Redwood Trust, Inc. (RWT) Q1 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Redwood Trust, Inc. First Quarter 2020 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Augusta. Hello, everyone. Thank you for participating in Redwood's First Quarter 2020 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 may 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 our first quarter Redwood review available on our website. 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 open remarks and introductions.

Thank you, Lisa. Good morning, everyone. It's 5 a.m. on the West Coast. We appreciate everybody setting your alarms and taking the call. Redwood entered the first quarter of 2020, building on a strong momentum gained over the past year. Our January and February, were filled with optimism and opportunities for growth including record monthly loan volumes. Dynamics quickly shifted as the spread of the novel coronavirus accelerated into a global pandemic end of March. Significant dislocation in the financial markets quickly ensued, resulting in one of the fastest market declines in history. In a span of 6 weeks, the U.S. economy has shed over 30 million jobs, more than we experienced during the entire great financial crisis 2007, 2008. More important than the economic impact, we've lost more Americans to COVID-19 than we did from the entire Vietnam war. We expect - we extend our sincerest gratitude to the nurses, doctors, first responders and others who are protecting people's lives and paring out essential functions at substantial risk to themselves. In a great financial crisis, it was a bubble in residential housing and mortgage credit rather than a public health pandemic that led the way. That we've been impacted just as severely in the current crisis and in a small fraction of the time. Despite the overall strong credit quality and underlying performance of our residential and business purpose loan assets, uncertainty related to the pandemic and its impact in the economy through the collapse and liquidity for any sector, not explicitly supported by the federal government. And as we disclosed on April 2, our balance sheet sustained heavy losses as a result. In our April disclosure, we estimated that book value per share at March 31 would be between $7.03 and $7.67, which excluded any potential decline in the value of intangible assets. Actual book value results at March 31 were consistent with this prior estimate. Book value at March 31 was $6.32 per share, but only after giving effect to a $0.78 per share negative impact on the noncash impairment associated with our BPL operating platform. These declines were driven by widespread panic among market participants and the systematic repricing of mortgage-related assets financed by large financial institutions. Importantly, however, nearly 2/3 of the declines in our investments were $5.36 per share were negative mark-to-market adjustments and assets that remain on our balance sheet at quarter end that we generally expect to hold for the long term. While we can't be sure exactly where the economy goes from here, we believe our portfolio is well positioned to recover meaningful value from quarter end levels in the event market technicals subside and our nation gets back to work. Based on our observations of spread tightening in many areas of our investment portfolio since the end of March, we estimate our book value per common share increase by approximately 5% as of April 30. While no playbook existed to manage the sheer speed at which this economic downturn occurred, we took necessary and timely actions to preserve our franchise. With our employees working remotely and with the help of our strongest counterparties, we managed to significantly reposition our balance sheet and boost our liquidity. As a result, at May 6, our unrestricted cash balance was $552 million, and our outstanding secured debt that remains subject to margin calls, primarily loan warehouse facilities used to aggregate residential and business purpose loans, a decline from $4.2 billion at December 31 to approximately $1.1 billion at March 31 on a pro forma basis, with several initiatives well underway that we expect will reduce that even further. One of the actions we took to preserve our liquidity was to delay the payment of our $0.32 per share first quarter dividend, which was originally scheduled to be paid on March 30. While this was a difficult decision to make, we believe that was in Redwood's best interest while we navigated through the onset of this crisis. We are pleased to have recently announced that the first quarter dividend is now scheduled to be paid fully in cash today. Given the current resizing of our balance sheet, we're evaluating our dividends in the second quarter and we'll provide an update in the coming weeks. We've taken and continue to take myriad additional steps to address the various impacts of this pandemic. I'll discuss a few here, and Dash and Collin will walk through more detail shortly. As I alluded to earlier, our priority shifted towards managing our liquidity through an incredibly challenging period for the economy, which included selling assets to free up capital as well as selling assets where we fundamentally believe the return profile is no longer attractive based on our updated projections and the prospect of a severe, imminent recession. During the quarter, we completed the sale of approximately $724 million of securities, which included the sale of most of our multifamily investments in a large portion of subordinate third-party RMBS securities. We also made the decision to sell or refinance our $2.4 billion of assets financed through the FHLB and repay substantially all of our borrowings. As of today, we have reduced our borrowings under this facility from $2 billion in March to $230 million today and expect to pay down nearly all of the line in the near