Good afternoon, and welcome to the Redwood Trust Incorporated Second Quarter 2017 Earnings Conference call. During management's presentation, your line will be in a listen-only mode. At the conclusion of management's remarks, there will be a question-and-answer session. I will provide you with instructions to enter the Q&A 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, Ann. Good afternoon, and thank you for joining us to review Redwood Trust's second quarter 2017 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 substitute for measures of financial performance prepared in accordance with GAAP. They are 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 second quarter earnings press release and the Redwood review, which is available on our website, redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, August 3, 2017. 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 website 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 second quarter 2017 earnings call. Joining me on the call is Chris Abate, Redwood's President and CFO. Following my remarks on our key financial metrics and accomplishments for the second quarter, Chris will discuss the quarter's investment and residential mortgage banking activities and in detail our financial results. The second quarter was another productive one for Redwood. We put more capital to work, completed our fourth securitization of the year and our fifth early in the third quarter, repurchased some of our convertible debt at attractive levels and built additional momentum for our Redwood Choice loan program. We anticipated moving towards completing our first Choice securitization sometime late in the third quarter, possibly early in the fourth quarter. In terms of our quarterly financial results, our GAAP book value increased to $15.29 at June 30 from $15.13 at March 31. Our GAAP earnings per share were $0.43, consistent with the first quarter and our non-GAAP core earnings per share were $0.35 versus $0.36 for the first quarter. Overall, we say that second quarter looked a lot like the first quarter, especially in terms of market conditions. Investor confidence remains bullish, volatility was subdued, credit spreads continue to tighten and asset prices continue to climb to new highs. And all this in spite of ongoing drama down in DC, heightened geopolitical risks, and the tepid pace of economic growth, and tightening action and talk by the Fed. Against this backdrop, we feel good that we aggressively added to our investment portfolio earlier in the year and also the tighter spreads to benefit the execution on our recent Sequoia securitization program. Through July, we have securitized almost $2 billion of loans, almost double our volume in 2016. Others in the marketplace have taken…

Thanks, Marty, and good afternoon, everyone. I'd like to start up as usual with our recent investment activity. We deployed $78 million of capital into new investments in the second quarter, and $236 million year-to-date. Despite competitive asset pricing, we continue to find pockets of attractive opportunities, including investments in Sequoia and third party RMBS, as well as residential CRT and agency multifamily securities. We also sold $72 million of securities and substantially all of our remaining conforming MSRs during the second quarter, bringing our $79 million of capital for investment after repayment of the associated debt. Our capital available for investments is roughly $180 million at June 30. And we can potentially source additional capital redeployment as needed through the continued optimization of our investment portfolio. For the second quarter this included selling our conforming MSRs, financing our multifamily securities, which are previously held with equity and selling certain securities where the current market yield was lower cost of capital as a result of a very favorable pricing environment. Overall, we were pleased with the performance of our investment portfolio during the second quarter, portfolio net interest income increased driven by capital deployment in first half of the year. And the underlying credit performance of our investments remained very strong. Our investment portfolio represented $1.6 billion or about 90% of our $1.8 billion of total capital at June 30. The remaining 10% was allocated to residential mortgage banking, which had a strong first half of 2017. Our expanded prime Redwood Choice loan program continues to represent the most significant area of growth for our conduit. The second quarter lock volume for Choice loans increased almost 30% from the first quarter and accounted for about 20% of our total loan purchase volume in the second quarter. Rates in Choice loans…

Thank you. [Operator Instructions] Our first question comes from Steve DeLaney with JMP Securities.

Thanks, everyone. I appreciate you taking the question. Guys, I'm sure you probably noticed, you've been around in this business a long time as I have. And we have had more capital raising done by mortgage REITs in the first half of this year than I think we've had since 2011, 12 follow-ons, $2.9 billion. As I hear you speak about your business, I come away with two observations. One, you have ample dry powder of $180 million. And that your biggest challenge with the credit spread tightening is to find a place to put the $180 million, not another amount of money that you might want to raise. I'm just curious, your thoughts, Marty, you're saying you think we're at the extreme tights and, I guess, what I'm - I like your thoughts on, you've been around the industry a long time. This capital being deployed, whether it's in commercial, whether it's in agency MBS, it doesn't sound like that something that Redwood Trust would - you don't view the market as one in which to double down on. I think it's where I'm going.

