Greetings, and welcome to the Redwood Trust Second Quarter 2025 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kaitlyn Moritz, Head of Investor Relations. Kaitlyn, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's second quarter 2025 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin today, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions and include 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 cause actual results to differ from those that may be expressed in forward- looking statements. On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our second quarter Redwood review, which is available on our website, redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that are only accurate as of today. We do not intend and undertake 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. With that, I'll turn the call over to Chris for opening remarks.

Thanks, Kate, and good morning, everyone. Our second quarter results reflected our decision to accelerate Redwood's strategic transition toward a more scalable and simplified operating model, an evolution we first articulated at our 2024 Investor Day. The avenues for growth we see today across our operating platforms are unequivocally transformative, particularly amid evolving market dynamics in single-family housing, shifts in bank lending practices and potential outcomes related to the GSEs. In light of this, we took decisive steps to begin reducing exposure to holdings that now reside outside of our core operating footprint. These include our legacy multifamily bridge loan portfolio, third-party securities portfolio and other noncore legacy assets, the vast majority of which we have held for years. While these investments were initially aligned with our strategy and return thresholds, some are now fully valued, while others have underperformed as interest rates rose and have become a significant drag on our forward earnings. In assessing the shifts now occurring in housing finance and the growth potential of our mortgage banking platforms, where capital allocation has grown by over $200 million in the past year, and we have generated combined GAAP returns north of 20% in each of the past 4 quarters, the opportunity cost of simply allowing legacy investments to naturally run off has become too [ great ], prompting us to more proactively reposition our capital. The decision to accelerate the wind down of our legacy portfolio resulted in approximately $0.79 per share of fair value and repositioning charges in the second quarter as we move forward with liquidations, term financings or other resolutions for these assets. This was the primary contributing factor to a reduction in our GAAP book value per share to $7.49 at June 30, 2025, as compared to $8.39 at March 31, 2025. However,…

Thank you, Chris. Operating performance in the second quarter built on recent momentum as our mortgage banking platforms continue to deliver elevated returns driven by increased market share, operating efficiencies and accretive channels for distribution. To start, Sequoia locked $3.3 billion of jumbo loans in the second quarter, representing a 15% increase in on the run or current coupon flow volume versus Q1. Notably, this was Sequoia's highest quarterly flow volume since 2021 when total industry volumes were more than 3x current levels, underscoring meaningful growth in market share and increased opportunities to capture portfolios sold by banks and other institutions. While seasoned bulk activity may remain episodic, as Chris mentioned, meaningful activity has commenced with approximately $15 billion of such pools trading in the first half of 2025. The resumption of bank M&A activity and more depositories seeking creative capital solutions for both legacy and newly originated books of business are expected to drive further activity for us going forward. Flow volume remained balanced between both banks and nonbanks, driven by sustained momentum across our expanding loan seller network, which now includes active relationships with sellers accounting for 80% of the jumbo origination market. Notably, we continue to grow our sourcing network by partnering with new sellers, several of whom are looking to sell their production for the first time and are engaging Redwood as their sole takeout partner. Our ability to deliver flexible balance sheet solutions across a variety of loan types, including adjustable rate loans and certain specialized production segments continues to set us apart, and we remain in active collaboration with partners to develop tailored portfolio strategies. Importantly, Sequoia's distribution activity remained robust with gain on sale margins exceeding historical averages for the fourth consecutive quarter. In the second quarter, we distributed nearly $3 billion of…

