Earnings Call Transcript
REDWOOD TRUST INC (RWT)
Earnings Call Transcript - RWT Q4 2022
Operator, Operator
Good afternoon, and welcome to the Redwood Trust Incorporated Fourth Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I'll now turn the call over to Kaitlyn Mauritz of Investor Relations. Please go ahead, ma'am.
Kaitlyn Mauritz, Investor Relations
Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's fourth quarter 2022 earnings conference call. With me on today's call are Christopher 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 regarding 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 and 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 might 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 fourth quarter Redwood review, which is available on our website at www.redwoodtrust.com. As a reminder, the Company's financial statement audit for the year ended December 31, 2022, is now complete and the results you're reporting today are unaudited and may vary from the Company's audited financial results for the year ended December 31, 2022, presented in our annual report on Form 10-K for 2022, including due to the completion audit procedures related to the valuation of our deferred tax assets at December 31, 2022. The Company's 2022 annual financial statement audit is scheduled to conclude on schedule in late February in advance of our Form 10-K filing. Also note that the content of today's conference call contains time-sensitive information that is only accurate as of today. And we do not intend and undertake no obligation to date this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. I'll now turn the call over to Chris for opening remarks.
Christopher Abate, CEO
Thanks, Kate, and thanks to everyone for tuning in this afternoon. We're excited to have the opportunity to speak with you today about our fourth quarter results. We'll also update you on our performance in the first month or so of 2023. Additionally, we'll touch on how we view the opportunity in front of us for the remainder of the year. As you probably suspect, I will cover off on the high points, and then Dash and Brooke will handle our business and financial performance in greater detail. The fourth quarter rounded out a year that brought about sudden change to the mortgage markets in a manner that was markedly different than we've seen through previous downturns and past housing cycles. In 2022, the Federal Reserve's efforts to curb inflation led to the most pronounced jump in rates in over four years, largely freezing mortgage refinance activity and profoundly affecting consumer behavior in the housing market. Significant increases in rates, severe spread widening, and ongoing bouts of volatility characterized much of the second half of the year. Our results during this period certainly didn't meet our expectations. We focused on prudently protecting our book value, managing risk, and positioning our company for the path forward. As we all know, long-term focal points such as these are sometimes only fully appreciated in hindsight. Such a challenging year is now behind us. We resolved to break the huddle in early January and quickly build momentum towards our 2023 priorities. That's exactly what we've done, realizing a welcome uptick of activity and a few accomplishments worth noting that have helped to improve our GAAP book value thus far in 2023. Already this year, we've completed a preferred stock offering, reopening a segment of the market that had seen little activity last year, while expanding our balance sheet to an alternative source of capital. Next up, we completed a sale of $230 million in business purpose lending or BPL loans to a top institutional partner at attractive terms for both firms. Selling this pool of loans was a bellwether of sorts for us, creating forward momentum for the platform that has positively impacted our new loan pricing and reaffirmed our BPL business potential to build from last year's record volumes. Generally, with our BPL loan sale in late January, our residential team completed our first Sequoia securitization in over a year. Once again, this deal helped reset the market and has now influenced a significant expansion of the RMBs issuance calendar by other sponsors; a good fact for all market participants. Investor demand for the securitization was the strongest we've seen for any private label deal in over a year, and it allowed us to increase bond prices and boost our GAAP gain on sale. Through these actions, as well as other optimizations across our balance sheet, we grew our unrestricted cash position to just over $400 million as of February 7th. This robust liquidity puts us in a strong position when considering our future debt maturities and allows us to proceed opportunistically in our markets, including through M&A and other creative investments. Accompanying this boost in available capital has been a significant reduction in our ongoing operating expenses. As Brooke will touch on, the primary focus here has been to reduce costs that conflict with loan volumes. We've been very strategic in this regard, managing costs while preserving full optionality to take advantage of market conditions as opportunities arise. As we think about capital allocation going forward, we expect consumer mortgage volumes to remain challenged, as the majority of homeowners are not financially incentivized to refinance their existing home or move to a new one with the prospect of assuming a much higher mortgage rate. In response, we have reduced working capital allocated to our residential mortgage banking business by about 70% throughout 2022. We acknowledge that January brought about some much-needed stability to the market, which was partially due to a modest decline in mortgage rates. It's simply too early to tell, however, if this is the start of a trend or simply pent-up demand following a slow fourth quarter. In the meantime, a strategic focus of ours remains attending to our seller base and ensuring we have products that meet their needs as the market evolves. This includes the refinement of our expanded prime products, as well as investor products that cater to consumers who own second homes or are looking to finance a single rental property. Despite our belief that consumer mortgage volumes will remain under pressure in the near term, there remains heightened demand for BPL products in a sector that is very much still in growth mode. BPL borrowers, unlike consumers, are locked into low 30-year rates and are therefore not content to sit on the sidelines. They are transaction-oriented, executing on business plans, and