Good afternoon, and welcome to the Redwood Trust Incorporated Third Quarter 2020 Financial Results Conference Call. During management's presentation, your line will be on a listen-only mode. After conclusion of prepared remarks, there will be a question-and-answer session. I will provide you with instructions to join the question queue after management's comments. 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, Ashley and hello, everyone. Thank you for joining us. With me on today's call 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 am pleased to announce we recently launched a new company website with a refreshed brand identity that reflects our evolution as an organization over the past several years. This launch includes a new Investor Relations page where investors and analysts can easily find the trail related to our financial results. We hope you find that these very helpful. I also 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 these 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 third quarter Redwood review 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 Abate, Redwood's Chief Executive Officer for opening remarks.

Thank you, Lisa, and thanks to all of you for joining the call. As Lisa mentioned, we've got a fancy new website and I encourage everyone to take a look to learn more about the company and the things that make us who we are. Of particular note for those on the call, we also [ph] rolled out a new Investor Relations section with enhanced functionality, which should make accessing our result and filings much easier going forward. In the quarter 2020, Redwood moved forward. With the early shocks of the COVID-19 pandemic behind us, we solidified our team and positioned ourselves to take advantage of extraordinary opportunities emerging in our markets. Our businesses are back to operating at full throttle and we're optimistic that we will end 2020 on a high note even with policymakers and markets on guard with respect to the election next week and a new wave of coronavirus cases emerging throughout the world. We feel well prepared for this and our position to take advantage of any dislocations that might arise. As I discussed last quarter, we spent much of the early spring focused on recasting our balance sheet and positioning our businesses to relaunch from a position of strength. We're now conducting new business at a rapid pace, leveraging our experienced team and very strong industry relationships forged over many cycles. We're pleased to once again see this hard work reflected in our financial results. Our third quarter GAAP net income with $1.02 per share, which includes record contribution from our business purpose lending segment. Our residential lending business also achieved record-breaking results for select volumes of $2.1 billion growing from nearly $0 in the second quarter. Additionally, our portfolio of investments continue to increase in market value growing 10% since June 30. The…

Thank you, Chris. Our third quarter results reflect the hard work and discipline of our experienced team. For the fortified balance sheet and enhance relationships with business partners old and new, our platforms are operating at full strength and capitalizing on a unique market opportunity. We entered the quarter optimistic for significant volumes and improved operating margins for our residential and CoreVest businesses and both platforms exceeded expectations. Continued improvement in the broader financial markets also benefited our investment portfolio with further tightening in non-agency spreads. Coupled with strong financial results from our operating platforms, this drove GAAP book value at September 30 higher to $9.41 per share, an increase of 15% from the second quarter. Critical to our success in driving scale is the health and flexibility of our balance sheet. During the past several months, we further improved balance sheet and operating capacity by reducing our recourse and marginable debt, expanding our non-recourse borrowings and growing non-marginable warehouse capacity. We remain focused on efficient use of our working capital, including new structures that we hope will disrupt traditional aggregation warehouse financing. Before I go deeper into the business, I want to share observations we are seeing in the markets we serve. As Chris mentioned, the secular trends we laid out at the beginning of last year are accelerating as demand for single-family homes whether rented or owned is increasing. Recent reports show the health of the housing market is strong. Total household equity now exceeds $20 trillion and continues to trend higher, a result of a persistent supply-demand imbalance and record low cost of borrowing for home buyers. The migration from cities to suburbs we observed over the past several months is also expected to continue in some form. Evidenced by recent housing search data showing over 50%…

Thanks Dash and good afternoon, everyone. As Chris and Dash discussed, our third quarter earnings and book value benefited from strong results at both of our operating businesses as well as further increases in the fair value of our investment portfolio including the GAAP earnings of $1.02 per share for the quarter and helping to generate a 17% economic return on book value for the quarter. As our business continues to evolve, we are continuing to evaluate our revised core earnings metric that will be most relevant in assessing our operating performance in the future and currently expect to launch new metric for 2021. After the payment of $0.14 dividend, which was 12% higher than our prior quarter dividend, our book value increased to $9.41 per share. This represents a 15% increase for the quarter that was primarily driven by our strong earnings and also benefited from the repurchase of approximately three million of our outstanding shares for $22 million, which we repurchased at a 25% discount towards September 30 book value. At September 30, we had $78 million of capacity remaining under our repurchase authorization. Looking at some of the operating results within the business, our Residential Mortgage banking team achieved a significant increase of volume during the quarter with loan purchase commitments of $1.2 billion and gross margins of 95 basis points, generating $11 million of mortgage banking income. At CoreVest we retained $61 million of business purpose loans, including $196 million of SFR loans and $66 million of bridge loan. These originations in combination with our $380 million of SFR loan inventory at the end of the prior quarter, both benefitted from the very strong execution of CoreVest's September securitization that Dash discussed, hoping to generate $49 million of mortgage banking income for the quarter. In our…

We'll now begin the question-and-answer session. [Operator instructions] Your first question comes from Stephen Laws with Raymond James. Please go ahead.

