Earnings Call Transcript
REDWOOD TRUST INC (RWT)
Earnings Call Transcript - RWT Q2 2020
Operator, Operator
Good day, and welcome to the Redwood Trust Incorporated Second Quarter 2020 Financial Results Conference Call. During management presentation, your line will be in a listen-only mode. After conclusion of prepared remarks, there will be a question-and-answer session. I will provide with instructions to join the question queue after management comment. Today's conference is being recorded. I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead.
Lisa Hartman, SVP of Investor Relations
Thank you, Kate. Hello, everyone. And thank you for participating in our Second Quarter 2020 Financial Results Call. Joining me on the call today are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President; and Collin Cochrane, Redwood's Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation with respect to 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 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 could 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 available on our website at redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today. The company does not intend and undertakes 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. I will now turn the call over to Chris Abate, Redwood's Chief Executive Officer for opening remarks.
Chris Abate, CEO
Thank you, Lisa, and thanks to all of you for joining the call today. We're extremely pleased with the progress we've made in response to the collapse of liquidity that the non-government mortgage sector experienced in March. The COVID-19 pandemic has continued to rage on since then, and as a nation, we are now experiencing a second round of lockdowns after a spike in coronavirus cases during July. So Redwood's story through this crisis will continue to be written. We are now in a unique position to not only weather the storm, but also take advantage of a significant recovery in our business lines, which is now underway. Before I proceed with a discussion of our businesses, I'll preview our financial results and condition. Our second quarter GAAP earnings were $1 per share, as compared to negative $8.28 per share in the first quarter. Our GAAP book value per share increased almost 30%, to $8.15 at June 30, from $6.32 at March 31. This represents a retrace of nearly one third of the first quarter book value decline linked to unrealized losses in our investment portfolio. While not uniform in magnitude, as the valuations were materially higher, we still possess significant upside to the extent the economy continues to recover. During the second quarter, we successfully recast most of our secured recourse debt. In aggregate, recourse debt declined from $4.6 billion on March 31 to $1.8 billion at June 30, reducing our recourse leverage ratio from 6.9 times to 2.1 times. On a pro forma basis, factoring in a new non-recourse facility we entered into during July, our recourse debt is further decreased to $1.6 billion, and our recourse leverage ratio was 1.9 times. Marginable debt for that portion of recourse debt that is subject to daily margin calls represented only about 23% of our recourse debt of $375 million at June 30 on a pro forma basis. When comparing our $529 million of unrestricted cash at the end of June to our marginable debt, our coverage is approximately 1.4 times, leaving us with ample room to allocate significant capital to our operating businesses and new investments as we had begun to do. Importantly, the evolution of our capital structure has been managed organically without the proverbial need for a crisis-driven diluted equity capital raise. Not only do we not require outside capital in the second quarter, we repurchased $125 million of our convertible debt at significant discounts, generating $25 million of economic gains. These repurchases provide the lasting benefit of reduced debt service costs on leverage, and some of the gains can contribute towards long-term technological investments we have planned for our platforms. We will continue to opportunistically repurchase our long-term debt or common equity to the extent we believe valuations remain significantly detached from fundamentals. With our capital structure enhancements largely complete, we paid a second quarter dividend of $0.125 per share at the end of June. The second quarter dividend aligned with the current size of our balance sheet and reflected a sustainable level that we would hope to build upon as we begin to deploy our excess capital and as the economy in our business' cash flow stabilize. We remain committed to delivering an attractive dividend to shareholders while remaining well positioned to opportunistically deploy capital going forward. When taking stock of the extreme market shocks brought about by COVID-19 in our go-forward earnings, we believe it's still premature to look too far ahead, as the true impact of the US economy in the mortgage industry is yet to be seen. From a macro perspective, the recovery in financial markets remains meaningfully detached from the continued and in many areas accelerating health pandemic. Record job losses and the associated economic contraction have significantly outpaced the Great Financial Crisis in both speed and severity. The spectacular resiliency of the financial markets, as best we can tell, is still buoyed by extreme monetary and fiscal stimulus with the prospect that risk assets can be supported, either directly or implicitly by the Fed until the COVID-19 vaccine or effective treatment can be found. While the Fed has not yet indicated support for the non-agency mortgage sector through TALF, significant engagement is ongoing, and we do not believe the ship has sailed. Discomforted by the prospect of trying to predict in time the outcome of the pandemic and with an election looming in November, we put ourselves in a position to be patient and focused on the long-term through what will likely evolve over the next few months. The virtual patience set meaningful ancillary benefits to us as we've been able to focus on the strategic evolution of our business model and how our platforms will function in a