future. Net result of the actions we took in response to the crisis meaningfully reduced the size of our balance sheet. And after thoughtful analysis of the current state of our business, in April, we completed a corresponding reduction in our workforce by approximately 35%. These reductions took place, but we work to be absorbed within the organization and where there were potential redundancies. Our infrastructure and franchise remained strong. We have completely preserved our capability to resume normal business activities once the economy begins to stabilize. As you can imagine, this crisis has inflicted pain across our workforce, our shareholders, our business partners and our friends and families. While it will take time for our industry to recover from the economic fallout caused by the crisis, we are cautiously optimistic at both Redwood and the broader economy can begin to turn the page in the coming days, weeks and months. Meanwhile, we continue to run the business under the continuity plans we implemented on March 16. Substantially, all of our employees are working remotely and we are maintaining our remote working policies to be consistent with actions taken and statements made by requisite state and local government officials. And if applicable state and local guidelines allow our officers to reopen, we will do so only when we are confident that we have the protocols and practices in place to safeguard the health and well-being of our employees. Looking ahead, what do we expect the post-crisis world would look like for Redwood? We can start with what we know. We know that the Fed took lessons learned from the last crisis and quickly moved to support the federally-guaranteed mortgage market and through its agency MBS purchase program has driven agency performing mortgage rates back to record lows. This should become a medium-term positive for the residential mortgage market as it will allow many agency eligible borrowers to refinance their home loans, reduce their monthly payments and free up cash to spend in other pressing household and family needs. And while the private residential lending markets did not receive this type of government support, we expect mortgage rates to reach products to re-correlate with traditional benchmark rates over time. These benchmarks are significantly lower than before the prices began and are expected to continue converging towards 0 until the economy begins to grow again. We also know that traditional sources of funding for mortgage aggregators, namely loan warehouse facilities, would need to be reimagined with the potential for another health crisis in mind. The business of aggregating, structuring and distributing exposure to the mortgage loans is always required financing to accommodate the scale, diversification needs and return thresholds of whole loan and securities investors. In the past, the quality of the assets financed drove the structure and the pricing of these facilities. Going forward, we'll need to assume the prospect of another wave of COVID-19 impacts or another health pandemic, the resulting shutdown of many or most of the significant performance of the U.S. economy and the associated market effects. Working with our lending counterparties to recast our borrowing facilities with these factors in mind as a necessary step to regrowing our loan origination and acquisition volumes. In fact, we've already made meaningful progress replacing marginable warehouse facilities. Since April 30, we closed two new nonmarginal warehouse facilities to provide financing the business purpose loans of residential whole loans previously financed on our marginable facilities. From a product perspective, we continue to believe in housing credit. Reforms undertaken since the great financial crisis, coupled with discipline amongst both originators and investors have created a cohort of high-quality residential and business purpose loan products, which should continue to perform well through this crisis. Substantial improvements exhibited by the private mortgage sector in recent years should accelerate our market's recovery relative to the last crisis. We also believe that the strength of our underwriting and knowledge of the loans we've originated or flowed through our conduits has the potential to differentiate our platform going forward. But there remains significant challenges we must manage before fully turning the page on this crisis. We continue to monitor trends and borrower requested loan forbearance closely as well as the financial health of loan servicers. Unhelpful and rich rhetoric stemming from housing officials in Washington has perpetuated the market panic and diluted otherwise unified efforts in the Federal Reserve, Congress, treasury and other stakeholders to support consumers through this health pandemic. One area that has already been impacted is the home purchase market, where borrowers are experiencing significantly tighter credit terms due to uncertainty amongst lenders and whether there will be reliable liquidity for newly originated loans. But as often said, the biggest challenges can present greatest opportunities. Our franchise remains intact, and our focus will be emerging from this crisis with enhanced business model that is capable of delivering meaningful value to our shareholders while taking into account the likelihood of a prolonged recession and possible resurgence of COVID-19 in the coming months. The posture will remain defensive in how we structure and manage around these significant risks. But we believe we will find the best path forward with competition across our business lines expected to be significantly reduced, the need for our sourcing and structuring capabilities, especially with tighter underwriting criteria at banks will remain strong. That concludes my prepared remarks. I'll now turn the call over to Dash, Redwood's President.