requiring liquidity from our loan products to fuel growth. With demand for rentals still elevated, we continue to see investors actively seeking the range of solutions we offer. The rental market has been tasked with providing more alternatives for households, including multi-family, built-for-rent, and workforce housing. Our focus remains on originating BPL loans secured by assets with strong fundamentals and quality sponsors. That's why we remain particularly bullish on our BPL business, even with the potential prospect of a recession in 2023. Perhaps the overall positive market sentiment to start the year matters most with respect to our investment portfolio, as it remains the primary driver of our book value. While the fourth quarter mirrored much of 2022 with further credit spread widening, thus far in 2023, the story has been different. Market prices for securities have begun to firm up, reflecting lower mortgage rates, increased housing market activity, and positive deal flow in securitization markets. I'd like to continue emphasizing that the vast majority of mark-to-market declines we incurred on the portfolio in 2022 remain largely detached from the underlying cash flows, with the book continuing to display strong credit fundamentals and low overall delinquencies. With a weighted average year-end carrying value of $0.62 to principal face value and a projected forward loss adjusted yield of 15%, our investment portfolio had approximately $500 million or $4.33 per share of net discount at year-end that we have the potential to realize over time into earnings. While the path of home prices and its impact on mortgage credit remains the critical question for 2023, we believe our portfolio construction with many seasoned assets and significant HPA realized to date makes it resilient to a wide range of downturn scenarios for the economy. With our strong cash position, we remain intentional about steering capital and resources towards markets that we believe perform better in this environment and assets we believe to be undervalued, including Redwood's corporate debt and equity. We repurchased $88 million of our own securities in 2022 and continue to be active in doing so in 2023. We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our upcoming 2023 convertible bond maturity, and remain opportunistic in repurchasing elsewhere across our convertible debt stack. While uncertainty is likely to linger well into 2023, we believe we're in the late innings of this Fed cycle, remain confident in our ability to navigate further challenges for the pillars of our diversification, strong balance sheet, and most importantly, our people. Our platform offers a compelling opportunity and a unique access point to invest in a very dynamic housing market. And with that, I'll turn the call over to Dash Robinson, Redwood's President.
Dash Robinson, President
Thank you, Chris. Following a turbulent 2022, we enter 2023 ready to take advantage of current market dynamics and drive creative results across our operating businesses and investment portfolio. I will focus my commentary on the recent performance of these segments and our current outlook and positioning before turning the call over to Brooke for a current overview of our financial performance. Our investment portfolio, which now represents 84% of our allocated capital and remains a key driver of our dividends, continues to deliver strong fundamental performance in the fourth quarter, notwithstanding further unrealized fair value changes that impacted book value. Cash flow durability remained robust across the book, an important input into our ability to realize the net discount and carrying value that Chris referenced. Delinquency rates were stable to improving across the portfolio for our organically created assets, including BPL loans and securities and retained bonds from our Sequoia deal. In the fourth quarter, 90-plus day delinquency rates stood at 2%, down from 2.1% at the end of Q3. Elsewhere, delinquency rates on our core reperforming loan positions, which we refer to as SLST, also improved, with 90-plus day delinquencies 0.5% lower quarter-over-quarter. Even with the recent slowing in HPA, and modest home price declines in certain markets, equity continues to build in these underlying loans as borrowers remain consistent in their payments. In aggregate, we estimate that the loans underpinning our securities portfolio have an LTV of approximately 50%. Results have also been favorable in our home equity investment option portfolio or ATI, the majority of which is either securitized or financed through the warehouse line that Brooke will touch on. Year-to-date speeds on our securitized portfolio have been approximately 20%, and realized returns have been strong, protected in part by an average discount to initial home value of approximately 18%. This allows the holder of the AGI to withstand meaningful downward pressure on home prices before incurring a loss of investment. Notwithstanding fundamental performance, fair values in our investment portfolio were once again impacted by spread widening during the fourth quarter, in sympathy with trends across the market. As Brooke will describe in more detail, these adjustments continue to be largely unrealized and have begun to reverse meaningfully year-to-date. As Chris referenced, our portfolio's net discount to face now stands at $4.33 per share, the realization of which comes into clearer view with each passing quarter. We remained active in optimizing our capital deployment during the fourth quarter, putting in approximately $100 million to work across organic and third-party investments and repurchases of our near-term convertible debt maturities at attractive discounts. While spreads have stabilized meaningfully year-to-date, we still see ample opportunity to deploy capital creatively across our operating platforms, third-party securities, and our own capital structure. Our operating platforms have quickly turned the page on 2022 with strategic progress in the early weeks of the year, reversing some of the volatility induced P&L from the fourth quarter. In business purpose mortgage banking, while broad market headwinds persisted through the end of the year, the team has made key improvements that are already paying dividends in 2023, including advancing the Riverbend integration, growing our whole loan distribution capabilities, and adding a new non-recourse borrowing line for bridge loans that meaningfully enhances our overall financing flexibility. We originated $424 million of BPL loans in the fourth quarter, down 26% from Q3, but in line with