Redwood Trust, Inc. (NYSE:RWT) Q2 2020 Earnings Conference Call July 30, 2020 5:00 PM ET
Lisa Hartman – Senior Vice President of Investor Relations
Chris Abate – Chief Executive Officer
Dash Robinson – President
Collin Cochrane – Chief Financial Officer
Conference Call Participants
Eric Hagen – KBW
Stephen Laws – Raymond James
Steve Delaney – JMP Securities
Kevin Barker – Piper Sandler
Good day, and welcome to the Redwood Trust Incorporated Second Quarter 2020 Financial Results Conference Call. During management presentation, your line will be in a listen-only mode. After conclusion of prepared remarks, there will be a question-and-answer session. I will provide with instructions to join the question queue after management comment. Today’s conference is being recorded.
I will now turn the call over to Lisa Hartman, Redwood’s Senior Vice President of Investor Relations. Please go ahead.
Thank you, Kate. Hello, everyone. And thank you for participating in our Second Quarter 2020 Financial Results Call. Joining me on the call today are Chris Abate, Redwood’s Chief Executive Officer; Dash Robinson, Redwood’s President; and Collin Cochrane, Redwood’s Chief Financial Officer.
Before we begin, I want to remind you that certain statements made during management’s presentation with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company’s annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company’s performance and could cause actual results to differ from those that may be expressed in forward-looking statements.
On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is provided in our second quarter Redwood review available on our website at redwoodtrust.com.
Also note that the content of this conference call contains time-sensitive information that is accurate only as of today. The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today’s call is being recorded and will be available on our website later today.
I will now turn the call over to Chris Abate, Redwood’s Chief Executive Officer for opening remarks.
Thank you, Lisa, and thanks to all of you for joining the call today. We’re extremely pleased with the progress we’ve made in response to the collapse of liquidity that the non-government mortgage sector experienced in March. COVID-19 pandemic has continued to rage on since then, and as a nation, we are now experiencing a second round of lockdowns after a spike in coronavirus cases during July.
So Redwood story through this crisis will continue to be written. We are now in a unique position to not only weather the storm, but also take advantage of a significant recovery in our business lines, which is now underway.
Before I proceed with a discussion of our businesses, I’ll preview our financial results in condition. Our second quarter GAAP earnings were $1 per share, as compared to negative $8.28 per share in the first quarter. Our GAAP book value per share increased almost 30%, $8.15 at June 30, from $6.32 at March 31. This represents a retrace of nearly one third of the first quarter book value decline linked to unrealized losses in our investment portfolio. Well, not uniform in magnitude, as the valuations were materially higher and still possess significant upside to the extent the economy continues to recover.
During the second quarter, we successfully recast most of our secured recourse debt. In aggregate recourse debt declined from $4.6 billion in March 31 to 1$.8 billion at June 30, reducing recourse leverage ratio from 6.9 times to 2.1 times. On a pro forma basis, factoring in a new non-recourse facility, we entered into during July, our recourse debt is further decreased to $1.6 billion, and our recourse leverage ratio was 1.9 times. Marginable debt for that portion of recourse debt that is subject to daily margin calls represented only about 23% of our recourse debt of $375 million at June 30 on a pro forma basis. When comparing our $529 million of unrestricted cash at the end of June to our marginable debt, our coverage is approximately 1.4 times, leaving us with ample room to allocate significant capital to our operating businesses and new investments as we had begun to do.
Importantly, the evolution of our capital structure has been managed organically without the proverbial need for crisis driven diluted equity capital raise. Not only do we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt as significant discounts, generating $25 million of economic gains. These repurchases provide the lasting benefit of reduced debt service costs on leverage. And some of the games can contribute towards long-term technological investments we have planned for our platforms. We will continue to opportunistically repurchase our long-term debt or common equity to the extent we believe valuations remain significantly detached from fundamentals.
With our capital structure enhancements largely complete, we paid a second quarter dividend of $0.125 per share at the end of June. Second quarter dividend aligned with the current size of our balance sheet and reflected a sustainable level that we would hope to build upon as we begin to deploy our access capital and as the economy in our business cash flow stabilize. We remain committed to delivering an attractive dividend to shareholders, while remain well positioned to opportunistically deploy capital going forward.
When taking stock of the extreme market shocks brought about by COVID-19 in our go forward earnings, we believe it’s still premature to look too far ahead, as the true impact of the US economy in the mortgage industry is yet to be seen. From a macro perspective, the recovery in financial markets remains meaningfully attached from the continued and in many areas accelerating health pandemic. Record job losses and the associated economic contraction has significantly outpace the great financial crisis in both speed and severity. The spectacular resiliency of the financial markets, as best we can tell, is still buoyed by extreme monetary and fiscal stimulus with the prospect that risk assets can be supported, either directly or implicitly by the Fed until the COVID-19 vaccine or effective treatment can be found.
