Good afternoon, and welcome to the Redwood Trust Fourth Quarter 2021 Financial Results Conference Call. Today’s conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood’s Senior Vice President of Investor Relations. Please go ahead, Kaitlyn.

Thank you, operator. Hello, everyone, and thank you for joining us for Redwood’s fourth quarter 2021 earnings conference call. With me on today’s call are Chris Abate, Redwood’s CEO; 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 today with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company’s Annual Report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company’s performance and could cause actual results to differ from those that maybe 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 fourth quarter Redwood review and investor presentation both which are 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. Redwood does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today’s call is being recorded and will be available on our website later today. I will now turn the call over to Chris Abate, Redwood’s Chief Executive Officer for opening remarks.

Thank you, Kate, and good afternoon, everyone. Thank you for joining us here today. 2021 was a truly transformative year for Redwood in reflection, we are extremely proud of our team and the continued progress we made throughout the year. We generated record performance within our operating companies, as they continued to profitably scale. In addition, we executed on our capital deployment strategies while also advancing key strategic objectives and technology and product development. Our performance reflected dedication, discipline, and great collaboration across our enterprise. This is only possible because of our people. I’m proud to say we’ve maintained a retention rate for employees that have significantly outpaced published averages for the financial services sector in 2021. In all of this helped us establish ourselves as the leading operator and strategic capital provider and housing finance, the heart of our corporate vision. Quickly recap our quarterly performance for the fourth quarter, which Brooke will cover in much greater detail. We generated GAAP earnings of $0.34 per diluted share and book value increased to $12.6 at December 31, a marginal increase over the third quarter. We increased our dividend to $0.23 per share in Q4 of 9.5% from the third quarter, this was our fifth dividend raise over the last six quarters. On the year, we delivered a 25% return on equity, a 30% economic return and a 60% total shareholder return. These numbers do not exist in isolation and are a clear reflection of our potential to generate durable earnings through complementary operating businesses and our investment portfolio. We have long positioned our platform to be flexible as the interest rate environment evolves and this readiness positions as well to navigate the current market. But the country is still struggling to turn the page on the COVID-19 pandemic, the broad…

Thank you, Chris, and good afternoon, everyone. As Chris mentioned, the fourth quarter rounded out a very impressive year for Redwood and I will focus my remarks on framing our recent performance in the context of current market conditions and how we believe our balanced business model will continue to create value for shareholders. As interest rates rise and volatility touches more segments of the market, it is natural to think back to the last time we were in this part of the cycle, namely from late 2015 through the middle of 2019. The period during which the Fed last hike rates witnessed its own bouts of volatility, in some cases, backdrop by significant geopolitical conflict. The 10-year treasury yield crap north of 3% in late 2018 impacting mortgage production volumes and leaving the industry with substantial excess capacity. The tenure, of course, hasn’t been close to 3% since, but as policy makers once again grapple with inflation now amids an ongoing health pandemic. It’s helpful to ask what’s changed since the last time. For Redwood, the answer is quite a bit. While our operating model and investment portfolio have always been designed to outperform through a full interest rate cycle, our business model now covers a much broader landscape of housing finance. We have products suited for owner occupants and housing investors like a critical balance, given the path of home prices and persistence supply demand dynamics. We are also emerging as a leading innovator in finding new ways to help consumers tap into the equity in their homes. As Chris mentioned, key to our diversification strategy has been our entry into the business purpose lending space and CoreVest, our BPL platform continues to raise the bar recently, setting a series of funding records in quick succession, $340 million…

