Good afternoon, and welcome to the Redwood Trust Inc. Third Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded. I'll now turn the call over to Kaitlyn Mauritz, Redwood’s Senior Vice President of Investor Relations. Please go ahead, ma’am.

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood’s third quarter 2022 earnings conference call. With me on today’s call are Christopher Abate, Redwood’s Chief Executive Officer; Dash Robinson, 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 and Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we might also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non- GAAP financial measures are provided in our third quarter Redwood review, which is available on our website at www.redwoodtrust.com. Also note that content on today's conference call contains time sensitive information that's only accurate as of today. And we do not intend and undertake no obligation to 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'll now turn the call over to Chris for opening remarks.

Thanks Kait and welcome everyone to Redwood's third quarter 2022 earnings call. Before I hand it over to Dash and Brooke to discuss our operating results and financial performance, I want to begin by framing the quarter and light up the broader market conditions we've been facing. I'll also comment on how we plan and navigate the myriad challenge facing the mortgage market. But before we proceed, let me first summarize our headline results. Redwood's GAAP book value declined to $10.18 per share at September 30, a 5.6%, declined from $10.78 per share at June 30. As was the case in the prior quarter, mark-to-market adjustments of negative $0.50 per share on our investment portfolio with a primary driver of our $0.44 cent per share GAAP loss for the quarter. As many of market swings like we've seen recently create volatility in our quarterly GAAP earnings due to the accounting elections we apply. That said the credit backing of our investment portfolio and its associated cash flows remained rock solid during the quarter. And we remain confident in our ability to recover mark-to-market declines in future quarters. As a means to isolate our operating performance from the short-term fluctuations in market prices, we've reintroduced a non-GAAP metric this quarter, earnings available for distribution. For the third quarter, earnings available for distribution was $0.16 per share. This compares to a loss of $0.11 per share in the second quarter when applying this metric. We also declared and paid a $0.23 cents per share common stock dividend, which is unchanged from the previous quarter. As you might suspect Brooke will have much more to say about our quarterly financial results in her prepared remarks. Our markets need to normalize for operating businesses to return to their optimal levels of performance. Both our…

Thanks, Chris. Well, macro themes from the first half of the year remained key drivers of overall market activity in the third quarter. Performance across our businesses and investment portfolio was a testament to our long-term positioning and our ability to successfully navigate this extended period of market volatility. The abrupt move higher in rates has impacted all corners of the financial markets, and it's perhaps now felt most acutely in residential mortgage volumes. But some industry estimates pegging overall year-over-year activity down 50% or more. Our residential business remained conservatively positioned in the third quarter locking $461 million of jumbo loans while distributing $612 million of loans, all through sales to eight discrete whole loan buyers. Importantly, profitability on these third quarter sales was in line with our historical target gain on sale range. As a reminder, our most recent Sequoia securitization was executed in January of this year, and in 2022 overall, we have now sold $3.7 billion of loans and continue to track the securitization market notwithstanding the challenges that Chris referenced. At September 30, our net undistributed loan inventory was $712 million, down 5% from the end of Q2, we've continued to incrementally reduce our inventory thus far in Q4. The relatively high average coupon over inventory has allowed us to create investment profiles that whole loan buyers find attractive. This active pipeline management allowed us to reduce our capital allocation to residential mortgage banking to $150 million, freeing up valuable investment capacity as Chris mentioned earlier. Given the continued slowdown in capital markets activity, we believe that many market participants are grappling with large inventories of lower coupon loans. And we have also seen certain large depositories meaningfully reduced risk appetite for non-agency loans, especially through their correspondent channels. Additionally, FHFA's announcement earlier this week…