Well the Fed has not yet indicated support for the non-agency mortgage sector through TALF, significant engagement is ongoing and we do not believe the ship has sailed. Discomforted by the prospect of trying to predict in time the outcome of the pandemic and with an election looming in November, we put ourselves in a position to be patient and focused on the long-term through what we likely be evolve next few months. The virtual patients set meaningful ancillary benefits to us as we’ve been able to focus on the strategic evolution of our business model, and how our platforms will function in a post-pandemic world. Dash will discuss this in more detail in a few moments.
For now, our residential and business purpose lending segments continue to operate in a significantly altered landscape. Many aspects of the mortgage process that historically took place in first person, such as appraisals and closings are now done remotely. Residential credit performance that’s fundamentally deteriorated from the record low delinquencies, the industry enjoyed before the crisis will continues to run better than most expected. As of June 30, we received approximately 96% of our payments due in June for residential loans underlying our Sequoia securitizations and we received also approximately 96% of payments due in June for the single-family rental loans underlying our CoreVest securitizations.
Most of these non-payments represent loans in forbearance, as opposed to serious delinquencies. The nationwide rise and pass-through mortgages thus far does not appear to be weakening the single-family housing sector, thanks to record low mortgage rates, in some cases below 3% for agency mortgages and trending lower.
Refinance activity has remained elevated and home purchases have seen a resurgence in demand. By way of shelter-in-place orders and broader perhaps secular trends and working remotely, the concept of home has taken on a greater significance for most Americans.
Many children are now learning virtually down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states for families with the extra dense metropolitan areas. This is a remarkable shift in consumer preference from even a few short months ago, and one that on balance is positive for both our residential consumer and rental products, which are predominantly focused on single-family loans.
Our residential lending team entered the second half of the year prime for a relaunch with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders have significantly tightened the underwriting guidelines for newly originated jumbo loans due to the prospect of a severe recession and lack of fed support to the non-agency sector. Additionally, constraints on the bandwidth of loan officers who have remained largely focused on high margin refinancings to agency eligible borrowers has weighed on jumbo origination activity.
Based on our recent engagement with loan sellers and narrowing of the spread between agency and jumbo mortgage rates, we’ve begun to see a pickup and lock activity and expect this to grow meaningfully as we head into the fall. Even with this narrowing, we continue to see substantial relative value and non-agency home loans, a sentiment shared by our loan buying partners, both current and prospective.
Our near-term focus continues to be on recasting our products and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Our team’s efforts may not yet be reflected in results, tremendous progress has been made and we’re excited about the resurgence underway.
To reach this point, we completed the difficult work of managing through our pre-COVID loan inventory, culminating with the sale of substantially all of those loans and the clearing out of our associated secured debt facilities. As part of this process, our residential team completed our Sequoia MC1 securitization in late June, the transaction that brought the sale of these loans to a close. The dealer price better than we expected and positioned us to safely begin locking new loans in July.
Transitioning to our business purpose lending segment, the recovery was very much underway at the end of the second quarter, and we have much to be excited about going forward. Our BPL team originated 234 million of loans in the second quarter, the majority in late May and June, when we re-entered the market in earnest after securitizing a significant portion of the pre-COVID single-family rental loans on our balance sheet.
Our origination footprint remained largely consistent SFR loans and our bridge origination strategy is sharpened its focus on sponsors whose strategy is to ultimately hold and stabilize all or most of their portfolios. In addition to their institutional caliber, these sponsors often become accretive repeat customers for both SFR loans and fresh bridge financing to support new investments.
Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more competition to re-enter the space. However, we do believe our operational advantage remains durable.
Our BPL business continued to make great progress in diversifying its outlets to distribute risks in the second quarter and through July. We completed two non-recourse financing arrangements for over 85% of our pre-COVID Bridge portfolio, essentially match funding a book that has thus far displayed solid performance through the pandemic.
Investment demand remains very robust for SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest to provide private financing. We expect these options to become a reliable complement to traditional securitization.
The attractive risk adjusted returns in the space have kept BPL assets in strong demand, and we continue to receive strong indications from investors in our SFR securitizations. As we take stock of the year so far and look towards the fall, reminded that we are truly living in historic times.
We face a pandemic that is creating global economic disruption, trade and technology wars are looming. The fight against racism and social injustice is hitting an inflection point at a global scale. And the U.S. presidential election is a mere three months away. All of this presents an opportunity to all of us to examine our values, use our priorities and pause while we rethink how we want our world to function. As times evolve, our corporate mission remains the same, how to make a quality housing accessible to all Americans, whether rented or owned.