Hi. Good afternoon and congratulations on the very nice third quarter. Chris, I want to start with really the comments in the first paragraph in the review that talked about jumbo rate versus conforming rates and seeing some lower jumbo rates potentially drive higher volumes. Can you maybe talk to where those rates are in that spread today and what metrics you're watching to push those jumbo rates lower to drive higher origination volumes and then refinance activity on the portfolio?

Hey Stephen, it's Dash. I can take that. Yes, jumbo rates are still lingering above conforming probably 20 bps to 25 bps or so depending on how the market is situated on any given day. The average gross coupon of the jumbo loans that we're locking are still right around 3% and we continue to feel even at that level frankly that there is a significant in the money as a lot of borrowers that just haven’t been served yet just due to natural capacity constraints given the volume of conforming and so we do feel that there is a lot there as we said with rates that are currently situated and obviously if jumbo rates trend lower and conversion we're conforming, we do expect more and more driven out. We are hearing from sellers that capacity constraints are starting to ease a little bit as we've gotten through near the past several months and we're starting to see loans deliver to us on the jumbo side more efficiently, which reflects better capacity with our sellers and so we remain optimistic on just the refi side as we'll continue to see over the next quarter or two that continue to pick up. As Chris alluded to, the service level we provide with our sellers continues to be really, really important in terms of speed to fund that of course the flexibility we always provide them. So that will continue to be important.

Stephen I'll add, the AAA spreads have come in quite a bit as well. So it's been a really nice story and that will definitely help us compete effectively here going forward. We've started to see that at the beginning of the quarter and just completing a securitization actually today we feel really good about funding costs in our pipeline and being able to price loans competitively and profitably.

Thanks for the color there and to follow-up on that, I also saw in the review, can you talk about your expectations for additional securitizations this quarter given the sizable lock to pipeline, which even after fallouts pretty strong purchase volume, but I expect you also have been really couple of forward sale agreements one in prior quarter and one in October. Can you really talk about the decision to do that and then what the deal pipeline look like on Sequoia front?

Yeah Stephen, we'll see in terms of between now and the end of the year, but certainly we're beginning to lay plan for the first quarter to continue to execute Sequoia. You're right, the forward sales that we executed some of which are settled this week and which we'll continue to serve between now and the end of the year, we did capitalize on some unique opportunities there in terms of bank demand, which as you know continues to be robust just given the overall pressures on NIM with depositories broadly. And so we were able to put on some attractive forward sales between now and the end of the year. So we'll see about Sequoia between now and December, but certainly for the first quarter, again we would expect to recommence in some shape or form.

Yeah and Stephen, you need inventory to complete the deals and so as we're selling more loans forward, actually the inventories building at a slower pace, which is a good thing. So to us the faster we can transact, recycle capital or at least neutralize risk that's just really going to push this business to the next level and get us operating and hopefully sustainably higher volumes going forward.

And final question and I'll re-queue, but can you talk about the unrealized loss -- unrealized mark assets you hold now versus year end, kind of where does that stand today as far as what potentially could be recovered and when you think about that book value plus that number, how do you think about stock buybacks from here? I know you're buying back stock a little lower level, but stock buybacks versus putting money into new investments right now?

Sure, so we did continue to recover some of the unrealized loss from the end of the first quarter. You probably got around a third or so that remaining, which I think as Collin articulated about $1.50 a share to retrace everything remaining back to 12/31. Through that when Stephen is always we're going to remain flexible on the stock buybacks. So obviously we refer just the 3 million shares in the third quarter, which was about $0.03 accretive to book. So that's always going to be on the table, but I would probably reinforce that the real priority strategically remains earmarking more operating capital to the businesses to ensure they can grow safely and of course remaining opportunistic, not only for what we see from third-party markets, but obviously remaining flexible and nimble to retain or distribute the pieces that we see set from CoreVest and from our residential business.

Stephen, I'd add -- good color commentator today, the stock still in our view is undervalued certainly with our Q3 book at $9.41. So that's definitely something we'll continue to focus on. As Dash alluded to, we think we've got pretty good opportunities to deploy capital away from that, but we're not pleased with where the stock sits today relative to the inherent value of the book and so we'll continue to focus on that and monitor it, particularly as we go through the period of volatility that's already started with the election and certainly with the escalation in COVID cases just how the markets respond.