Thank you, Dash. The powerful combination of our complimentary segment produced historic operating and financial results in 2021. As Chris highlighted in his remarks, in the fourth quarter, we reported GAAP net income of $44 million or $0.34 per diluted share, delivering a 13% overall annualized return on equity for the quarter. Our book value per share increased to $12.06. And during the quarter we announced our fourth consecutive dividend increase up nearly 10% to $0.23 per share or more notably up 64% on the year. In terms of full year results for 2021, we earned $2.37 per diluted share, our GAAP ROE was 25% and book value grew 22%. The growth in both our dividend and our book value led to a 30% total economic return on the year. I’ll begin with our segments, which were realigns this quarter to reflect how we are managing and evaluating the business. We believe the new segments clearly present the distinct contributions of our operating businesses and our investment portfolio and how they drive value for the overall company. At year end, approximately 70% of our capital was allocated to the investment portfolio with the remaining 30% towards our mortgage banking platforms, which was roughly unchanged in the quarter. We saw several highlights from our Business Purpose Mortgage Banking segment. As Dash mentioned, CoreVest had a record quarter for volume up 15% quarter-over-quarter, ending a year where we saw continued growth in funding volume and growth in new products, which has continued into 2022. The segment’s fourth quarter adjusted return on capital was 29% compared to 43% in the prior quarter. The decline was primarily driven by widening securitization spreads on SFR loans, as we approached to year end, which negatively impacted the pricing of the pipeline relative to Q3. The Residential…

Thank you. At this time, we’ll conduct our question-and-answer session [Operator Instructions] Our first question comes from Bose George with KBW. Please state your question.

Hey, everyone. Good afternoon. Actually first, just in terms of residential gain on sale margin trends, how are they looking in the first quarter to relative to what you saw last quarter?

So Bose, they’re still within our historical long-term range, probably a bit closer to the lower end than the 90 basis points that we had in the fourth quarter. Just a couple points of insight in terms of what we’re seeing in the market right now, obviously there’s been a fair amount of interest rate volatility year-to-date. A couple things, we have been able to consistently leverage our speed and brand to enhance our execution in general, some of the securitization executions that we’ve seen year-to-date of somewhat of a function of issuer securitizing, lower coupons amidst obviously this rate backup. So our ability to securitize more quickly, I think it’s particularly powerful in markets like this. As a reminder, when we securitize our typical loan age is a month or less, which leads the market and really helps from an execution perspective, just to be as close to current coupon as possible when rates are moving around. The other thing just we’re observing, market wide in general with our competitors. There’s always an array of pricing strategies between some of our direct competitors, the banks, et cetera. And I think what we’re observing now is an opportunity to slot our pricing in a spot that is relatively compelling in order to drive more volume at margins that we like that are within our long-term range.

Okay, great. Thanks. That’s helpful. And then just in terms of the investments you put to work in the third-party channel this quarter. Just curious, what the returns are like and how they compare to what you have your target rate for the – for your retained securitization investments.

Yes. I think they differ a little bit by product, but we’re seeing really kind of mid teens returns just given the fact that we were deploying those as spreads were widening throughout the fourth quarter. So in terms of entry points, we really like the basis at which were owning the securities. So it compares favorably relative to what we had been seeing in terms of subordinated retention level heading into fourth quarter.

Thanks a lot. Actually, just one quick one more, just book value quarter-to-date, any changes there.

Yes. Through January, we were about 0.5% lower in terms of book value.

Okay, great. Thanks a lot.

Thank you. Our next question comes from Don Fandetti with Wells Fargo. Please state your question.

Good evening. Thanks for the efforts to make things a little more simple. I guess to follow-up on the residential mortgage originations, is this sort of just like a market blip where you think you could get back to that $4 billion lock range per quarter? Or do you think this is like a permanent step down in the market where you’ll just be less active?

Hey, Don, it’s Chris. I think the makeup of our production will change, but we’re optimistic that we can grow volume from here. We are in a state of transition in the non-agency space for certain. And I think the headlines out of the space, there’s another month to go in February of issuers clearing aged collateral. And dash mentioned, most of our – most of what we’re seeing today is new loans. But what you’re seeing securitized is or loans that are three or more, four months old or more. And a lot happened in the last three months with rates. So I think there’s another month to go there with PLS, but what’s happening now and where we’re transitioning is to some of the changes that we’ve seen on the agency side, which is start to hit the market in April, most notably, the LLPA adjustments for second homes. You still see a lot of non-owner occupied. So I think the makeup of what you see in non-agency is going to change, but for somebody in our position, we remain optimistic that we can grow volume over time. This quarter, I think is definitely a quarter of transition. So I think we’ll have better guidance the next time we talk, but there’s a lot to like from our perspective on where the markets headed.

