Redwood Trust, Inc. (RWT) Q4 2019 Earnings Report, Transcript and Summary

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 we move forward. Reflecting on the brand we built over a quarter century now, Redwood has developed a track record of innovative housing investment programs that address underserved markets with the best long-term growth potential, fueled in part by two acquisitions. 2019 not only enhanced our brand, but also set a new foundation for profitable growth. We are now a leading participant in several distinct areas of housing credit and our consolidated portfolio is evolved to incorporate a diverse mix of residential business purpose and multifamily investments. Areas of the housing market where we see the biggest opportunities for strong returns. We now operate out of four principle locations and our earnings power is squarely driven by organically created investments and associated platforms that produce them. We also post two of the most highly regarded securitization issuance platforms in the entire PLS market. Putting this all together, we are better positioned than ever to serve the public through our corporate mission, which is to help make quality housing accessible to all Americans, whether it’s rented or owned. As we work towards increasing our relevance to the broader housing market, we recently reorganized our business to facilitate continued growth through a more scalable infrastructure. This will allow us to better manage the ever evolving opportunities of risks facing our business and to create better visibility into the earnings power of our operating platforms and the investments that create. We now manage our business in four distinct segments or verticals, which align to our strategy and where we believe there is compelling runway to grow and expand in the housing market. These verticals include residential lending, business purpose lending, multifamily investments and third-party residential investments. Our new structure provides for centralized strategic decision making that drives the activities of these verticals. In turn, our businesses can operate end to end in the respective sectors, while benefiting from corporate risk oversight and traditional shared services. Each of our verticals currently operates at a slightly different stage of maturity, creating what we view as a compelling mix of stable earnings generation and future upside. In summary, we believe this profile offers differentiated cash flows and return profiles that will contribute towards robust earnings for our shareholders. I’d like to now turn to the recent economic environment and what it means for our business. First reflecting on 2019, you expected it to be a record year for residential mortgage refinance activity that’s essentially what we got. The federal reserve cap rates low after cutting the 3 times in 2019 and a global trade tensions and signs of economic weakness. Inflation meanwhile remain low and the U.S. consumer balance sheet remains strong, part driven by an increased propensity to say to put downward pressure on benchmark interest rates. As we head deeper into 2020, the markets have once again become gripped with fear as growing concerns over COVID-19, also known as the coronavirus and its potential impact in the global economy now dominate market sentiment. In just the past week, we’ve seen a steep drop in the equity markets along with a 10 year treasury deal hitting all time lows. On a global scale, we’ve got all the ingredients for an interruption and economic activity. Supply chains have already been materially impacted, especially those that rely on Chinese manufacturing. Thus far, at least the impact in the U.S. economy has been negligible. The extended coronavirus outbreak does extend to the U.S. in a material way. We would expect various debt markets to respond differently, at least initially. For example, the corporate bond markets are likely to be directly impacted, followed by the CRE markets. While, COVID-19 does raise questions about the risk premiums for residential credit, unlike some past downturns, we would not expect housing or even the consumer to lead the way. The ultimate impact of residential credit would likely depend on the severity and duration of any broad domestic outbreak if it were to occur. Regardless of where things head from here, we continue to run our business on the foundation of a strong risk culture utilizing moderate leverage and disciplined underwriting, enabling us to generate attractive returns through various economic scenarios. Additionally, we would highlight the diversity of our revenue streams, which can help to offset some of the negative economic forces associated with the virus. For instance, the 30-year conforming mortgage rate continues to fall in Redwood benchmarks and as once again three-year lows, not to mention within striking distance of all-time lows. This continues to provide ample fuel for refinance activity for our mortgage banking business and helps to lower consumers’ debt service. Lower rates have also contributed to increased borrower spending power, something that should in theory buoy home purchase demand amongst millennials who are now entering their prime home buying years. But in keeping with the recent trends in housing, buying power is a moot point when there’s nothing to buy. A low rate environment