Thank you, Chris, and good morning, everyone. As Chris described earlier, the impact from COVID-19 resulted in record market volatility late in the first quarter, extreme dislocations in the financial markets and seemingly overnight, an evaporation of liquidity. These events substantially impacted our operating results, including a GAAP loss of $8.28 per share. In a moment, I will provide some additional detail on how market conditions impacted our business over the past 6 to 8 weeks. However, I wanted to emphasize early in my remarks the cumulative progress of our recent efforts. As Chris noted, as of May 6, 2020, our unrestricted cash position totaled $552 million, pro forma for pending asset sales and 2 recently completed financing transactions that I will describe in more detail. Our unrestricted cash as a percentage of margin book debt, that is to say, secured debt subject to traditional mark-to-market rights held by the lender, totaled 54%. Our work here is not done, and we expect this ratio to increase over time as we complete whole loan sales that we have entered into an additional financing arrangements currently in process that will further reduce marginable debt. Now for some additional commentary on the markets and our related actions. During the late stages of the first quarter, as overall market volatility spiked, there emerged a substantial technical diversions in mortgage assets, mainly between the government-backed assets that benefited from stimulus efforts and the non-agency sector, which to date has received none. As such, the second half of March witnessed steep declines in non-agency prices, driving significant margin call activity market-wide across securities, repo and whole loan warehouse arrangements. We began positioning for the potential dislocation prior to the substantial spike in volatility by lifting certain of our hedges and building cash. These activities continued throughout March as we identified several opportunities to derisk the balance sheet and build valuable liquidity in the process. Our most significant balance sheet management decision was to begin selling the residential whole loans we had financed in our facility with the Federal Home Loan Bank of Chicago. This decision was taken both due to our portfolio strategy and ongoing revisions to the terms offered by the FHLBC. Since our most recent update on this topic in our 8-K dated April 2, 2020, as Chris noted, we have continued to successfully execute on these dispositions. In preparation for the potential long-term economic impacts of the pandemic, we also began to sell portions of our securities portfolio, including bonds financed with short-term repo debt. Sales of these securities were concentrated mainly in the mezzanine securities for multifamily transactions issued by Freddie Mac and certain subordinate residential securities. Pro forma for these securities sales through April 30, 2020. These disposition activities have reduced our short-term securities repo borrowings to $373 million, down from $1.2 billion at December 31, 2019. Additionally, as we noted in our previous disclosure from early April, we removed substantially all our hedges due to an observed deterioration in correlation between hedge values and asset prices. The cumulative impact of these activities resulted in losses of $3.08 per share during the first quarter on hedges we terminated and assets we either sold during the first quarter or intended to subsequently sell. As such, nearly two-third of our investment losses were $5.36 per share were related to negative investment fair value changes on assets we continue to hold at the end of the first quarter and generally intend to hold for the longer term. While mark-to-market losses impacted essentially all facets of our portfolio, they were particularly acute in the more subordinate securities we own across jumbo, single-family rental and reperforming loan securitizations. This portion of our portfolio has always had embedded accretion value and in most cases, this potential upside is now substantially more pronounced. Market technicals have improved to various degrees across the capital structure since quarter end, driving the estimated GAAP book value increase that Chris alluded to. Our operating platforms got off to a strong start during the first quarter, with both residential and business purpose lending seeing increased volumes from what was generally a robust market for the first 7 to 8 weeks of the year. As markets became dislocated in March, however, profitability was negatively impacted. In our residential lending business, we purchased $2.7 billion of jumbo loans during the first quarter, the majority in the first 60 days. From a distribution perspective, we were fortunate to be in the market early during the first quarter, completing 3 select securitizations in total for $1.6 billion and selling $1.1 billion of select and choice whole loans to third parties. Our first two Sequoia securitizations were priced ahead of the market volatility and saw strong execution, while the third transaction executed at a less advantageous level. Nonetheless, we priced our most recent transaction in advance of the peak volatility and our ability to do so allow us to use proceeds to further retire marginable warehouse debt. Subsequent to completing this third transaction, liquidity in the non-agency loan space, including for prime jumbo, dissipated considerably. Across the market, aggregation of non-agency collateral largely ceased, including by some of the industry's largest buyers. Retail production quickly became subject to stringent credit overlays for borrower credit score and other loan features. Against this backdrop, later in March, we became more selective in our loan purchases, and we have significantly reduced our volumes, focusing efforts to acquire and distribute loans while seeking to minimize market risk. In support of this work, we recently procured a non-mark-to-market warehouse facility that will finance existing loans and portfolio and also provide ample room for new production. Similar to residential lending, our BPL business started the year with substantial momentum. And for the quarter, our platform originated $486 million of SFR and bridge loans. As in residential lending, the vast majority of this activity occurred in January and February. We priced 1 SFR securitization for the quarter in early March, just prior to the onset of increased volatility, with the transaction closing just after many of the shelter-in-place orders have commenced. Subsequently, we began to slow the pace of fundings considerably, in part driven by the fundamental challenges to origination work streams caused by the pandemic, including procurement of appraisals and other related requisites. Earnings in our BPL segment were also impacted by our decision to impair all of the goodwill associated with our acquisitions in 2019. This represented an $89 million charge or $0.78 per share, leaving us at March 31, 2020 with $69 million of intangibles related to these acquisitions. There are many factors, several of them technical, that drive an impairment analysis. And it is important to reinforce the significant strategic value we see in our BPL business going forward, including near-term prospects to continue lending to top-quality sponsors in the market we view as ripe with opportunity. Relatedly, we have made substantial progress in recasting how we finance our BPL activities, including the recent completion of a $500 million non-mark-to-market facility to finance SFR and bridge loans. The facility currently finances a significant portion of our BPL portfolio, but also includes headroom to finance go forward BPL originations, a particularly valuable feature, given what we view as attractive near-term lending opportunities within this market. Additionally, we are currently progressing work on other debt arrangements, including an SFR securitization that, if completed, will provide nonrecourse, non-mark-to-market financing on the substantial remainder of our BPL portfolio. While we believe our recent activities from live have significantly strengthened our balance sheet and ability to withstand further market dislocation, may have also impacted our current mix of investments. Importantly, as we continue to refine the appropriate amount of risk capital to keep on hand given our recast liability mix and the potential for further volatility, and as the broader investment landscape hopefully comes into clearer focus, we believe our current cash position, the largest in the company's history, affords us the ability to explore any number of capital deployment opportunities. Given that we are still in the midst of this pandemic, it is difficult at this point to define the exact contours of these opportunities. That said, we believe the operating flexibility of the firm puts us in a position to capitalize on what the market will bear, be it through our operating platforms or in the open market. As such, over time, we expect our capital allocation mix to continue evolving based on where we see the best relative value, while always staying close to our main competencies in housing credit, where our core views will, as always, drive our go-forward strategy. In the meantime, we remain focused on managing our existing portfolio, including leveraging our internal servicer oversight and loan administration teams. While predicting credit performance is a fluid exercise in the middle of the crisis, it helps to reinforce the core underwriting metrics of the loans in our portfolio and that underpin our issued securities, many of which are detailed in our Redwood Review. For jumbo loans, these include average FICOs of mid-700s or higher and substantial borrower down payments at origination. For BPL, we need to focus on sponsor equity, experience and liquidity, well-underwritten cash flow coverage metrics and loan structures that appropriately align in sense. And with that, I'll turn the call over to Collin, Redwood's CFO.