Okay. There are a couple of parts to it. I mean, one thing when we think about capital, you're right. One of the first things is what are the opportunities? But the second thing we need to ultimately balance with is the convert that we have coming due in April next year, which is the principal amount of $250 million. That would be one consideration that we would have. And the second would be what we would need to do business. But at the moment you're correct, we have capital.

Yeah, I would also add, Steve. We've invested about $274 million year to date. We've also had some sales. We sold just over $100 million. So from an investment pace, we're still on track to deploy our excess capital. So from that perspective, we continue to do long-term planning for capital. And as Marty said, we got to remain conscious of these upcoming maturities.

[Multiple Speakers] we had, Steve…

Sure, and I would not - yes, sir. Go ahead.

Another consideration is if we were able to complete a Choice securitization later on, the amount of capital that we would use towards those securitizations from an investment standpoint would be a lot higher than it would be for our normal Sequoia.

Got it. Yeah, now, definitely, I would think the - dealing with the debt maturity is an entirely different strategy with capital or for capital, a more appropriate use for capital than possibly just chasing the market if you will is where kind of I was going, because I clearly heard you guys say that other than your own securitization program. And obviously hopefully Choice has an even higher return profile than Select. You don't see a lot of CUSIP stuff to buy in the market that has attractive returns it would seem, so I appreciate your…

It could be third party securitizations that we could participate. But in terms, you're right, in terms of legacy CUSIPs there is a melting ice-cube.

Yeah, that's what we're hearing broadly. I'm curious, one part of your program, your jumbo program and your relationship with Chicago was the MPF Direct and I was wondering if you could just give a brief update on that, how that's working.

It's been pretty consistent. It's been growing, but the numbers, I think Choice has significantly eclipsed our expectations and most of our focus has shifted there. It continues to be a good program. We've got a number of MPF sellers. And it also I think to us presents good optionality based on the direction of rates in the housing market. But for now, I would say most of our efforts are focused towards Choice.

So that program only uses Select. Is that what you're implying?

Currently, but really it has more to do with the base of participants that are members of the system and what their sources of liquidity are, so obviously large banks are very competitive.

Got it.

And I think ultimately it's going to potentially be more meaningful as rates shift.

How many correspondents do you have using Choice at this point roughly?

Almost all, I think 90% or so have kind of rolled it out and I think 75% or so have actually locked a loan.

Then you have, what, two - you have about 200?

I think it's 185.

185 correspondents, okay.

So close to a 150 or so has actually been producing.

Great. Okay. And just one final, just to touch on the whole litigation big picture and I'll drop off. But this kind of started, Marty, with the Pimco/BlackRock lawsuits. And now, it's getting into a game, right? And, all right, this is - I'm sure Wells had - basically isn't very happy, but the lawsuits, they said, here is what I'll do and then of course they get to - sued after, they hit the holdback. I guess, what I'm saying is a trustee has a certain role and you guys have written whitepapers about how this private RMBS market should really work. Do you really think that we go through the credit crisis? Do you think there actually can be liability for a trustee for the performance of the loans and a pull [ph]? So should - I guess, I'm saying, should trustees be sued for in the manner in which the trustees were sued in the first place, if you're comfortable sharing any opinion on that?

