Good afternoon, and welcome to the Redwood Trust Inc. Second Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood's Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today for our second quarter 2024 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions and include 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 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 second quarter Redwood Review, which is available on our website, redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that is only accurate as of today. We do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. With that, I'll turn the call over to Chris for opening remarks.

Thanks, Kate, and welcome everyone to Redwood's second quarter of 2024 earnings call. As always, I'll kick off our opening remarks before handing it over to Dash and Brooke to cover our operating and financial results. At our March Investor Day, we said that investors in RWT hold the keys to tremendous optionality on the future of housing finance. This statement was meant to reflect our unique strategic positioning in response to anticipated regulatory shifts and the rapid emergence of private credit investors in our sector. Today, after a second consecutive quarter of approximately 50% growth in residential consumer lock volumes, combined with 40% quarterly growth in residential investor loan volumes, validation of that statement is upon us. Year-to-date, we have distributed close to $3.5 billion of our collateral. As investors continue to exhibit strong demand for the residential assets, we are uniquely positioned to source and manage. And now, as the Fed finally begins to exhibit signs that its historic tightening cycle is ending, a macro environment to facilitate transformative growth can emerge. Putting it all together, we think the case for Redwood has never been clearer. To recap our second quarter results, we improved our operating efficiency on the back of strong volumes while realizing a 20% reduction in fixed costs. Earnings available for distribution was $0.13 per share, 70% higher than the prior quarter. Our June 30 GAAP book value was $8.73 per share, roughly flat on the quarter, and we estimate book value is up an additional 1% to 2% at July 31. Progress with our bank partners illustrates the core asset liability challenges these institutions still face when funding fixed-rate mortgages with deposits. This drives shifts in bank product and portfolio strategies and has further evolved how banks serve their customers. As we continue to focus on forward flow jumbo production with the banks, we now consider the $1.3 trillion of seasoned jumbo loans on bank balance sheets to be an addressable market for us. In fact, in the second quarter, approximately 35% of our bank lock volume came from such seasoned portfolios. All told, our lock volume with banks grew 80% quarter-over-quarter. On the regulatory front, recent commentary from the Fed also suggests that a re-proposal of the Basel III Endgame rules is imminent. Though we were the first to acknowledge that anything can happen in Washington these days, we're encouraged by the early feedback on Christy Goldsmith Romero, who has been nominated to be the new Chair of the FDIC. Goldsmith Romero stated publicly that she is very open to the re-proposal of the Basel III Endgame capital requirements and that the agency under her leadership will strive to follow congressional intent concerning a law requiring banking agencies to tailor their capital regulations to bank size. We currently expect a vote on this nomination to occur in September after the Senate returns for a three-week session beginning the week of September 9th. Turning to our investor loan business, demand from private credit institutions helped drive the strongest return for our residential investor segment since 2021. As you recall, our recently established partnerships with CPP Investments and Oaktree are indicative of the ongoing demand we have witnessed for our residential investor loans. These joint ventures, combined with ongoing inroads with whole loan buyers, will help evolve the platform's revenues toward recurring and predictable fee streams, facilitating scale with less direct capital usage over time. Looking ahead to the second half of the year, we remain pleased with our market positioning and will continue to execute on our strategic goals. However, we're preparing for unexpected challenges, particularly in light of an already unprecedented presidential election cycle. Though rates remain stubbornly high, a data-driven Fed now has increasing evidence to commence a more accommodating monetary policy, and we're optimistic on what that could mean for our markets across the residential housing landscape. We look forward to further updating you on our progress as regulatory, monetary, and political changes take shape this fall. And now, I'll turn the call over to Dash to discuss our operating performance in more detail.