Thanks Dash, and good morning, everyone. As Chris and Dash discussed, our first quarter earnings and book value were significantly impacted by the pandemic, which ultimately led to substantial losses on our investments and an $8.28 loss per share for the quarter. Majority of these losses were driven by negative fair value changes on our investments. Our operating businesses were also impacted as profitability was negatively impacted due to less favorable execution on securitizations we completed in March and lower marks on the remaining loan inventories we held at quarter end. Our residential mortgage banking operations had a net loss of $19 million for the quarter, and our business purpose mortgage banking operations had a net loss of $12 million for the quarter, excluding the impairment of goodwill. As Dash discussed, while we believe our business purpose platform continues to have a meaningful implicit and strategic value and performing our GAAP assessment, we determined it was necessary to impair the platform's intangible value and recorded an impairment charge of $89 million, effectively writing off all of our goodwill associated with this segment. In a change from prior quarters, we did not disclose non-GAAP core earnings for the first quarter as we determined that this measure, as we've historically calculated it does not appropriately reflect the economic impact of the pandemic on our results. As financial markets stabilize, we will evaluate whether core earnings or other non-GAAP measures could be relevant in evaluating our operating performance in future periods. Our losses for the first quarter contributed to $9.66 per share decrease in our book value to $6.32 per share at March 31. This decrease was primarily driven by negative fair value changes on our investments that ran through both our income statement and our balance sheet through comprehensive income. Shifting to the tax side. Our REIT taxable income for the first quarter was $0.33 per share compared to our first quarter dividend of $0.32 per share. Although we experienced losses on investments held at our REIT, for tax purposes, these can only be used to offset capital gains and do not reduce the taxable income in our circumstance. We ended the quarter with an available REIT NOL of approximately $27 million. Looking forward, this will provide us with some flexibility around our dividend. As Chris discussed, we have taken and continue to take more important actions to reposition the business and our balance sheet for the current environment. Given the significance of some of these changes, we felt it was important to provide investors with a forward-looking view of our capital and funding positions. In the Redwood Review, we included both a current company update and pro forma financial information that provides insight into what we expect our balance sheet and capital position to look like, inclusive of April activity and the settlement of certain pending transactions. Continuing to build on the progress we've made to date, on a pro forma basis and accounting for the payment of our dividend, we expect our cash balance to increase to nearly $600 million and our marginable debt to decrease to $1.1 billion. And as Dash mentioned, we are making progress on additional transactions that will further reduce our marginable debt. Using our March 31 pro forma total recourse debt of $2.6 billion and our tangible book value at March 31, we estimate our recourse leverage ratio would be 4x on a pro forma basis. While this amount is near the high end of our historical target range, it is driven by what we view as depressed prices on many of our assets. And relative to before the pandemic, our new funding structure will have significantly small exposure to marketable debt. As Dash discussed, with this new capital structure in place, we believe we'll be in a solid position to handle further near-term market volatility, and as the broader investment landscape comes into clear focus, be well positioned for similar opportunities. One last topic I want to touch on is servicing advance obligations. This has garnered a lot press of late, and since we own servicing rights and have various servicing obligations in relation to Sequoia securitizations we sponsored, we thought it would be helpful to scoop out our exposure here. And overall, we believe our exposure is very manageable with the servicing obligations associated with $11 billion of underlying notional loan principal. And we estimate that for each 10% of delinquencies, we have to advance approximately $6 million per month. April 30th's delinquency rate on these loans was just over 3%, and about 3/4 of these loans have a 120-day stop-advance structure that limits how long we're required to make advances. Please refer to the mortgage servicing advance obligations section of the Redwood Review for further information on this topic. I will close with our outlook. Given the uncertainties surrounding the future economic impact of the pandemic, we won't be issuing any earnings guidance at this time. What we do know now is that our in-place investment portfolios are the basis that should provide attractive returns going forward. And by themselves, generate positive cash flow of our total current expense load, which, as Chris discussed, we have reduced to align with an expected slowdown in originations. As we begin to gain more clarity on the operating environment and the pace of recovery from the pandemic, we'll be better able to assess the new baseline for our operating platforms and evaluate the opportunities to begin redeploying an appropriate portion of our substantial cash position, to generate incremental earnings. And with that, I'll conclude our prepared remarks. Operator, please open the call for Q&A.