That concludes my prepared remarks. I’ll now turn the call over to Dash Robinson, Redwood’s President.
Thank you, Chris and good afternoon, everyone. Before I get into the review of our operating businesses, I want to begin with providing additional details on the progress we made recasting our capital structure, which includes significant milestones towards how we plan to run our franchise going forward.
In the second quarter, we considerably reduced our recourse debt, most notably marginable secured debt, and entered into key financing arrangements on several parts of our existing portfolio and to support our operating and investing activities going forward.
In total, our recourse debt as of today stands at $1.6 billion, approximately $1 billion of which is secured. As Chris articulated, only $375 million of this is marginable. Approximately 80% of our total recourse debt matures in 2022 or later. And as Chris mentioned, we procured non-recourse debt for approximately 85% of our shorter term business purpose bridge loans, with the majority of the remainder funded with non-marginable debt or held unencumbered.
In addition to these completed initiatives, incremental work on further reducing our recourse and marginable debt remains underway. Our work in the second quarter positions us to fund the vast majority of our residential and business purpose loan inventories with non- marginable debt.
While this new debt financing comes with a modest increase in cost of capital, we believe the associated benefits, including longer durations and a lower required amount of risk capital over time will allow us to continue to achieve attractive risk adjusted returns on our portfolio for the long term.
During the quarter, we also completed the sale of nearly all residential loans held for investments, and completed the sale of nearly all of our remaining pre COVID jumbo loan inventory. While we continue to carry exposure to standard representations and warranties from loan sold, our estimate for this exposure was not material at June 30, 2020.
With this work complete, we enter the third quarter in a unique position of strength with the ability to allocate significant additional capital to our operating businesses and new investments. Importantly, to emphasize Chris’s earlier point, the organic management of our balance sheet was achieved without the need for dilutive capital infusion or equity linked options for our lenders.
Within our portfolio of securities investments, fair values improved in the second quarter, those still remain well below pre-pandemic level. More pronounced increases were seen an agency CRT, Sequoia subordinate securities and other third parties securities. However, we saw positive price movements in substantially all portions of the portfolio.
Our second quarter Redwood Review provides more detail on value change by asset type. We estimate that as of June 30th, approximately $3 per share of the unrealized losses recognized in the first quarter of 2020, remained outstanding.
It is also important to keep in mind that even our December 31st marks, reflect a significant discount to face value in certain parts of the portfolio, reflecting potential upside as the underlying structures deliver, something that happened at an accelerated pace in the second quarter, particularly for our subordinate prime jumbo security.
I’ll now move on to a discussion of our business segments. Given changes in the composition of our portfolio over the last several months, in the second quarter of 2020, we combined our third party residential investment and multifamily investment segments into a new segment called third-party investments.
Our residential and business purpose lending segments continue to represent vertically integrated platforms. For third-party investments segment is comprised of other investments, not sourced to our core mortgage banking operations, including reperforming loan securities, CRT securities, our remaining multifamily securities and other housing related investments.
Our completed initiatives in the second quarter have allowed us to more fully lean in back into our operating activities. As technicals have improved and overall market supply and housing credit remains tepid, we believe our operating advantages position us perhaps better than ever before.
Our core competencies of controlling production quality, and being closest to the asset, remain valuable to market participants, so you can still layer on risk, but can’t otherwise access. This discipline not only shines through an asset performance, which I’ll touch on in a moment, but also through diversity of revenue stream that will be increasingly important and what is likely a longer term is normal.
The behavioral shifts we are seeing as a result of the pandemic in our review are bringing the market in our direction. Man for detached single-family homes is increasing with a migration from densely populated areas to the suburbs as consumers seek additional interior space, more private access to the outdoors, and other amenities commensurate with spending more time at home.
This shift in sentiment could very well be structural, and supports the underlying business drivers of both our residential and BPL businesses. Against this backdrop, our platform has made great progress in the second quarter. With new financing facilities in place, our residential lending business is locking loans at a measured, but accelerating pace.
Demand for housing credit has strengthened, and both the whole loan and securitization markets, particularly since the end of the second quarter, where demand for securities remaining high and spreads continuing to tighten as demand outstrips supply.
As Chris mentioned, while at the same time, originators have largely prioritize their focus on conforming lone. We’ve begun to see a pickup and lock activity, and expect us to grow meaningfully as we head into the fall. A hallmark of our residential lending platform has always been the diverse channels, through which we distribute risk.