Thanks, Chris. Second quarter operating performance across our platforms reflected important progress on wallet share, improved efficiencies, and continued momentum on distribution. We grew revenues, increased activity with joint ventures, sold term loans to a new strategic investor, and maintained our monthly cadence for jumbo loan securitizations. Residential mortgage banking's lock volume growth was driven by increased penetration across our seller base, including the 80% quarter-over-quarter increase in bank volumes that Chris referenced. As seasonality helped nudge overall industry volumes up from the first quarter, we estimate our overall second quarter market share in jumbo to be approximately 6%, up from 5% in the first quarter. Activity on the quarter was highlighted by the purchase from a bank of a sizable pool of seasoned hybrid adjustable rate mortgages, or ARMs, that we expect to settle later in August, an important development that underscores our role as a solutions provider to bank balance sheets. The transaction also represents attractive diversification from our traditional 30-year fixed-rate offering, which, given banks' traditional footprint in ARM lending, may become a growing opportunity for our business. As is often the case, when market conditions become more favorable, new players in our space attempt to enter or reemerge, a phenomenon we saw in the second quarter as a handful of issuers pursued market share from independent mortgage bankers, or IMBs. This dynamic quickly shifted as securitization spreads began to retrace, tightening from earlier in the year. IMBs remain a longstanding competitive advantage for our business, and in spite of these entrants, we grew IMB lock volume by 10% quarter-over-quarter. IMBs represent 50% of quarterly volume, and we expect this group to remain a critical focus in driving our overall wallet share higher. Distribution has kept pace with the growth, and we priced three jumbo securitizations during the quarter while maintaining an active posture on pipeline hedging. This drove gross margins of 72 basis points, just below our historical target range, despite TBA widening and softening in issuance spreads. Already in the third quarter, we priced our seventh jumbo securitization of the year backed by $638 million of collateral and sold $150 million of whole loans to an insurance company. Our Residential Investor segment also posted impressive upticks in volume and profitability during the second quarter, funding $459 million of loans, up 41% from the first quarter. Importantly, origination momentum came from higher margin products where we have prioritized growth. After several quarters of impact from persistently higher rates, term loan volume rose 90% quarter-over-quarter and was close to half our overall funding mix, key progress given our historical footprint in this product. We also achieved record volume for both single-asset bridge and DSCR loans, growing each 50% from the first quarter. July fundings for the full business were in line with average monthly volumes for the second quarter. Market demand for our products, most notably from large pools of institutional capital seeking long-term partnerships, remains a key differentiator for the platform. We sold $415 million of loans in the second quarter, a high watermark for distribution away from securitization. This included sales to our joint ventures, including the initial funding on the CPP Investments JV and an accretive sale of $240 million in term loans to a large insurance-backed buyer. This was a notable transaction and represented a sizable new investor for our loans. Our results reflect the benefits of the partnerships that we have established, and looking ahead, we believe the depth of our distribution sets us apart in managing the business to durable profitability. Credit performance in our Residential Investor portfolio has remained stable overall but continues to command asset management focus, particularly related to workout activity within our legacy multifamily bridge portfolio, a strategy we largely discontinued in the summer of 2022. Through the process of stabilizing this portfolio, we have continued to incur incidental workout costs as we progress toward productive resolutions. Given the pace of paydowns and workout activity, we expect this portfolio to continue factoring down in the next two to three quarters with moderating interest rates, potentially accelerating payoff and refinance activity. The second quarter was a recent high point in deployment within our investment portfolio, with over $130 million of capital put to work. Investments were generally focused on shorter duration, higher coupon securities from third-parties, and helped drive the growth in net interest income that Brooke will describe in more detail. Fundamentals within our overall $3.4 billion investment portfolio continued to perform well, particularly in our jumbo and reperforming loan books, where performance has materially exceeded our modeled expectations. The carrying value of this portfolio has been significantly impacted by the 550 basis point hike in benchmark rates over the past two years. As rates stabilize and potentially begin to come down, the book values of our long-term fixed-rate investments stand to directly benefit. With the overall portfolio still carried at an aggregate $2.18 per share net discount, 65% of which is from our jumbo and reperforming loan securities. This represents a key source of earnings upside that in recent quarters has been hard to unlock. I will now turn the call over to Brooke to discuss our financial results in more detail.

