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…

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…

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…

[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.