Got it. And I know with the September Investor Day, I think there was some guidance provided for 2022. How should we think about that now?

I think echoing Chris’s comments about where we are just in terms of kind of being in the midst of a massive transition and in terms of all markets. We have a lot to learn here heading into March, but both with the pace of runoff, the pace of rate hike in the landscape from here. And so I think we wouldn’t want draw a straight line through what we’re seeing in terms of trends in the first quarter. So it’s early to give update on guidance. There’s a lot that remains, in terms of our long-term plan, we have a lot that remains on track with the objectives that we laid out with our Investor Day. And we’re seeing what we – I think, one thing that we’ve seen this year is if you look at the contribution of each of our segments, they ended the year almost kind of commensurate with one another all around 26% to 28% return. And that was – that demonstrated tremendous variability between the segments, between the quarters, just given they have very different drivers of performance. And so that is something that we’re seeing with the residential business this quarter. Obviously, we – there’s a lot that we’re constructive on in terms of the investment portfolio that just generated a 17% adjusted return on the quarter. And we’re highly constructive on the BPL outlook too from here with respect to volume. So a lot remains on track, but it would be early to give an update on that guidance at this stage.

Got it. Thank you.

Our next question comes from Stephen Laws with Raymond James. Please state your question.

Hi, good afternoon. I guess, looks like the increase on the BPL side bridge about half the volume. Can you talk about that, how you expect that mix going forward between SFR and bridge. I don’t think bridge is very interest rate sensitive, but can you maybe talk about the stabilized SFR and how you’re seeing that product react any change in pricing?

Sure. We really like the balance, Stephen, thanks for the question. Historically, over the past three or four quarters, it’s probably been closer to two-thirds and one-third SFR and bridge. And so we really like the balance for a number of reasons, including the historically CoreVest has been particularly adapted, turning to bridge portfolio into opportunities for SFR loans, the life cycle lender to housing investors. So the more balance we see between bridge and SFR, we think that really organically buttress the pipeline very positively for us. In terms of the bridge opportunities, we’re doing a lot of our traditional bread and butter products, but things like lines of credit, which are cross collateralized to investors, things of that nature. We are starting to see more opportunities in the multifamily space come our way. Having a bridge securitization under our belt from last year was a really important step, because it provides really long tenured and stable financing for us that is very efficient. And you’re right, obviously the bridge portfolio carries with it little to no duration risk just because of the nature of the loans. On the single family rental side, we still think there are a lot of layers to peel back to fully serve that market. Our repeat customer rate in general is around 50%, which is again a good balance, because it’s the right mix between repeat customers and folks that are new to the platform and new to the space in general. Obviously, we pay close attention to benchmark interest rates. Those SFR loans are our size both to home values from a retail perspective, but also debt service coverage, obviously, we have to carefully underwrite our exit. One tailwind there has been obviously the path of rents, rents have been historically extremely resilient, even when HPA hasn’t been. And so that’s a big tailwind there. But we continue to see a lot of equity capital come into the space, nothing is purely rate agnostic, but we’re very bullish on the fact that capital will continue to come into the space. It’s still a very efficient and attractive investment. And as you know, it’s worked out quite well as an asset class, over the past 10 years and we think that will continue to attract more sponsorship to the space.

Appreciate the comments there, Chris. And touching – you talked a little bit about expanded prime products and opportunities in the purchase market. When you think about bigger picture, is purchase market going to benefit more from, do you think these expanded prime products or is it more supply that needs to head as various bottlenecks get sorted out? And then as you think about refis going forward, certainly rate driven refis likely in the past. But given HPA and what seems like less stimulus coming, could we see a wave of cash out refi as homeowners tap equity in their homes, which is pretty sizable for a lot of homeowners at this point?

