Good afternoon, and welcome to the Redwood Trust Incorporated Fourth Quarter 2019 Financial Results Conference Call. [Operator instructions] Today’s conference is being recorded. I’ll now turn the call over to Lisa Hartman, Redwood’s Senior Vice President and Head of Investor Relations for opening remarks and introductions. Please go ahead.

Thank you, Shakshi. Hello, everyone and thank you for participating in Redwood’s fourth quarter 2019 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 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. A reconciliation between GAAP and non-GAAP financial measures is provided in both our fourth quarter earnings press release and Redwood review and also 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 the company’s website later today. I will now turn the call over to Chris for opening remarks and introductions.

Thank you, Lisa. Good afternoon, everyone. Fourth quarter of 2019 marks a strong and to historic year Redwood. We made significant progress towards our vision by executing on our strategic initiatives to expand our reach across all major throughways housing finance. We also scaled our platform to grow profitably and turbocharged our investing activity. Our hard work is beginning to pay off as shown through our fourth quarter financial results where we delivered solid earnings, sustained momentum across our business lines. To recap, GAAP and non-GAAP core earnings were $0.38 and $0.45 per share respectively for the fourth quarter. We ended the full year with GAAP earnings of $1.46 per share and core earnings of $1.58 per share, resulting in a core ROE for 2019 of 11.6%. Earnings benefited from a healthy balance of investment returns and income from mortgage banking operations. And we made $1.1 billion of investments that we believe will help us deliver increased returns to our shareholders in the coming quarters and years. Additionally, our earnings for the full year benefited from our strategic portfolio optimization activities as we netted gains from sales of lower yielding assets, freed up capital for new investments. In recognition of the longer run strategic progress we have made, today we announced a 6.7% increase to our regular quarterly dividend to shareholders the $0.32 per share for the first quarter of 2020. Our ability to raise our dividend despite the market volatility we have experienced over the past year is significant and that it demonstrates the stability of our business model and the durability of our revenue streams. Including today’s dividend raise, we have increased our dividend 14% over the past two years. We remain committed to delivering earnings that can continue to support a growing dividend to our shareholders as…

Thank you, Chris, and good afternoon, everyone. Our fourth quarter results demonstrate the strength of our business model, the diversity of our revenue streams and our ability to react to shifts in the market to take advantage of opportunities to invest capital, where we see the best risk adjusted returns. As Chris discussed, over the past two years, we have substantially expanded our role in housing finance. We now tell operating platforms deeply ingrained in both the consumer and business purpose mortgage loan market. Furthermore, we have meaningfully deepened our presence in the multifamily sector, and as Chris mentioned, we’re exploring additional ways to provide liquidity in this area. This progress has evolved our operating approach and capital allocations in a way we believe will drive shareholder returns for the long term. We now have four business segments for the operational and investing wherewithal to run in a coordinated, but independent fashion and be measured as such. Before I get into our results for the quarter, I want to start by providing a deeper dive into these segments. Our new verticals aligned to how we are running the company and provide better transparency into the value creation of our overall operations. We measure ourselves on the holistic results of these business lines, including earnings from both our operating activities and the financial assets, these activities create. Our residential lending segment is comprised of our residential mortgage banking operations and investments created from these activities, including residential loans financed with the Federal Home Loan Bank and investments retained from our residential whole loans purchase and securitization activities. Our business purpose lending segment includes our origination in investing activities across BPL, for the continued focus on single family rental and single family bridge loans, small-balance multifamily loans, and other related products. Our…

Thanks, Dash and good afternoon, everyone. To summarize our financial results for the fourth quarter, our GAAP earnings were $0.38 per share compared with $0.31 in the third quarter. And core earnings were $0.45 per share compared with $0.37 in the third quarter. Debt position of CoreVest in October contributed strong overall results for the quarter as its origination platform to help drive strong mortgage banking income and capital deployed into business purpose loan investments help drive higher net interest income. Our results were also bolstered by strong performance from our residential mortgage banking platform, which saw increased volume and strong markets during the quarter. Our overall corporate investment portfolio saw improved returns from rotating out of lower yielding third-party CRT and multifamily designated securities into higher yielding assets and business purpose lending. While the majority of our strategic optimization activities were completed during the first nine months of the year. Strong demand for residential mortgage credit continued into the fourth quarter presenting additional opportunities for us to take gains. In the quarter we added $150 million of capital for deployment and captured $23 million of realized gains. These increases in revenues were accompanied with an increase in operating expenses, which beginning this quarter we broke out into two line items; general and administrative expenses and other expenses. Other expenses primarily consist of acquisition related items such as intangible amortization. The increase in overall expenses was from both the incremental operating expenses consolidated from the CoreVest platform and from higher variable compensation costs, which are reflective of our improved full year results. For the full year GAAP earnings were $1.46 per share and core earnings were $1.58 per share. Those are GAAP and core result benefited from higher investment returns in 2019 as we’ve rotated capital in the higher yielding…

[Operator Instructions] The first question is from Stephen Laws of Raymond James. Please go ahead.