Thank you, Dash. As Chris mentioned, our GAAP book value was $10.18 per share or 5.6% lower than $10.78 per share at the end of the second quarter. The $0.60 decline was driven by negative $0.57 of primarily unrealized fair value changes on our investments, our dividend of $0.23, partially offset by $0.07 per share of other comprehensive income, and a $0.12 benefit from our $24 million of share repurchases in the quarter. Consistent with evolving industry practices, we have reintroduced a non-GAAP measure to provide the market insight into our run rate operating and investing margins, called Earnings Available for Distribution or EAD, which was $0.16 per share in the third quarter as compared to negative $0.11 per share in Q2. The measure adjusts GAAP net income for realized and unrealized gains and losses, the change in basis of our investments, as well as certain periodic expense items. We believe this measure will aid our stakeholder's valuation of our long-term performance. And our relative performance given is a more consistent measure across peers and GAAP net income. Earnings available for distribution should not be considered an indication of our taxable income, or what is required to be distributed by the IRS. Our Redwood review provides the reconciliation of EAD to GAAP. The key drivers of our EAD results relative to the second quarter were higher economic net interest income from our investment portfolio, which benefited from higher asset yields, accretive deployment and improved mortgage banking results. These improvements were partially offset by long term interest expense from a full quarter impact of our June convertible debt issuance. Our mortgage banking platforms rebounded significantly from the second quarter. BPL mortgage banking activity saw a $26 million increase versus Q2, and spreads stabilized for SFR loans on positive underlying credit trends.…

[Operator Instructions] Our first question is from Doug Harter of Credit Suisse.

Thanks. As you mentioned, you're looking to be a little bit more active in deploying into your own capital structure. Can you just talk about the attractiveness of common versus kind of handling the upcoming convert maturity early, and kind of how you're weighing the various parts of the capital structure?

Sure, Doug, this is Chris. We, at this point feel very good about our capital position across the board, we're aware of the August 2023, convert maturity. But when we look at our capital, both in place today, as well as what can be freed up or optimized within the book, we think we have ample room to do a significant amount, kind of both on the stock. And that if we choose, obviously, the dynamic is constantly changing. I'd be remiss not to say as I mentioned in the opening remarks that the commonest trading at a discount that we rarely see, we've seen it only a few times over the course of the company's history. So that definitely has our attention. As well as being opportunistic across the businesses. I think it's difficult in mortgage banking today. But there's somewhat of an inverse relationship between issuing and investing, which means it's a great time to be an investor. So we're definitely opportunistic, as far as investing in our business, as well as investing in third party assets.

And Brooke, you mentioned the ability to kind of get additional financing from the portfolio. Is that something that you guys are actively looking or actively working on today? Or would you kind of wait? Or are you waiting until you actually need it? Just how to think about that liquidity source?

And it's a good question. I think it's -- the answer is a bit of both and I think we have; we ended the quarter with $300 million of cash on hand. And so given rising costs of capital, we're not out in a hurry to raise all of that $300 million of potential capital that we cited in our prepared remarks at once as we want to make sure we're accretively deploying it. But there are tangible near-term opportunities that we see for both the amount of financing that we mentioned, the $75 million, that's kind of more optimally financing some of our assets that have happened to us in place, but have de-levered over time. And so they're much lower effective advance rates than we could get out there from other financing counterparties and then also, from financing currently unlevered assets at attractive rates. So it's a bit of both, but you likely won't see us do it all in one quarter.

Next question is from Jay McCandless of Redbush Securities.

Hey, good afternoon, thanks for taking my questions. The first one I had. I know the SG&A went up from 2Q to 3Q because of the Riverbend acquisition, but I guess how much of that increase was one time? And what should we expect for that line going forward?

And it's a good question. So as you mentioned in a G&A, was up $8 million, about $2.5 million was from the addition of Riverbend to our platform, and then we had another call it million dollars of transaction expenses that were one time and excluded from our earnings available for distribution. We had a few other onetime items that were associated with expense streamlining of $4 million. So that will continue to be a onetime item and then there was another adjustment relative to last quarter for a onetime benefit relative to a payroll tax. So I think in terms of run rate going forward, we had roughly, I would say about $6 million of one time, expenses that were nonrecurring. And I made a couple of comments in my prepared remarks around run rate expenses going forward. But if you take the 5% to 10% of expense cuts that I cited, and what our run rate has been thus far, that's about $160 million, kind of total OpEx run rate for us.

Okay, great, thank you for that. And then next question. I had, I guess, any commentary post quarter about delinquencies in either the bridge portfolio or the SFR? And what I guess is the appetite, I think you guys talked about on the prepared comments about the appetite being maybe a little more hesitant, but just any color, you can give us around delinquencies there? Or if you think the marks might get worse and some of those assets.