Sure. We’re pretty excited about the non-QM lineup that we plan to roll out, before the QM rule changes, it was largely DTI driven. And now there’s just a number of different products that we’re interested in. So I think there’s a big runway there and I think a lot of originators are pivoting towards those types of products. We’re having really good engagement with our seller base. As far as cash out refis, I’m not sure given where we’re at in the cycle that you’ll see so much of that, but I do think you are going to see people look for ways to tap into equity in their homes. And that’s something we’ve been very focused on internally and we should have a lot more to talk about going forward. Obviously, we did the first securitization in the third quarter of home equity investment options with Point Digital. So there’s a lot to like there. But overall, I do think there’s going to be a big transition to credit cure or expanded credit non-QM. And for us, we feel like, we’re a step ahead there and that should definitely be a bigger piece of what we do.

Thank you. Our next question comes from Kevin Barker with Piper Sandler. Please state your question.

Thank you very much. Your execution on Sequoia securitization has been very efficient. Could you help us or at least quantify – help quantify the impact of liquid mortgage and utilizing some of that technology in order to – the real time remittance payments and the transparency that’s developed. Can you help quantify not only the bid in the market just for those assets and the transparency, but also maybe the efficiencies that are being developed?

Yes. I mean, it all factors into our financing costs at the end of the day and where our Sequoia is execute. And I think early on we focused on blockchain technology to help investors get greater transparency into the performance of the underlying loans. So that’s not something that, you sort of quantify and basis points. But when we look at how our deals have executed certainly in January, I think it’s widely known that that the first Sequoia we completed was well through current market levels. And we continue to see very strong interest for the program. And I think those enhancements continuing to roll those out, we rolled out some ESG disclosures the first time in January, SASB based. So trying to lead from the front with those types of innovations, I think is what keeps the execution in our program ahead. And over time, as we continue to work with liquid mortgage and we continue to work enhance the deals and we are very focused on blockchain. You’ll start to see more tangibles there, but I think it’s still very early innings. And for now, I think what we’re most focused on is just kind of trying to stay ahead of the market, get through this transitionary phase until you start to see the broader markets in a more current coupon position. And I think there – the real differentiation will become more apparent, which is hard to do in a heavy refi market, which is where we’ve been.

Okay. And then we see home price appreciation was up exorbitant amount historical highs relative to the past several decades combined with student loan repayment. That’s going to – the moratoriums going to end here a couple months. There’s a significant amount of pressure that’s likely to be on consumers as we move through this year on top of higher rates as well. When you look at that – when you look at your portfolio today, are there any specific asset classes where you feel like there’s the biggest risk from some of those changes, whether it’s slowing HPA or higher rates combined with potential less stimulus dollars than we’ve seen in the past?

Yeah. I mean, I – at this point we feel great about the overall portfolio. Delinquencies are more or less back to pre-pandemic levels. There is record amounts of home equity broadly speaking. So there is no particular point or area of concern today. Clearly, we have some deep subs on the balance sheet and we’ve got RPLs, we performing loan deals. So there is areas where risks are marginally greater. But those are factored down quite a bit as well. And when we look at the quality of the collateral and where we’re at from a basis perspective, we would need to see a pretty significant downturn. So we’re not – we don’t expect that currently. We obviously monitor, we’ve got a number of credit metrics that we track and model. But right now, we feel very, very good about the book itself and we’re pretty opportunistic right now putting capital to the work.

Okay, great. Thank you for taking my questions.

Thank you. Our next question comes from Doug Harter with Credit Suisse. Please state your question.

Thanks. You talked about the business purpose lending gain on sale was lower due to kind of volatility and securitization execution. One, can you talk about whether there’s been any transactions kind of in so far in the first quarter and kind of how those spreads are trending? And two, your ability to pass on higher financing costs into the note rate?