Thank you, Dash. We reported GAAP earnings of $14 million, or $0.10 per share for the second quarter compared to $29 million, or $0.21 per share in the first quarter. Earnings available for distribution, or EAD, was $19 million, or $0.13 per share for the second quarter, up 70% from $11 million, or $0.08 per share in the first quarter. This resulted in an EAD return on common equity of 6.5%, primarily due to growth in net interest income and higher net income contributions from both our mortgage banking platforms. We saw positive fair value changes on our investment portfolio in the second quarter, but performance lagged the first quarter due to higher reserves on our bridge loans. Our book value per share was $8.73, a slight decrease as compared to $8.78 at March 31. Including our $0.16 common dividend, we delivered an economic return of 1.3%. This brings the year-to-date total economic return to nearly 5%, which would exceed our dividend yield on book value on an annualized basis, underscoring our ability to deliver a stable to growing book value and consistent dividends despite a volatile market backdrop. Higher volumes and improved operating efficiencies resulted in higher returns across our operating platforms during the quarter. The Residential Consumer Mortgage Banking segment delivered a 16% return, and the Residential Investor segment delivered a 13% return, adjusting for the amortization of acquisition-related intangibles. Net interest income continued to grow in the second quarter, increasing by $1 million to $25 million. The roughly $130 million of accretive capital deployment during Q2 contributed roughly $4 million to net interest income. This was somewhat offset by lower net interest income from the bridge portfolio due to a smaller portfolio size, as we saw nearly $400 million of payoffs and $200 million of transfers into joint ventures in the first half of the year. Additionally, loan modifications led to a 10-basis point reduction in our weighted average coupon on the portfolio compared to Q1. We anticipate that continued accretive capital deployment and the resolution of lower-yielding legacy bridge assets will unlock incremental capital for redeployment, further optimizing our Investment Portfolio's net interest income. We benefited from measures taken in recent quarters with general and administrative, or G&A expenses, decreasing by $1.2 million from the first quarter, primarily due to a 20% reduction in fixed employee compensation. Given the progress in scaling our volumes, efficiencies also improved in our operating businesses. The cost per loan for a residential consumer decreased to 22 basis points from 36 basis points in the first quarter, driven by bulk activity. With two consecutive quarters of 50% growth in loss volume, we anticipate that operating expenses will trend back closer to a 30 to 35 basis point historical target range. We also saw the net cost to originate for residential investors, improving to just under 100 basis points in the second quarter, which is also approaching long-term efficiency targets for that business. We maintained a robust cash position of $276 million at quarter end, effectively unchanged from the first quarter even as we grew the business and deployed accretive capital. Post quarter end, we retired our 2024 outstanding convertible debt using existing cash on hand, reducing our total convertible debt outstanding to $364 million, down 43% year-over-year. We closed one temp securitization and one resecuritization, freeing up approximately $70 million of incremental cash. Pro forma for these activities, our July 31st cash and cash equivalent position stood at approximately $275 million. We were active on the financing front, securing $2.5 billion in new or refreshed capacity, including $1 billion to support our joint ventures. These new facilities, executed on favorable terms with existing bank partners, are expected to support growth of our own production. We added a few new facilities to maintain sufficient runway for our residential consumer pipeline with a $300 million facility that supports our capital-light, high capital return strategy. Additionally, during the second quarter, we drew down $125 million of our CPP Investments facility and still have another $125 million remaining under that facility. We also completed an $85 million senior unsecured corporate note offering with a 9% coupon inside our inaugural issue in January, providing incrementally accretive capital for deployment. Total recourse leverage was 2.1x for the second quarter, up from 1.9x in Q1. The increase was attributable to a higher balance of residential loans and inventory, partially offset by the conversion of over $200 million of recourse debt secured by bridge loans to longer-term, nonrecourse structures. We believe we have sufficient capacity to support the further growth of our operating platforms, with $6.1 billion in total financing capacity at quarter end, of which $3.8 billion was undrawn and available. Looking forward, we aim to build on the momentum generated in the first half of 2024. We remain committed to growing market share and deploying capital accretively to grow earnings throughout the remainder of the year. And with that, operator, we will open the line for questions.

Our first question comes from Bose George with KBW.

Can you talk about the bulk pipeline, and also can you discuss just the economics of the bulk business, like was there any financial impact from the acquisitions this quarter, or is that when it's disposed? Yes, how that differs in any way from the regular full volume?

