale securities, for which returns are reflected in net interest income. Being replaced with trading securities for us returns are reflected in net interest income and investment for value changes. To address this dynamic, we adjust our calculation of core earnings and economic net interesting come this quarter to more accurately capture the effective yield of some of our newer investments, including multifamily securities, certain re-performing securities, and our servicing advance investments. Going forward, we expect to see this dynamic continue and we remain focused on growing economic net interest income. Moving on, our GAAP book value increased approximately 0.7% during the first quarter to $16 per share, which along with our dividend contributed to a 2.6% economic return for the quarter. The increase in book value was primarily driven by positive market valuation adjustments on our portfolio of investments, which recovered a significant portion of the losses we experienced in the fourth quarter, offset…

Thank you. [Operator Instructions] And we'll take our first question today from Doug Harter with Credit Suisse.

Hey, guys, this is actually Josh [ph] on for Doug, thanks for taking the questions. Real quick on the $100 million of investable capital at the end of March and then also the $75 million that's been committed but not deployed, can you guys give us any idea of the pace of that deployment? Or maybe how the pipeline is looking quarter to date? Thanks.

Yes. What we said is we expect that the pace of deployment will pick up as we head into the second and third quarters. The first quarter just from a seasonal perspective is traditionally not a heavy quarter for us. That said, we think we have a fair amount of investable capital. And I think a big aspect of our strategy will be further optimizing our balance sheet. As Dash noted, there's quite a few levers that we can pull to the extent the pace of deployments picks up sooner than we would expect. So I think overall, we don't have a roadmap for the calendar. But we do feel like we've got the capital today to meet our near-term objectives.

Great. And then, looking at how the markets have performed year to date, how are you seeing the execution? Or how are you thinking about the tradeoff between whole loan sales versus securitizations? Thanks.

Hey, it's Dash. I would say if you think about last year, for the preponderance of 2018, the execution via securitization was notably stronger than whole loan sales. We discussed this a little bit last quarter as well. I think our view at this point is that those executions are relatively in parity with each other at this point. That's driven in part by continued robust demand from bank balance sheet that we are delivering product into securitization markets have clearly found their footing year to date, and have continued to strengthen here in the second quarter. But we continue to see strong opportunities to whole loans, and driven in part by our continued deepening of our whole loan buyers, and their continued confidence in our process. We are always going to focus on the best execution for any given loan or pool of loans. But as we've said before, keeping the spigot open for hold on buyers is critically important and has served us very well in the past. And so we will continue to balance those considerations going forward.

Great, thanks, guys.

Next we'll hear from Bose George with KBW.

Yes. Good afternoon. Can you talk about how going on sale margins are trending in the second quarter? And also just in the first quarter was the gain on sale margin on the select product pretty stable and the improvement was on the choice side.

Yes, I think that's right. The select margins were stable. And the choice margins like we said those were strong driven largely by the securitization execution that we had but also we did in our production have an increasing amount of choice hybrids which we're able to sell on whole loan form as well, which represented good margins for us, too. So it was really a mix of those things.

Yes, I think one thing I'd add, Bose, is where we executed our last securitization where the market was at that time, AAAs were somewhere in the neighborhood of 1.75 back of TBAs. I think the markets tightened more or less around a half a point since then. So, I think just observed market levels are quite a bit tighter, which all else equal be positive for margins.

Okay, great. That's helpful. And then just in terms of the different opportunities out there that you're seeing, where do you feel sort of the best incremental returns are?

I think the view is, we continue to see probably the best risk adjusted returns and in a few different areas and obviously the market in general has tightened since the beginning of the year. So, first of all, in the multifamily space, we continue to deploy more capital, as I mentioned in my prepared remarks into the Freddie Mac programs. We purchased other BPs earlier this quarter with a pretty substantial capital allocation of $70 million. We continue to really like the risk return in the Freddie Mac multifamily space and no small part by the continued strength of credit quality and the underwriting discipline that we can leverage by participating in Freddie's programs that's definitely a big one. The risk return on choice continues to be very, very strong, we talked about the margins there and net of those margins we continue to retain the copies in the portfolio where we're very pleased with the return. And then thirdly, I would say no the business purpose lending side with 5 Arches we intent to allocate incremental capital above the $50 million we currently have allocated. So their bridge products and are continuing to build our pipeline of single-family rental loans on a standalone unlevered basis just from a whole loan perspective we really like the returns in that space. And as I mentioned before on prior calls, the financing markets continue to mature and at least at this point continue to come our way in terms of opportunity to create better levered returns there. So I would say those are the areas where we are probably most focused at this point.

Okay, great. Thanks. And actually just one more, in terms of book value since quarter end any meaningful changes there?

At this point I don't expect book value to be down, it's a little early to give any guidance, but certainly spreads have generally tightened and we've seen good liquidity in the markets we're focused in. So I think the trajectory all else equal I think is positive.

Okay, great. Thanks.

We will now hear from Steve Delaney with JMP Securities.

Hey, guys I'm in the airport so I'm going to ask my question and drop off on mute, so you won't pick up all this background noise. Chris, I'm curious have you had the chance yet to meet Mark Calabria? And if so, anything that he may have said or you have read or heard where you might have any ideas about narrowing program to the agencies maybe besides maximum loan sizes anything that you sense is possible to create more wide space for the private sector in the residential mortgage market. Thanks appreciate it.

Thanks for the question, Steve. I have had the opportunity to sit down one on one with director Calabria and I would say it's too early to get into any type of specifics on initiatives that that might occur via regulatory changes. But I can't say and I think you can sight some of the interviews he has given that he is very focused on giving Congress an opportunity to act, but in the absence of action there are changes that can be made to level the playing field between the public and private sectors. I do sense a market difference in approach, since the regime change and there are opportunities such as the QM patch which is set to expire to really allow private capital to step in and be part of that solution. There is certainly a number of focus areas that we think we can engage in Washington. And at this point I think we're letting the new leaders sort of get comfortable in the positions and over the next few months hopefully we can be of help.

Thanks, Chris. That's helpful.

Next we will hear from George Bahamondes with Deutsche Bank.

Hey, guys. Good afternoon. Just a point of clarity here, so you referenced the $100 million of available capital that the $75 million of committed capital is separate from that, so the $100 million is dry powder uncommitted or is it $75 million of committed capital accounted for in that $100 million that you referenced?

Yes, those are two separate amounts, George, we have the $100 million that is dry powder that we have available and then the $75 million we've already counted that as deploy that's been committed. It just hasn't quite get in funded yet. So as I mentioned in my remarks we expect that to go out here in the next few months.

Okay, great. And I know you referenced mortgage rates being down and they've been down for a few weeks. Are you seeing maybe acceleration in an acquisition or refi volumes that are maybe materially different from maybe what you were seeing earlier this year or is it not something that has a change not really been material from what you've been seeing as you been speak to folks you have relationships with.

Yes, we have noticed the change in refinance activity, not a major change it might be 70-30 purchased to 60-40 for us. We can check on that, I think the overarching point is we have observed the change not earth shattering. That said, we're pretty optimistic about where we see volumes in the near-term we've seen a steady trend month over month of increased volumes across the board. And so we're fairly optimistic that the lower rates are resulting in increased activity and when you couple that with the traditional spring selling season, I think that's been a reversal from what we observed heading into the end of the year.

Got it, that's helpful. That's all for me today. Thank you.

Thank you.

All right. Operator, you can close the call.

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.