Hi, good afternoon and congratulations on a nice close and the year of dividend increase to start 2020. Chris, I guess first obvious with where rates have gone. Can you talk about volumes and expectations this year or how you guys have moved loan pricing kind of given the 50th decline in long-term rates and how you view volumes in the jumbo business this year?

Sure. Thanks for the question Steven and I would say is obviously our volumes are up considerably. They were up in the fourth quarter. They’re up again this far in the first quarter. Rates have a lot to do with that another factor that has a lot to do with it is just share capacity constraints at the money center banks. I think we’re seeing some sun competitors focus more on margins right now than volume. As a result it’s really allowed us to step in and be very competitive. For the time being, I would expect that to continue because rates don’t seem to be showing any sign of slowing down with respect to rallying. So we feel pretty strongly about the trajectory of our residential business. All the same, we’ve got a lot of strategic work to do there this year. We’re going to be investing in technology and positioning the firm to be able to look a lot more like an agency execution with respect to the private sector. So there’s a lot to do there but we see a lot of opportunity in that business going forward.

Great. And saying on the – I guess the jumbo and IQ and business. Can you talk about the QM patch, GSE reform, any updates or changes there from your comments three months ago on the same call? I believe I asked as well, but can you, can you talk about the opportunity there and any insight you have into how you see that playing out as we get close to the – or past the January expiration date of the QM patch?

Yes, good question. We’ve had some developments there. I think the CFPB is committed or is hoping to get something up by May, some proposed rule making. There was an indication by the Director that they’re strongly looking at moving away from DTI as de facto constraining metric, something in favor of a market based metric. We were given assurances that no determination had been made. And I really do think they’re very interested in what the market has to say. I think that when it comes to the change, whatever it is we’ll adapt very quickly. I think the important thing is the focus on leveling the playing field is still very much front and center for not only the CFPB but also the IP HFA. That’s the most important piece for us. It sounds like there could be somewhat of a delay into 2021, but it was reiterated that this, this is going to happen, so we feel very good about that. Overall, as I mentioned in my comments, we’d still like to see a borrower credit metric. That’s really tethered to the specific underwrite. There’s, there’s issues with, with market based metrics. I think they work well in coordination with other factors and we’ll have to wait and see how all of appendix queue potentially changes. But in and of itself we would prefer to see something that continues to link the QM designation to, to the borrower underwrite.

Great. Thanks for those comments, Chris. Dash, I think you mentioned in your prepared remarks $264 million of BPL volume in January and please correct me if I’m wrong. I was writing a lot down and I think that’s pretty consistent with the $750 million of volume in 4Q. Is this kind of a good run rate $3 billion on the BPL volume or how should we think about annual volume in that business line?

Yes, I would say directionally, we would say we expect the business to continue to build on the $2.4 billion cumulatively that the two platforms did last year. The business over the past several years has displayed some positive seasonality effects in December as investors seek to get transactions done before year end. And so that certainly buoyed our December volumes, which obviously drove QPR overall and there was a little bit of benefit from that in January as well. So in general, we remain very optimistic on continuing to build on the $2.4 billion cumulatively we did last year. Largely because we feel like we can go deeper to the existing products, but also as Chris and I both alluded to, are continuing to really see some positive momentum in additional products that compliment sort of the core SFR and bridge production that we see. So that’s what I would say there. I mean from an interest rate perspective, the origination volumes in the space are certainly, at least we’ve seen less sensitive to interest rates, much more driven by other motivations for investors and things of that nature. But for all the reasons we’ve said, we’re very optimistic, continue to grow on last year, but there are some seasonality effects where quarter-by-quarter we’re not necessarily measuring over the long-term measured in years.

Great, thanks. And then lastly at CoreVest, I think for the last two quarters you have deployed about $150 million in capital into new investment. I believe that the review said $260 million available at year end. I would think some has been put to work. But can you talk about your capital needs and it leverage is kind of under the mid point of a target range. I know you’ve got a little bit of portfolio optimization, I guess, that could still be done. But can you talk about capital needs, how you think about that as we look at 2020.