has extended to now a decade-long run in housing, it also masks some worrisome trends that continue to garner our close attention. Most notably, the supply of quality affordable homes in the United States badly lags new household formation. While this imbalance has greatly supported rising home prices, it’s made access to desirable housing more challenging for many, especially low to moderate income families, many of whom are would-be first-time home buyers. An expedient solution making the rounds in Washington is to relax underwriting standards and make it easier to offer loans with lower down payments to borrowers with higher debt to income ratios. While we support expanding homeownership opportunities for all Americans who desire to own their own homes, lowering underwriting standards had disastrous consequences leading up to the 2008 financial crisis and beyond. Additionally, these solutions ignore the fundamental problem with housing, not enough homes. At Redwood, our approach to residential lending remains unchanged. We emphasize purchasing safe, well-structured loans that borrowers can reliably afford. But more importantly, we are championing solutions in our business lines that offer more high quality and accessible housing for consumers. For instance, our business purpose lending initiatives focused not only on stabilized rentals, but also bridge lending. Our homes are renovated, upgraded, and brought up to current building codes before getting resold or rented to consumers. We’re actively expanding the bridge business to include more robust construction/redevelopment opportunities including market leading financing programs for build-to-rent communities, urban infill development and modular home development, to name a few. These strategies all compliment our consumer residential lending business and expand upon our mission. As we look toward the regulatory front. All eyes are now on the FHFA, where it’s new director is focused on taking the GSEs out of conservatorship, reducing their footprint across the housing sector, and leveling the playing field for private capital to participate in a larger part of the market. We see this regulatory shift as a major opportunity for our residential lending business, and the catalyst for us to invest in our platform to support higher levels of growth and profitability. We’re now applying recent technological innovations to reimagine the entire non-agency loan production and distribution work stream. At this time, technology to assist loan sellers in originating conventional loans that can be seamlessly sold exists only in the agency origination space. We want to make it a reality in the private sector. We see an equally compelling runway in our business-purpose lending segment, which is now nearly 30% of our equity allocation. We are now one of the largest originators of business-purpose residential loans, with a platform capable of building on the $2.4 billion of loans originated by CoreVest and 5 Arches in 2019. As I mentioned earlier, we also have the largest and most highly-regarded SFR securitization platform in the housing market, which will help accelerate our strategy to grow profitably and organically generate assets with attractive risk adjusted returns. Our multifamily investing fits squarely within our corporate mission and is quickly emerged as a strategic and complimentary facet of our overall housing finance strategy. Befittingly, we now designate multifamily investing as a core business at Redwood, with over $475 million of capital invested since 2017. We currently originate small-balance multifamily loans both term and bridge in our business-purpose lending segment. However, our capital deployment in traditional multifamily has been almost exclusively done through programs offered by Freddie Mac. To date, we remain one of the few investors in newly issued Freddie Mac multifamily B-pieces that is not also a multifamily operator or direct lender. Given recent changes implemented by the FHFA, we are now exploring ways to expand how we provide liquidity to this rapidly growing market. While we anticipate most of our investing activities to be driven from within our residential, BPL, and multifamily verticals going forward, we continue to dedicate meaningful resources to other third-party investment activities. For over a quarter century, our role as an active investor and liquidity provider has been, and will remain, highly relevant to the mortgage capital markets. Before I hand it over to Dash, I’d like to close by saying, we are proud of the progress we made over the past two years. We will continue to push our platforms ahead towards the next phase of growth. Our strategic priorities for 2020 will be focused on channeling regulatory changes and technological innovations to significantly advance our overall relevance to the housing market. We plan to confront key issues facing housing finance and drive the industry forward with actionable initiatives. We recognize that the needs of consumers have changed, and the allure of a home has as much to do with comfort, proximity to work, and lifestyle as it does with pride of homeownership. As we move forward, we’re committed to generating solid risk-adjusted returns that can sustainably grow our dividends over time for our shareholders. And with that, I’ll hand the call off to Dash.