Hey, Jay, it's Dash. No, delinquencies have -- are still in that 2% range across that part of the book, across the residential and BPL organic investments, like we talked about that piece of the story for us I think has been a really good one. And we are obviously like I said, in the prepared remarks very focused on maintaining the durability of the cash flows. So I want to your point on mark-to-market, like we said, there, from our perspective, there's been a decoupling of mark-to-market in fundamentals, which continued in Q3. So it's hard to comment necessarily on the mark-to-market part of the book, but from a cash flow durability perspective, we continue to feel really, really good, they're great loans to do, and BPL right now we think we've got obviously the great competitive footprint, we're in an environment where other lenders are clearly stepping back. And we continue to have really strong conviction about our borrower base and our products, it starts with the strength of the sponsor, and then goes into how we size the loans, we've always been appropriately conservative, in terms of how we think about stressing interest rates, and the takeout on our bridge loans. And that continues to serve us very well. Our bridge loans in general are a little bit different than a lot of the traditional sort of smaller balance, fix and flip loans that a lot of other lenders do, we certainly do some of that, but most of our loans are to larger sponsors, and allow us to get back to the table with them a lot throughout the life of the loan. They're very well reserved for interest coverage. There are ongoing covenants, around leasing, cash flow, coverage, et cetera. So those things give us not only high confidence when we size those loans, but also the opportunity to make sure we're very high touch with those bars throughout the life of their project. And that's proven a tailwind to performance to date, we expect it to be going forward.

Great. And then just one other housekeeping thing, when you were talking about the bridge portfolio, you gave a couple of stats, and I couldn't write them down fast enough. I think you said it was 78% loan to cost and then I missed the LTV stat on that.

It's about 65%.

Our next question is from Eric Hagen of BTIG.

Hey, good afternoon. Hope you guys are doing alright, going back to the liquidity for just a second, can you describe what's included in the unencumbered asset pool?

Sure, it's a mix of our assets that are all unlevered today, that includes things like our home equity improvement options and some of our subordinate securities, it's a mix of things that are in our third party and organic securities that we own on our balance sheet, CRT is unlevered.

Okay, got it. Thank you. And then on the sales of the BPL loans in the quarter, can you talk about the execution that you got there and what the gain on sale looks like there? Can you also say what your unfunded commitment in the BPL portfolio was at the end of September [Inaudible]?

Yes, for the execution the loans we sold were largely single asset bridge loans where we were keeping a net strip of anywhere between 25 and 75 basis points, it may be average was about 50 or 60 on the quarter. The average unfunded commitment is just under a billion dollar, which we expect to sort of play out over the next couple of years. The vast majority of that is in longer term build per rent projects that we expect to fund over the next sort of six to eight quarters. So just provide some context but that's the current number.

Our next question is from Steve DeLaney of JMP Securities.

Thank you. First applaud the EAD decision. I think it's very timely. And the district it's very similar to the distributable EPS measure that the SEC mandated for the commercial mortgage REITs. And that's been widely accepted by investors. So hopefully you don't get any pushback. I think you'll find a lot of support with the analyst on that. Also, bridge loans are the hot topic tonight. Your funding has held up well, you funded by my math, you funded $470 million and only sold $48 million. To me that suggests that you're thinking about doing another securitization. You did one in the second quarter for $250 million is, are you -- is the difference between the origination volume and the whole loan sales of $48 million, is that indicate -- is that accurate that you hope to hold those and be able to securitize them as a permanent investment on your books rather than selling them off? Thanks.

We certainly have the flexibility to do that. And we did part of the $570 million is single family rental overall that we did and we did a like I said in my remarks a $275 million SFR securitization as well in Q2, which was Q3 excuse me, which is, which was very accretive. We have the optionality to do either one, Steve, I think our intention is to probably do a mix of whole on sales where we're comfortable with gain on sale. A good chunk of the bridge book is already financed, non-recourse and non-mark-to-market. We have $550 million of bonds out there through two securitizations. We have another facility bilaterally, which is non-recourse and non-mark-to- market and punitively that capacity is over a billion dollars, which is obviously very valuable. So we do have the ability to sort of keep those outside of a traditional securitization context and feel very good about the returns and the match funding and the lack of contingent liquidity risks given how those deals are structured, but we're always exploring a bunch of different avenues. We could look at a broadly distributed deal. There's great interest in the loans that we make, certainly because of where the return profiles are no small part because they're floating rate, obviously SFR is higher. So it'll be a mix of things. But I do want to underscore that the current financing apparatuses, we have been compelling as is. So we don't feel like our hand would be forced.

