Good afternoon, and welcome to the Redwood Trust Inc. 2016 Third Quarter Earnings Conference call. During management's presentation, your lines will be in a listen-only mode. After conclusion of management's remarks, there will be a 1b-and-answer session. I will provide you with instructions and through the QA queue after management's comments. I would now like to turn the conference over to Kristin Brown, Vice President of Investor Relations. Please go ahead.

Thank you, Dana. Good afternoon, and thank you for joining us to review Redwood Trust's third quarter 2016 earnings report. Before we begin, I wanted to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's Annual Report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance, and could cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we will also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. They are also included to aid investors in further understanding the company's performance and to provide insight into one of the ways that management analysis Redwood's performance. A reconciliation between GAAP and non-GAAP financial measures is provided in both our third quarter earnings press release and Redwood review available on our Web site redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, Monday, November 7, 2016. The company does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded, and will be available on the company's Web site later today. For opening remarks and introductions, I will now turn the call over to Marty Hughes, Redwood's Chief Executive Officer.

Good afternoon, everyone. Thank you for participating in Redwood's third quarter 2016 earnings call. Joining me on the call is Chris Abate, Redwood's President and CFO. Following my remarks on the quarter's highlights and our current investment initiatives, Chris will discuss the quarter's investment and residential mortgage banking activities and our financial results for the quarter. For the third quarter of 2016, our GAAP earnings were $0.58 per share, our best GAAP results in three years. Our non-GAAP core earnings were $0.39 per share, and our GAAP book value increased 3.8% to $14.74 per share at September 30, from $14.20 a share at June 30. After incorporating our third results into our current outlet, we expect full year 2016 earnings to fall at the higher end of the $1 to $1.50 per share range we outlined back in February. The third quarter of 2016 was the first in a long while where we experienced consistently low interest rate volatility in benchmark rates, helping to push credit spreads tighter and valuations higher across many asset classes. This environment is ideal for our existing holdings, but makes for a challenging environment to reinvest our capital, given the historically high asset prices and low absolute yields we have observed recently in the credit markets. As value investors, we believe now is an appropriate time to be holding dry powder especially in advance of the historic Presidential Election tomorrow and an upcoming Federal Reserve Board meeting where many believe the Fed is poised to raise interest rates. With fewer liquidity buffers available in the financial system to keep rate volatility low, lower asset prices may only be one macro headlines away. So we plan to maintain our opportunistic yet value-driven approach while understanding that deploying our available capital efficiently and at the highest possible…

Well, thank you, Marty, and good afternoon everyone. I'd like to begin with some comments on our recent investment activity. We deployed $76 million of capital in the new investments during the third quarter with an emphasis on residential CRT securities. We also continue to invest opportunistically in commercial multifamily securities issued by Freddy Mac to leverage our quarter residential credit expertise in the capital markets efficiencies. Through September 30, we've deployed $300 million of capital including $98 million in the residential CRT, $65 million in commercial securities, $31 million in to new Sequoia PRT and other RMB as well as $23 million into NSRs. We also deployed $82 million of capital into loans financed through our FHLB subsidiary earlier in the year allowing us to fully utilizing our $2 billion of financing capacity at the Federal Home Loan Bank of Chicago for the second and third quarters. Finally our convertible debt and share repurchases have totaled $29 million year-to-date. We sold $28 million of residential securities during the third quarter and $287 million through September 30, bringing up approximately $136 million of capital for reinvestment and generating $21 million of realized gains. Our sales activity has primarily focused on lower yielding legacy securities that are fully appreciated. Going forward, we anticipate redeploying this capital through risk sharing structures, supported RMBS and commercial securities. We are pleased with the performance of our investment portfolio overall during the third quarter and net interest income was steady. In the end underlying credit performance of our residential investments remains excellent. Our investment portfolio represented $1.6 billion or about 90% of our $1.8 billion of total capital at September 30. The remaining 10% was allocated to residential mortgage banking activities and it's continued to perform well since we repositioned our platform in early 2016.…

[Operator Instructions] We will take our first question from Vivek Agarwal with Well Fargo.