post-pandemic world. Dash will discuss this in more detail in a few moments. For now, our residential and business purpose lending segments continue to operate in a significantly altered landscape. Many aspects of the mortgage process that historically took place in person, such as appraisals and closings, are now done remotely. Residential credit performance that had fundamentally deteriorated from the record low delinquencies the industry enjoyed before the crisis will continue to run better than most expected. As of June 30, we received approximately 96% of our payments due in June for residential loans underlying our Sequoia securitizations, and we also received approximately 96% of payments due in June for the single-family rental loans underlying our CoreVest securitizations. Most of these non-payments represent loans in forbearance, as opposed to serious delinquencies. The nationwide rise in pass-through mortgages thus far does not appear to be weakening the single-family housing sector, thanks to record low mortgage rates, in some cases below 3% for agency mortgages and trending lower. Refinance activity has remained elevated, and home purchases have seen a resurgence in demand. By way of shelter-in-place orders and broader perhaps secular trends of working remotely, the concept of home has taken on greater significance for most Americans. Many children are now learning virtually down the hall from their working parents. Particularly strong demand for suburban housing has been observed in many states among families with extra dense metropolitan areas. This is a remarkable shift in consumer preference from even a few short months ago, and one that on balance is positive for both our residential consumer and rental products, which are predominantly focused on single-family loans. Our residential lending team entered the second half of the year primed for a relaunch with an idle period in the jumbo mortgage space slowly coming to an end. Since March, most lenders have significantly tightened the underwriting guidelines for newly originated jumbo loans due to the prospect of a severe recession and lack of Fed support for the non-agency sector. Additionally, constraints on the bandwidth of loan officers who have remained largely focused on high margin refinancings to agency-eligible borrowers has weighed on jumbo origination activity. Based on our recent engagement with loan sellers and the narrowing of the spread between agency and jumbo mortgage rates, we've begun to see a pickup in lock activity and expect this to grow meaningfully as we head into the fall. Even with this narrowing, we continue to see substantial relative value in non-agency home loans, a sentiment shared by our loan-buying partners, both current and prospective. Our near-term focus continues to be on recasting our products and guidelines with loan sellers to reflect the economic environment in preparation for increased activity. Our team's efforts may not yet be reflected in results, tremendous progress has been made, and we're excited about the resurgence underway. To reach this point, we completed the difficult work of managing through our pre-COVID loan inventory, culminating with the sale of substantially all those loans and the clearing out of our associated secured debt facilities. As part of this process, our residential team completed our Sequoia MC1 securitization in late June, the transaction that brought the sale of these loans to a close. The dealer price better than we expected and positioned us to safely begin locking new loans in July. Transitioning to our business purpose lending segment, the recovery was very much underway at the end of the second quarter, and we have much to be excited about going forward. Our BPL team originated $234 million of loans in the second quarter, the majority in late May and June, when we re-entered the market in earnest after securitizing a significant portion of the pre-COVID single-family rental loans on our balance sheet. Our origination footprint remained largely consistent, focusing on SFR loans, and our bridge origination strategy sharpened its focus on sponsors whose strategy is to ultimately hold and stabilize all or most of their portfolios. In addition to their institutional caliber, these sponsors often become accretive repeat customers for both SFR loans and fresh bridge financing to support new investments. Across our BPL products, we are commanding improved lending terms in both structure and coupon. As funding markets improve, we expect more competition to re-enter the space. However, we do believe our operational advantage remains durable. Our BPL business continued to make great progress in diversifying its outlets to distribute risks in the second quarter and through July. We completed two non-recourse financing arrangements for over 85% of our pre-COVID bridge portfolio, essentially match funding a book that has thus far displayed solid performance through the pandemic. Investment demand remains very robust for SFR and bridge loans, including significant inquiry for both loan purchases and opportunities to co-invest to provide private financing. We expect these options to become a reliable complement to traditional securitization. The attractive risk-adjusted returns in the space have kept BPL assets in strong demand, and we continue to receive strong indications from investors in our SFR securitizations. As we take stock of the year so far and look towards the fall, we are reminded that we are truly living in historic times. We face a pandemic that is creating global economic disruption, trade and technology wars are looming. The fight against racism and social injustice is hitting an inflection point at a global scale. And the U.S. presidential election is merely three months away. All of this presents an opportunity for us to examine our values, use our priorities and pause while we rethink how we want our world to function. As times evolve, our corporate mission remains the same: how to make quality housing accessible to all Americans, whether rented or owned. That concludes my prepared remarks. I'll now turn the call over to Dash Robinson, Redwood’s President.