Our current view of the market indicates strong demand for both, Sequoia issuances and home loan sales, as well as additional structures through which we can distribute risk in a durable fashion and turn our capital efficiently
During the second quarter, the residential lending segment generated $33 million of net income, driven primarily by positive investment fair value changes in our subordinates Sequoia security. The home loan sales described earlier benefited our cash positions, recourse leverage and marginable debt ratios but reduce net interest income in the second quarter.
We purchased $55 million of loans during the quarter, largely in May and June as a significant slowdown in the jumbo market gradually began to thaw. Lock volume has picked up substantially in July as we established fresh momentum.
Additionally, during the second quarter, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of Investment Securities from a $271 million securitization we completed during the quarter, which was comprised of our remaining pre-COVID jumbo loan inventory.
During the quarter, we also completed a non-marginable warehouse facility that we’re utilizing to finance existing loan inventory. As we move forward, our residential team is focused on a handful of key strategic priorities, including as Chris mentioned, continued investment in technology to improve efficiencies and operations and to refine how and how quickly we can purchase loans in a safe and sound manner.
Meanwhile our business purpose lending segment is capitalizing on a unique market opportunity, fueled by an increase in demand from the rental market for high quality single family homes, our origination pipeline for both SFR and bridge loans remains robust.
During the second quarter, the segment contributed $46 million of net income, driven by positive investment fair value changes, net interest income from investments at an accelerated pace of origination.
In the second quarter overall, we originated $176 million of single family rental loans and $58 million of bridge loans. We were able to commence higher coupons, lower LTVs and other structural enhancements for BPL loans. And while a level of competition has reentered the space, our speed to close, even amidst the impact of the pandemic on our traditional workflows remains a durable competitive advantage.
Bridge lending remains a key strategic focus to drive long-term value for a business purpose lending segments, including through attractive risk adjusted returns for our portfolio and sponsor conversion rates into adjacent product.
Our second quarter Redwood review contains more detail on this part of our portfolio and our approach to client acquisition, highlighting a strategy that is unique in several important ways, chief among these is a more concentrated focus on experienced sponsors with a longer term approach to real estate investment. These sponsors make strong long-term clients that we have observed will utilize several lending products that our platform offers, a key reason we prioritize a customized lending approach that we believe leads to stronger credit performance through time.
This has been borne out in the recent performance of our BPL portfolio overall, on a blended basis 90-plus day delinquencies in our BPL book total 2.4% at June 30, and have increased only modestly since the onset of the pandemic. In particular, delinquencies in the bridge portfolio are less than 1% higher than in March and stand at just over 4.5% overall, the portfolio totaled over $90 million in the second quarter, and are exceeding $50 million in July alone, indicative of strength of sponsors strategy and overall robustness of the housing market, particularly the average price point refinance.
In May, we completed a $221 million single family rental loan securitization, consisting of loans we held at the end of the first quarter, from which we retained a $20 million block of security.
Our third-party investment segments contributed $77 million of net income during the second quarter as a result of positive investment fair value changes and net interest income driven by a rebound at agency CRT investments and other subordinate securities. We have considerably reduced the amount of marginal debt used to finance our third-party investments and expect to reduce it further going forward.
During the second quarter, we sold $53 million of third-party investments, including $35 million of residential subordinate securities and $19 million of CRT securities. And we deployed $10 million primarily into new CRT security.
Net of these dispositions are investments in re-performing loans securities or an increased proportion of our third-party investment portfolio. As a reminder, these investments are backed by seasoned mortgages whose underlying borrowers have gone through some sort of modification over the course of time.
The bonds we own comprise approximately 25% of the capital structure and are subordinate to senior securities wrapped by Freddie Mac, an attractive source of non-recourse term financing.
Performance in the underlying portfolios has been stable relative to current market conditions, but overall delinquencies approximately 4% higher than earlier in the year, and overall cash flow velocity reflecting strong borrower engagement.
Overall, as the market has become more orderly during the past month or two, the credit curve remains steeper than before the onset of the pandemic. And while the dearth of applied more subordinate securities has deepened the associated market debt considerably over the last several weeks, we believe that attractive capital allocation opportunities will occur
And with that, I’ll turn the call over to Collin, Redwood’s CFO.
Thanks, Dash and good afternoon everyone. As Chris and Dash discussed our second quarter earnings and book values benefited from a significant rebound in asset pricing, which primarily drove or $1 of earnings per share for the quarter and helped to generate a 31% economic return on book value. Well, the majority of these earnings were driven by positive fair value changes on our investment.
As Dash mentioned, we also saw improvements in operating businesses and recorded $25 million of gains on the repurchase of convertible debt. Of note, the gains from extinguishment of debt are excluded from our diluted earnings per share in accordance with GAAP. Our basic earnings per share, which include these gains were $1.41.
