Good afternoon, and welcome to the Redwood Trust Second Quarter 2018 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 question-and-answer session. I will provide you with instructions to enter the question-and-answer 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, Vickie. Good afternoon and thank you for joining us to review Redwood Trust second quarter 2018 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 included to aid investors in further understanding the company's performance and to provide insight into one of the ways that management analyzes 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, Tuesday, August 7, 2018. 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. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer, for opening remarks and introductions.

Thank you and good afternoon everyone. Thank you for participating in Redwood’s second quarter earnings call. Joining me on the call today is Dash Robinson, Redwood’s President; and Collin Cochrane, our CFO. The second quarter marked the official start for newly transitioned management team and my first as CEO. As many of you may recall our high level vision for Redwood’s future growth was actually laid out back in December 2017 when the management transition was first announced. So I would like to start our commentary there, as many of you are likely focused on the longer-term initiatives that are now beginning to define our business. Following our December slide presentation, we expanded on it in January 2018 with an analysis of the secular shifts we see occurring in the housing market. Specifically, we noted an evolving view of consumers towards rentership, the increased prominence of non-bank sellers and the potential funding needs and finally how the recently implemented tax reform legislation could change the calculus of home ownership and accelerate alternative means of real-estate investment. To address these secular shifts, we knew we needed to expand our strategic footprint across the broader housing market with an emphasis on not only lending to traditional home buyers but also lending to housing investors and activity we like to refer to as business purpose lending. We also noted opportunities to address the financing needs of some of our non-bank sellers with an emphasis on strengthening our seller relationships and delivering more value to our partners throughout the mortgage lifecycle. We asserted that if we could successfully broaden our reach and recognize where our capital was most useful to the marketplace that would lead to growing and diversify revenue streams, larger investment opportunities, greater scale and operating leverage and ultimately high quality and…

Thank you, Chris, and good afternoon everyone. I'd like to start off with our jumbo mortgage banking activity for the quarter. Despite more challenging conditions relative to the first quarter, we successfully completed four Sequoia securitizations on loans totaling over $1.7 billion and increased our purchase volume to approximately $2 billion, up 8% from the prior quarter and 60% from the second quarter of 2017. These growth metrics underscore the overall trajectory of our mortgage banking business and further validate the benefits of channel diversification through efforts such as Redwood Choice. Through the end of the second quarter, our purchase total for 2018 was $3.75 billion on track to meet our full-year volume guidance of $7 billion to $8 billion. Overall, mortgage banking generated margins that were within our long-term expected range of 75 basis points to 100 basis points versus the outsized margins we realized in the first quarter. The uptick in rates as it often does has caused originators to assess near-term operational capacity and margin requirements given changes and their production mix. Additionally and as expected based on pricing dynamics we saw earlier in the year jumbo RMBS issuance in the second quarter increase causing spreads to soften somewhat heading into quarter end. Notably, we have recently seen spreads begin to firm and retrace some of this widening. The nature of our pipeline in the second quarter reflected the overall market trend of heavier purchase money volume, 73% of our volume represented purchase money transactions versus 63% in the first quarter and 64% for full year of 2017. In our view, the current environment reaffirms the value of product diversity that we bring to our sellers, most notably Redwood Choice. This channel remains a significant area of growth for us with Choice loans accounting for approximately 33%…

Thanks, Dash, and good afternoon everyone. To summarize our financial results for the second quarter, our GAAP earnings were $0.38 per share compared with $0.50 in the first quarter and core earnings were $0.41 per share compared with $0.60 in the first quarter. Our second quarter results reflects lower mortgage banking income with gross margins within our long-term expected range after outperformance in the first quarter. Additionally, we experienced a decrease in gains realized from security sales relative to the first quarter as the pace of our portfolio optimization moderated. Our GAAP book value increased $0.11 to $16.23 per share at June 30, which with our new quarterly dividend rate of $0.30 per share generated a total economic return of 2.5% for the quarter. Our solid earnings and an increase in the value of the Derivatives and Hedging, our long-term debt primarily contributed to this increase. As we've noted previously, our investment in hedging strategy makes our portfolio less sensitive to changes in interest rates and our book value was minimally impacted by rising rates during the quarter. On a hedge adjusted basis, we saw a slight overall benefit from fair value changes during the second quarter driven mostly by modest improvements in CRT and multifamily spreads. Net interest income for our investment portfolio decreased slightly from the first quarter due to higher interest expense though this decrease was more than offset by benefit of $3 million and reduced net swap interest expense on our associated hedges, which is included in our investment fair value changes line item. On a combined basis, net interest income and net swap interest expense increased by $3 million from the first quarter representing the benefit from increased capital deployment and higher yields from recent portfolio optimization. Shifting to the taxable side for a moment,…

Thank you. [Operator Instructions] We’ll go first to Vik Agrawal with Compass Point.

Hi, good afternoon and thanks for taking my question. I want to start with maybe a little bit on the competitive environment. When do you think the – how are you kind of thinking about the excess capacity in the system? And how long do you think that could potentially take to come out? And then does that mean that we could potentially expect your gain on sale to be slightly higher than your long-term averages at that point?