our estimated volume trend for the market overall. Our production mix for the quarter between BPL, bridge, and term loans rebalance compared to other quarters in 2022, as more sponsors opted to lock in long-term fixed rates where possible in lieu of shorter-term floating rate bridge loans. BPL term production volume was up 36% quarter-over-quarter, driven by a significant increase in term multifamily funding. The fourth quarter's fundings rounded out full year production volumes of $2.8 billion, a record year for the platform that led to increased importance in diversifying our distribution channels to position ourselves appropriately for 2023. We sold $92 million of BPL prison term loans during the fourth quarter and over $220 million more in January, recycling capital for a growing go-forward pipeline across our products. Distribution and profitability on new BPL term production have been particularly strong, as we complement a best-in-class securitization platform with a deeper whole loan buyer base attracted to the structure and quality of our loans. Importantly, the overall improvement in sentiment in January carried over to our sponsors. We're once again leaning into refinance opportunities or taking advantage of more constructive conditions to put fresh capital to work, either through traditional acquisition channels or newer partnerships emerging as a result of dynamics between the for-sale and for-rent markets. Our progress in loan distribution has proven well-timed and is both improving sponsor demand and addressing significant uncertainty around funding capacity for certain of our competitors. Additionally, we continue to optimize financing on our bridge loan portfolio, inclusive of the $335 million financing line we completed in December; at year-end, 100% of our bridge portfolio continued to be financed on a non-marginal basis, with 70% of the financing also non-recourse. We maintain substantial excess capacity to support new production and future funding obligations on existing loans. Notwithstanding more favorable market conditions and the equity backing of our BPL loans, given the overall environment, we continue to expect increased engagement from our asset management team in 2023, including with bridge loan sponsors seeking to refinance and managing earlier stage delinquencies, which are up modestly in Europe. As we have previously highlighted, our overall origination footprint and 2022 focus largely on sponsors with some sort of real estate stabilization strategy. Approximately 90% of originations were in bridge loans from sponsors improving and leasing off single and multifamily properties where fixed-rate loans are already stabilized. Given our progress in integrating Riverbend in the past six months, we expect to round out that production mix with an increased emphasis on single asset bridge loans, focused on repeat customers of the Riverbend platform with strong liquidity profiles and track records. Importantly, capital markets distribution for these types of loans is relatively mature, and we are well positioned to broaden our whole loan buyer partnerships and begin leveraging existing and creative financing to keep more on balance sheet. Our residential mortgage banking business maintained its defensive posture in the fourth quarter, locking $43 million of loans and managing our lowest level of inventory since early to mid-2020. This was by design as jumbo mortgage rates during the quarter moved off their 7% plus highs down to the 6%, an improvement but not enough to drive purchase money volumes higher in an environment in which refinance demand remains substantially muted. Improved market conditions in January allowed us to reverse much of the fourth quarter's widening of our residential inventory, which at year-end stood around $660 million and currently sits at roughly half that amount after several small whole loan sales and the successful completion of our January Sequoia issuance, our first in over a year. Execution on the securitization was indicative of improved market sentiment, with final pricing meaningfully above where the pipeline was carried at year-end. In monitoring market sentiment, we believe we will be able to further distribute remaining pipeline at favorable levels. As Chris mentioned, capital and costs allocated to our residential business have been reduced commensurate with recent transaction volumes. However, we have preserved the optionality to lean back in as conditions warrant to continue serving our seller base, including through enhanced rollouts of our expanded prime product offerings. The recent exit of one of the largest players in the correspondent market highlights the durability of our partnerships even after a period of reduced activity, as many of our sellers continue to prioritize capital efficiency and still place as much value as ever on our consistent speed and reliability. I will now turn the call over to Brooke to cover our financial results.
Brooke Carillo, CFO
Thank you, Dash. In my comments today, I will provide an overview of our GAAP and non-GAAP results for the year-end quarter ended December 31, 2022, and discuss select quarter-to-date metrics relating to the first quarter of 2023. We've reported a GAAP book value of $9.55 per share, reflecting an economic return on equity of negative 3.9% for the fourth quarter. The primary drivers of book value were a $0.40 loss in basic earnings per share and our dividend of $0.23 per share. GAAP earnings were impacted by negative investment fair value changes of $0.21 per share, which continue to substantially reflect unrealized mark-to-market changes. Earnings available for distribution was negative $0.11 per share in the fourth quarter, as compared to $0.16 per share in the third quarter, driven by a loss of $0.28 per share from mortgage banking due to credit spread widening on both the residential and BPL inventories. More specifically, our lower marks on our inventories reflected a lack of activity and available distribution channels at year-end, a trend as noted by Chris that has reversed thus far in the first quarter. Overall, GAAP net interest income decreased from the third quarter due to lower mortgage banking inventory as volumes and average balances declined in the fourth quarter while our cost of debt increased, partially offset by higher average coupons for our bridge loans. As Dash mentioned, during the fourth quarter, we closed a new $150 million borrowing facility for HEI investment, which contributed to the increase in interest expense. Importantly, economic net interest income was nearly $6 million higher than