[Operator Instructions] We'll go first to Doug Harter with Credit Suisse. Please go ahead.

I'm understanding that it's still a fluid situation. Maybe just can you think - help us understand, as you look at the unrealized loss on the assets you retained, how much of that might be expected credit losses? And how much of that would primarily be increase in market rates or liquidity premiums that were kind of placed onto the securities?

Yes, Doug, we're not in a position to do that with a sufficient level of specificity, mostly because we're still modeling out kind of how this recession will play out and how extensive it will become. That said, I'd say the significantly vast portion of the higher discount rates was liquidity driven. We haven't observed market credit deterioration in our book today by any material level so remains as P&I. Obviously, there's some deterioration, but it's been minimal overall and certainly not reflective of the significant decline in price of these assets.

Great. And then I guess, do you have any historical information deployments to kind of how some of the business purpose loans might perform in a period of stress. And again, just if you could just remind us kind of what the loan-to-value is? And kind of how those underlying assets might perform kind of expectations around kind of home price declines for that type of asset?

Sure, Doug, it's Dash. Thanks for the question. In terms of the underwriting parameters for those sorts of products, we do think going into the potential cycle here that the underwriting rigor and the structure of those loans are definitely a positive. On average - the average upfront equity is over 30 points. So average LTV across the bridge and SFR book is in the high 60s, a huge structural benefit across pretty much the entire SFR book, and a good chunk in the bridge book is also cross collateralization of these loans. As you know, the majority of the SFR we do, the vast majority are on multiple home portfolios, where we get the benefit of cross rental streams as well as cross-collateralized equity in the underlying homes. A good chunk of our bridge portfolio is similarly structured, where we have the benefit of cross collateralization across the portfolio, where a sponsor may be rehabilitating for sale or rent. I would mention that a good percentage of the bridge book, our sponsors do have the investment strategy of stabilizing and ultimately renting out. A good portion of our SFR business in general represents terming out our bridge borrowers. And so there's always been a life-cycle continuity to the business, which we think will actually really help us going forward because we have more privity of the borrower, frankly, and there's relatively less strategy to rely on a disposition of an asset versus a stabilization. So we think those are both good strengths. On the SFR loans, our average debt service coverage, underwritten DSCRs between 1.3 and 1.4. So we have received, I would say at this point, pretty meaningful feedback from our larger sponsors in terms of April rents and even into May. And frankly, some of it is geographic specific, but for the most part, sponsors have seen rental collection rates on par with, or maybe a couple of percentage points below where they have been before the crisis. In fact, many of our sponsors have actually reported an increase in lease apps, particularly for their single-family portfolios, anecdotally with certain tenants looking to move out of multi into single-family. And so we're still early innings here potentially. And to Chris' point, we don't want to necessarily overly prognosticate how the next couple of quarters will play out. We do expect the workload and managing these loans to go up. That's to be expected. These are high-touch assets at some level to begin with in terms of these relationships with the borrowers and adapt on those relationships. But to date, we've been pleased with what we've seen. And again, the loan structures, and as I mentioned in my remarks, the sponsorship liquidity - liquidity of the sponsor, the requirement, generally, that we get all their equity in upfront, we think is really, really important as well as the concentration of the underlying strategy to term out a lot of these portfolios.