As was the case last quarter, we did not disclose non-GAAP core earnings for the second quarter. We are continuing to evaluate a revised core earnings metrics that will be most relevant and assessing our operating performance in future periods.
After the payment of $12.5 dividend, our book value increased $1.83 per share in the second quarter to $8.15 per share. This increase was primarily driven by a $1.78 per share of fair value changes our investment, representing the recovery of approximately one-third of the unrealized losses recognized in the first quarter of 2020.
As Dash mentioned, we estimated at June 30th, that approximately $3 per share of the unrealized losses reported in the first quarter remained outstanding. Shifting to the tax side, we had a taxable loss of $0.50 per share in the second quarter REIT, which was primarily driven by timing difference related to recognition of head losses that were incurred in the first quarter, but not realized for tax until the second quarter. Exclusive of these amounts and gains for extinguishment of debt, REIT taxable income from the quarter was $0.14 per share. Given our year-to-date net loss at the REIT, we currently expect the majority of our dividend payment in 2020 the return of capital for tax purposes.
Turning to our balance sheet, we ended the second quarter with unrestricted cash of $520 9 million. As Chris and Dash discussed in recent months, we have repositioned our secured recourse debt structure, significantly reducing overall recourse debt and shifting substantially to non-marketable debt. Additionally, we’ve utilized new non-recourse structures to finance 4% of our investment portfolio.
Using our pro forma recourse debt of $1.6 billion at June 30th, adjusted for new non-recourse financing we entered into in July. We estimate our recourse leverage ratio will be 1.9 times. We expect this leverage ratio to rise as we begin to increase our accumulation of loans that are operating business for sale, for securitization, and begin to deploy our available capital into new investments.
As we mentioned, we expect to utilize non-marketable debt facilities to finance our loan inventory and new operational investments. And we expect to remain judicious in our use of marketable debt financed other investments.
I’ll close with our outlook. Given the continued uncertainties surrounding future economic impact of the pandemic, we’re continuing to refrain from providing earnings guidance at this time. What we do know is that we entered the second half of this year with a strengthened capital structure and a significant cash balance that we believe provides us the optionality to play offense and defense as we navigate through the ongoing pandemic. Our in-place investment portfolios are generating strong cash yields to our current basis that continues to include a significant embedded discount, which provides a strong foundation for earnings growth as we begin to declare excess capital and operating businesses return to profitability.
On the expense side, general and administrative expenses decreased during the quarter, primarily due to a reduction in our workforce that we implemented in late April. So I will expect some incremental savings from costs specific to these and other activities in the second quarter. We also anticipate an increase in variable loan acquisition costs, as the volume and revenue at our operating businesses continues to improve.
As we begin to gain more clarity on the operating environment and the pace of recovery from this pandemic, we’ll be better able to assess the new baseline for our platforms and evaluate the opportunities to begin redeploying an appropriate portion for substantial cash position to generate incremental earnings.
So with that I’ll conclude prepared remarks. Operator, please open the call for Q&A.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Eric Hagen of KBW. Please, go ahead.
Hi guys. Good to hear from you. Hey, is there both a yield and a blended cost of funds that we should think about in the portfolio going forward? And then, I realized the loan portfolios are marked deferred value, so it’s maybe just a little bit more challenging to tease apart what would ordinarily be a loss reserve. But what are the loss rates that you expect in the business loan portfolio in the Sequoia choice portfolios? In other words, if you were required to post a reserve for those, what would those numbers look like?
Hey, Eric, it’s Dash. I can take those. Thanks for the questions. As to your first question, from a yield perspective, on our subordinate securities to Collin’s point, based on our basis and where we’re originating loans to, we are seeing yields to our basis well into the double digits, in some cases, mid-teens or higher, for some of the more subordinate securities that we hold.
On the whole loan side, particularly in business purpose lending, before those loans get financed, just on a raw asset yield basis, those yields are anywhere from, 5% to 6% for SFR loans and then higher single digits for bridge loans, 8% to 9% or higher.
From a cost of funds perspective, we detailed this in the review, so you can take a look at that as well. But our recourse debt, blended cost of funds is about 4.7% now, which includes our unsecured converts, it takes up a little bit higher than that when you blend in some of the non-recourse financing that we procured during the quarter.
So that’s how you can think about those. So there’s still a good access spreads particularly on the bridge portfolio. And then obviously, when we securitize our SFR loans and our jumbo loans, we’re availing ourselves with a more permanent cost of funds, which is far lower than that in the securities market.