Thank you, Dash. We reported a GAAP net loss of $100.2 million or $0.76 per share for the second quarter. The net loss was primarily driven by our decision to accelerate the wind down of our legacy portfolio and the associated fair value changes that reflect realized and anticipated resolutions on legacy bridge loans and other noncore portfolios. GAAP book value per common share was $7.49 at June 30 relative to $8.39 per share at March 31. To enhance investor transparency, we've introduced a new reporting segment, Legacy Investments, which separately presents assets targeted for sale or other disposition. Core segment's earnings available for distribution or core segment's EAD is a newly introduced non-GAAP financial measure this quarter designed to provide investors with greater insight into the performance of our core business operations, which are Sequoia and CoreVest together with their related investments in an allocated portion of our Corporate segment by excluding the impact of our legacy Investment segment. Core segment's EAD for the quarter was $25 million or $0.18 per share, equating to a 14.5% annualized ROE. This is as compared to $28 million or $0.20 per share in the first quarter. Our results highlight the resilience and earnings power of our core platform. Collectively, our mortgage banking platforms continue to profitably scale. These businesses delivered combined returns exceeding 20% and mortgage banking gain on sale margins above target levels for the fourth consecutive quarter despite market volatility and persistently high interest rates. Additionally, mortgage banking revenue increased 88% compared to the same period last year. Sequoia Mortgage Banking posted strong quarterly performance, generating segment net income of $22 million and a 19% annualized ROE. On the run or current production jumbo loan lock volume grew 15% sequentially to $3.3 billion, and Aspire loan volumes were $330 million,…

[Operator Instructions] Our first question is coming from Bose George from KBW.

When we think about that 9% to 12% EAD for 2026, should we calculate that based on the $7.49 of book value? Or should we strip out the 20% of the capital that's still going to be in the legacy piece at the end of the year?

So that's a blended number inclusive of the legacy portfolio. So you would calculate on our full book value.

Okay. Great. And then in terms of the home equity investments that was moved into the legacy piece, can you just talk about that portfolio, what changed? And yes, just the thought process there?

Yes, Bose. What -- the only thing that changed is speeding up the evolution of our operating model. So we've talked about capital light. We've talked about our franchise value sort of being towards sourcing assets and distributing assets through securitizations and into the hands of third parties, private credit and so. I think the HEI book on balance sheet had appreciated quite a bit over the years. And we've decided that recovering that capital and deploying it into the operating platforms is [Technical difficulty] use at this point. Also, you started to see some trailing off of HPA in many sectors of the country. And I think there's a few good reasons to move on from that book. The good news, though, is that, that process is very much underway. We expect to have a lot more to talk about in Q3. But I think the overall message this quarter is our evolution to this capital-light structure where a lot of the sort of on-balance sheet investing that we've done in the past for balance sheet is going to turn into capital that moves into our operating platforms and co- investments with third parties.

Okay. Great. And then just the losses this quarter, the charges, et cetera, that sort of incorporates what you expect to take as these loans are being disposed. So is it -- are you reasonably comfortable that this is kind of the marks on these legacy assets as they work their way through?

Yes. We obviously really leaned in this quarter. I think that reflects our conviction to hit the fast forward button on the transition of the operating model. Each of these legacy assets, particularly the bridge loans, each one is its own special situation. They're not homogenous pools like even HEI, for instance. And so I think the -- we really leaned in on the marks and we did our best to reflect kind of actionable levels. There continues to be fundamental challenges with some of these assets, which has also informed our thinking. So the operating environment there is not necessarily improving. But I do think that where this business is headed and where we need our internal focus, the right answer was to lean in as we did. And again, recovering that capital $250 and redeploying it is something we think we can do very quickly based on the opportunities we're seeing, which we talked about in the scripts. So that's really what's informed the number, and we're certainly hoping that, that reflects actionable levels.

Next question is coming from Crispin Love from Piper Sandler.

Just following up on that last question, the dispositions of the bridge loans and the legacy portfolio. So you're citing expected to generate up to $200 million to $250 million of incremental capital by year-end. What types of prices versus the prior marks do you expect to sell those loans at? And then who are you seeing broadly as potential buyers? And then how has that appetite been so far?