Your next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. Can you help us think about kind of a normalized level of mortgage banking income for the BPL business and how much of this quarter's was because of the kind of the spread tightening that happened during the quarter?

Sure Doug. So the number was certainly a little bit outsized this quarter just based on the inventory that we were carrying at $6.30. Little more than half of the revenue was because of that, but I also think the third quarter had a unique set of circumstances in terms of the loans that we produce over the summer and we're able to securitize those with particular low benchmark rate, which was very, very helpful to us. So those are some of the elements that drove the number higher. So on average, our margins were if you look at simply the total revenues over volume, easily a few points higher than you'd expect to see them normally for those reasons.

And can you help us kind of frame kind of for the BPL how you exited the quarter in terms of volume and where you are in terms of getting to full speed in terms of production volume?

Yeah I would say we exited the quarter a little bit lighter in inventory than we entered it, but we've obviously had a very active October and so those balances have come back up and if the pipeline remain really robust, certainly the rate environment, which benchmarks as low as they are as accommodated, we have the arrived from some of the Sequoia side, we have the significant tailwinds from the recent execution of the CoreVest securitization in our back which is meaningful. We continue to see significant opportunities across what I'll consider the bread-and-butter SFR loans that we originate and securitize, but also in the pockets of the bridge book, which I think the problem is really unique in executing things like built to rent, other types of portfolio of strategies for more sophisticated sponsors that we hope will ultimately stay with the platform when they get termed out.

And I'd add though we're not providing guidance this quarter, seasonally the fourth quarter has been historically a very strong quarter for the BPL business. The borrowers unlike the residential business where things sort of slow down during holiday season, some of these are more commercial lending borrowers and actively working to get loans closed ahead of year end. So typically December is a very busy time for this business. So as things really ramp back up, we're looking forward to as we indicated closing out the year on a high note.

Your next question comes from Bose George with KBW. Please go ahead.

I just wanted to follow-up on Doug's question just on the how to think about the operating earnings this quarter. The $107 million of gains that's in the mortgage banking segment, is a component of that was obviously driven by valuation changes, but is there a piece of that has also operating in a sense that would've been even if spreads did not improve?

I'll just clarify that $107 million is the full mark-to-market across our entire investment portfolio. So that's within resi, BPL and third-party. So that is the full mark-to-market. There is some portion of that that is related to the change in fair value security that can be the amortization of premium with some small amounts that is kind of recurring and implicit in the portfolio, but the vast majority of that spread driven particularly this quarter as we discussed related to some of our investments particularly the RPL.

If you follow Bose, there is some spread tightening though particularly related to loans that were closed in the third quarter that appreciated prior to certainly securitization in both businesses. So there's always going to be a spread component to our mortgage banking results. We're fortunate this quarter it was significant tightening. So it contributed to our mortgage banking income, but as Colin indicated, most of it certainly in the BPL side had to do with June 30 inventory.

And then just wanted to go back to the comment about the expected economic returns the low to mid teens, so should we think about the book value is where it is and the return based on the portfolio plus mortgage banking gets you the book at $9.41 that's the guess the returns whatever $1.25 to $1.50, is that kind of what you're what the numbers would suggest?

I'll just clarify a couple of things on that. The number that Chris referenced and I also referenced in my script, were really specific to the investment portfolio. So that's away from the operating businesses and we did update the numbers there to the low to mid double-digits as we saw an increase in the book value of the assets in our investment portfolio. The math there just causes some downward push on the yield. So the yields you referenced is what we discussed last quarter. So we saw some appreciation in the portfolio those came down a little bit as we realize that appreciation into book value.

We've also Bose -- we've tried to call out that we have this non-agency portfolio that seems to be pretty unique at this point and I think some of our competitors have moved on sold their positions and so I think the story and the significant appreciation or recovery in our book perhaps hasn’t tracked with the industry. I think it continues to be a good story. Certainly I think we've said we've got about a third of that unrealized loss that we took in March that hasn’t been recovered. As far as what we'll recover going forward, that's going to be dependent upon market forces, but at this point absent another major downturn with respect to COVID or something else in the economy, we feel pretty good about the prospects of recovering more of that in the next two few quarters.

Can you also get your book value today and change that.

No significant change. We don't expect that it down, but no significant change higher.

Your next question comes from Kevin Barker with Piper Sandler. Please go ahead.

In regards to the mortgage banking outlook on the jumbo side, can you talk about some of the puts and takes you're seeing in the near-term? I know the markets are loosening and you're seeing better spreads, you're starting to see a little bit more capacity come to market, and you definitely saw much better revenue line. Can you help us maybe size up that ramp in that as we go into early '21 just given the current market dynamics?