Yes. There’s been a couple of transactions year-to-date, Doug. Although, I would emphasize that we are the only platform that is securitizing our traditional core capital loans. There’s no one out there on the market doing those that remotely close to the scale that we are. And so our capital offerings are very unique and they’ve historically executed accordingly. There have been a couple of transactions one backed by bridge loans and then a couple backed by smaller balance 30-year term SFR loans, which tend to be backed by just one home. So pretty fundamentally different products. And it would be hard to draw frankly, two solid of the line between those executions and our core capital offerings for a variety of reasons. That said in terms of the ability to pass on to borrowers, we have the ability obviously to reset, our pricing and the market is competitive. But we look at that every day. And I think one thing that I would say is, historically just the margin of error, with margins in that business, we’ve historically had significant pricing power. And so we feel like we’ve got room to still make healthy margins even without fully passing along costs to the bar. It’s just – it’s a huge competitive advantage for us, like I said, because we’re really the only platform doing those types of loans at scale. So but those are pretty big mitigants. And again, in terms of observable prints in the market, there’s nothing that really quite compares to what we traditionally issue through CoreVest.

Great. And then, sticking with CoreVest, BPL, it seems like there is more capital coming into to be a lender in that space through other private equity back companies or transactions that are happening there. Can you just talk about the competitive dynamics and kind of how you feel that CoreVest is positioned?

Sure. Well, you’re right. We’ve certainly seen a couple of larger competitors of CoreVest changed hands over the past quarter to, I think it’s probably a bit early to tell exactly how that shakes out from a competitive landscape perspective. I would note that one of the platforms was originally or held by a bank and then changed hands. So they’re – it’s tough to tell exactly how that – how the costs of capital will evolve from the prior owners to the current. But we expect the market to remain very competitive. I think the couple big things with CoreVest that I think are really durable. Competitive advantages are number one, just how institutionalized and automated the processes are there. It’s a really big deal to be able to serve these housing investors more quickly. And we feel pretty strongly that we’ve got a pretty deep competitive mode around our technology and our process which to your prior question is another reason why we feel like we’ve got good pricing power in the space. The other thing is just the suite of products, CoreVest has always been the end to end lender or the ability to finance the first actions of the investor, all the way to financing them when they’ve got to stabilize portfolio. We’re continuing to diversify those products build for rent is another area of focus, which we hadn’t yet mentioned today. And so I think on any given loan, it is competitive, but when a borrower who has got diverse needs a one stop shop, CoreVest continues to be the phone call choice, but that said, you’re right. The market has clearly been favorable and we do expect competition to remain strong with these new owners.

Great. Thank you.

Thank you. Our next question comes from Eric Hagen with BTIG. Please state your question.

Thanks. Good afternoon. I think just one from me. Can you repeat how much discount accretion you have left to accrete in the portfolio and the rough timing for that to flow through under earnings?

Yes. We have about $2.22 per share of discount remaining the book. We didn’t include the breakdown of that this quarter in the investor presentation, but it is in one of the tables in our financial tables, but the vast majority of that is in our RPL portfolio and in our capital portfolio as well.

Okay. And then the timing associated with pulling some of that into earnings on maybe how sensitive that is to all the conditions you’ve talked about on the call.

Yes. So we have about $700 million of loans that we think are called well this year that could obviously accelerate some of the discount coming into the book. Fees while they’ve slowed slightly remain elevated. We see that across our RPL portfolio, which pays about a 16 CPR last quarter, that has been a continued tailwind for that portfolio over the last number of quarters and fees remained high across our Select and Choice shelves as well. So those are the main – that’s the main driver in addition to underlying credit performance and as Chris and Dash all have mentioned in prepared remarks and subsequent then, we continue to see a lot of strength in the consumer and tailwinds for delinquencies to continue to be stable at these levels. So all of those should provide support for us capturing that discount.