From a loss perspective, like I said, we haven’t provided any formal guidance on that. We’ve continued to see delinquencies overall, really remain quite stable. They’ve picked up a bit clearly over the past few months. But, in general, we’ve been really, really hard with the overall trend in delinquencies, particularly with – in terms of the loans in forbearance in Sequoia.
That range remains in the 6.5 to 7 point range, in general, as a percentage of the overall book. About half those bars are current. And as we mentioned during the prepared remarks, we will see over the next several months how those borrowers perform as they roll off of forbearance.
Yeah, Eric, this is Chris. I’d also add, when you think about reserving, and we don’t – we don’t book reserves in that sense as you as you noted. There’s incidents and there is severity and I think on the incident side, the book is performed better than our expectations given where the economy’s gone to. On the severity side, you have to look at the single family housing sector, and I really think it started to deter from not only commercial but multi-family. The housing markets remained very strong and sales are up. So I think from a severity perspective, just given the average LTVs of the book, we’re in pretty good shape.
Okay. That was good. That was really helpful. And you understood that you guys are starting to get you’re footing back into jumbo origination side. But what again on sale margins look like right there in that market right now? And how much origination volume do you think you could support on that channel until you get up and running in the fall?
For the margins – liquidity still building in the market, so certainly, you know, we’re seeing margins recover. We ended June essentially having cleared out our entire inventory, and at this point we’re locking loans, but the ramp has been pretty impressive. And as far as – as far as what we can support, we’re in a – we’re in a place where we can support pre-crisis levels. The team is in place, and I think really the story there is going to be the pace of recovery and jumbo and based on what we’ve seen, even these past few weeks, we’ve got – we’re pretty optimistic heading into the fall. You’re going to see a pickup in activity.
Did you guys – thanks for that Chris. Hey, did you guys say what your book value was through July?
We didn’t. It’s up modestly. We didn’t – we didn’t say the number, but it’s up, maybe a few percent.
Got it. Okay. Hey, thanks a lot for comment.
The next question is from Stephen Laws of Raymond James. Please go ahead.
Hi, good afternoon. I guess, I want to start, the investor, the BPL side, a single-family rental loan portfolio demand for that asset seems class extremely strong – seeing those stocks of the SFR managers do, are certainly working well. Curious, I know, Dash, I believe your prepared remarks mentioned some, other capital in that space. Can you talk about what the competition’s like? Is it institutional capital trying to provide financing? Is it more local either hard money lenders that have been recapitalized or where’s that competition coming from on that front? And how do you – how do your yield through coupons you’re able to get today compared to where you were doing the similar SFR loans say in January, February?
Thanks, Stephen, for the question. I would say that, if you think about SFR, specifically, the barriers to entry, by our estimation are significantly higher than with other types of business purpose lending, like bridge. There’s a deeper group of bridge lenders, largely, however, who’ve been focused on different products then we focus on, traditionally, the more – bit more single asset versus a lot of the products that are articulated that we tend to focus on there. But yeah, it’s a bit of both. We have seen some of the traditional stuff refinance competitors reenter the space who typically fund themselves with some amount of third party capital in terms of their production.
Those are the folks, who would see probably on the smaller loans, including smaller balance SFR loans and certainly some bridge. Then as you get into larger loan balances, specifically our single family run over. And as you know, we can do loans as large as $40 to $50 million or higher, but tend to be in that sweet spot of 3 million to 5 million.
For the larger loans we continue to compete with some banks and insurance companies as well. There is a lot of demand from certain insurance companies that, that understand the asset class there. But our sweet spots that 2 million to 5 million or so, remains pretty uncrowned, frankly, which we’re thankful for.
And as relates to, how we continue to manage our risk going forward. There are a lot of private debt structures that we can avail ourselves of to complement securitization, which could be a very interesting compliment to how refinance the business going forward. In a lot of insurance capital and other capital in the space, that could be a direct lender also potentially interested in partnering on some lenders as well which could be a nice diversifier for us going forward.
So there’s definitely a lot of demand for it. From a coupon perspective, we are easily 75bps to 100 bps or so higher and rate than we were earlier this year. And that’s taking into account the fact that benchmarks are lower as well. We recognize that as markets normalized that could come in a bit. But for now, that’s where we are and try to stay with.
Great and then you’ve pushed on the financing side a little bit. So far you’ve got the securitization. So the regular view as we afraid what we get through ahead of the call, but I think it said on the bridge side, you’ve got to the two year committed financing facilities that are built on margin now in place for the 600 million to 700 million of bridge loans is that correct?
Yeah. We termed out almost 90% of the bridge book and not only a non margin able, but also non recourse fashion. Those are two arrangements which effectively match. And there is a little bit of replenishment capability in there, which is nice to support some of our go for production. But from an overall capital allocation and capital management perspective, it was a great achievement to be able to get vast, vast majority that book turn down now non recourse in the second quarter, which is what that’s referencing.