Got it. Thanks Dash on that. The BPL whole loans. I mean, obviously, when you were back in the days when you were selling prom jumbo loans, the banks had a pretty good bid there. When you look at BPL whole loan sales. Is the buyer there a private fund, private debt fund? Or I know, obviously, you don't want to be specific. But what's the nature of the end buyer, the end investor in that product?

It's a great question. It's probably a mix of certain insurance vehicles, or insurance companies that have an appetite and sort of an expertise to deploy into the space. It's certainly traditional funds, money managers. Securitization we did in Q3 was placed with one investors sort of very large global institutional investor with a few different sleeves of capital. And so I think one big upside to continuing to grow the BPL business is just continued whole loan buyer education. I think there's a relatively orderly whole loan market for BPL. It's not as efficient as jumbo as when markets are more orderly than they are today. And so that's a huge upside for us. It's traditionally not the banks, which is, as you know, Steve, part of the reason we love the business. It's just not efficiently --

There's no cheap money coming into that particular sector, like the banks normally flood.

That's right.

Well, lastly, the reallocation of capital away from the origination building, rather than trying to bang your head against the post to make that happened on a volume basis. I applaud that. And you've proven you can be an opportunistic investor over the years. And I know there's strong relationships that allow you to make that happen. So all the best for the fourth quarter and closing out the year. Thank you.

Our next question is from Bose George of KBW.

Hi, everyone. Good afternoon. Actually I wanted to ask about the funding markets. I mean, they sound solid, but just can you talk about any trends there? Are you seeing changes in terms of advanced rates or the number of lenders active in the markets, et cetera.

Hi, Bose. So far, it's been very orderly. I mentioned in my prepared remarks that we've rolled about $5.5 billion of lines across 14 facilities, all with domestic banks. And we've had really a lot of stability in terms of our advanced rates. We are -- have recently seen a little bit of increases on spreads, just given everyone's cost to capital has gone up. But as most of those facilities that we use are for our mortgage banking inventory, where we're resetting those coupons live with the market. So that's why we've continued to see durability from our net interest income in terms of our ability to cushion that impact.

Yes, Bose, I'd also add that the collateral quality remains high. And it's a collateralized lending business. And I think there's big differences today versus 10 or 15 years ago, after the great financial crisis, I think lenders are pretty confident and the collateral and the performance to date. So that keeps the markets open.

Okay, great. That's helpful, thanks. Actually, switching to the, thanks for the EAD disclosure, in terms of the returns from the discount assets as they run off, I assume that isn't captured in EAD. Right? Is that going to just be like in book value or?

No, we actually are, we are trying to capture the concept of accretion to our change in basis of investments, which I know our material just came out here shortly before the call. But we do outline in detail what those add backs products. We only have a very small portion of our assets that are -- our held for sale assets just are like $140 million, which are effective yield. So we're trying to capture that principal portion of our income by effectively recapturing some of our effective yields back through income.

Okay. Thanks. And then actually, could you just repeat what you said earlier about the goodwill from the Riverbend acquisition?

Yes, we have about $37 million of goodwill and intangibles from the Riverbend acquisition based off our $44 million purchase price.

Our next question is from Stephen Laws of Raymond James.

Hi. Good afternoon. Dash, a lot has been covered on the BPL side, but one question on kind of pricing and I guess really across bridge and SFR. But how much has not at rates, I don't want to say stabilized. But we don't have this rapid pace of increase or maybe we're getting a month or a few weeks how quickly you're able to get pricing reset? Have we seen that flow through? Or is there still some catchup across products? Have you been able to kind of maintain or increase your spreads as you think about this cost of financing for the new investments increasing?