Hey Stephen, this is Collin. I can speak to that real quick. Right now I think we feel like we’re in a pretty good position on capital. We did talk about – we did see the opportunity to optimize some of our assets in the fourth quarter as we continue to see spread tighten. So that did leave us with some capital heading here into the first quarter. So we feel like for the time being we’re in a good place and that gives us a little bit of runway to keep working forward on initiatives we have here in the near-term and we’ll see how things develop over the next months.

Yes. Stephen, I’d also add that, we’ve said in the past, we tried to be very disciplined with our capital raising and our needs. It was that excess capital number we had enough to run the business and deploy on normal course. So obviously there’s been opportunities to raise money over the past few months and that’s a big reason why we have it.

Okay, great. Thanks a lot for the comments and appreciate the opportunity to ask questions.

The next question is from Steve Delaney of JMP Securities. Please go ahead.

Hey, thanks everyone and congrats on the strong start with CoreVest. This week, as you can imagine, the questions we’re getting from investors all have to do with refis and increase expectations for refi volume. I’m just curious for your business, obviously you’re not an agency MBS investor having to deal with the CPR increases. But when you look at your business, how do you feel about – I assume there’s kind of pluses and minuses with refis, right? I mean, you’ve got the origination business, but you’re also an investor. Could you just comment briefly and broadly on sort of how you see the pluses and the minuses on high refi environment working out for Redwood? Thanks.

Sure. I think overall we think it’s a plus. Our residential lending group looking at our volumes and our margins both have been very strong. As I mentioned, there’s some capacity constraints in the system, which has really helped to bolster our volumes recently very opportunistic there. We obviously on the flip side have some investments to manage, we have some ALS and IO style securities. Not too much. We don’t hold a lot of servicing. But those become more difficult to manage. And our home loan bank portfolio becomes more difficult to manage. As you know, that’s predominantly seasoned jumbo loans and a lot of those had sort of inherent price caps with based on their convexity profiles. So the fact that pricing there is necessary but also challenging in these environments. So I do think that there are some pluses and minuses. But the good news for us is we’ve got – I think a fairly diverse revenue stream. And right now the pluses have been outweighing the minuses.

That’s helpful, Chris. Thanks. And just a quick follow-up my last question. You mentioned construction loans, construction/development, obviously with specific property types involved. I’m just curious if you – is that a new team at Redwood that you brought in and logistically kind of like with the resi bridge. How do you handle that logistically from just then inspection, disbursement and all of that?

Yes. The reference to construction was really the effort that’s already embedded in our combined BPL business.

Okay. Got it.

It’s not ground up large multifamily, like maybe you’re referencing, it really is more development and things like that. The majority of what we do that’s pure construction are these built around communities, which we’re seeing more and more of. And CoreVest has been a market leader now for two or three years. The discipline around managing those construction draws and that progress is really analogous to how we would manage any non-fully dispersed loan. We have third-party vendors and internal teams that verify expenditures and progress on the projects. And no additional money goes out the door until there’s at least those two sets of eyes to validate expenditures and actual progress on the ground. And then additionally, particularly with the build around, one of the structural things that we like to use is really sort of a based approach. So if the sponsor has a larger project that they would like to complete, we tend to finance a certain portion of the construction, we’d like to see it stabilized and/or termed out before going on to other parts of the project, which is the healthful way to mitigate larger exposures to larger projects that are in flight. So to your point at a backend logistical analysis that we always do and then on the front end of the structure of alone, there’s ways to manage for the cumulative exposure over time based on the progress of a specific project. But it’s much more driven by the single family build around where we’ve seen a lot of momentum over the past few quarters.

Thanks for that clarity Dash. Appreciate it.

The next question is from Matt Howlett of Nomura. Please go ahead.

Hey guys, congrats. Thanks for taking my question. First, you mentioned in the review that you’re putting business purpose loans on the FHLB line, you’re rolling it out to your correspondence sellers. So just naturally, it seems like an obvious question, but given the ROIs you’re making, this is just going to continue to make a bigger portion of the total capital allocation at the company. Could you kind of go over that and what you’re seeing so far with offering that to your sellers and how that’s looking on the FHLB line.