Sure Dash and I can tag team, but a lot of it has to do with our sellers coming back online and actually offering jumbo products again. There's been such a great opportunity in the agency side with the fed effectively supporting the market that the easy money has clearly been an agency and it's only been in the past few months where jumbos really started to take hold again with originators. It's a big opportunity for us to just getting our sellers back online and as Dash said, we had 80 distinct sellers contribute over the past quarter or quarter-to-date. We've got -- we typically had 185 to 200 sellers. So we think there's a great opportunity there. We've seen very little focus on Redwood Choice which we expect to change significantly in the coming quarters. That's a great purchase product and we're still seeing over half of our flow as purchase related. So there's things you need to Redwood that we feel confident in. We alluded to that I think on the last call. So we certainly observed it. I think we'll continue to observe it. As far as the market goes, the convergence back towards agency mortgage rates continues to occur. We expect that to continue. We expect that the banks will slowly refocus on jumbo and there will be some competitive forces, but really we're extremely well positioned right now as a team, as a network and I think that for those looking to build at this point, were up and running, we're going at full steam ahead and I think we're very focused on taking share and really growing the business in the next few quarters.

Do you think is volume going to drive most of the increase in mortgage banking in the jumbo side or do you feel like it's going to be more driven by spreads or the execution you get securitization?

Right now it's both. We've got great trajectory on volumes certainly as we bring more sellers online and as I mentioned, we've got some strategies, some technology focus to take share, take wallet share, but spreads continue to tighten. There's great demand for securitized products right now. Pricing on AAA has been very strong both on the capital side and the Sequoia side. So to the extent we continue to see demands in the POS space that really drives a lot of the industry-wide pricing. So I think in the near-term, there's certainly a strong likelihood that we'll experience both. I'd caveat that statement with the near-term volatility that we all know is headed our way as a country over the next few weeks.

Are you seeing churn times accelerate now than anywhere in the past or do you still feel like you have room to accelerate the churn times than you typically would have?

Just to clarify Kevin, you mean churn times on an off of our balance sheet or in terms of how we settle with our sellers?

On and off of your balance sheet?

Yeah, I think we continue to improve that, but there also is room to improve. As we -- the sooner we can purchase loans from sellers, the sooner we can either securitize or sell them to the ultimate end-user. We've talked about a couple times on this call in terms of that pilot initiative which we're very excited about and it does peak to just continue to deepen the outlets and continuing frankly in some ways to try and disrupt the traditional securitization process and the lead time and of course standing on new partnerships with loan buyers that once you get to the net interest margin more quickly, we talked about the banks we're definitely seeing an increased demand for NIM and everyone is aligned to get loans to their final spot more quickly and so there's more for us to do there, but I think we've come a long way over the past year or so.

Your next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Most of my questions have been asked but I was curious when you were talking about sellers coming back online with more products. When you look at the expanded prime products, can you just share some thoughts on sort of how far away you think we are from more originators starting to work on that product and originating the expanded prime products again and you guys more formally relaunching in that space?

Sure. Good question. We expect the product to begin ramping sooner this quarter. It's going to take some time to get back to choice becoming 40% plus of our quarterly volume, but the demand for the product exist today, the inhibitor is capacity. So you have a limited number of loan officers, limited amount of capital and there is frankly just easier loans to underwrite, but as our reports show, there's a huge drive towards the suburbs, there's a lot of purchase activity going on in the market and choice is very much relevant in the purchase space, helping people get in the homes, getting to yes. One body underwriting, that's all we think very much still in demand. It's just a function of focusing loan officers on a marginally more difficult underwrite -- more time-consuming underwrite.

And can you say like when you evaluate that market and where you're seeing securitizations price where you think margins would potentially be for that business just generally relative to where they were pre-COVID?

A little trick to say at this point Trevor just because it is so nascent and I think there's a lot to discover in terms of the coupon that a choice borrowers want to take at this point and the relative coupon spread versus our select loans. I think there is a lot more discovery from the middle of doing right now and stealing securitization apparatus back up we expect to do, but there is some price discovery there, but to Chris's point the first step is engaging on the product. And as he said, the view from the ground continues to indicate incrementally more and more direct LO engagement on non-agency broadly and choice and specific because there is a borrower need. There is no question about that. It is a capacity issue as Chris said but if you talk to our business development team, they will tell you that the LO engagement continues to increase every day for the products that we're focused on including choice, which is obviously where we need to start.

[Operator instructions] We have no further questions at this time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.