Crispin, it's Dash. So to clarify, the $200 million to $250 million includes the overall legacy investments portfolio. Some of that's bridge and some of that is some of the other asset classes we talked about. But as Chris articulated, we have the position in mark commensurate with where we have been executing in the second quarter and through July through today, we've resolved about $200 million of that legacy portfolio. The marks also reflect actionable levels for another subset of that portfolio that we expect to monetize in the third quarter. In terms of the buyers and the overall market, I would say, as Chris said, each of these loans is its own story. We have had some success being more aggressive in just selling notes or REO. We have had a number of these loans refinanced out, which has been good. And so I would say that liquidity is pretty varied. There are buyers out there that would look at portfolios, but we've had success as well just working through these line by line. And I think the message is we're trying to do that more expeditiously because, frankly, the earn-back period on unlocking this capital is extremely short when you combine all the mortgage banking opportunities we've got, obviously, the share buyback announcement. The capital we can unlock here is extremely accretively deployed very, very quickly. It's not like it takes time to do that. It's pretty instant offense as we've seen. And so we're going to be intelligent at the prices at which we transact. As you're well aware, just the overall operating conditions within the multifamily market broadly remain mixed or challenged, potentially better said. And so I think some of this portfolio is a small subset of sort of a broader macro environment that a lot of others are dealing with significantly more quantum than we are, and we have to be cognizant of that as we try and transact. So we're trying to be as intelligent as we can and obviously maximize the value at which we exit these, but a big piece of that is the deployable capital we're unlocking, and that's a very, very important part of the story.

Great. I appreciate all the color there. And then just last question for me. Just on the Sequoia gain on sale margin, definitely outperformed as you have been. Can you discuss just some of the drivers there? And do you think you could remain above that 75 to 100 basis point longer-term target over the near term? I don't think I heard any update on that on the -- in the prepared remarks.

Yes. I mean we -- again, we're always hesitant to forecast above the range for obvious reasons, just the push and pull of the market and capacity corrections and so forth. But we have been able to generate strong returns in Sequoia. We were off to a very good start in Q3. We're off to a very good start in each of the platforms through July. So there's optimism there that margins could remain elevated. We also -- the pricing of our Sequoia is extremely tight today. It's the best pricing we've seen in some time without getting into specifics. And so I think the execution, the fact that we've completed 8 deals through July, just being very regimented about our issuance. I think all of that's played into the efficiencies that are driving those margins. So we don't like to project higher than that long-term average. But certainly, we're optimistic that we can continue to generate strong returns in that segment.

Our next question is coming from Doug Harter from UBS.

I want to dig a little bit more into the $0.79 loss. Can you just help us sort of compartmentalize that loss? How much of that is future cash flow or losses that you would have recognized, but just over a longer time? How much of that is just kind of an acceleration of disposing under-earning assets? And kind of what was that expected time frame just as we can think about that payback period?

I'm happy to take that, Doug. I mean, in terms of the composition, it is largely driven by our older vintage multifamily and to a certain extent, just '21, early '22 vintage bridge, where we continue to see all of our delinquencies really focused. That is the vast majority of that breakdown. I would say the majority is where we see near-term resolutions or expected disposition. As Chris mentioned, fundamentals remain challenged. So a portion also was driven by fundamentals and also some of our HEI and another third-party book that we mentioned was a part of that as well.

Doug, I would also add, those marks do reflect, as Dash noted, any situation where we feel like we have an active resolution strategy that we can execute in the near term. So as you know, most of these assets, certainly through many peers are booked using CECL and other sort of cost-based reserving methodologies. I think the downside of fair value accounting is you have to be closer to the bid side and it can be more volatile. But I think the optimism we have of kind of moving on from these legacy investments and again, steering all of our internal resources towards growing these platforms that definitely informed the decision to move now I feel it was absolutely the right decision for the company. And we're going to resolve these as quickly as we can, but we did want to lean in again and do our best to get the marks where we're seeing visibility and where we could potentially transact.

Got it. And you mentioned that you expect a relatively quick payback. Is there any way you can conceptualize that to kind of help us see the logic of kind of taking this hit upfront and kind of getting the higher earnings and just how to think about what that actual payback period is?

