REDWOOD TRUST INC Q3 FY2024 earnings call

• Increased common dividend by over 6% to $0.17 per share for Q3, reflecting operating growth. Combined mortgage banking returns were highest in over three years. - Collaborating with loan sellers as mortgage rates rise; sold or securitized ~$1.5 billion of jumbo collateral in October. - Residential consumer mortgage banking returns tripled vs Q2, with return on capital at 30%. Residential Investor segment EAD return on capital at 58%. - Optimized use of high advance rate facilities, distributed $242 million of loans into JV entities. - Partnership with CPP Investments joint venture, contributing nearly $650 million of loans to JVs through October.

The Residential Consumer Mortgage Banking segment achieved a return on capital of 30%, up from 16% in Q2. Its income was driven by lower rates, strategic positioning for interest rate volatility, and spread tightening on securitizations. The Residential Investor segment had an EAD return on capital of 58% compared to 13% last quarter. It funded $458 million of investor loans during the third quarter, with highlights including record Single Asset Bridge originations and growth in bridge lines of credit. The Residential Consumer Mortgage Banking segment's revenue contribution and the Residential Investor segment's financial performance were key aspects.

• Anticipate elevated margins for consumer business will normalize to historical range of 75-100 basis points as longer-dated rates revert higher. - Expect housing activity to pick up in coming quarters from anemic levels. - Portfolio's net discount of $2.09 could unlock as interest rates fall, with 97% of assets having call rights. - Normalized margins for consumer business are guided, but momentum continued into October.

• Rate volatility, as seen with rates sitting nearly 70 basis points higher than September lows. - Credit risks in different portfolios, with Residential Investor segment taking incremental reserves on bridge loans. - Market uncertainties related to the presidential election and macroeconomic policy shifts affecting housing access.

Q: Rick Shane asked about the net discount on the portfolio and credit risks.

A: Dash Robinson said risks differ by asset class, with reperforming loans having strong performance and capital securities having different dynamics. Chris Abate added the portfolio's discount is mostly recoverable and they expect to benefit as rates ease.

Q: Bose George inquired about disaggregating mortgage banking gains and lock volume trends.

A: Brooke Carillo said half of mortgage banking revenue was from rates, with 12 ticks of spread tightening on securitization. Chris Abate noted lock volume ended the quarter higher, with October off to a good start.

Q: Jason Weaver asked about leverage and liquidity.

A: Brooke Carillo said leverage trended back down, around 2.2 times, and they're pleased with liquidity. Chris Abate mentioned lower leverage than sector and strong non-recourse facilities.

Q: Doug Harter asked about HEI income and ROE.

A: Brooke Carillo said HEI income down due to HPA reverting, and Chris Abate noted long-term bullishness on HPA and upside in the portfolio.

Q: Don Fandetti asked about rate move impact on book value and EAD.

A: Chris Abate said book value was flat, and Dash Robinson added hedging strategy impact on NII and risk capital.

Q: Brad Capuzzi asked about dividend.

A: Chris Abate said Board values growing dividend, and Brooke Carillo mentioned tailwinds from accommodative rate cycle and capital deployment.

Q: Steve Delaney asked about 30-year fixed rate prime jumbo loans.

A: Dash Robinson said 30-year fixed rate is in high 6s to low 7s, with borrower psychology and market share gain.

Q: Eric Hagen asked about HPA and jumbo supply.

A: Chris Abate said GSE loan limit increases are priced in, and jumbo supply could grow with bank lending if rates remain high.