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 multifamily investment segment includes multifamily securities and loans, we have acquired as well as other multifamily investments source through our various operating partners. And finally, our third-party residential investment segment includes residential investments source predominantly through partnerships and traditional purchases of residential securities issued by others, including re-performing loan securities, CRT securities, and other third-party RMBS. You can find more details about these new segments in the new segment overview and capital allocation detail sections of the Redwood review. Turning to our results, I’m going to start with our business purpose lending segment, which had fantastic quarter highlighted by our acquisition of CoreVest and strong overall performance from CoreVest and 5 Arches. Nearly 30% of our equity capital is now allocated to our BPL business and the segment contributed $24 million of core earnings during the fourth quarter equating to a 23% core return on average equity. We saw significant increase in volume and higher earnings contribution across both mortgage banking activities and our BPL portfolio. Overall, BPL originations in the fourth quarter totaled $750 million, including $457 million from CoreVest and $293 million from 5 Arches. The mix of total BPL originations included $435 million from SFR loans and $315 million from bridge loans. Note that CoreVest origination numbers include only loans originated by the platform, since we closed the acquisition in mid-October of last year. Going forward, we will be reporting one BPL origination number overall, in keeping with our progress and unifying the platforms into one cohesive operation. I’ll provide more detail on these efforts in a moment. On a standalone basis, CoreVest contributed $21 million of core earnings and slightly less than one full quarter of operations as part of Redwood. We estimate CoreVest is being $0.08 accretive in earnings per diluted share for the fourth quarter. The appendix of the Redwood review contains more detailed information on CoreVest fourth quarter performance. In addition to robust origination volumes, strong execution in November on Redwoods’ first SFR securitization and CoreVest tenth overall was an earnings driver for the segment. At $395 million, the transaction was the largest securitization for the capital shelf in its five year history and was met by strong investor demand. The securitization closed less than 30 days following the completion of the acquisition representing an important early win. We have achieved other key milestones as well. Notably the recent restructuring of our BPL warehouse facilities, including those utilized by both CoreVest and 5 Arches, which should have a meaningful benefit to net interest income going forward. Furthermore, the first quarter of BPL is already off to a strong start. In January, the segment originated $264 million of loans. We also made further progress on financing the business, recently closing a long-term secured debt transaction totaling $104 million in borrowing. The transaction generated $24 million of proceeds above amounts used to repay repo borrowings previously encumbering these assets. The new debt is collateralized by most of our retained subordinate and interest only SFR securities and is similar to a transaction that we completed in the third quarter for a large portion of our Sequoia subordinated securities. The debt is now marked-to-market with a fixed interest rate of 4.21% for the first three years. Continued product development remains a hallmark of our BPL strategy. In addition to our core SFR and bridge line offerings, we continue to grow and develop other products that support related housing investment activities, including build-to-rent financing. And as Chris mentioned, loans that support modular home development. We’ve begun the process of combining the 5 Arches and CoreVest platforms under a unified leadership structure, combining the substantial talent from both businesses to position for profitable future growth. Once fully integrated, we believe no competing platform will possess the same breadth of financing products and depth of expertise to deliver all inclusive and customized solutions to residential real estate investors. A unified platform will also allow us to apply our technology advantage to a full suite of products and in the process remove redundant external costs and the day-to-day operation of the business. Moving on to our other operating segments, residential lending delivered $20 million of core earnings in the fourth quarter or meaningfully higher locked volumes versus the third quarter and improved securitization execution. During the fourth quarter, benchmark rates remain relatively low and were stable versus the third quarter, a boon to our production volumes and securitization execution. We had a record quarter of loan purchase commitment volumes of $2.4 billion up 42% from the third quarter. Cumulatively for the quarter, our purchases were comprised of 62% Select and 38% Choice. Volumes overall were supported by the purchase of a season book pool of jumbo loans which we subsequently securitized in our first Sequoia securitization in 2020. In the spirit of celebrating milestones, it is worth noting that during the fourth quarter our cumulative Choice purchases exceeded $6 billion since inception of the program in early 2016. The diversity of our distribution channels between whole loan and securitization continues to benefit our results. We are seeing increased demand from whole loan buyers for both Select and Choice production. During the quarter we sold $843 million of Select whole loans to third-parties, completed two Select securitizations totaling $776 million and sold $581 million of Choice whole loans to third-parties. We saw improved securitization execution in the quarter as elevated investor concerns over prepayment risk we saw in the third quarter subsided, resulting in fourth quarter gross margins in line with our long-term target range. This momentum has continued into the first quarter of 2020 with year-to-date, loan purchase commitment volumes totaling $1.8 billion. We have completed two Sequoia’s securitizations year-to-date as slightly better all-in execution versus our last transaction 2019 and continue to sell more whole loan pools into a strengthening bid for mortgage credit. While the current target of interest rates is likely to produce a near-term hit to our purchase volumes, we remain focused on evolving our residential lending business to be operationally responsive to a larger and sustained opportunity to grow our footprint, whether through exploration of the QM patch or other regulatory changes. As Chris noted, this strategy centers around technological advancements designed to enable increased scale and efficiency of our platform. Most importantly, by reducing the time it takes to purchase loans from our origination partners. We plan to transform our correspondent loan acquisition platform to be more component-based, allowing us to implement the best technologies as they become available rather than through the all-or-none systems that remain the standard in the industry today. Our multifamily strategy continues to evolve as well, as Chris previously mentioned, multifamily is emerging as an increasingly key facet of our housing finance strategy. Over the past year, we have strengthened our strategic partnerships and expanded our access to rental housing credit. These activities included new investments in multifamily pieces and joint venture participation in a whole loan fund that purchases short-term floating rate, light renovation, multifamily loans from Freddie Mac. In the fourth quarter we deployed $11 million into our first new issue Freddie Mac, multifamily BPs and in January the first $500 million of loans in our joint venture fund were securitized, creating $36 million of subordinate securities for our balance sheet. Pricing on the securitization was tighter than our initially modeled expectations, while much of the sector remains efficiently financed through activities of the GSEs, we believe originators will increasingly value alternative outlets for loan products that fall slightly outside the GSE credit box. There may also be an opportunity to show the GSEs focus change due to mandate/scoring changes from the FHFA and a potential exit from conservatorship. Under leadership resources already on our platform, we are hard at work on this initiative which we view as a natural extension of our last several years of involvement in this market. We look forward to keeping our stakeholders apprised of our progress. Capital allocation to third-party investments was reduced slightly from the third quarter, driven largely by continued disposition of agency CRT bonds and other third-party securities as part of our portfolio optimization activities. Securities in this segment helped drive our increase in book value quarter-on-quarter, highlighted by continued strong performance of the two re-performing loan investments we’ve made with Freddie Mac. The more seasoned of these two investments which we made in late 2018 continues to exceed modeled expectations with the delinquencies have fallen 30% since closing. Albeit with less track record to analyze, our more recent investment is trending slightly ahead of modeled expectations as well. Cumulatively we have $154 million of capital deployed across re-performing loan securities, representing almost half of the capital currently allocated to this segment. With that I will now turn the call over to Collin.

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 investments in multifamily RPM BPL assets including through the CoreVest acquisition. In addition to helping increase investment income on our investment portfolio, increased pace of portfolio optimization during the year resulted in elevated core gain. Our 2019 results also benefited from increased income from business purpose mortgage banking as we ramped up our activity of 5 Arches and further boosted volume for acquisition of CoreVest. And while residential mortgage banking income decreased overall lower margin we ran that business with less capital during 2019, which contributed to better overall ROEs from those operations. Looking for a moment on the composition of our earnings, as I previously mentioned 2019 was a big year for portfolio optimization. As spreads tighten on many of our assets, we are opportunistic in making sales, locking in meaningful gains that grow strong total returns for our investment. The capital from these sales was deployed into higher yielding assets and we expect to see growth in our core net interesting term in 2020 as a result of this process. Looking forward, we expect our pace of sales to normalize beginning in the first quarter and given current conditions to see gains decreased in 2020 as proportion of overall earnings. Additionally, as we continue to deploy our available capital, we expect core investment income to comprise more significant portion of the total return from our investments contributing to greater sustainable earnings, which supports our dividends. Our fourth quarter results contributed to an increase in book value of $0.06 per share and economic return of 2.3% for the quarter. Included in our change in GAAP book value was $0.11 per share associated with acquisition related items. These included $0.08 per share from the one-time impact of equity based purchase consideration for CoreVest; and $0.03 