Well, Steve, I think we want to avoid a piding [ph] on any ongoing litigation, especially if we're not a direct part of it. But, our frustration with this trustee matters is pretty evident at this point. We've seen these types of things happen in the past, but obviously in much smaller amounts, nothing remotely close to the $90 million of losses that just got pushed through the system last month. It's just unfortunate, because we have great relationships throughout the industry, especially with our banking partners at Wells, presumably operate completely independent of the trustee division. They've done a tremendous job as our lead underwriter for all our recent Sequoias. So I just say it's unfortunate, but we are where we are. We've now taken some highly questionable shortfalls. So we're forced into a position here, where we need to closely monitor the situation and ultimately protect our interests. I should probably add, we have reviewed our investment portfolio and taken steps to try and avoid any additional pain for from these types of holdbacks. We took some steps in July, but regardless we're frustrated, not just for us, but for other markets participants given our role as you've noted. We've been kind of add this for the last eight years trying to reinvigorate and reform the market it's been a core part of our strategy as you know. I guess, the good news just the follow on Marty said, as we do feel really good that the structural enhancements we put into our 2.0 deals as well as the credit quality should preclude this type of holdback hopefully from even happening in the first place. I know, we can wrote about in the review and for now we'll just have to continue updating and educating new issue investors, and I hope for a quick resolution to this legacy litigation issues.

Thanks, guys, for your time and the comments. I appreciate it.

Thanks, Steve.

We take our next question from Bose George with KBW.

Thanks. This is Eric Hagen on for Bose. I appreciate the Wells disclosure that was really helpful. Do you have an early read on the return on securitizing the Redwood Choice versus Redwood Select, specifically the returns from holding the residual? Thanks.

It's hard, especially since we've been completed our first deal, obviously, we said we intend to hope to in the second half of the year. Generally speaking, we expect this coordination levels to be around 2 times credit enhancement or so. So from that perspective we expect to need your investment. And then when you factoring that there is additional 1 to 1.5 points or so of coupon on the collateral. That should be good for something at least few points higher on the subs. So I would say it's hard to give specifics at this point until we complete a deal, and see where spreads fall out, but we certainly think the return profile will be quite a bit better than our Select program.

Got it. There is a coordination that's helpful information. Is there - second question here, is the home price depreciation that you are seeing in some of the postal markets, a source concern for you guys, and are you doing anything that's different from an underwriting perspective than any other markets as a result of that? Thanks.

No, I mean, our underwriting and due diligence has been pretty significant since we kind of help through start this market. So I think from a due diligence perspective we continue to focus on appraisals and focus on borrow profiles and characteristics. We pay close attention to HPA. But at this point, again just given where affordability is given our rates are given the fact that you see savings rates and FICOs where they're at. We feel pretty good about the credit environment certainly right now and for the foreseeable future.

Yes. That's very helpful. Thank you, guys. I appreciate it.

Thanks.

[Operator Instructions] We'll go next to Brock Vandervliet with UBS.

Thanks for taking my question. You covered a lot of it on Choice already, I was just curious what some of your correspondence are kind of informing you in terms of the who else maybe out there in the market is still a leading edge pioneer product, or are you beginning to see others give this a harder look?

Hey, Brock, welcome back.

Thank you.

We - I still think we feel good about our position in the market, I think, when we talked about in the past was differentiated us is the sort of breadth of the rollout. And we certainly see in certain areas and for certain products, some competition, but I wouldn't say it's significantly increase. I think what we've been trying to do is really bolt-on to some of the existing relationships and really focused on educating loan officers on the product. And then really targeting purchase borrowers. So our purchase mix continues to be two-thirds or so plus purchase. And so I think given that we really - we are hopefully getting our hooks in here and getting some traction with the solid base.

Got it. And anything, the share of your total origination is already at - I think what you had already talked about in terms of your goal of 20% or so. Any sense of where this could go or really too early until you crank out your first securitization and get for the down the road?

Yes, I mean, well, we are really excited about is the percentage gains, so 20% to 30% gains in volume - quarter is pretty significant from our perspective, which is why I replaced a lot of energy here. I think we plan at this point to maintain this range of run rate, which is why we feel good about rolling out of securitization program at this point. But really the focus internally, we believe the Choice - best leverages are credit competencies, and the in-house service oriented platform that we have. So we certainly think we can do a lot more. At this point, I don't think, we really updated our guidance other than to say, we still feel very good about the - $5 billion to $6 billion of total production, we hope to do in 2017 - 15% to 20% that would be Choice.

Great. Okay. Thank you.

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