GAAP, primarily due to a higher average balance of economic investments from capital deployment. Liquidity was solid as of year-end and has been building. Unrestricted cash and equivalents increased by $141 million to $400 million from December 31 to February 7. This is a function of various activities already covered, such as the $70 million preferred stock offering as well as sales, securitization, and financing optimization efforts. As we noted in the review, we also see incremental opportunities to generate over $100 million of liquidity beyond our existing cash position by financing a portion of our $300 million plus of unencumbered assets. While our total recourse debt balance of $2.9 billion was unchanged quarter-over-quarter, the decline in tangible equity drove a modest increase in leverage from 2.6x to 2.8x. Given the financing and capital markets activities we conducted thus far in 2023, our estimated total recourse leverage ratio fell to 2.2x as of February 7. This decline in leverage is also attributable to our repurchase of nearly $60 million of convertible debt since the end of the third quarter, contributing both to reduced interest expense and realized gains for our shareholders. With respect to the term structure of our liabilities, we have $1.8 billion of recourse leverage maturing in 2023. As financing markets remain orderly, we foresee no issues rolling these facilities in normal markets. To further illustrate, during 2022, we renewed or established 18 financing facilities representing $6 billion of total financing capacity. In terms of our outlook, we are currently estimating book value to be up 2% through February 7, and both GAAP and EAD earnings to re-approach our dividend level for the first quarter. We see several factors that support the return to more normalized return levels for the business throughout 2023. With the mark-to-market changes we've experienced, we are carrying the investment portfolio at a forward yield of approximately 15% with credit spreads affirming. Across both mortgage banking platforms, we have largely cleared the inventory overhang from last year, which further improves our gain on sale and volume outlets. Furthermore, in the business purpose lending, we are building on our origination volumes from 2022 and are seeing profitable execution fueled by improved distribution alternatives. Our nimble capital allocation has underscored the diversity of our revenue streams and our ability to optimize the business dynamically based on where the best risk-adjusted returns are in the market. We have a variable cost-driven model that has allowed us to reduce operating expenses at the residential mortgage banking segment by 40% year-over-year and reduce capital allocated to the business by 70%. We preserved the optionality of a flagship platform that has historically generated ROE in excess of 15%. Given the changes we've made, even with the smaller opportunities, maintaining our historical market share and margins is sufficient to generate normalized returns for this business. And finally, in response to the challenging market conditions we face this year, we have been focused on rationalizing our overall operating footprint. General and administrative or G&A expenses increased slightly from the third quarter, primarily due to employee severance and related transition expenses. However, for the full year 2022, G&A expenses were down 20% relative to the prior year. Pro forma for expense reduction initiatives completed since September 30, we currently expect 2023 run rate units to be 5% to 10% lower than full-year 2022 comparable levels, in line with our guidance in last quarter's earnings call. We expect these changes to our cost structure to lead to improved profitability in 2023. And with that, I will turn the call over to the operator to open the line for Q&A.
Operator, Operator
Thank you. At this time, we will begin our question-and-answer session. Our first question comes from Stephen Laws with Raymond James. Please go ahead with your question.
Stephen Laws, Analyst
I guess first I want to touch on the conduit business. I remember a year where we've seen it kind of move like it did as volatile through the year. As you look forward, what do we need to see to kind of see more stabilized margins there and solid profitability, although obviously lower volumes and much you've seen in the first Sequoia deal and some other transactions in the market year-to-date? Do you feel we've turned the corner there, and what's your outlook on margins and margin volatility for '23?
Christopher Abate, CEO
Hi, Stephen, it's Chris. Good question. I think for residential in particular, obviously, it was a really tough year for mortgage banking and volumes, and there are pretty well-known reasons for that. As far as turning the corner goes, I think the first thing that we got done this year was a Sequoia deal. We saw a much greater demand for the issuance. That was the first deal that we'd done in over a year. I think that as demand returns in the PLS markets, that will create greater confidence, certainly for aggregators like ourselves to begin acquiring and leaning in on rates. Now, that said, we're still, I think, a ways off in rate as far as where most people would be interested in refinancing homes, versus where current rates stand north of 6%, and in some cases 7%. So, I think we're cautious in declaring victory here in the first quarter as things fully stabilize, but we've built some optionality, as Brooke said. We've taken a lot of capital out of the business. One of the great things about Redwood is, you know, we're a 29-year-old business, and we've got the ability to shift capital and resources to their highest and best use. And so, I think when it's not a tremendously a great time to be issuing, it's usually a good time to be investing. And so, I think we've created a lot of optionality there to be an investor in residential. In 2023, we're going to proceed cautiously, and hopefully we can continue issuing. We'd like to issue and do another securitization here at some point in the coming months. But in the meantime, I think we're focusing on growth areas across the business, and Dash had a lot of comments on the BPL business earlier on.
Stephen Laws, Analyst
And I'm going to follow up on one of the options on the residential side, the home equity investments. Seeing the DAC, the new financing facility put in place in the fourth quarter. Can you talk about the opportunities there? Is that an area you view as attractive now, or how do you force rank your options for the investment side as far as new capital being deployed?