Sure, Bose. It's Dash. I can take that. In terms of the prospects for bulk, I think we remain really optimistic that the transaction we talked about that we expect to settle later this month is the first of several. Obviously, those are a little bit more episodic conversations with banks versus our sort of point-of-sale flow business. But if you look at the dynamics, number one, with rates, obviously with this recent rally, we're getting much closer to a point where dollar prices may make sense for certain banks looking to dispose of seasoned collateral. Obviously, the dynamics with Basel, banks looking to manage overall balance sheet sizes, continue to be a dynamic that we see a lot, and we think is a tailwind for availability of bulk. So those are all positive tailwinds. And oftentimes, including this situation that we talked about, it involves being around the loop with these banks and constant dialogue, whether that's being active on the flow side already or simply being in with the C-suite of these banks with the decision-makers and being the first phone call when they decide to sell those portfolios. So, obviously, a bulk pipeline looks and feels a little bit different than flow, just given how episodic it can be, but we feel like there are a lot of tailwinds, including being able to get one done. There's always a lot of learnings, particularly with seasoned portfolios that really matter. In terms of the economics, I think we are appropriately conservative in terms of how we thought about the economics in the second quarter of the pool. As I mentioned, it was scheduled to settle later this month. We'll intend to execute that in the third quarter. So there's hopefully some incremental upside there. And like we talked about on the call, the fact that it's hybrids, I think, is meaningful. As you know, hybrids are not commonly securitized. They've historically been a bank product. Sometimes they do trade bank-to-bank or maybe even with insurance companies. But we're really excited to control that production because we think it's differentiated in terms of what the market is buying, and I think also sets us up well to potentially do more hybrids on the run as well.

Okay. So that makes sense. But just in terms of like when you think about your target range of 75 to 100, the bulk doesn't necessarily need to kind of fall there. Is that fair?

It could. I mean, I think for bulk where we're in touch with larger loans and there's less fallout pipeline risk to manage, you're right, it could make sense to work for a little bit below that. That's not how we feel like we're working on this portfolio. We felt like with this portfolio we're working within our range. But you're right. With bulk, there are efficiencies and through time it could make sense to work for a little bit less if the capital efficiency is ultimately there.

Okay. Great. And then, actually just one more on switching to the bridge loan, the delinquency increase. Can you talk about the drivers? Was that on the multifamily trends? What drove that?

Sure. So, in terms of the overall trend of the book, it was a modest uptick. It was largely driven by multifamily. We did resolve several of our 90-plus bucket during the first quarter. But in general, that book, Bose, I would say, just a few things. In the bridge portfolio overall, we've continued to see runoff. We had close to $0.25 billion of payoffs in the second quarter. So, some of that increase is because we actually do have a smaller portfolio at this point. In general, we're seeing the lending markets open up. We saw a lot of loans refinance out in the second quarter that we were probably less constructive on refinancing. So you're definitely starting to see the flow of funds increase in those markets. So it was definitely a modest uptick, but we resolved a lot in the second quarter. And importantly, that portfolio remains ring-fenced. It's just over 10% of our overall capital at this point. And we're continuing to see it factor down.

Our next question is from Douglas Harter with UBS.

Hoping you could talk a little bit about the decline in revenue margin this quarter. How much of that would you attribute to the competition you mentioned versus the volatility in TBA and securitization spreads?

This is Chris. On margins overall, there's a lot of forces at play. There's a lot of issuance activity that's picked up. A lot of it has to do with the mix of the collateral. But what I would say is, we continue to become more efficient. And so, we're controlling what we can control. I do think that we're still projecting historical ranges for margins. That's 75 to 100 in jumbo, for instance. We still like where that sits, mostly because there's pushes and pulls in the market. And as margins go up, you see more competitors, which we have seen very recently. And when there's a glut of supply, deals widen and competitors leave, and margins trend back to the range. So I think it's part of the noise of the business. But I still think the historical ranges that we speak to are the right way to think about the economics.

Great. And I apologize if I missed anything. Please continue, Brooke.

No, I'm just going to remind you that we have experienced losses in the previous two quarters, which were significantly beyond our historical gain on sale primarily due to securitization spreads. We are continuing to improve our execution. Therefore, being able to achieve results close to our historical gain on sale, despite both AAA spreads to TBAs and TBAs widening throughout the quarter, demonstrates the effectiveness of our hedging strategy.