Sure. So a couple of clarifying things there, Matt. The single family rental loans that we have been putting at the FHLB are more of the five to 10 year product that is consistent with what we’ve been securitizing. We’re looking at other types of analogous products that could fit as well on the flop. But that is largely what we’re doing there. And yes, you’re correct. We have seen an evolution of the loan portfolio at the FHLB. And to Chris’s point, now that we’re as actively involved in BPL as we are – we have the opportunity to frankly originate loans with better convexity profiles, particularly in this interest rate environment than a lot of the jumbo loans that we have. And so the runoff in jumbo loans that we’ve seen at the FHLB has been essentially exclusively replaced with a couple of smaller exceptions with newly originated SFR loans, like the type I was describing. The effort through our Denver operations is a bit more linked to some of the smaller balance where we call, single-property SFR loans that CoreVest produces some of it’s not the preponderance of their production. But we produce a little bit of it through CoreVest and have historically sold that whole loan. And the strategy there is to really, use our resi lending operation to expand our distribution for that product, a lot of our sellers already making those types of loans and selling them to our competitors. So we’ve been closely coordinated and trying to develop a program to compliment our direct lending effort at CoreVest and essentially be able to accumulate more of those loans more efficiently either for follow-on sale, like we’re doing today or potentially securitization.

Got it. Great. The FHLB, there’s been a request for comment to – I know you guys have sort of this one of the longest access to it, but any thoughts on how it would impact you if they allow everyone to get back in and I’ll say you could renew your membership or possibly increase it?

Yes. The FHFA I think on Monday put out the requests for input. It was 15 pages with four pages of comments. So I think our first knee jerk reaction is, this is a big win. If you recall, this was settled business under the lot regime at the FHFA. And even by way of opening this issue up, it sort of to me indicates that this isn’t settled within the loans of the FHFA. And I think we obviously had been working fairly hard behind the scenes on this. And again, I think what we have is an example of an unlevel playing field. You’ve now got 50% of mortgages being originated through or purchased by non-depository institutions, who do not have access at this point. So I think, treasury started the process by advocating for a modernization of the membership. And I think what the big hurdles had been around a mission and safety and soundness. And I think some of the mission work could be relatively easily done. You should have a strong nexus to the mission of the banks and you should be affiliated with residential lending somehow. So if you’re not, I think that’s probably reason for not having access to membership. On the safety and soundness side, it’s a little bit more complicated just based on how captives and insurance have worked versus banks. Banks have effectively an FDIC backstop, which can be utilized by the home of bank system and the advent of the defaults. That doesn’t currently exist for captives. We actually have a solution that with others has been developed that we think addresses the main thrusts of these safety and soundness concerns. So we do plan on submitting response to the RFI and laying out the solution. I think it’s somewhat established now in Washington. And we’re actually very hopeful at this point that something can be done. And again, at the end of the day, I think along with the QM patch, the spirit is, can we do something safe and sound that level in playing field, with respect to this access to Homeland bank liquidity. So we think that would be a very good thing for us and other investors and the residential housing market.

Well, it’s nice to hear that from you guys. I’ve given you are a leading voice and for the group in Washington. And on that note, on leveling the playing field, if the securitization exit was strong, 4Q said, actually it’s been even a little bit better if I heard you right. And beginning of this year when you look at securitization exit versus agency exit, are you getting volume in – on your jumbo or your choice because loans execution is just superior to that of the GSEs. If GSE fee is higher in certain products, we’re hearing on investor loans and might sure where it is on prime jumbo or choice type product. But are you seeing better execution because that’s why you’re getting flow or do the GSE still have an unfair advantage on a lot of that product? It’s something that I know the regulator has been looking at.

Well, it’s still have an unfair advantage if nothing else by way of the not having to comply with the QM rules and demonstrating borrower’s ability to pay. And also for that matter, the QRM, which involves risk retention. So if Redwood’s were required to hold lifetime risk retention on a choice deal. For instance, we need to price in that cost of capital into every mortgage that we buy. We need to price in the legal exposure to the extent. They’re non-QM loans. So those are definitely still clear advantages that the GSEs have today by way of the QM patch. That’s said, we have been competitive in certain aspects of loans that are GSE eligible. You mentioned investor loans and certainly some higher DTI loans and some other products. That’s been a pretty consistent theme over the past year or so. Some of that has to do with the way the GSEs price those products in relation to other products. So it’s hard to say, what’s sustainable at this point, but I still think that the main driver and what’s really made us more competitive recently. It is just been the rate volatility and how consumers have responded to lower rates.

Right. Well, congrats on excellent results. Thank you.

The next question is from George Bose of KBW. Please go ahead.

Hey, guys. Good afternoon. This is Bose. Actually, first just on CoreVest, the accretion there obviously was very attractive, the $0.08 that you noted, earlier when you did the call at the time of the acquisition, you guys had mentioned that you’d thought they’d be $0.15 to $0.20 of accretion, obviously the run rate seems to be a lot stronger here. So just any thoughts on should we think more in terms of what you guys did this quarter in terms of the accretion from that deal?