Hey, Vik, welcome back.

Thanks.

As far as capacity goes, it's something that I'm sure most on this call have heard about at this point there is excess capacity out there. I don't think the second quarter was going to be the quarter for rationalization. It includes the spring selling season and historically from a seasonal perspective it's a very busy quarter. So you could see this continue for a period of time perhaps later in the fall or in the fourth quarter we'll start to see some rationalization, but we think it needs to occur. It's a cyclical business. This happens routinely in the mortgage business. The key to us is our positioning number one and number two our balance sheet. As you know, Redwood has a very strong balance sheet and just given the niche products and the specialty aspect of what we do. We feel like we'll be able to take advantage of some rationalization. From a margin perspective, we always hope to provide any guidance outside of our long-term expectations. We had significant margins in the first quarter and we caution then against drawing a line through them. We think that spreads have compressed certainly in the past few months, but we'd also caution against drawing a line through those. I think in the long run once capacity is corrected that 75 basis points to 100 basis points is where we expect to make money in the business.

Okay, thanks. And I think my next question is to come up on few times or have been discussed a couple of times. But now we have potentially the FHFA director term expiring in January. Any potential thoughts there in terms of private capital risk sharing or is it’s still a little early to have that discussion?

It’s still a little early certainly because the successor to Mel Watt if there is one in January is TBD. We do think it has the potential for meaningful positive benefits to the private market certainly with respect to GSE reform, but also with a potential to revisit our home loan bank membership status, which is also something we’re very focused on in Washington these days.

Then lastly, I think you mentioned that you have deployed – you’re about to deploy $50 million in capital for 5 Arches production. How should we think about that for the remainder of the year or is that the allocation for remainder of the year at this point?

Hey, Vik. It’s Dash. I will take that one. I would think about the 5 Arches capital deployment in a couple of different pieces. The $50 million that Chris talked to during the prepared remarks is in the shorter term, more rehab and resale or fixed and flip product. And so we put some capital to work earlier this month and also concurrently entered into a flow purchase agreement to purchase a portion of that particular type of production from 5 Arches. So we expect that that capital deployments at least for now to be maintained at that level. Separately and what we've been working on for quite some time as you know is the single family rental piece and we've started to deploy capital there. And like we've said, our hope is by the end of the year we’ll be purchasing those loans at sort of a $50 million to $60 million a month clip. We’ll have leverage on top of that, so that won't be our monthly capital deployment by the end of the year, but that gives you a sense of how we hope that the pipeline to scale over time. So as I said we have a pipeline building. We've purchased our first couple of single family rental loans and by the end of the year that's the clip which we hope to be deploying monthly into that asset class. So it's the sum of those two parts when you think about the 5 Arches partnership.

Okay, Thanks for answering it.

We’ll go next to Steve Delaney with JMP Securities.

Hey, good evening everybody. Thanks for taking the question. I wanted to ask about the excess of core over GAAP. We don't usually see that. And Collin, I guess, I’ll address this to you. The phrase in that sentences, gains realized versus let’s say trading securities. It's just simply a situation where in prior periods you had unrealized gains that were in GAAP and now that those securities have actually been sold. You are simply converting that unrealized gain to a realized gain and including that in your core.

Yeah, you have that right.

Okay.

So the trading securities – we do mark them to market through the P&L, so they go through GAAP earnings, but we back those marks out to get to core earnings. And so when we ultimately sell those trading securities and realize those gains at that point in time we take the benefit through core. So that's what you're seeing there.

Got it. So and of course on trading – I am sorry. Go ahead, Dash or Chris.

That was me. I was just confirming. The gain on – the realized gain on the trading securities.

Okay, great. And the trading securities that's fair value marked through the income statement versus OCI anyway I assume. But exactly what type of securities do you classify as trading?

At this point about three quarters of our portfolio is classified as trading – a long time ago a lot of our portfolio was available for sale, but now predominantly most of our securities are trading some of our first-class credit pieces that we retain through our Sequoias or it’s available for sale. And then some of our legacy securities that we still have back from [indiscernible] year ago are still under the AFS transformation.

Okay, thanks. Dash, I guess, this is for you. On the customized warehouse program, I think, you first mentioned that on your last call, but it's now effective $40 million. Can you talk a little bit about we obviously – we know what warehouse plans are, everybody needs some. What is the unique thing that these non-bank correspondents? What is it that they need that you're providing that stealing a hole in the marketplace?

Sure, thanks for the question, Steve. At a high level the notion of that strategy is broader than specifically warehouse lines. The idea is to work with our sellers and our balance sheet provide more sort of rifle shock customized working capital needs that can help them run their business more efficiently. One example of that is the warehouse structure where we are effectively adding on a couple of points of additional leverage on top of an existing bank's warehouse line.

Okay.