Yes, we can maybe tag team this one. But the first thing I'd say is we plan to be -- we plan to have, I would say, the most aggressive buyback posture we've had since I've been in my seat. We deeply care about shareholder value. And given where the stock has traded, the idea of freeing up this capital and buying back shares is extremely attractive and instantly accretive, as you know. So I think the buyback is going to be a meaningful portion of the other side of the story, if you will. And then the businesses are scaling, I think, as rapidly as we've seen certainly post-COVID. We've deployed a lot of capital. I think we said $200 million over the last year into these operating platforms. they are -- we have the capacity to do more. It takes a lot of working capital to acquire loans for securitization or other distributions. And if we have the capital to deploy there, I think the great thing about the operating platforms is we're locking loans every day. It's not as opportunistic as investing in third-party assets. It's a very consistent business. So I think the payback periods, we feel really, really good about. To be honest, the only question is how quickly this capital sort of comes back in-house. And I think that's why we specified by year-end, getting the legacy capital, getting a significant portion of it back. But each of these assets is its own story, and we're working them out. The good news is, as I said, is that we've started this earlier in the second quarter, and we feel like we're well on our way to moving this position and recovering the capital.

Just one thing, Doug, our EAD ROE on our legacy book was negative 22%. So even forgetting removing all of the investment fair value losses associated with some of the changes in valuation this quarter, you saw a dramatic decline in net interest income. So there is a large -- we said the opportunity cost has never been higher. That's both from kind of a NIM perspective and full economic return. We can immediately redeploy that negative 22% into our 20-plus percent operating businesses or our stock north of that. So in fact, for some of the resolutions we've seen, we've seen inside of a 1 quarter payback period.

[Operator Instructions] Our next question is coming from Eric Hagen from BTIG.

Maybe a follow-up around the margins in the jumbo channel. I mean, under what scenarios at this point could you see the margins there like really expand? I mean do you think originators have the capacity to handle an increase in demand when rates fall and the margin would stay kind of the same?

Yes. I mean there's obviously a lot of capacity. The market has been slow. The spring selling season was slow. So from a housing activity perspective, I think everybody has been hoping for lower mortgage rates, and it just hasn't manifested. So from that standpoint, we don't necessarily expect TAM to grow, but our wallet share has been growing significantly. And the way that we really expand those average margins is by bolting on bulk pools and opportunistic pools from banks, particularly to supplement our daily flow volume. So flow volumes very strong. It's the highest it's been in 2 or 3 years. If we can supplement that with bulk, that really leverages the operation, if you will. It leverages the team and you really start to see those efficiencies move towards net margins. So, I think for us, it's still a volume story. It's a wallet share story. And the goal is to have a growing flow business where we're facing originators each day locking loans. And then we cited some very large opportunities that we're currently reviewing and evaluating, most of which we think we're seeing exclusively. So, if some of those come to pass this quarter, I think that will be a very positive part of the story for margins.

The other thing I'd add, Eric, is just the overall universe of investors for jumbo compared to even a more nascent asset class like non- QM probably has some room to the ceiling to continue to grow. Our securitizations are very, very well subscribed, but there's still an opportunity to grow that buyer base, particularly as our issuance [Technical difficulty] as robust as we're over a deal a month at this point. To piggyback Chris' point as well, the seasoned portfolios, obviously, those come at a discount. That's a very different value proposition for a lot of pockets of capital who are hedging out premium and convexity risk elsewhere in their portfolios. Obviously, those discount pools create an interesting balance in terms of profile. And as Chris said, because we're just uniquely accessing those pools. We bought a couple of billion dollar pools already this year of discount. There's a lot more to come, we hope. That's another opportunity for margin expansion to be able to control that type of convexity profile as a complement to our on-the-run business.

Really helpful color. What's the feedback or outlook for the bridge portfolio in light of tariffs and other higher input costs? I mean is the expectation that a Fed rate cut would be a major catalyst for that portfolio, a refinancing opportunity for those loans? Could we actually see any mark-to-market upside for that portfolio when the Fed does cut?