per share of expense rate and tangible amortization associated with both the CoreVest and 5 Arches acquisitions. Excluding these acquisition related items, our non-GAAP book value increased $0.17 per share and our economic return on book value was 3% during the fourth quarter. Chipping to the tax side, our total taxable income increased to $0.66 per share for the fourth quarter, driven by increases in taxable income at both our TRS and REIT. Focusing specifically on REIT taxable income for the full year of 2019 we generated a $1.28 per share, which exceeded our dividends of $1.20 per share. As a result, we expect to utilize approximately $10 billion of our REIT and [indiscernible] for 2019 leaving us $28 million to carry forward. Additionally, for the full year of 2019 we generated $0.27 per share of taxable income at our TRS, which we’re able to retain for reinvestment in our business. Turning to the balance sheet and capital position, during the fourth quarter we deployed $634 million in capital, generated $150 million in capital from sales of low yield insecurity and ended the quarter with $260 million of capital available for our investment. The bulk of our capital deployment during the quarter was driven by the CoreVest acquisition, and as a reminder the total transaction consideration was $492 million net of employees financing. At that note, as appendix of our Redwood review has a section on the CoreVest acquisition that provides additional detail on a purchase price allocation and CoreVest standalone results for the quarter. In addition to the acquisition we deployed an incremental $62 million towards BPL investments, including $41 million in bridge loan investment and $21 million in FFR securities from our CoreVest sponsored securitization, and also deployed $54 million towards third party investment and $21 million towards multifamily investments in [indiscernible] mezzanine securities. As presented in the capital allocation section of a Redwood review, we manage our capital at a corporate level and don’t include it in the equity allocated to our segments until it’s deployed. Our average capital balance remained high during the fourth quarter as we had a significant amount of available capital coming out of the third quarter in anticipation of the CoreVest acquisition as well as the repayment of our $201 billion of exchangeable notes that came due in November Looking at our capital structure holistically, our recourse leverage ratio was 3.1 times at the end of the fourth quarter, increasing slightly from the third quarter. As we deployed capital, including through the CoreVest acquisition. Looking forward, we expect our leverage to increase closer to the midpoint of our three to four times target range as we deploy our excess capital. As we’ve discussed before, our leverage will vary quarter-to-quarter depending on the amount of loans carrying inventory and our balance of available capital. With the growth of our business purpose lending operations this will create some additional variability and while this can create a bit of noise on this metric, we focus most closely on the leverage we employee on our long-term investment. And in that regard our debt structure remains a significant differentiator between us and our peers. To help present this, our Redwood review includes a new leverage section, which detailed out over 60% of our long-term investments or finance with long-term debt with a weighted average remaining term is almost four years. Additionally, a portion of our short-term debt is term financing we used to finance our business purpose version loans, which are themselves short-term in nature. Turning to our 2020 outlook we plan to give a more detailed outlook at our investor day in a few weeks and otherwise be providing commentary on our outlook through our earnings calls going forward. As such we encourage you to listen to our Investor Day or follow the webcast, which will be made available on our webcasts. As Chris discussed earlier, we’re looking to build off our results in 2019 they continue delivering strong risk adjusted returns to our investors in 2020 and beyond. We believe the business is currently positioned to build on 11.6% core ROE we delivered in 2019 with meaningful upside over the long-term as we continue to develop and grow our business purpose lending and multifamily businesses and as a residential living businesses positioned to capitalize on potential GSE reform. Directionally, we expect acquisition and origination volumes to grow at our residential and business purpose lending statement contributing to growth in our mortgage banking income. We believe this grip can occur while maintaining capital allocation to the mortgage banking platforms relatively stable. We will continue to supply our available capital dynamically into investments at our business segments depending on where we see the best risk adjusted returns. As we become fully deployed, we expect our coordinate interesting come to continue increasing and as the pace of portfolio optimization slows, we expect the lower court realized gain. With the addition of CoreVest interrupts our variable compensation for improved results in the fourth quarter our general administrative expenses had a bit of noise in them. Looking forward, we currently expect our quarterly run rate of total consolidated general and administrative expenses to be in the range of $36 million to $38 million. With growth in our mortgage banking businesses we do expect to see some variability in our total operating expenses as long as origination costs including permissions when move in tandem with origination volumes. And with that I will conclude our prepared remarks. Operator, please open the call for Q&A.

[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.