Christopher Abate, CEO
Yes, I think it's very exciting. That's a great example of some of the optionality that we've built into the platform. Certainly, if people are not incentivized to move or refinance their homes, they'd like to extract trapped equity within their homes, and anybody that's bought a home in the last two or three years has accumulated quite a bit of equity, by and large. Our HEI initiative is really meant to sort of modernize the home equity process. We'll have a lot more to say about it, I think, in the coming months, but certainly, we see strong demand. We've completed a securitization in the past, and Brooke's team recently completed a financing or warehouse financing of that product. So, we're excited about things starting to institutionalize there, and we expect that to be a big focus area of ours in 2023.
Operator, Operator
Our next question comes from Rick Shane with JPMorgan. Please state your question.
Rick Shane, Analyst
Thanks, everybody, for taking my questions. I want to talk a little bit about how to think of the residential mortgage banking income line and the loss in the fourth quarter. I'm assuming that because of the execution, that some of that was mark-to-market from pipeline from the third quarter, and I'm wondering with the Sequoia sale in the first quarter, if some of that sort of been reversed, I'm just trying to understand the locks and the purchases and the fundings and the timing of everything.
Dash Robinson, President
Sure, Rick. It's Dash. I can take that. You are right. The residential mortgage banking outcomes for Q4 were largely a result of the mark-to-market on the book we held at 9/30. As we noted, we locked a little over $40 million of loans in Q4, so the position did not move meaningfully between 9/30 and the end of the year. The revenue outcomes for residential mortgage banking were really a result of just spread widening in the market. You are right. Some of Brooke's commentary on book value also includes an improvement in the carrying value of the pipeline here in January and in the early part of the year, half of which has been realized through the Sequoia deal that we executed. So the position since 9/30 has been fairly easy to trace just because we barely added to it in Q4. And you are right, much of that has reversed thus far in January with the Sequoia execution and the prospects, as Chris said, of doing another one.
Rick Shane, Analyst
Got it. And again, looking at the loan sales in the fourth quarter, it was only $131 million. So there was presumably a realized loss on the $131 million, but the remainder, whatever the outcome is on the Sequoia transaction, we will see in a few months.
Christopher Abate, CEO
Yes. I mean, whether it was mark-to-market adjustments or realized losses, we reflected the value of that pipeline at December 31. And I think that is the right way to think about it. Since then, things have firmed up quite a bit in residential. We wanted; we anticipated that, and we prepared to issue that transaction right out of the gate. So, it was a successful deal. And those again are some of the green shoots we did see in that space with investor demand, especially back for AAAs to feel confident to really lean into our rate sheets. Because ultimately, we control the volumes; it's just a matter of all the pieces coming together around inventories and volatility.
Rick Shane, Analyst
Got it. Okay. Thank you. Look, there are a lot of moving parts here, but at the end of the day, the economics at Redwood are really determined by credit performance. You have alluded to related to the securities portfolio, no deterioration, no variance versus model. Can you talk a little bit and provide some additional insight in terms of what you are seeing, pockets of strength, pockets of weakness in residential mortgage credit at this point, from a credit perspective?
Christopher Abate, CEO
Yes. I mean, I'll touch on consumer residential quickly, and then Dash can touch on BPL because at the end of the day all of our businesses are, as you said, somewhat tethered to residential credit. Our consumer residential book, which consists of our traditional jumbo, our expanded line and our RPLs, our performing loan book, just continues to perform remarkably well. Delinquencies have been essentially flat and in many cases declining. These are largely seasoned loans, most of which have participated in significant appreciation over the past few years. Looking at some numbers, our select book, our estimate for average appreciation-adjusted LTV is under 40. The choice is around 40, just over 40, and the RPL book is in the mid-40s. So when you think about our embedded discounts there—which again for select is 28 million, choice is 34 and RPLs is 278—they're sitting on significant home equity before any of these positions incur meaningful losses. So we continue to feel very, very good about where the book is positioned, certainly including with some downside scenarios with a recession. Our job is just to keep maintaining, monitoring the book and managing credit. But why don't I let Dash continue with BPL, which is the other piece of the puzzle.
Dash Robinson, President
Sure. Thanks, Chris. I would say, similar to the consumer part of the book, the empirical performance within BPL remains really, really good. Bridge delinquencies are down from where they were earlier in the year, around just over 2%, which is a very strong level. The single-family rental book, which is largely securitized, as I mentioned in my prepared remarks, saw a slight uptick in early-stage delinquencies in that book at year-end, but that has been trending in the right direction, already year-to-date, just with our asset management team engaging very directly with borrowers. Just as a reminder, in the bridge portfolio, the vast majority—around 90%—of what we finance are in some shape or form a rental or stabilization strategy. As such, the durability of the cash flows remains really, really good. What we do is look around the corner and try to anticipate where the areas of stress will be. We try to guard for that upfront with our underwriting. Our multifamily loans are typically underwritten to close to a 9% debt yield or higher. We're very careful about how we underwrite rents, and all that’s overlaid with focusing on the most sophisticated sponsors with the best liquidity. Even as rates have come down here, the 10-year sits right now probably 55 basis points below its peak from Q4. The reality is across the bridge space, there will likely be sponsors that need to come out of pocket by a few LTV points to refinance into an agency loan, et cetera. And our focus is making sure we're with sponsors that have the capital to do that, and they're executing on their business plans. We have a lot of insights into how those borrowers are performing, ensuring that reserves are rebalanced and we're revaluing properties. With more and more of those data points coming in, we're more and more heartened by how both sponsors are executing. But that's an area we will have increased focus here.