We'll go next to Stephen Laws with Raymond James.

Great to hear from everybody. I hope all are doing well in a time when everybody is spread out but I hope all is good. Chris, I want to start maybe on how to think about where the portfolio goes, maybe near term. I know you're still undergoing a number of actions looking especially to focus on the non-marginable financing. And you continue to take action in the last few weeks. How do we think about additional sales from here? Are there certain assets you've targeted? Is it really more on the other side where it's about changing the financing type? Kind of how do we think about our portfolio in our model in the near term, obviously, before we start thinking about growth at some point in the future?

Stephen, good morning, and thanks for the question. It's a big question. Overall, we start with the $550 million of cash, which, as Dash mentioned, is the most the company has ever held. And I personally ascribe a pretty high multiple to that and during pandemic times. So we have a lot of optionality in how we move forward. I think we've moved away from heavy selling of assets or dispositions, and we're much more focused on go-forward strategy. And with our cash position and with these non-marginable debt facilities as well as our ability to securitize, we are in the midst of rethinking how we get our businesses, how we evolve them to work optimally in this type of environment. I think the opportunities on the BPL side, it's a little bit more straightforward because frankly, we're not competing directly with banks in that sector. We are an effective leader in that space. So our pricing power and our ability to structure around some of the near-term economic reality is, frankly, quite a bit easier than some of the consumer products. So there, we see a lot of attractive opportunities and are working right now to get that business that moving and get things starting to normalize. I think on the resi side, we're starting to see a lot of distressed opportunities. There's still a lot of engagement with the Fed with respect to health to our PLS, which would be a big positive. We're seeing a lot of orphan assets sitting on warehouse lines, jumbo assets that are potentially good opportunities from a pricing perspective. And we're also starting the process of the day-to-day business of buying loans and distributing. So we get a lot in the works. And I think someone remarks in their write-up, Q1 was essentially a kitchen sink quarter. And we worked hard to be in a position to try and turn the page here and new position.

Yes. Great. Appreciate the color there. A follow-up question for me on the FHLB kind of a few smaller questions. When should we expect that line to reach 0? I know - I believe I read in the review that, that is expected later this quarter. Year-end, I think you owned $43 million of FHLB stock on the balance sheet. I haven't had a chance to look at the update, but how quickly do they repurchase that? I assume it's $43 million of cash coming in. And then - or is there any reason you would say a member of the FHLB, I believe, a number of years ago, maybe an origination program or pipeline was put in place. But just some general comments on the FHLB relationship, where that goes from here? And if you'll sell that stock and then get to $43 million of cash?

Sure. As far as the stock goes, substantially all of it, we will get back. There is a small piece, I think, around $5 million that is agreed upon as a longer-term holding that may not come back for 5 years. But the rest of the stock sort of builds with the size of the facility. And as we paid that down, I think we're down to $230 million or so of advances. We're able to pull that stock back as well as our cash. Overall, we expect to have that substantially paid down in the coming days, frankly. Whether or not it goes to 0, as far as the long-term relationship, we really haven't made any determinations there. I would call out a number of banks and counterparties who helped us wind down that facility. It's a very tenant-driven time and we needed calm and strength in collaboration and the outreach and the support we got from our strongest bank counterparties was really impressive and probably the point at which we knew we would - we will turn the corner here. So it was really great to see. And the sales of the assets were extremely constructive. We ended up building a lot of cash as we've seen on the balance sheet from where those had been financed to where they were sold. So it was a very, very positive outcome for us.

We'll go next to Matthew Howlett with Nomura.

Chris, before I get to some of the questions, just on TALF. I heard some interesting comments and I've been a little bit surprised they've left out non-agency. Any kind of update where the conversations are going and talk in allowing every other asset and why - how have they left out the non-agency space?

That's a great question. We're still trying to figure it out. I think that wasn't included in the last TALF program. And perhaps one of the reasons was resi credit, at that point, was the driver of the crisis. I think when they reinstituted the TALF program, they just dusted off the manual. And because resi wasn't in it then, it wasn't in it now. I think initially, when they added CMBS, we assumed that, that was sort of it. Through additional meetings and conversations, we believe that they are strongly looking at POS at this point. And I think it would be a great thing because it would really accelerate a return to normalcy in the sector, just having confidence in financing and liquidity available. If nothing else from a messaging standpoint, I think we'll go a long way. So we're waiting and standing by to the extent we can be helpful for those guys, but I'm more optimistic on the prospect than I was a month ago.

Great. And the other question, I guess, is you went over in detail in terms of what you saw, why you sold stuff. Just remind us because I remember Redwood has always been very conservative on their valuations. They're always sort of at midsize quotes. Remind me again, so just you held on to more of the higher quality, maybe some of the subordinated securities that you feel has longer upside than the sort of more liquid up and quality stuff that you sold to sort of delever. Is that sort of how do we think about where the portfolio went and what you sold versus what you retained?