Hey, good afternoon. Thanks for taking my questions. Chris, I think your guidance of -- I think you said 120 to 150 sort of below where your core earnings are running, is that sort of what you are expecting for the fourth quarter at this point?

You know Vivek, we said I think we are 123 year-to-date. We expect to be in the higher end of the range for the year; could we be higher potentially, but there is a lot of uncertainty headed our way in the fourth quarter beginning with an election tomorrow. Since a significant portion of Q2 earnings had to do with a lack of spread volatility, what we felt most comfortable saying is that we should end up at the higher end of the range.

Okay. And then maybe can you give us a sense where your book value is post the quarter?

Sorry?

Can you give us a sense where your book value is post the quarter?

Oh, it's largely unchanged I would guess. Spreads have widening a little bit since the end of the quarter. So perhaps there're some declines in asset values, but it's been somewhat modest. Again, I think the big changes to book value are going to be the result of some of the events we anticipate happening pretty soon, one being the election and two, the Fed meeting in December.

Sure. And then, I guess if spreads have been just a tad wider, and assuming we don't get too much volatility post the election and whatever the Fed does in December, are you envisioning sort of acceleration in the securitization volume at that point?

Yes. We lavishly are fans of securitization, and the execution has improved throughout the year consecutively with the three transactions we completed. There is a chance we could complete a fourth one this year. We expect to have the inventory to do so, but I think it will be a function of spreads and volatility as you mentioned. Obviously we have got a very strong hold on distribution, and we are going to follow our best execution.

Yes, I'd just add, Vivek, in October, the execution-governed securitization was better than it was on whole loans, but since that period of time and with the election, credit spreads have gapped out a bit. We will just have to see what happens post election where things tighten back down.

Okay. And then one last one if I may, looks like you followed about 9 million of MMSRs, just want to get some of your thoughts given that we were sort of seeing little bit higher rates and uptick in just overall mortgage levels?

We have slowed down our conforming MSR investing, and most of that that you know, that you saw probably had to do with pay downs. We do view that portfolio opportunistically, so we could end up selling portions of it, specifically on the conforming side since we're not focused on conforming MSRs at the moment, or running conforming loans through the conduit. That said, I would think about it opportunistically. At this point, we don't however anticipate significant increase in our appetite for MSR, if that was the question.

Okay. Well, thanks for answering my questions.

And we'll go next to Bose George with KBW.

Good afternoon. Actually first, just in terms of the excess -- the capital that you guys have, what's the good way to think about the timelines for deploying that? I mean, it obviously have something to do with where spreads are, but is there any way you can sort of talk through the potential timeline?

Hey, Bose. If we just looked at the averages, that our recent run rates has been in the neighborhood of $75 million a quarter. Unfortunately, I don't expect it to play out that way. We've got a lot of lines in the water if you will. We're working in a lot of different initiatives on the risk sharing fronts, and my guess is it will be lumpy. So, from a peer modeling standpoint, you might look at our recent averages, but again, a lots is going to come down to win some of these transactions if they manifest.

Okay, that makes sense. And actually switching over to Redwood Choice, are the returns there potentially higher, or is that really sort of creating a new asset class for you guys to invest in?

The returns are absolutely higher. The mortgage rates are higher, and we have completed a few small sales consisting with our whole loan sale activity of Choice loans. The executions have been at or exceeded our expectations, but we're still in the validation process. So we're still ironing out what products the market really desires. Choice is a really broad spectrum. It really represents the entire expanded prime universe. So the specific products and then how to price those products is where we are at today. I do think though, Bose that with our fourth quarter Redwood review in February, we'll be in a much better position to give some guidance on how big we think Redwood Choice could be.

Okay.