Operator, Operator
Our next question comes from Eric Hagen with BTIG. Please state your question.
Eric Hagen, Analyst
I think I have three questions, so just bear with me here. I mean, how would you say the return on capital and securitizing both the jumbo and BPL compares now versus a year ago when spreads were at some of their tightest levels? And then is the capital that you have in the jumbo segment more or less the minimum that you envision, just given where the market is? Is there any scale that you can achieve with the capital that you have there if origination volume improves? And do you see Wells Fargo's exit from the correspondent channel being an opportunity? On the originations in BPL, how often would you say agency funding is a viable takeout for those loans? I think I just heard you mention that in some cases it is. Like, is there any connectivity to the fact that GE fees have risen for those loans? And in cases where it's not an agency loan, what is the source of capital? But that typically applies to the takeout? Thanks a lot.
Christopher Abate, CEO
We’ll try to divide and conquer here. On the residential front, spreads obviously were quite a bit tighter a year ago, but I think the bigger story is what’s happened in the past few months. In early December and mid-December, prime, Jumbo, AAA were trading two to three points back of agencies; now it's closer to one and five-eighths or so. So, there’s been a big snapback, which has significantly improved the economics of securitization. Again, for us, that’s a very good sign, but running that business and leaning in on rates involves a lot of different moving parts, one of which is that you've got to carry fixed-rate mortgages with an inverted yield curve, which incurs all of the spread volatility. So, getting up and down in a securitization requires additional risk, frankly. What we’re trying to do is continue to get more efficient with that business, and we mentioned that we lowered the capital by 70% over the course of the year. As we look to distribute our remaining inventory from last year, we think that capital number can go down further, probably down to something closer to $50 million. Really, what that does is create a nice base case to lean back in when we’re ready to go, and that money doesn’t disappear. It can be redeployed, and all of this sort of pencils out into the $400-plus million of unrestricted cash that we’ve amassed here in the last few weeks and months. So, I think the goal of the fourth quarter was, in some sense, a modest restructuring to get us in a position to kind of go back on offense, which is exactly what we've done to start here.
Dash Robinson, President
On the Wells front, which I think you refer to, I think that's a tremendous long-term opportunity for us and for our long-term shareholders. That's somewhat of a bellwether of sorts. I wouldn't say Wells by and large has been the largest corresponding aggregator in non-agency, particularly jumbo since the great financial crisis, so their exit really finds opportunity for us, and potentially others. So, it’s not an overnight shift, but I think for a company that's heading into its 29th year, our business is the residential business. As things evolve, we expect that to significantly support our competitiveness in this space, with a major player like Wells stepping back. I do think that's very notable and potentially a very big long-term tailwind for us. But in the near term, the real emphasis is on the Fed and its stability, and particularly in housing and the economy, which we're most focused on.
Christopher Abate, CEO
Eric, to take your questions around BPL, if you sort of divide the bridge portfolio into three areas—multifamily, built for rent, and the single-family stabilization strategy—I would say that in the majority of cases on the multifamily side, the first sponsor that wants to hold on to the property and has the capital tenor to do that, plan A will likely be an agency or a HUD takeout. Some of that, as you know, depends on the nature of the underlying tenants, the affordability angle, things of that nature. Agency and HUD takeouts are very common to the extent that the sponsor wants to stay in investment. But many of our multifamily sponsors, I'd say most, focus on tenants where the GSEs and HUD are actually in a spot of continuing to lean into housing affordability and things of that nature. Historically, those have led to more favorable execution outcomes that we would expect to continue. Notwithstanding your point around the GV, just given where our mission footprint is with the GSEs. We have often refinanced multi-family into our own term product, which we securitize. That tends to occur when the GSEs hit their caps, which they have annually, as you know. We also can do that when a sponsor is stabilized and view it as more efficient to refinance private label as opposed to waiting for a number of months of seasoning by the GSEs at certain stabilization levels. We do see opportunities like that. On the build-for-rent side, some of those are eligible for agency, which depends upon how the property is packaged. Typically, for single-family bridge stabilization strategies, it’s a win-win for us to be the takeout. That's a huge source of our term business, which we securitize, as our bridge book for sponsors refinance with us into longer-term fixed rates.
Operator, Operator
Our next question comes from Derek Sommers with Jefferies. Please state your question.
Derek Sommers, Analyst
Good afternoon, guys. With Wells exiting correspondent and some other smaller non-QM lenders hitting speed bumps, do you see that as more of a volume opportunity or a margin opportunity in the near term or a combination of both? And then just to tap into the capital allocation to the mortgage lending. I know you guys mentioned that you reduced it by 70%, but how flexible is that capital allocation on the flip side on a quarter-to-quarter basis when you want to dial it back up? Thank you.