Yes. First of all, we have always been, I think, to the letter of the rule with respect to valuing assets and bid side where they can be sold, pandemic, no pandemic. I don't know that it's always benefited us, but note that principal transparency continues to apply. So we've taken some heavy, heavy price adjustments on assets, but frankly, their model expectations have largely unchanged. So we do think that the book net-net is higher quality than it was based on the assets that we sold. And we do expect, by and large, our assets to perform. They were well underwritten. And while nobody, I think, modeled this type of pandemic, I do think that anecdotally, the performance we've seen in the last month or two gives us some confidence that, that we'll be happy with the ultimate outcome. I'd say, overall, whether it's our MSR mark, which I think our multiple is at 1.8, which is below JP and Wells, I think we've been across-the-board just as transparent as we can possibly be. And that hurts with respect to our first quarter results, but hopefully, provides us a good, sound basis for building for the future.

Got it. You guys have a long history of valuing this stuff. Last question, did you announce that you're in the market with the Sequoia deal? I just remember you guys breaking through in 2010. So the first jumbo non-issue was pretty, in your remarks, was actually on target. Just curious if you announced that you're going to be in the market with the Sequoia deal and work what type of levels that you could get there?

Matt, it's Dash. To clarify in my remarks, what I was alluding to is we're exploring a securitization on the SFR side. It's early days, and we'll have to reserve comment until the deal is completed, but it was on the SFR side, not Sequoia.

Let me ask it this way. Do you think that - I mean where AAAs are now, you see the market, Sequoia got the best-in-class shelf here. Do you think that you could be in the market sometime in the near future with the Sequoia deal?

We don't have any immediate plans. But as far as the thought process you laid out, certainly. Right now, what's going on in the non-agency space is, I think there's still a fair amount of cleanup. There's loans that are trading at discounts to clean up warehouse lines and just get them through the system. We're slowly starting to see opportunities to where new products will start to make sense. And TALF, as I said, would accelerate that. But overall, whether it's a securitization of slightly seasoned, more distressed price assets or something on the - of the new issue variety on new collateral, we'll be focused on both. And I think it's - the one thing I do think is different this time around is, in the last crisis, obviously, the underwriting standards had significantly deteriorated, in addition, due to the extreme leverage with LTVs, borrowers had very little equity in the homes. This time around, that wasn't the case. And the loss experience on the jumbo side, whether it be forbearance or delinquencies, you're still going to roll through the process, emerge with a borrower that's got its drawn down payment or potentially has participated in multiple years of HPA. So overall, I think that leads well to a faster recovery than you saw after the last crisis. And you're right, we did complete the first securitization, I think, in 2010 after that crisis.

I remember it very well.

We'll go next to Kevin Barker with Piper Sandler.

So in regards to the $5.36 of fair value changes on your assets and decline in book value, when you think about the various investments currently on your balance sheet and the potential for a recovery of value over time, are there any particular assets that stand out where you think would see the most near-term appreciation in your view, just given what the market looks like and how it's being cleaned up per your comments on the non-agency market?

Kevin, it's Dash. I would say a couple of things. First of all, since the end of the quarter, we have seen various parts of the cap stack definitely firm up. That's a big driver behind the book value, the estimated book value we just talked about at month end for April. So we've definitely seen more constructive levels, not a ton of trading volume, but I would say, constructive prints in the secondary market more up the capital structure, more in the investment-grade part of the capital structure. Some of that from a technical perspective has sort of leaked down a bit into the more subordinate parts of the structure where we own. But in many, many cases, we have not yet seen, even including the book value estimate we just provided, as much market value move back up in a more deeper subordinate securities we own, particularly in Sequoia and the CoreVest securitizations and then a bit more bespoke in the reperforming loan investments that we have. Again, to Chris' point, we have not seen any empirical, at this point, credit deterioration there. We've seen the April and starting to see the May remits come in. And so if you look at the balance sheet today, there's a lot of potential positive credit convexity in those deeper subs that I don't think we've seen even yet as of this morning, notwithstanding some of the technical improvement further up in the capital structure. So those are the areas that I was referencing in my remarks where we see, based on where we have these, we currently mark certainly the most substantial upside.

And then given that outlook, when you think about the various asset classes, is there any particular assets where you feel more constructive on the recovery of value, just given where the balance sheet stands today?