Yes, we have much like on the resi side, we refresh our pricing daily, I think with bridge loans that definitely is a more sort of loan-by-loan analysis based on sponsor quality leverage, geography, so we always have no great optionality there, I think as you know Steven, for the fixed rate SFR loans, we don't actually lock those loans until right before we fund. So that's a little bit of a simpler pipeline management tool than with the traditional jumbo pipeline, I'd say, yes, we do have pricing power, clear the fact that SOFR is now at 3% has sort of moved the effective floating rate coupon and at the very high single low, very low double digits which is appealing. And we still compete on every loan, but I would say the, our overall pricing power is in a good place. And, to your point, we do have the ability to be very nimble in terms of how we adjust our prices verse what we're seeing in the market.

Thanks Dash. Chris, you've touched on this a couple times, you mentioned third party securities, and they talked to Doug and Steve brought it up as well. 10, 11, 12 years ago, you guys bought a pretty material amount that you then sold over the following years at some pretty attractive returns. But I think that if I remember correctly, maybe the rest of your capital stack wasn't so cheap. So kind of thinking about how you view that the relative attractiveness of buying something back in your stack and retiring it versus buying third party securities that you can sell later and maybe recycle that capital back into the, say origination business if it returns at that point.

Yes, no. Great observation. We did a lot of this after the great financial crisis, and I'd say securities aren't quite as cheap as they were back then. I do think they're probably getting cheaper in the consumer resi market, for instance. There's not a lot of securitizations getting done right now, other than age collateral. That's sort of been the story for the year and somewhat of a distressed area right now where if you don't need to be securitizing at least certainly in jumbo, you're probably not. So eventually these warehouse lines that are formed, this collateral will come to market, it may not come to market until Q1, but it will and there should be some extremely compelling opportunities to put capital to work. But I think it's kind of a timing issue for us, the one thing we have great line of sight in is obviously share repurchases. And so that's something that we can affect immediately, which is, obviously, going to be a focus of ours. But I do think we're starting to see really good opportunities. And, of course one of the great parts of the BPL business, is we can continue to organically create these investments. When you look at the profiles of the investments, we're putting on the books today, they look extremely attractive to me. And by controlling the credit and the underwriting, we feel really good about the quality of the book, and certainly across a range of scenarios, based on what's going on with the economy. So, overall, I think it's definitely an investor's market. And hopefully, you'll see some virtuous combination of both here in the coming quarters.

Thanks, Chris. Appreciate that. And lastly, just some comments on Horizons. And can you provide maybe an update on your portfolio there in this environment in the outperformers, and the underperformers highlight. And then, from a new investment standpoint certainly valuations in public markets have moved a lot. Have you seen similar moves in the private market? Are those valuations catching up? How does the new pipeline in Horizons look?

Thanks for the questions, Stephen. It's, I would say, we've become, as you might expect, even more judicious around capital deployment in Horizons, Horizons has always had a very specific investment thesis around trying to marry durable technology solutions with needs for our business or our markets. So it's always been sort of a rifle shot approach. And I would say even more so today, obviously, given where the markets are. The book, we're generally very, very pleased with. We did on a net basis, write up on a small amount of the overall Horizons investments this quarter. there's no bellwether, like further opportunities for the underlying portfolio companies to raise capital. So in Q3, four of the portfolio companies in Horizons actually did raise incremental capital we participated in to one part -- one led to a small write up and the other three were basically non unpriced deals that were basically flat to the prior raises, which is great, because it allows them more runway without the dilution risk of the prior investors, including ourselves. So I think we've been really pleased with that. But look, the market is -- market overall is challenging obviously, these companies, as you know, we're are largely very early stage or seed round that we're investing in. So you don't see the daily price action, obviously, like you do with the publics, but it's clearly made its way in to more of the top of the funnel, I would say in terms of the earlier stage companies and ultimately feel like it will create more opportunity for us. We're still focused on business models, which are more a cyclical and more sort of serving in efficiencies and durable markets, whether it's solutions for landlords and tenants, blockchain use cases that are more durable through cycles and not cyclical to volumes. And I think we've been well served by that so far, but more to come for sure.

Now, there are no further questions. And with this, concludes today's teleconference. Thank you for joining us. You may now disconnect your lines.