Yes, I would think – I would say they’re both a little bit along the lines of – in responding to Steven earlier there, they were probably it was a fantastic quarter for BPL overall and we’re thrilled with that. That said, there were a couple of items in there which are worth mentioning. I mentioned the December seasonality, which certainly drove volumes higher, but because of how our acquisition was structured, we also garnered some P&L from the loans that we acquired as part of the acquisition, which we then securitized. But none of the loans that we – that were originated by CoreVest since we acquired them went into that 2019 transaction, so we did have some incremental revenue from there as well. Q1 has started off very, very strong, but like I said earlier, we’re trying to measure this over the long-term, but for some of those reasons would not draw a line through the $0.08 quarter-to-quarter, but we still are extremely optimistic on the accretive value of the acquisition over time.

Well that makes sense. Thanks. And then actually, Collin had mentioned that the realized gains should be more normalized next year, relative to the levels this year. I mean, it was obviously a reasonably big numbers this year. So is there any way for us to think about what normalized means? I mean, could it be like half the level of this year or any color there?

Yes, Bose, I think gains are always a little bit hard to predict. Just given the nature of how they occur and how we’re always – when we do have sales, those are our optimistic –opportunistic in nature given where the markets at any point in time. I mean, I think we can say directionally we do expect them to be lower. How much lower? We didn’t give a range, I didn’t give a range of my commentary, but I do expect that they probably be meaningfully lower. We do expect that to be replaced to large extent, an increase in income from the net interest income and from our investments as we’ve rotated into the higher yielding investment. So overall, we think about the business, in my commentary I noted, we’re looking to build off the overall ROE that we achieved this year. So we do think even though with lower gains that the rest of the business and how we’re redeploying the capital is going to essentially make up for those loss gains and allow us to be able to build off the overall ROE.

Okay, great. That’s helpful. Thanks. Then I actually just wanted to follow-up on Steve DeLaney’s earlier question, just on rates and sort of the pluses and minuses, just in terms of the book value side of it. Can you just update us on where you think book value is reported today?

Probably it probably down modestly maybe a few cents. You’re just thinking about hedging costs, we retraced a lot of the spread, the spread movements at the beginning of the year. So I think probably the biggest effect on the book has been just movements in interest rates. So I would anticipate a small decline there, but not anything overly material at this point. And I’d also say, as of today, we’re in the most volatile moment that we’ve seen in probably a year from a market perspective. And so if there was any – ever a time where the rest of the quarter could be more impactful than the first part, it’s probably the first quarter of this year. So I think we’ll have to pay attention to what happens with the coronavirus and the macro outlook. And perhaps at our Investor Day we may have a better, a more – a better response that’s more indicative of the full quarter.

Okay. Thanks. And Collin, let me just throw in one more and I just wanted to touch on the comments you made on the multifamily segment, potential ways you might increase your role there. And then I think you referred to some of changes made by the FHF there. Can you just elaborate that on that a little?

Sure. Bose, its Dash. Yes, recently last year, the caps within which Fannie and Freddie operate were restructured a bit as you may know. Most importantly, they now include selectively all the products that the GSEs do and including affordable and sort of mission rich products, which have to be at least 37.5% of total production. So we have a very, very close relationship with the GSEs, particularly with Freddie Mac and multifamily and we are intending to deepen that relationship. And really what we’re saying is, if there are opportunities in the market to provide liquidity and alternative liquidity source that sort of compliments how the GSEs may run their business going forward. Given how large the multifamily market is, this is a market that’s approaching $400 billion in production per annum. There’s a lot of opportunity there to be an adjacent player frankly, depending on how all that shakes out. So that is a – it’s a little bit early days, like I said in my remarks, we look forward to updating folks over time, but when you think about all the competencies we have across Redwood now from a credit structuring and overall operations perspective, this is something we feel is just a natural extension and can compliment and very nicely with the businesses we’re already running.

Yes. Makes sense, thanks a lot guys.

We have reached the end of the question-and-answer session. I will now turn the call over to Chris Abate for closing remarks.

Thank you very much and thank you to everyone who participated on our call today. We appreciate it. And lastly, once again, we’d like to remind you that our Investor Day, one of the great wonders of the world is on March 24th, in New York City. If you are interested in attending please reach out to Lisa Hartman, our Head of Investor Relations via phone or our website. Thank you.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.