Great. Thanks a lot.

Thank you. Our next question comes from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Good evening, everyone. Excuse me. Look, obviously the changes in the financials, I think, well thought out things do need to evolve. I do appreciate you saving the shareholders’ letter. I think it’s just nice connection with your history and legacy, so props on that. Not that I’ve had a chance to read it this quarter yet. So look, I appreciate the candor you guys have kind of expressed and going through the business lines and the fact that there will be sensitivity to higher rates and credit spreads move being a little volatile and widening out here. I mean, I just want to summarize exactly what I think you said CoreVest pretty much business as usual with obviously tight focus on financing the investment that would be number one in terms of, okay, the least impacted businesses would be the BPL. Number two, use your investment portfolio. I think Brooke said, you didn’t have a lot of availability, but $125 million. But if we’re going to get this location spread wide, that’s obviously you guys are very well equipped to step in and take advantage of that. So maybe that’s like option two. And it seems like the real challenge you have from a management standpoint is the prime business, residential business. I guess to switch from statements to questions. It sounds like that’s the area where you need to be the most creative in terms of whether looking at products, whether it’s more in the choice area, where it’s more of these expanded agency paper. I mean, how quickly, I guess, I’m saying, first off, did I summarize kind of where – how you’re going to approach 2022? And how much can you really do in the residential to kind of make up for the slowdown with higher rates, especially with respect to refis? Thank you.

Hey Steve, I’ll take a first crack at that. I think you summarized it well. We’re – the CoreVest business, the BPL business, we were very strategic in entering that space for these types of circumstances.

Yes, great. Great move.

Yes, that – so that’s happening exactly as we had hoped and expected, and we expect another strong year for the platform. The portfolio, you’re right as well. When spreads widen, particularly credit spreads, we’re more sensitive to credit spreads than rates in our book. Asset prices go down. And so that definitely has a mark-to-market impact on your existing book, but creates great opportunities to deploy capital, and that also played out in the fourth quarter as our biggest quarter of capital deployment since before the pandemic began. And so the more interesting story is clearly in resi. The good news for us is I think we’ve tried to highlight how we’re differentiated. And there is points in that cycle where you should be more focused on not losing money than trying to make a lot of money. And in the fourth quarter, you started with an industry that had the capacity to originate $4 trillion of mortgages annually all in. And in the span of the quarter, we saw what happened with the inflation prints and with the Fed signaling and mortgage rates gapped higher. They’re significantly higher than they were a few months ago. And that was quickly on the back of record originations. And so we have all this inventory that needs to clear the market, which is in the process of doing. So that’s going to continue to be a headline in the consumer resi space. We’ve substantially cleared out our pipeline though. And in fact, I would say we’re very much on offense in here in the middle of the first quarter. We’re actively successfully buying bulk pools and mortgages from originators. We are having a lot of success effectively pre-placing risk. And we’re very much preparing for these LLPA adjustments and to make sure that we’re in a position with our seller base to be boosting our production in our share. So I think our story is not the macro story that’s going to command a lot of ink in the first quarter. I think clearly, capacity needs to correct the expenses that for most originators are too high at this point based on what they were sized to do. And for us, it’s continuing to be efficient, turnover capital make sure that we’re issuing the same types of investments and securities that our core investors know and expect and be creative. Our team is very entrepreneurial. We’ve got – we’re having great success with the rollout of non-QM products and just meeting the needs of consumers in this type of rate environment, declining purchasing power and the need for expanded products. So it will be interesting, but I’d say the headline for us is we feel really good about how we’re positioned. The business is profitable. And if we can do our jobs here, we should be able to take market share and meet our goals.

Yes. That’s great to hear. I think it’s a positive attitude for the year, and it would be different, but you’re going to go for it. So thanks for the comments, Chris. I appreciate it.

Thanks, Steve.

Thank you. And ladies and gentlemen, that is our last question for today. And with that, that concludes today’s call. All parties may disconnect. Have a great evening.