Great and then last question for me. I mean what kind of — know you have customers originations done there in May in June, what type of volumes should we look at kind of go forward? And, is it more constrained by the ability to securitize more or is it more constrained by finding loan to meet your characteristics or kind of what’s or just you’re not willing to put your foot on there? What’s the outlook for near-term and then maybe medium-term origination volume on the PPE side?
Sure, I would say we did over 400 million in the first quarter. If I recall which was down from about three quarters of a billion in the fourth quarter of last year, I would say that, we expect to build significantly on what we did in the first quarter. And probably hopefully build towards numbers closer to that Q1 number year over time.
The constraint is in some level, just the workflows. As I mentioned in my remarks it is –it sometimes is taking longer to complete loans, because of internal appraisals, procuring title, things of that nature, some of this is just taking longer than it has in the past. And so that’s probably from a volume perspective, really the more — the most meaningful headwind is, just trying to get through some of those process elements which the team has done a really fantastic job of doing.
We have leaned back in to these products and in a real way. We picked our spots a bit more in bridge and we’ll see how those markets reemerge, but from a sponsor perspective, for the reasons we articulated, a lot of our sponsors are very eager to put more capital to work here because of these trends that we’re seeing. And so we expect our existing sponsors to go deeper with their business models with also fresh capital come in as well. So we’re optimistic that the Q2 numbers we’ll grow meaningfully here over the next few quarters.
Right. Thanks a lot for the color. Appreciate it.
The next question is from Steve Delaney of JMP Securities. Please go ahead.
Thank you. Hey guys, first congratulations on the all the hard work and the results in terms of tightening up the balance sheet of a lot accomplished in a quarter, props on that. I’d like to try to get some clarity, you mean the $3 per share figure kind of jumps out at me about 350 million of value that can be recovered further beyond what you were able to do in the second quarter.
Just trying to focus or help me focus on sort of, I know you’ve got multiple specialty buckets but just kind of looking at your balance sheet billion of loans and then $1.2 billion of other types of securities and investments. Maybe help me focus in on the $350 million with the — one or two main asset classes that where you see the greatest potential for recovery? That would be helpful. Thanks.
Sure. Steve, just to clarify that $3 per share is versus the 1231 mark, which as I mentioned also have some embedded outside based on the natural credit trajectory of our portfolio. But I would say the areas that drive most of that number are reperforming loan investments. There are few securities that we own beneath the Freddie Mac term financing.
As well as, our organically created support and securities, both in Sequoia that was below that securitization. There some other elements to that number, but that — those three areas are the majority of it. As we hopefully continue to see solid performance, across those books those – as there’s, as we mentioned in the call, definitely from our perspective, potentially much more offsite in those discounts.
Okay. So that – I mean, those are your big asset classes, obvious Sequoia and single family rental. And I guess what you’re telling is, when you — while those generate NIM for you, you also on the retain bonds, you have a fair value. I think of those is just permanently locked and loaded loans. Loans on the left side, securitized debt on the right side, and what I’m hearing is; yes, what that is, but you’re fair valuing the structures as well. Is that correct?
That’s right. Both in both in Sequoia and in our Corvette securitizations in capital, we sell a decent amount of premium into the market either through IO securities or I bonds and that the offsetting discount is largely embedded in our support in securities, which is where all that credit convexity profile comes in. So, like when Sequoia prepays pick up significantly, you start to see those structures delever, and some of that optionality starts to unlock itself over time, which is definitely something we saw in the second quarter.
Understood. Okay. Well, that helps a great deal. And now I’ll follow-up with Collin on that later. When you begin, you did speak a little bit about being in a position where you can start thinking about playing office — offence. In terms of the initial capital allocation, should we think about that largely in the third-party segment as opposed to sounds like you’re still at a point where you’re more in the ramping in terms of needing capital for any significant volume of Sequoia or CoreVest securitizations?
Hi, Steve. It’s Chris.
We’re — good to hear from you.
An offence first and foremost, it really is in the operating platforms.
Cumulating loans, originating loans, really, really getting the team’s doing what they’re great at. On the third-party side, we’re opportunistic. But when you think about some of the opportunities out there, there’s been a pretty significant rally in credit. And so there I think we’re picking our spots, but they’re still — third-party is still very active and the GSEs are active. So there’s opportunities there, but I think the big capital needs are going to be from the business lines.
And we’re well on our way with CoreVest, and the volume started picking up halfway through the second quarter. And on the residential side, we’re now starting to see it. And it all signs point towards a significant pickup in activity here heading into the fall.