Dash Robinson, President
Thank you, Chris, and good afternoon, everyone. Before I get into the review of our operating businesses, I want to begin by providing additional details on the progress we made recasting our capital structure, which includes significant milestones towards how we plan to run our franchise going forward. In the second quarter, we considerably reduced our recourse debt, most notably marginable secured debt, and entered into key financing arrangements on several parts of our existing portfolio to support our operating and investing activities going forward. In total, our recourse debt as of today stands at $1.6 billion, approximately $1 billion of which is secured. As Chris articulated, only $375 million of this is marginable. Approximately 80% of our total recourse debt matures in 2022 or later. As Chris mentioned, we procured non-recourse debt for approximately 85% of our shorter-term business purpose bridge loans, with the majority of the remainder funded with non-marginable debt or held unencumbered. In addition to these completed initiatives, incremental work on further reducing our recourse and marginable debt remains underway. Our work in the second quarter positioned us to fund the vast majority of our residential and business purpose loan inventories with non-marginable debt. While this new debt financing comes with a modest increase in cost of capital, we believe the associated benefits, including longer durations and a lower required amount of risk capital over time, will allow us to continue to achieve attractive risk-adjusted returns on our portfolio for the long term. During the quarter, we also completed the sale of nearly all residential loans held for investments and completed the sale of nearly all of our remaining pre-COVID jumbo loan inventory. While we continue to carry exposure to standard representations and warranties from loans sold, our estimate for this exposure was not material at June 30, 2020. With this work complete, we enter the third quarter in a unique position of strength with the ability to allocate significant additional capital to our operating businesses and new investments. Importantly, to emphasize Chris's earlier point, the organic management of our balance sheet was achieved without the need for dilutive capital infusion or equity-linked options for our lenders. Within our portfolio of securities investments, fair values improved in the second quarter; those still remain well below pre-pandemic levels. More pronounced increases were seen in agency CRT, Sequoia subordinate securities, and other third-party securities. However, we saw positive price movements in substantially all portions of the portfolio. Our second quarter Redwood Review provides more detail on value change by asset type. We estimate that as of June 30, approximately $3 per share of the unrealized losses recognized in the first quarter of 2020 remained outstanding. It is also important to keep in mind that even our December 31 marks reflect a significant discount to face value in certain parts of the portfolio, reflecting potential upside as the underlying structures deliver—something that happened at an accelerated pace in the second quarter, particularly for our subordinate prime jumbo security. I'll now move on to a discussion of our business segments. Given changes in the composition of our portfolio over the last several months, in the second quarter of 2020, we combined our third-party residential investment and multifamily investment segments into a new segment called third-party investments. Our residential and business purpose lending segments continue to represent vertically integrated platforms. The third-party investments segment is comprised of other investments not sourced through our core mortgage banking operations, including reperforming loan securities, CRT securities, our remaining multifamily securities, and other housing-related investments. Our completed initiatives in the second quarter have allowed us to more fully lean back into our operating activities. As technicals have improved and overall market supply and housing credit remains tepid, we believe our operating advantages position us perhaps better than ever before. Our core competencies of controlling production quality and being closest to the asset remain valuable to market participants, so you can still layer on risk, but can't otherwise access. This discipline not only shines through asset performance, which I'll touch on in a moment, but also through diversity of revenue streams that will be increasingly important in what is likely a longer-term normal. The behavioral shifts we are seeing as a result of the pandemic in our review are bringing the market in our direction. Demand for detached single-family homes is increasing as consumers migrate from densely populated areas to the suburbs, seeking additional interior space, more private access to the outdoors, and other amenities commensurate with spending more time at home. This shift in sentiment could very well be structural and supports the underlying business drivers of both our residential and BPL businesses. Against this backdrop, our platform has made great progress in the second quarter. With new financing facilities in place, our residential lending business is locking loans at a measured, but accelerating pace. Demand for housing credit has strengthened in both the whole loan and securitization markets, particularly since the end of the second quarter, where demand for securities remains high and spreads continue to tighten as demand outstrips supply. As Chris mentioned, while at the same time, originators have largely prioritized their focus on conforming loans. We've begun to see a pickup in lock activity and expect this to grow meaningfully as we head into the fall. A hallmark of our residential lending