Great. And I apologize if I missed this, but did you give an outlook for either July locked volumes or your outlook for the full quarter?

No, we didn't.

Our next question comes from Crispin Love with Piper Sandler.

First, can you talk about the HEI product a little bit, which saw a big pickup in revenues in the quarter? What drove the pickup? There was primarily just valuations there. And also just HEI in the area, you're bullish on near-term what rates are and how you do the outlook.

Yes, it's a great question. The main driver of those at work, you're correct. And then, the portfolio in terms of its overall valuation was that those were really fair value changes on the portfolio. A lot of what we have in terms of income on that portfolio is almost think about it as like recurring accretion. Those underlying options are struck at a discount to appraise value and so almost act like a bond instrument in certain ways that a lot of our return from the underlying option is accreted through time. In excess of that accretable return every quarter, we did see a modest pickup in the fair values also from both an improvement in HPA throughout the quarter as well as a small improvement in the forward forecast for HPA.

Great. Appreciate that. And then, can you just also just speak to your current thoughts on the dividend? And if you and the Board think you are at the right level at $0.16 when you look at GAAP EAD, and then also the rate outlook with the Fed likely to begin cutting in the coming months. And then, what you might need to see to get back to covering the dividend with EAD?

Yes, I'd say high level and Brooke can color comment on that. We feel very good about the current level of the dividend. And we feel like starting with our March Investor Day, we're tracking towards EAD covering the dividend at $0.16, EAD was $0.13. I think more importantly, though, in the big picture, there is the prospect of a rate cut. And we talked about the macroeconomic environment for our sector has been very, very challenging the past few years. As that environment shifts, that should definitely be a tailwind behind us, not only in our ability to lower funding costs and generate incremental net interest income, but the book, the portfolio, we have a lot of longer duration fixed rate assets that have been impacted by rising rates over the past few years. And to see that start to recover, that's another facet of earnings generation on the GAAP side that is quite meaningful in how we think about the dividend going forward.

Yes. Just to pick up on Chris' comments, one thing to answer the part of your question around just earnings covering the dividend, I think when we put out the Investor Day comments, that was really under the backdrop of a higher for longer or kind of more of the same rate backdrop. So, a lot of what we laid out was really centered around our capital deployment. We have raised or unlocked a significant amount of capital from the fact that we had carried such low recourse leverage in the portfolio. You saw that take down again this quarter, so sitting just over a half a turn. When we think about the dry powder that we have to invest to continue to drive NII through accretive capital deployment, we really think about it as about $250 million today. We cited $275 million of current cash, but pro forma for the other $125 million or so remaining under CPP. And we have a lot of sources of capital, I think, behind that just in terms of the unencumbered assets that we still carry in our portfolio. As we mentioned in some of our prepared remarks, we are continuing to unlock some of those unencumbered assets through term securitizations that are pretty accretive and allow us for incremental capital to be redeployed at higher spreads today. And then, furthermore, I think if you, to Chris's point on a rate cut, if you look at the mix, especially with the uptick in residential volume, we have about $1 billion more floating rate debt than assets today because of that fixed rate residential pipeline that we finance with warehouse line debt. So that is, we see an immediate pickup to NIM there.

Our next question comes from Jason Weaver with Jones Trading.

Dash, I'm going to miss your remarks about July, but the jumbo retention rate looked quite a bit higher at 630, but with the effect of the securitization subsequently, that might be more evened out. Is that correct?

Yes, that's right. We've since done a deal in July. You're seeing that we have about $963 million of loans on balance sheets. You could continue to see that increase just as we continue to gain share and further support growing our volumes. But we are at about a deal a month cadence in the securitization markets right now. So, depending on the timing of those securitizations, you might see that balance fluctuate up and down over quarter end.

Got it. And Dash, I wanted to ask about HEI as well. Can you talk about the build-out of the sort of the sourcing network behind that?