Yes. Good question, Eric. I think -- look, certainly a Fed cut, any sort of recompression in overall cap rates would be helpful. Those are things we pay extremely close attention to in our on-the-run bridge business, where we're doing infill ground up or transition loan, fix and flip, just really paying close attention to those input costs. We're still seeing relatively healthy ROEs for the sponsors, which, as you know, is really the leading indicator for the health of that overall business. And what are these sponsors working for, how much cushion is there in the deals that they see. We've become more selective in certain markets for sure. Some of the input costs have certainly eased when you look at lumber and things like that. That's definitely been helpful. But yes, it could definitely help and overall reduction in mortgage rate could also increase just the overall velocity of those businesses. Sponsors are able to get out of their projects more quickly and redeploy. So there would be a number of ancillary benefits there for sure.

Next question is coming from Don Fandetti from Wells Fargo.

Yes. Can you just remind us of your sensitivity if the Fed does cut in terms of NII, there's some modest pickup. Is that correct?

Yes. Tom, we did see that through the last couple of Fed cuts. We do have some sensitivity there between our fixed rate Sequoia pipeline and the floating liabilities that finance it. That is where the vast majority of our recourse leverage sits today. So if mortgage rates remain elevated, we would expect to pick up a modest benefit there as well as some other parts of our fixed rate portfolio. Another area we've been locking more ARMs than we have historically through the Sequoia platform and represented over 12% of our production year-to-date, and we've -- it's a big focus area for us in terms of some of these seasoned bulk portfolios and how we distribute them efficiently. So we would expect that production to continue to pick up as well.

Next question today is coming from Steve Delaney from JMP Securities.

So look, it's never easy as a public company to be bold, but I have to applaud you pushing a little harder on the strategy reset button in the second quarter. Best to kind of focus on the future, not the problems of the past. With that said, thinking big picture about the core housing market, the owner-occupied market. It seems to me we're in a situation right now where we're seeing record HPA in terms of home prices, but interest rates are kind of holding things back. I'm curious from sort of like a product offering standpoint, as the Fed begins easing probably not much until '26, and that has some impact on the longer end, and we see 30-year rates coming down. Do you have some thoughts of how to recapture sort of maybe a once in a 5-year refi opportunity within the prime jumbo segment? Because we really just don't -- we don't hear people talking about that because people have got a lot of HPA, but they don't like mortgage rates. And I'm just curious if there's a plan on how to maximize that opportunity when that activity picks up again.

Yes, Steve, it's been a tough issue for homeowners. This lockout effect is very real and many people are 300, 400 basis points kind of out of the money as far as where they could take out a mortgage today versus sitting with the one they got at home. So that's a real issue and things like closed-end seconds and other ways to bank the consumer, we're very focused on. As far as refis go, slowly, more and more of the market just by way of people moving and changing jobs and growing their families, a much bigger percentage, I think closing in on 15% or 20% of mortgages are actually much closer to the current rate. in the high 6s. And so those mortgages could very easily be refinanced with a few Fed rate cuts and some help on the long end. So I think it's a riddle we're all trying to solve. It's been a tough market. But I think if you look at our strategy, where we've been focused is market share because of this. If you can't -- if half the business is traditionally refis and that market has been very, very slow, you got to take share, and that's exactly what we're doing. The good news for us is if rates do come down, that will just be an accelerator on the business. So if we've got higher wallet share today and rates come down, we would expect to preserve that share. So certainly, there's been a lot of headwinds in mortgage. I think candidly, it's been significantly worse in multifamily, where I think everybody is dealing with some of those challenges, including the GSEs. But in single-family housing, I think it's -- the jumbo market has been extremely resilient. And we're constantly looking for ways to rebank the consumer and make sure that we retain the relationships.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you, operator, and thank you, everyone, for joining today. We appreciate the continued sponsorship and engagement, and we wish you a good rest of your day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.