So I think we’ll be funding loans and we kind of transformed the balance sheet, diverse are in a position to have access to non-marginal facilities, so we feel pretty good about where we’re at with capital. And I’d also say, one of our biggest uses of capital in the second quarter was repurchasing convertible debt.
That’s sort of a risk free asset to us. So at least the way we think about it, so those returns were instant. And we still — where we see those prices today, they’re still significantly detached from par.
So that’s something we’ll monitor obviously, we have a buyback authorization. So we feel good about where we can deploy going forward. But primarily we’re focused on the operating businesses.
Great. Okay. Thank you all for your color. Appreciate it.
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Hey, guys. It’s actually Josh on for Doug. I know, you just touch on it briefly, but wondering if you could talk about your appetite for additional debt repurchase. And if you’re thinking about equity repurchases as well? And if you could remind us if you have a common share repurchase authorization? Thanks.
Yes. We do have an authorization 100 million. That’s been in place for a while. We have we have essentially unlimited ability to repurchase debt. And we’ll be focused on both of those markets. I think what we said in our review was focusing on the fundamentals versus market values. And we’re very focused on any way possible to deliver value to the shareholders. So that’s definitely something we’ll monitor.
I also — as I mentioned before, we’re seeing a growing need for capital in the go-forward business. We not only are we deploying capital new investments, but we’re actually investing in the platform’s themselves, however, we’re making some technology investments and other. We’re growing — we started adding staff.
So, I think we’re pretty optimistic that we can realize some run rates here going forward that will start to look more like they did pre-crisis. That said, the next few months, we also mentioned could be pretty rocky. We are heading into a Presidential Election among other things, and we’ve had somewhat of a resurgence of the virus. So, monitoring the economy and financial markets is going to continue to be a primary focus for us.
Hey, thanks for the comment.
The next question is from Kevin Barker of Piper Sandler. Please go ahead.
Thank you. Good afternoon. Just a follow-up on the capital question. Could you stack rank your capital allocation priorities between buying back stock, buying back — reallocating that capital into certain investments and what you see as the most attractive today, given where your stock trades or where your debt trades and the opportunities that exist out there? Thanks.
Hey Kevin. It’s a pretty fluid dynamic at Redwood. We don’t think about it. Ideologically, we were constantly looking at relative value and certainly earlier in the second quarter, the most detached piece was the convertible bonds. We were able to buyback a significant amount at really healthy discounts that had a double effect of realizing some economic gains, but also reducing our leverage and improving our leverage ratios.
So, on a relative basis, that was very attractive last quarter, obviously, we’ve seen a big jump in our book value as of the release today. We’ll continue to monitor the stock, we do have the authorization. So that’s something we’ll follow.
But I think we’re most focused, as I mentioned, is in the operating platforms, because we’re seeing growing demand for the loans we buy or originate.
The business feels much healthier today and we want to make sure that we’ve got the capital in place to fuel those businesses and as I said, get back to doing what the teams do well. So, I think it’ll continue to be fluid, but all of those are big opportunities for us.
So, I mean, you might you had $300 million of unrealized gains or — I’m sorry losses that could potentially be recouped, depending on the market dynamics. I mean do you feel like you can recapture those? And if so it would appear that your equity is trading and possibly a convert as well — is trading at significant fair value to what your book value may be.
I mean when you think about that investment, it would seem that the return on equity or return on investment might be a little bit higher on buying back stock versus reinvesting it elsewhere. Could you help provide — help us explain like the difference between how you think about the return on investment on new initiatives or where you see opportunities versus where you see it in your own company or your own equity for that matter?
Yes, I mean, the one thing — the one caveat with the stock is there’s some practical limitations both on the amount you can buyback, the timeline that you can buy it back during open periods. And then of course, we’re constrained by whatever our board authorization is. So, there’s some practical limitations there, which could evolve, but certainly it’s not. It’s not as straightforward per se as buying back debt or retiring debt.
So I think the sizing of the opportunities is one thing. The operating businesses right now it’s very important as we turn the page here to make sure that we’re focused on the long run. So, we like the upside from a recovery and book value of the of the unrealized losses on the existing investments, but it very important from a market presence perspective and a long term perspective that we’re leading in these markets and not abandoning the markets.
So we’re going to continue to face the markets and rebuild the platforms and make sure that we’re active and very engaged. But I think, we can do all three very well. I really believe that. In addition to third party investments, we were active today in third party investments. So, I think I think we’re, we’ve got a lot of coverage. And as I said, the decisioning is very fluid. We’re meeting constantly and if we see a relative value emerge in any one piece, I feel like we’ve got the capacity to take advantage of it.
Thank you. That’s really helpful. Thank you.
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