REDWOOD TRUST INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Market volatility was noted, with analogies to March 2020, but the mortgage market was relatively unaffected. Redwood continues to navigate from a position of strength.
• Strategic initiatives are taking hold, with shifts in housing finance policy in Washington creating potential opportunities. The firm positioned itself to hunt for seasoned jumbo loan production.
• Sequoia's growth was driven by wallet share growth and the emergence of seasoned bulk portfolios from banks. Gain on sale margins remained strong.
• Aspire platform expanded, with early lock volumes over $100 million and plans to grow volumes meaningfully in the second half of 2025.
• CoreVest maintained momentum with focus on smaller balanced loans, and efficiency metrics remained strong.
• Redwood Investments saw strong returns from retained operating investments but faced pressure in the legacy bridge book, with ongoing resolutions.
• Capital and liquidity: Ended the quarter with unrestricted cash of $260 million, accessed $50 million of additional capacity under the CPP Investments partnership.

Segment Performance

• Sequoia: First quarter locks were $4 billion, representing 73% quarter-on-quarter growth. Gain on sale margins were above historical targets. Aspire had early lock volumes just over $100 million. Sequoia's market share of on-the-run jumbo production was estimated to be between 6% and 7%, up from 4% to 5% in 2024.
• CoreVest: Funded $482 million of loans in Q1, a 4% decrease from the fourth quarter but up 48% year-over-year. Generated net income of $1.3 million (or $2.9 million excluding amortization of acquisition-related intangibles) with a 20% ROE. Margin expansion was seen in term loan production and strength in smaller balance bridge and DSCR strategies.
• Redwood Investments: Generated $22.9 million of net income in Q1, up from $2.8 million in Q4. Delinquency rates in the legacy bridge book rose due to credit migration on select vintage multifamily bridge loan exposures, but resolutions were ongoing. Book value per share was estimated at April 21 to be up 1% to 1.5% from quarter end.

Guidance

• Targeted annualized EAD returns on equity in the 9% to 12% range for the 2025 year-end run rate, up from 7% in Q1.
• Plan to reallocate nearly 20% of capital towards operating platforms and retained operating investments while reducing exposure to legacy bridge investments and other nonstrategic third-party securities.
• Potential for share repurchases given attractive stock levels and existing authorization over $100 million.

Risks

• Market volatility, including rate volatility and potential recession risk, which could impact financial performance.
• Credit migration in the legacy bridge book leading to increased delinquencies in select vintage multifamily bridge loan exposures, though resolutions were ongoing.
• Liquidity risks associated with managing large lock volumes in volatile market conditions.

Q: Doug Harter asked about how Redwood hedged during April's volatility and Sequoia spreads.

A: Christopher Abate said they used a combination of pipeline management, nonmarginal facilities, and learned from COVID experience. Spreads came back in, and they remain confident in generating margins in the 75 basis point to 100 basis point range.

Q: Rick Shane asked about managing liquidity and execution risk with $4 billion in lock volume.

A: Dashiell Robinson said speed and efficient risk turnover were key, with half of the pipeline sold or securitized since March 31. Closed pools from banks are viewed as an addressable market with resources and distribution in place.

Q: Don Fandetti asked about net capital net of resolutions in bridge loans.

A: Dashiell Robinson said $1.60 per share was specific to 2022 and earlier vintage multifamily bridge, with ongoing resolutions and focus on net present value optimization.

Q: Crispin Love asked about EAD ROE guide and share repurchases.

A: Brooke Carillo said reallocation of capital from underlevered investments to operating businesses was key, and there was an existing share repurchase authorization with evaluation ongoing. Christopher Abate added on debt maturity ladder and attention to share repurchases.

Q: Eric Hagen asked about securitization catalysts and CoreVest loan returns.

A: Christopher Abate mentioned rating agency model changes and advocacy for securitization rule changes. Dashiell Robinson said return expectations were stable, with competitive tailwinds in fragmented markets and focus on credit policy over spread adjustments.

Q: Steven Delaney asked about prime jumbo loan product and market dislocation.

A: Dashiell Robinson said prime jumbo rates moved within a 100 bp range, with mortgage spreads wide but attractive. Christopher Abate noted private credit bid helped stabilize during volatility.