And obviously one thing we'd like to do is, and this is Marty, is be in a position to potentially securitize these. We maybe six-nine months to do it, but that may offer another good opportunity to generate investments for Redwood.

Okay, thanks. And one more question, just on the PRT market, I noticed you've mentioned you participated in a couple of deals, what you think the market needs to see for there just to be a little more activity in that market?

Well, you know, JPMorgan has really led the initiative, and I do think that the market would need to see a few more successful transactions to really validate the concept. That said, we've been engaged in a lot of conversations with banks, and we're pretty excited about the potential. So I wouldn't expect anything else outside of what you've seen with the JPMorgan transactions in the near term, but I do think that as capital starts to become more scarce, it's not scarce today, but to the extent it does become more scarce at banks, it's a great concept to free up capital and improve returns.

Okay, great. Thanks.

And we'll go next to Brock Vandervliet with Nomura Securities.

Thanks for taking my question. Couple of these have already been asked and answered. Chris, on the expense dynamic, expense has been running pretty steady here around $20 million, what can you say in terms of go-forward expense dynamics?

Hey, Brock. We're in the $65 million to $70 million sort of annual expense range on the sort of run rate side. For instance, this quarter we ended up flat with last quarter at 20 -- but two of that had to do with higher earnings and the impact that has on variable compensation. So when you exclude the variable factor, sort of the core run rate we expect to be at $65 million to $70 million annually. That could change again the fourth quarter are to start the year with our fourth quarter review and letters when we really firm up all of that guidance for the following year. So we're going to be spending some time here kind of looking at the operation and refining that.

But it's $65 million-$70 million for this year full year?

Well, that's the run rate. That doesn't include the variable compensation.

Got it. Okay, got it. And on the stand [ph] within the Redwood review page 18, the fair value changes within the residential; if you could just kind of briefly walk through some of the puts and picks there, the volatility was a bit larger than I had expected in your favor, but if you could just spend a moment on that, it will be helpful.

Sure. What the table is intending to do is differentiate between the core and non-core components of the mark to markets, and the sort of non-cores part is the volatility associated with changes in rates. And so, I think the quarter sort of represented a lower vol quarter. And in addition to lower rate vol that was lower spread vol. So the hedges were up in value consistent with higher rates. And we didn't see the type of vol in asset prices that we would have otherwise seen in prior quarters. Let me go overall, it was a positive story, but again what we tried to do is differentiate what's a true change in asset value versus what's just a function of remarking to benchmark rates at the end of each quarter.

Got it, okay. Thank you.

And we'll go next to Steve Delaney with JMP Securities.

Thanks for taking the question. Hi, Marty, hey, Chris. How're you doing?

Great.

So, this is the time of year at the Redwood if I recall that the Board sits down and talks about the dividend and makes the statement about the upcoming year, and when I look at the change this year for the first three quarters you've averaged $0.31 at taxable last year, for the full year you averaged $0.26 at taxable. So you're over-earning the dividend this year under -- by a share. Can you talk about are there any carryover in terms of your current year taxable income? Are there any prior period carry-forwards or anything that gives the Board the flexibility to -- like, I don't know if you have loss carry-forwards or anything that should we pretty much think about the dividend as a function of current year taxable earnings?

Steve, I'll take that one.

Thank you.

We do have carried a $70 million NOL on at the REIT, which would come into play.

Yes.

It is coming way to your point, because we have been out earning the dividend recently in recent quarters relative to kind of where we've been over the past few years. In fact, it wouldn't surprise me if we ended up utilizing part of that NOL as early as this year. So the Board does have flexibility in the near term with respect to setting the dividend consistent with prior years. That said, it's always the combination of kind of recent operating progress and then what we expect going forward. And the other big factor that will impact that is probably the pace of capital deployment. It's not just what we are doing, how it's going forward. So, all of that will come into play when the Board meets to think about dividend.