Christopher Abate, CEO
As I noted, I think it's most fair to characterize the Wells exit as a long-term opportunity, frankly. Wells and other money center banks remain very competitive on the retail side and the branch side in mortgage. That piece of the puzzle hasn't meaningfully changed. But I do think as things stabilize, it could be quite a game changer for us in particular. As for the flexibility of the capital, I think it's very, very flexible. I think we have put ourselves in a position where we can be very nimble with allocating capital. We've got a workforce that's pretty attuned to operating and investment capacity, as well as an issuance capacity. Moving the capital around and optimizing it is one of the hallmarks of the platform. What our goal is in residential mortgage banking is to preserve full optionality. We have focused on variable costs, but as for the integrity of the platform, the relationship with our seller base, and the technology, we continue to make investments in technology. All of that is something we focus on a day-to-day basis. As for leaning in again, we control the rate sheet. So, the points at which we feel comfortable from a risk standpoint getting more aggressive? I do think that we need to see a little bit more here in the first quarter and potentially into the second quarter to really get that trajectory moving as rapidly as we'd like. But we have a lot of uses for the capital, and growing them right now is a big, big focus of ours.
Operator, Operator
And our next question comes from Doug Harter with Credit Suisse. Please state your question.
Doug Harter, Analyst
Can you talk about how long you think kind of aggregation periods are now, whether that's to securitization or the whole loan sale? And what you might be able to do to even shorten that time further, just kind of given the volatile period that we just went through?
Christopher Abate, CEO
Yes, again, we can speak to both businesses. On the residential side, I think what we've most focused on is clearing out some of the 2022 inventory. We're very fortunate to stay on top of it and not be a forced issuer as others were. We took a year off essentially between securitizations. When the moment was right, we were able to hit the market pretty quickly, and we did a few weeks ago, which accounted for a substantial amount of our inventory. As we've mentioned, we are hoping to do another deal here in the coming weeks or months. Going forward, I think capital turnover is going to be important because of the shape of the yield curve. Pricing in a healthy margin and, as far as the rate sheet goes, it’s going to be important just to factor in the extra hedging costs. So focusing on mini-bulk and selling loans as smaller bulk pools to investors will be an emphasis of ours. When all is said and done, we really would like to get back to kind of the regular way aggregation that we've seen the past few years; we're just proceeding cautiously.
Doug Harter, Analyst
Can you just talk about how you envision your capital structure? Obviously, you have the converts coming through this year and issued the preferred. What do you see as the optimal mix of the capital structure?
Brooke Carillo, CFO
Thanks, Doug. It's a good question. We probably thought from our materials that through the first quarter in the fourth quarter. We bought back about $55 million of our 23s and 25s. Since we started buying back our converts, we've actually seen our capital structure tightening quite nicely, which I think was also aided by our preferred equity offering that priced inside our convertible debt stack as well. I think we did a small inaugural issuance of preferred, intentionally, and it is expensive, but relative to the cost of convertible and other unsecured forms of debt, we think they're perpetual capital that actually has a nice place in our capital structure and our future issuance. We expect to be tighter on the follow of that. You probably noted from our materials and prepared remarks that we have done a nice job continuing to raise cash on hand, as we are set with $400 million. We have $300 million in total unsecured that matures through 2024. So, we will likely continue to either repurchase at a discount or cease it. If you even think about the level of costs that we have in our 2023 maturities. You can cover that interest expense with six-month T-bills today, which is quite amazing. We will continue to address our term maturities while balancing it nicely with other accreted forms of capital in the capital structure.
Operator, Operator
And our next question comes from Don Fandetti with Wells Fargo. Please state your question.
Don Fandetti, Analyst
Brooke, could you talk a little bit about how you're thinking about net interest income in Q1? And then maybe some of the pluses and minuses as you work through the year?
Brooke Carillo, CFO
Yes, it is a good question. I think what you've seen out of our net interest income line item is stability. In the fourth quarter, we reached what we really view to be a good run rate. We've had a lot of more one-time season income that have come into net interest income over the course of the year. Those represent upside from the levels we saw in the fourth quarter, but items such as yield maintenance have been as high as $5 million to $7 million in different quarters throughout the last year that were essentially flat in the fourth quarter. We think GAAP net interest income in the fourth quarter represents a good run rate, as I mentioned. We are continuing to deploy capital into bridge, which continues to be a nice tailwind for NIM, actually contributing a positive $4 million to an interest income on the quarter. It generated a 27% return on capital for the quarter. In terms of deployment opportunities—especially with the amount of cash that we're sitting on today—that continues to be an area of focus. We actually saw that this was driven not only by volume, which was actually done on the quarter but weighted average coupons on bridge loans being about 50 basis points higher than cost of funds. I would really point you to economic net interest income as we head forward, that was $6 million higher, as I mentioned in my prepared remarks, than GAAP net interest income, driven by some discount accretion and effective interest on certain assets that aren't captured in our GAAP net interest income but rather through investment for value changes—those are run rates that is run rate income for us. We see tailwinds for economic NII continue to grow both from deployment and certain of those assets whose effective yields will continue to be realized through it. I would also just note our financing costs; they were up about 100 basis points last quarter but they’ve really stabilized. With the projected front ends of the curve and also spreads on renewals, we've seen really stabilize. We had been seeing spreads widen a bit on financing lines throughout kind of the mid-second half of the year, and those need to be stable. We continue to have more floating rate exposure on the asset side of our portfolio than on the debt side of the portfolio. So any further increases to rates should actually be manageable.