Sure. I can take that one. This is Dash. When we decided to build that business organically a couple of years ago, we felt like we had a couple of main competitive advantages. Number one was just the operational infrastructure we have in place with the existing businesses, which is a stark contrast to a lot of the newer players that have come up over the past few years. But also inherent in that is this sort of 'wholesale sourcing network' where we can source potential HEI customers from our existing loan sellers or other sort of B2B contexts that a lot of other players aren't doing. The traditional model is more direct-to-consumer, spending a lot of money on marketing to get the word out, assessing your pull-throughs, et cetera. We definitely do a little bit of that. We have a modest spend on direct-to-consumer. But the real moat for that business from our perspective is the moat we have in other businesses with just this unique relationship that we have with 200-plus sellers. We have other relationships with other platforms that are in touch with other groups of consumers that may be interested in HEI. There's a whole emergence of secondary financing with second lean products. As you probably saw, Freddie Mac has sort of provisional approval to start purchasing closed on seconds. I bring that up because it illustrates the overall momentum in the space and that there's just a whole group of consumers we can unlock on a wholesale basis that we can serve through Aspire, which is the HEI platform. So it's still early days. We've been very judicious about the spend and the rollout because of just ranking the rate environment and also the relative newness of the product. But we're starting to see a lot of momentum in those channels. We're excited to see what that brings in the second half of the year.

Our next question comes from Don Fandetti with Wells Fargo.

Yes. Can you talk about whether or not you think Fed cuts could help some of the bridge loans get further refinanced out, and when you think that delinquency rate might peak?

Good question, Don. I think there's a few things going on. I think there's the math of an explicit cut, where certainly floating rate debt burdens will come down if SOFR goes down in the second half of the year. That's a math equation that will help incrementally. But I think maybe the overlay there is just what's happening with the sentiment in the market and the fact that I think the market has much more clarity at this point on potential timing of the Fed cutting and when we're going to go into a more accommodative cycle. And I think we're already seeing that make a difference, kind of like I mentioned in response to Bose's question. It's already making a big difference in how capital is flowing in the space. Not only are you seeing the lending markets open up, not only like in conduit land, but also private lenders that were probably more willing to step up and refinance loans today than they were six to nine months ago. You're seeing a lot of equity on the sidelines start to come off the sidelines in housing finance, where there's more clarity to what's going on with interest rates, more conviction around investments, things of that nature. And you're also seeing borrowers remain in projects. That's what's most important for us to keep sponsors engaged. Our multi-book, in particular, inherently is pretty seasoned because like we've talked about a lot, we sort of deemphasized that strategy coming up on two years ago at this point. And so, if you've been in a project for 2, 2.5 years and you've stuck with it, you have much more conviction now, frankly, than you did six to nine months ago when rates were higher, the markets were harder, and there was just less of a path to stabilization with rates and lowering. So, I think the math will help incrementally, but I think what really matters most is sentiment. And we're starting to see sentiment definitely shift, which we've seen in the runoff of our bridge portfolio, in which we're obviously pleased with.

And so, you think the delinquency rate could continue to tick up a little bit but remain relatively contained?

We have our arms around this portfolio. It's hard to exactly prognosticate the exact direction, but I think what we would expect to see continued pace of resolutions; we are actively engaged with outcomes on the vast majority of our 90-plus bucket at June 30, so we expect that to continue to run off. Being honest, we certainly expect to confront pockets of other issues in the portfolio. We expect that to come up, but we've got the right asset management team in place to deal with it. We've talked a lot in recent quarters about being ahead of the curve with these sponsors, which really matters. And I think you've seen that in the pace of resolutions. So I think we will continue to see resolutions in the book. Will other stuff come up? Yes, but we're ahead of the curve on those issues, which I think will help with the expediency of those resolutions.

Our next question comes from Stephen Laws with Raymond James.

I wanted to discuss net interest income and joint venture fees. Brooke, you mentioned some payoffs, and as we see a shift in investments, there will be an impact. Can you share the outlook for net interest income as more assets move into the joint ventures and how we can expect joint venture fees to increase? I recall you've previously mentioned an estimated $0.15 of annual effective annual distribution once fully scaled. Could you provide a timeline based on the pace you've observed in the second quarter for when you anticipate these joint ventures will reach scale?