And also it's important if -- the earnings are obviously a combination of earnings at the REIT and earnings at the taxable REIT subsidiary. So, depending on how you look at that, you may retain some of the earnings from the taxable REIT subsidiary. So we'll have to see how it goes going forward, and the Board will make a decision in a month or so.

Okay. That's helpful. And could you guys talk, because the K series investments are relatively new, are you buying first loss, I think I recall that you have to be approved to be a buyer by Freddie, I'm sure that's not a problem for Redwood, but are you buying first loss bonds or slightly higher up in the capital stack?

No, we are -- Steve, we are more focused in what amounts to be Triple B type exposure.

Got it.

So, 5% to 7% of credit support, and again the reason there is that at this point with the repositioning of the platform, we look at that as part of the structure we can really leverage our resi expertise both in credit and structuring. The point at which we look more closely at the first loss, that's a real deep-dive into commercial credit and something that we really want to think about before we deploy lot of capital. So I think for the mid-term, it's going to be more focused on the Triple B area.

Got it. And yes, at the bottom you're making a macro real estate call that would seem to me as opposed to necessarily being a bond investment, if you will?

Correct.

The Freddie, did they just guarantee the Triple As or how far down do they go in their guarantee on investment grade? So you are not buying, your bonds are not Freddie guaranteed, right?

Oh, no.

Okay, got it. I think it's just the Triple As on that.

Yes.

Okay. And one last if I may, on the -- well, Marty, I'm going to stay away from the PRT, on bank loan rates which has been your challenge over the last couple of years is the banks kind of really under-pricing, we have noticed, I guess maybe in the last two months, Wells has always had 25 basis point, quarter point cut from conforming to jumbo on third-year, but now it's just an eight, and I am just curious if you are seeing any relief in terms of how the banks are pricing their product, or is it still as bad as it was?

(A) It's still very competitive, and obviously where we can be gain more market share is not on the super-prime loans, which is really bud straight in their wheelhouse, and I think that's where the importance of Choice comes in where we're more on the edges of the fairway. It's a prime loan, but these are loans for which there is less competition, and we believe we can have more pricing advantages and competitive advantages.

So Choice with -- go ahead, Chris.

I was going to add to that, one thing we have seen as a clear pick-up is the exit last quarter of another big [technical difficulty] aggregate. I do think that our seller base appreciates and values having the option to sell to a non-bank correspondent. So, that certainly I think benefited us over the past few months. And as Marty said, we're really trying to identify those areas where we can operate more efficiently around the banks, not just head-to-head and rate this. It's going to be a big part of our focus in 2017.

Great. Guys, thank you for the comments. They are helpful.

We will go next to Paul Miller with FBR.

Yes, thank you very much, and as a follow-up on the comment upon head-to-head on rates, a big jumbo lender is running in some trouble on -- everybody knows that Wells is running on some trouble on some of their cross-sells and they were very big on cross-sells with their jumbo product. Have you seen any difference in pricing, be it more favorable or less favorable with all of the headline risks that Wells is facing?

Not anything too noticeable at this point, Paul. There is a lot of dynamics in the market right now. There is a big uptick in refis during the summer, and that's kind of pulled back. There has been a lot of headlines with the banks. And we have been pleased with the volumes, and our margins have improved, so for us though it's going to a take a series of quarters to really be able to understand if that's just quarterly volatility, or if there really is a change.

Okay. And then, going back to the GSE risk sharing, the -- correct me if I am wrong, couple of quarters ago you did one where you took a 1% loss position, is that stuff still working its way through the system or like where do we stand there?

Again, that transaction is still working its way through the system. We are no longer obviously buying conforming loans, but we do think there are creative ways where we can do front-end risk sharing with the GSEs in different forms. That's what we are working on now.

So that transaction is still working its way through to the system…

Yes, it is.

Okay. Hey, guys, thank you very much.

Thanks.

And there are no further questions at this time. This concludes our conference. On behalf of management, we very much appreciate you taking the time to participate in our earnings call.