Operator, Operator
And our next question comes from Bose George with KBW. Please state your question.
Bose George, Analyst
Sorry. It was on mute. Hey, guys. Just wanted to ask about returns on the investment opportunities or the best investment opportunities that you are seeing, and how returns compare to that 15% in-force yield on your existing portfolio?
Dash Robinson, President
Hey, Bose, this is Dash. I can take that. The organic creation largely through BPL is articulated in that mid-teens context or better for both bridge as well as the residual pieces that we can create through securitizing SFR loans are very much in that context too. Obviously, some of this is aided by the fact that we are in a higher total rate of return environment with benchmarks, and also our lending spreads have certainly widened in sympathy with the market over the past year or so, although they have tightened up given the market dynamics in the past few weeks. Beyond that, as Chris articulated earlier on the call, given market dynamics, we are definitely seeing more interesting opportunities on the third-party side as well. We have been a regular investor in agency CRT securities. Those have certainly tightened this year, but they remain interesting. There are also some other shorter-dated opportunities as well, more senior non-rated cash flows that others are issuing that we are focused on. We won't be investing in mortgage servicing rights. But with the potential for certain banks to be divesting of those, there might be some interesting opportunities there as well. So, in general, these will continue to meet that hurdle, with that, mid-teens or higher still based on where we see the market right now.
Bose George, Analyst
Okay, great. And then actually just going back to the residential mortgage banking business, in terms of getting back to normalized returns, do you need to see some pickup in refinance activity, or as sort of industry capacity gets pulled out over time, you can sort of get to normalized returns that way?
Dash Robinson, President
Yes, it's kind of all of the above. I think the first and most important thing is stability in rates. Rate volatility has kept a lot of consumers on the sidelines with respect to buying homes, and obviously refinancing homes. But the business can function in high-rate environments. I think the housing demand in the housing market has picked up in January, and we will be heading into the spring selling season here. The capacity issue is a real issue. It's a bigger issue, I think, for mortgage originators than it is for us. If anything, with the Wells announcement, there will be fewer players, so that piece is a positive. The real answer is rate stability, because it not only drives consumer behavior but also demand for our bonds. I think once we have had a really good January, and frankly, if we can continue the momentum here, I could certainly see the economics penciling out much better for the business in the coming months and certainly in the coming quarters.
Operator, Operator
Our next question comes from Steve DeLaney with JMP Securities. Please state your question.
Steve DeLaney, Analyst
Thanks, folks. Hi. I was a little late getting on, but I wanted to ask you if you haven't already covered your January Sequoia deal, the prime jumbo deal. If you talked about that, did you mention what we see the 5% coupon on the notes sold? Did you mention what the WACC was on the loan pool?
Christopher Abate, CEO
Yes, it was about five and a quarter gross, a little bit above that, Steve.
Steve Laws, Analyst
Okay. So pretty tight in. Was that—you both mentioned sort of this mid-teens kind of target hurdle. Was that deal the execution there that did that get you there, or was there something unique about that that you needed to clear those out, get those permanently financed? But at the margin today with current loans, that your purchase money jumbo loans that you're originating and pricing, do you think that 15% is a hurdle is doable on this loan product?
Dash Robinson, President
Yes. So, the portfolio we securitized was probably among the more seasoned that we've ever securitized. Someone else asked the question. I think we typically securitize jumbos within a month or two. As you can probably glean by the coupon, these were a bit more seasoned than just we saw a market early January. We securitized them as you recall, Steve. The pieces that we keep from those Sequoia deals tend to be a lot thinner. The piece we cap was sort of in that low- to mid-teen context. But it was sort of 1% or less of the capital structure. If you look at our current coupon—as I think Chris would have hit on it—if you look at the model, mid- to high-six rates, just from a term perspective, it should be able to get you there. The challenge is with the rates, stability, and all of that, and the consumer demand to just getting to actually be able to do that.
Steve DeLaney, Analyst
Yes, that makes sense. I appreciate it. Chris' comments about this volatility and people just deciding, okay, let's wait it out. But when we get into the spring, people need houses. I think the purchase side will pick up, and it's nice that you've tested the waters here. Everybody knows the SMT brand, and we'll see what the rest of the year brings, but I hope we'll get some a little more momentum in the purchase market for sure. Thanks for the comments.
Dash Robinson, President
Thanks, Steve.
Operator, Operator
Thank you. And ladies and gentlemen, that was our final question for today. That also concludes today's conference call. All parties may now disconnect. Have a great evening.