I'm glad to start. It's an important point regarding the timing disconnect. Historically, we have had $100 million in loans being repaid, which we reinvest into our investment portfolio and bridge loans. While there may be a slight delay in recognizing revenue from fees as we scale the joint ventures and account for 20% of the net interest income fees, this approach unlocks a significant amount of capital. I believe that $250 million is a conservative estimate for our investable capital today, considering our sources of capital. This will more than compensate for any impact from a smaller bridge portfolio on the balance sheet. Additional revenue may come from increased noninterest earnings, such as mortgage banking revenue, as the capital is redeployed either back into our operating businesses or into more third-party investments like we did in the second quarter. Our capital deployment led to approximately $4 million in incremental net interest income. Although we did experience an increase in corporate debt expenses to finance it, we expect net interest income to grow throughout the second quarter. We disclosed that we placed about $120 million in loans into the CPP joint venture, albeit late in the quarter. We also have multiple financing lines that we view as beneficial and that should help drive profitable volume in that sector. Therefore, the third quarter is set for deployment, and with the overall increase in bridge loan volume we observed, we anticipate ramping up nicely over the next few quarters.

And I want to follow up on kind of a broader higher-level question about the bank relationships. I know over the last year or so, as you guys have really started growing that given the shift in the market, it doesn't just turn on overnight. I know there's a difference in underwriting loans for bank balance sheets versus your exit of securitization. So, can you talk about how the maturation of those relationships or seasoning works? And are things still ramping up? And I think it probably goes to your point earlier about just being around the hoop with conversations with managements announcing some bulk purchase opportunities of season loans. But can you talk about how long that usually takes from forming that initial relationship to when you feel like you're really moving at 100% as far as capturing the flow and opportunity with those bank sponsors?

Sure, Stephen. I'll take that one. The bank relationship building has been ongoing, as you know. And we're really pleased with some of the metrics that we're seeing. Certainly, bank volume is a percentage of total lock volume, number of active sellers. I think we're right about 50-50 between banks and IMBs, and most of that momentum is with the banks today. So, we would expect that to continue to go higher on the bank side. The relationships, the way we think about it is we continue to be doing infrastructure building with these guys. And ultimately, this is the first time we've kind of declared the $1.3 trillion of jumbo sitting on bank balance sheets is officially an addressable market of ours, which is what we're trying to do. We're trying to build and grow the markets that we can address. For years, those were loans that we never saw. And I think that what's really interesting is as these relationships stood up, and as monetary policy shifts, we can buy loans from banks, and we've been an avid seller of loans to banks. So what's most important is the infrastructure building and having these relationships. We sort of approach it through the context of a vendor versus just a capital takeout. They invest a lot in the technology and the training. So, we think that these are durable relationships. Most of our competition, almost all of our competition for loans these days continues to be on the IMB side. The vast majority of securitization activity that picked up right into July were competitors on the IMB front. On the bank side, we continue to have great access. And most of my personal time these days is spent working with bank executives and advancing these partnerships. So, it's really exciting to start to see the work manifest into volume and earnings. And hopefully, all the work that we're doing today and over the past year, 1.5 years is going to contribute more significantly going forward. So, for us, it's full speed ahead with banking partners.

Our next question comes from Eric Hagen with BTIG.

A lot covered here already. But one follow-up on CoreVest. Is CoreVest the direct servicer for all the loans in its portfolio? And maybe you can share how the servicing function specifically has kind of evolved in that business as it's grown and how you're managing the cost as just in light of the delinquency pipeline?

Thank you for the question. For our bridge portfolio, we act as the special servicer, allowing us to interact directly with borrowers and sponsors. In both the term and the bridge books, we are not the primary servicer, so we outsource payment collection to third parties. In our securitized term portfolio, which constitutes the majority of our book, these transactions are rated. Therefore, there are designated primary and special servicers, and specific protocols for special servicing within REMICs. We are involved as the owner of the subordinate bonds, but there is a designated third-party special servicer. In the bridge portfolio, while payment collections are handled by a third-party, our asset management team maintains direct engagement with the sponsors as needed.

Got you. Okay, that's helpful. So how are you guys thinking about the cash position at this point? How much organic cash do you feel like you're generating, kind of like on a quarterly basis? How are you thinking about the pipeline of unsecured debt coming due? Just in light of other mortgage finance companies that have taken the opportunity to refinance their debt as well.