platform has always been the diverse channels through which we distribute risk. Our current view of the market indicates strong demand for both Sequoia issuances and home loan sales, as well as additional structures through which we can distribute risk in a durable fashion and turn our capital efficiently. During the second quarter, the residential lending segment generated $33 million of net income, driven primarily by positive investment fair value changes in our subordinated Sequoia security. The home loan sales described earlier benefited our cash positions, recourse leverage, and marginable debt ratios, but reduced net interest income in the second quarter. We purchased $55 million of loans during the quarter, largely in May and June as a significant slowdown in the jumbo market gradually began to thaw. Lock volume has picked up substantially in July as we established fresh momentum. Additionally, during the second quarter, we sold $29 million of securities from our residential lending investment portfolio and retained $20 million of investment securities from a $271 million securitization we completed during the quarter, which was comprised of our remaining pre-COVID jumbo loan inventory. During the quarter, we also completed a non-marginable warehouse facility that we're utilizing to finance existing loan inventory. As we move forward, our residential team is focused on a handful of key strategic priorities, including, as Chris mentioned, continued investment in technology to improve efficiencies and operations and to refine how and how quickly we can purchase loans in a safe and sound manner. Meanwhile, our business purpose lending segment is capitalizing on a unique market opportunity, fueled by an increase in demand from the rental market for high-quality single-family homes. Our origination pipeline for both SFR and bridge loans remains robust. During the second quarter, the segment contributed $46 million of net income, driven by positive investment fair value changes, net interest income from investments, and an accelerated pace of origination. In the second quarter overall, we originated $176 million of single-family rental loans and $58 million of bridge loans. We were able to commence higher coupons, lower LTVs, and other structural enhancements for BPL loans. While a level of competition has reentered the space, our speed to close, even amidst the impact of the pandemic on our traditional workflows, remains a durable competitive advantage. Bridge lending remains a key strategic focus to drive long-term value for the business purpose lending segments, including through attractive risk-adjusted returns for our portfolio and sponsor conversion rates into adjacent products. Our second quarter Redwood review contains more detail on this part of our portfolio and our approach to client acquisition, highlighting a strategy that is unique in several important ways, chief among these is a more concentrated focus on experienced sponsors with a longer-term approach to real estate investment. These sponsors make strong long-term clients that we have observed will utilize several lending products that our platform offers, a key reason we prioritize a customized lending approach that we believe leads to stronger credit performance over time. This has been borne out in the recent performance of our BPL portfolio overall, on a blended basis, 90-plus day delinquencies in our BPL book total 2.4% at June 30, and have increased only modestly since the onset of the pandemic. In particular, delinquencies in the bridge portfolio are less than 1% higher than in March and stand at just over 4.5%. Overall, the portfolio totaled over $90 million in the second quarter and exceeds $50 million in July alone, indicative of the strength of sponsors' strategy and overall robustness of the housing market, particularly the average price point refinance. In May, we completed a $221 million single-family rental loan securitization, consisting of loans we held at the end of the first quarter, from which we retained a $20 million block of security. Our third-party investment segments contributed $77 million of net income during the second quarter as a result of positive investment fair value changes and net interest income driven by a rebound in agency CRT investments and other subordinate securities. We have considerably reduced the amount of marginal debt used to finance our third-party investments and expect to reduce it further going forward. During the second quarter, we sold $53 million of third-party investments, including $35 million of residential subordinate securities and $19 million of CRT securities. We deployed $10 million primarily into new CRT security. Net of these dispositions, our investments in re-performing loans securities are an increased proportion of our third-party investment portfolio. As a reminder, these investments are backed by seasoned mortgages whose underlying borrowers have gone through some form of modification over the course of time. The bonds we own comprise approximately 25% of the capital structure and are subordinate to senior securities wrapped by Freddie Mac, an attractive source of non-recourse term financing. Performance in the underlying portfolios has been stable relative to current market conditions, with overall delinquencies approximately 4% higher than earlier in the year and overall cash flow velocity reflecting strong borrower engagement. Overall, as the market has become more orderly during the past month or two, the credit curve remains steeper than before the onset of the pandemic. While the dearth of applied more subordinate securities has deepened the associated market debt considerably over the last several weeks, we believe that attractive capital allocation opportunities will occur. And with that, I'll turn the call over to Collin, Redwood's CFO.
