Redwood Trust, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Strategic Transition: Chris Abate discussed accelerating Redwood's transition to a more scalable/simplified operating model, including reducing exposure to legacy multifamily bridge loan portfolio, third-party securities portfolio, and other noncore legacy assets. Repositioning capital into mortgage banking platforms, with over $200 million allocated to operating platforms in past year.
• Operating Platforms Performance: Dash Robinson highlighted Sequoia's lock volume growth, Aspire's traction with tripled lock volume, CoreVest's funding and distribution activity. Bridge portfolio delinquencies decreased to 11% at June 30 from 12.1% at March 31.
• Financial Results: Brooke Carillo reported GAAP net loss of $100.2 million or $0.76 per share for Q2. Introduced new reporting segment Legacy Investments and Core segment's EAD, a non-GAAP measure, showing Core segment's EAD of $25 million or $0.18 per share, 14.5% annualized ROE.

Segment Performance

• Sequoia: Locked $3.3 billion of jumbo loans in the second quarter, a 15% increase in on the run/current coupon flow volume vs Q1. Distributed nearly $3 billion of loans in Q2, including $2 billion via 4 securitizations. Year-to-date issuance at $5 billion, the most active since 2021.
• Aspire: Lock volume tripled sequentially to $330 million in Q2, driven by a growing network of originators. Current pipeline has an average borrower credit score of 753 and average LTV under 70%.
• CoreVest: Funded over $500 million in loans in Q2, highest volume since mid-2022. Distribution activity nearly $600 million through whole loan sales, sales to joint ventures, and securitizations, including first rated securitization backed by RTL and other bridge loans.
• Legacy Investments: Represents assets targeted for sale or other disposition. GAAP net loss driven by acceleration of legacy portfolio wind down and fair value changes related to legacy bridge loans and noncore portfolios.

Guidance

• EAD Target: Anticipate consolidated EAD returns to increase to a range of 9% to 12% by year-end 2026.
• Share Repurchase: Increased stock repurchase authorization to $150 million, with plans to be more aggressive in buying back shares.
• Capital Allocation: Expect to continue allocating capital to operating platforms as they scale, with over $200 million allocated to operating platforms in past year.
• Legacy Portfolio Harvest: Expect to harvest up to $200 million to $250 million from legacy investments by year-end 2025 through liquidations, term financings, or other resolutions.

Risks

• Legacy Asset Challenges: Legacy investments, particularly older vintage multifamily bridge loans, have underperformed due to interest rate changes and market dynamics, acting as a drag on earnings.
• Market Volatility: Uncertainty in housing finance market, including evolving bank lending practices, GSE outcomes, and bank M&A activity, poses risks to portfolio dispositions and valuations.
• Economic Factors: Persistent high interest rates and potential Fed rate cuts can impact the performance of bridge portfolios and refi opportunities in the jumbo market.

Question and Answer

• Q: When we think about that 9% to 12% EAD for 2026, should we calculate based on full book value?

A: Brooke E. Carillo stated it's a blended number inclusive of the legacy portfolio, so calculate on full book value.

• Q: Dispositions of the bridge loans and legacy portfolio, expected capital generation, prices and buyers?

A: Dash I. Robinson said the $200 million to $250 million includes the legacy portfolio, marks reflect actionable levels, varied buyers exist with some loans refinanced and liquidity varied.

• Q: Sequoia gain on sale margin drivers, outlook?

A: Christopher J. Abate mentioned strong execution, tight pricing, efficient issuance driving margins, optimistic to continue strong returns though hesitant to project above long-term average.

• Q: Compartmentalizing the $0.79 loss, acceleration of disposing under-earning assets?

A: Brooke E. Carillo said it's largely driven by older vintage multifamily and early '22 vintage bridge loans, majority near-term resolutions; Christopher J. Abate added marks reflect active resolution strategies and moving resources to core platforms.

• Q: Jumbo channel margins, Fed cut impact, bridge portfolio outlook?

A: Christopher J. Abate and Dash I. Robinson discussed volume and wallet share growth, seasoned portfolios as margin expansion opportunity; Fed cut could help bridge portfolio via refinancing and cap rate recompression.

• Q: Sensitivity to Fed cut on NII, refi opportunity in prime jumbo?

A: Brooke E. Carillo noted sensitivity in fixed rate Sequoia pipeline vs floating liabilities; Christopher J. Abate said refi opportunity exists as rates come down, focus on market share in meantime.