Yes. I think we feel really good about our cash and liquidity position today. Pro forma for paying off our converts, we're sitting at the same cash position that we've had for the last couple of quarters, and we put a lot of money to work accretively. The only two kind of main recourse financing obligations that we had through the next 12 months we addressed in July subsequent to quarter-end. We have had elevated bridge maturities. We are probably expecting in and around $350 million or so stepping down to high 200s of maturities of our bridge portfolio over the next number of quarters. That provides a very nice source of capital for us, as well as some of the resolution activity that Dash mentioned unlocks accretive capital that we can redeploy at more optimal levels than where it sits today. We also have dry powder from the CPP facility that I mentioned and a pretty good playback for the unencumbered assets where we sit today. But as I mentioned in my prepared remarks, our convertible debt is down 43% year-over-year. We've done a lot of work on the capital structure and raising term nonrecourse financing as you probably saw. We moved about $200 million of bridge loans into nonrecourse, non-marginal structures. Most of that bridge book is financed today in nonmarginable nonrecourse structures. We just feel really good overall about both our liquidity position, being able to go on offense, and also our liability structure in general.

Our next question comes from Rick Shane with JPMorgan.

I apologize if some of this has been covered. I'm bouncing between calls this morning. Look, one of the interesting developments we're going to start to face is a pickup in speeds as rates fall. When we think about many of the mortgage rates we follow where they own instruments at premiums, we're starting to factor that into our models. Historically, Redwood has owned instruments at pretty significant discounts and benefited from a pickup in speeds. Can you talk a little bit about that dynamic, where the accretable discount is in the portfolio and what you would need to see in terms of movements of rates to really see that manifest?

Certainly. The key point is that most REITs currently hold assets at premiums. Speeds pose a significant risk to those values and can diminish the premium. In our case, we consistently highlight that our portfolio is set at a notable net discount, specifically $2.18 per share of realizable discount. Speeds serve as an accelerant in this context, and from our portfolio standpoint, an increase in speeds will substantially enhance value. Generally, in our on-the-run businesses, lower interest rates benefit us. We have been prepared for a prolonged period of higher rates, as mentioned earlier, and the predictions regarding when rates may decrease have shifted dramatically. A few months ago, many did not anticipate a rate cut this year, but now there is a growing consensus pointing to September. This macroeconomic environment could create a positive tailwind for us, especially as we start to realize the accretable discount in our portfolio. While we've discussed multi-bridge, which constitutes a small portion of our overall portfolio, the credit performance has been robust. It's important to note that the main factors influencing movement are rates rather than credit. If rates decline, this will hopefully contribute positively to GAAP earnings. Additionally, an increase in speeds for the on-the-run business indicates higher loan activity, which translates to more regular business for us. Overall, I believe we are positioned quite differently and favorably compared to many others in the sector.

Got it, Chris. And if I could ask one follow-up. Is the takeout for most of your multi-family bridge, the Fannie-Freddie multi-family window, and are you starting to see a pickup in activity there, even though short rates remain elevated as the tenures come down?

That’s definitely part of it. As I mentioned earlier, we experienced about $0.25 billion of runoff in bridge financing during the second quarter, with a significant portion coming from multi-family. Many sponsors tend to go with Fannie-Freddie. The difference between a 10-year at 4% and 4.5% is substantial, impacting the feasibility of those loans being refinanced in relation to debt yields. This recent rally, especially following yesterday's comments, seems to be encouraging refinances for loans that may not have been viable before at 4.5% but are now. We are indeed recapturing the loans we want in our term book, while also seeing many loans that we are pleased to let go. It’s not just GSEs that are involved; numerous private lenders are now willing to step into the space and take on loans that may not have a straightforward path to GSE takeout. Generally, there’s more liquidity flowing through the system, even beyond the major institutional takeouts like the GSEs. This environment supports paydowns and related activities, and you’re correct in noting we’re in a rate range where slight decreases can significantly influence whether loans succeed or fail in terms of GSE takeouts.

Got it. Sorry, I sort of had you guys repeat that. Appreciate it.

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