Well, I think if you look through the underlying borrower quality, which is what I was sort of referencing in my remarks, I would say particular areas that we continue to like, largely because of, like I said, the underwriting strength certainly in Sequoia, those are still 750-plus FICO borrowers with great LTVs. Some of those borrowers intermittently here may have some free cash flow interruption depending upon their personal employment outlook. When we think about the equity in the home, and particularly if you think about Sequoia as a seasoning in that portfolio and the implied LTVs, the reserves that these borrowers had when we underwrote them, these - that's the cohort of borrowers, that from our perspective, should be best able to withstand the impacts of this pandemic, whatever those contours might be. And so from a fundamental underwriting perspective, as you know, those loans have always been a strength and those features from our perspective will hopefully outperform in here versus other areas. And then also, frankly, with single-family rental, in many ways, notwithstanding where we sit today versus 12 months ago, the housing thesis that underpins that strategy is still very much the case. And when you go back to some of the remarks I made in response to Doug's question, we've seen the rents really continue to come in. And from our perspective, again, with the quality of the sponsors and the quality of those structures, we continue to really like that asset class in here as well.

Okay. And then just a follow-up on some of the bridge loans, which have become a large portion of the BPL lending. There obviously will be some stress there from a credit perspective, but are you able to provide addition - or do you feel comfortable providing additional liquidity to a lot of those investors in order to get them to the other side, especially given the renovation work that needs to happen that might be on pause right now for a lot of those fixing floor plans?

Yes. Great question. It's - the answer is, obviously, it's going to be a borrower-specific analysis. And I would tell you anecdotally that throughout the last 6 to 8 weeks, we have been, in some modicum, very modest, continuing to fund those construction draws across a good chunk of the projects. As you know, I think we have a very, very robust process that goes into analyzing whether it's appropriate to meet a construction draw requests. We're obviously required to ensure and verify that the monies have been outlined by the sponsor. We have ways to verify on-site through our own work or through that of our vendors that the work has actually been completed. We have eyes on the project. And so frankly, with the good chunk of our book, work is actually ongoing. If you get a lot of the geographies or the majority of geographies where our book is in that book of business, work is continuing. And for projects that we view as progressing, we're happy to meet those jobs because they represent progress towards an outcome, like in many cases, stabilization and rental like I was alluding to earlier. So there will be borrowers that potentially elect to pause or pivot their strategy and we'll react accordingly. But it really isn't and it depends. And as you can imagine, that has been and we'll continue to be a borrower-by-borrower analysis project-by-project.

And then could you remind us what the average LTV on that portfolio is on a preconstruction and pro forma basis?

Yes. It's in the high 60s or so on sort of as is basis and then it drifts to the low to mid-60s on an after repaired basis.

We'll go next to Bose George with KBW.

I just want to ask us about the day-to-day operations on the jumbo businesses. You guys lock in loans, just curious what's going on there just operationally?

Bose, I'd say we're - I think the entire sector hit the pause button for a period of time. And you saw Wells Fargo exit the correspondents channel and as well as others. For us, we have been transacting as recently as this week. And I'd say it's much more on an assignment basis than full assembly line running. But what we're working towards is to safely kind of get back to business and the two facets of that are, one, just making sure that we've got the right facilities in place, we've got the right underwriting standards in place and we've got the right distribution in place. So once those all come together, I think you'll see volumes really start pick up. I do think that math plays a factor as well as far as rescaling that business. And where mortgage rates are today, obviously, jumbos have somewhat detethered from agencies for some of the reasons you guys all know about. As that relationship sort of re-correlates, you'll start to see more and more jumbo borrowers in the money. And there's going to be a refi - a major refi opportunity here Just a question is one. So I'd say it's - we're taking it day by day. We don't plan to have any type of big bang, but we'll start to lean in here and get back to business.

Okay. Makes sense. And then just in terms of the portfolio, sort of runoff, how much cash is being generated as the portfolio sort of on a monthly basis, for example? And then in terms of cash that's coming in now, are you sort of looking - will that delever the portfolio essentially as you - as some of these businesses take a little while to get ramped up again?

Bose, on your first question, our - a good chunk of our securities, as you know, are sort of locked out, and that's still the case, but monthly inflows or so, we expect to be in the $10 million to $15 million range from a free cash flow perspective. As it relates to deleveraging, it sort of depends upon the structure in which the assets are held. Our borrowing facilities on the whole loan side do vary a bit in terms of how those structures work, in terms of how the cash is giving up. But certainly, a majority of that principle on the whole loan book as it comes in to the extent those loans are financed, would certainly pay down the allocated debt at least, and in some cases, potentially delever the structure overall. It sort of depends upon how this specific facility works.

We have no other questions at this time. I'd like to turn it back to our - excuse me, our presenters for any additional or closing remarks.

Thank you. Thank you, everybody, for joining us this morning, and we look forward to speaking with you soon. Have a great day.

And that does conclude today's conference. Thank you all for your participation. You may now disconnect.