And the economic effect that that has is allowing these sellers to recycle their capital more efficiently. It's a little bit of the economic equivalent of us buying the loans sooner, but preserving a security package that we think is compelling including leveraging the operation aspect as well as having crossed lateralization with the loans and of course recourse in the warehouse structure to the borrower. So we're not building a warehouse business. We're leveraging our partnerships to provide that sort of working capital.

Okay, got it. That’s it. Go ahead, Chris.

On that piece that I would add is that the real initiative is how do we deliver more value to our sellers.

Right.

And financing is one aspect, product is another aspect, time to close, time to fund. We think about all these things and ultimately we feel like if we're more engaged better partner, it's going to result in good things for Redwood. And another nuance here is because we have a vast network and because we already do so much work on the counterparty risk front, we're able to do these things relatively efficiently. This is not necessarily the type of business activity that we would jump into without the network that we have. But with years of experience with these sellers understanding their financials and the associated risks and sitting across the table from the management teams, we’ve been able to get comfort launching this type of initiative.

What's the – it's the lifeblood of your business. I mean your alternative is to try to go out and build your own national origination platform and those situations kind of end badly a lot of times, right. I mean so – this is a way of being more of a strategic financial partner rather than adding new stores and all the bricks and mortar et cetera. So it sounds like – look you're adding the add-on to the warehouse advance. You're simply prefunding some. You’re going to buy the loan anyway, right. So you’re going to pay 100% of the dollar, so if you just tack on a little bit beyond what the bank is comfortable advancing that's all going to settle out when you take the loan in. But it sounds like the strategic part of this is that you are actually sitting down and looking at their businesses and being a – more of a like a senior term lender to them – to their business if you will as opposed to just financing the warehouse line. Am I reading that right?

I think that's really the essence of it, Steve. To Chris’ point from partner to partner the nature of the capital deployed will differ. If there is capital deployed, it could be product customization and other ways to just make ourselves more strategically important to our seller. It's all of the above. This is one example of that. Choice is another and all of our product innovation and creative partnership to get the hard loans done and fund more efficiently and reliably than others. All these activities are really in that album in that in that genre. It's all working towards the same goal to your point of deepening the partnership with our sellers and growing the business with them.

I appreciate the comments, all of you thanks.

Thanks.

We’ll go next to Bose George with KBW.

Hey, guys, good afternoon. Can you just talk about a good way to press or think about the timeline for deploying the capital that you guys increase?

Yeah, I mean, I think, at Dash mentioned, we really got off to a strong start here in the beginning of the third quarter with about $140 million already lined up to get deployed. I think as we look forward for the rest of the year, it's hard to exactly pin down a number for Q3 or Q4, but we feel like we’re off to a strong start and a good pace. I think we mentioned in the review, it will take some time to get that that capital out the door. So we mentioned there could be some slight dilution in the very near-term as that gets out, but if we can keep this pace up that that we're seeing early on here, we could get that out here potentially by the end of the year. And there is just a lot of variables there to consider.

Bose, this is Dash. One thing I would add – what’s nice about the deployment the quarter to date is that it has been chunky. It's been more structured transactions that where we've leveraged our partnerships and our structuring creativity to source assets that we feel like others can easily replicate. And so we're thrilled with the $140 million, but we're also thrilled with the composition of the $140 million because it’s unique and that will obviously help us to build towards deploying this capital more efficiently and quickly in addition to our regular investing activities. So it’s the number but also it’s the composition of the investment that we’re excited about.

Okay, great. Thanks. That makes sense. And then actually just in terms of leverage on the new asset classes that you’re in is it going to look sort of similar? Will the rent leverage sort of end up being roughly the similar – similar as once your capital is fully deployed?

Just to clarify you’re speaking specifically to the business purpose loan products.

Yeah the business purpose loan, yeah single family all that stuff, yeah.

Yeah, the leverage I think will be a little bit lower if you look at how we’ll finance those loans on warehouse lines. The haircut will be a little bit fatter than how we run our jumbo business currently. And then of course when we securitize one of the things that's appealing about it particularly for single family rental is that the amount of the capital structure will take back. We expect to be larger than both our Select and Choice programs. Choice we've talked about before is typically 3 to 4 x select and we expect the single family rental deployment to be an excess of Choice. So they’re newer asset classes. Leverage is certainly available, but it will be less leveraged slightly than how we typically aggregate and then securitize our jumbo loans.

Okay, thanks. And then actually just any updated thoughts on the multi-family – the Freddie Mac multifamily program whether you wanted to do more there in the BP side?

Yeah and that continues to be a strategic priority for us. We have deployed a lot of human resources towards that effort and an increasing amount of capital. So that's definitely front and center for us, we're optimistic about the supply in the second half of the year and I would expect us to be increasingly active in that market.

Okay, great thanks.

There are no further questions at this time. I would now like to turn the call back to Chris Abate for closing remarks.

Okay, we very much appreciate you taking the time today to participate on the earnings call. We feel confident about our Redwood’s position in the market and remain bullish on our prospects for the future. Thank you very much.

That does conclude today’s conference. We thank you for your participation.