Collin Cochrane, CFO
Thanks, Dash, and good afternoon everyone. As Chris and Dash discussed, our second quarter earnings and book values benefited from a significant rebound in asset pricing, which primarily drove our $1 of earnings per share for the quarter and helped to generate a 31% economic return on book value. While the majority of these earnings were driven by positive fair value changes on our investments, as Dash mentioned, we also saw improvements in operating businesses and recorded $25 million of gains on the repurchase of convertible debt. Of note, the gains from extinguishment of debt are excluded from our diluted earnings per share in accordance with GAAP. Our basic earnings per share, which include these gains, were $1.41. As was the case last quarter, we did not disclose non-GAAP core earnings for the second quarter. We are continuing to evaluate revised core earnings metrics that will be most relevant for assessing our operating performance in future periods. After the payment of a $12.5 million dividend, our book value increased $1.83 per share in the second quarter to $8.15 per share. This increase was primarily driven by $1.78 per share of fair value changes in our investments, representing the recovery of approximately one-third of the unrealized losses recognized in the first quarter of 2020. As Dash mentioned, we estimated at June 30 that approximately $3 per share of the unrealized losses reported in the first quarter remained outstanding. Shifting to the tax side, we had a taxable loss of $0.50 per share in the second quarter REIT, which was primarily driven by timing differences related to the recognition of head losses that were incurred in the first quarter but not realized for tax until the second quarter. Exclusive of these amounts and gains for the extinguishment of debt, REIT taxable income for the quarter was $0.14 per share. Given our year-to-date net loss at the REIT, we currently expect the majority of our dividend payments in 2020 to be a return of capital for tax purposes. Turning to our balance sheet, we ended the second quarter with unrestricted cash of $529 million. As Chris and Dash discussed, in recent months, we have repositioned our secured recourse debt structure, significantly reducing overall recourse debt and shifting substantially to non-marketable debt. Additionally, we've utilized new non-recourse structures to finance 4% of our investment portfolio. Using our pro forma recourse debt of $1.6 billion at June 30, adjusted for new non-recourse financing we entered into in July, we estimate our recourse leverage ratio will be 1.9 times. We expect this leverage ratio to rise as we begin to increase our accumulation of loans that are operating businesses for sale, for securitization, and begin to deploy our available capital into new investments. As we mentioned, we expect to utilize non-marketable debt facilities to finance our loan inventory and new operational investments. We expect to remain judicious in our use of marketable debt financed other investments. I'll close with our outlook. Given the continued uncertainties surrounding the future economic impact of the pandemic, we're continuing to refrain from providing earnings guidance at this time. What we do know is that we entered the second half of this year with a strengthened capital structure and a significant cash balance that we believe provides us the optionality to play offense and defense as we navigate through the ongoing pandemic. Our in-place investment portfolios are generating strong cash yields to our current basis, that continues to include a significant embedded discount, which provides a strong foundation for earnings growth as we begin to declare excess capital and operating businesses return to profitability. On the expense side, general and administrative expenses decreased during the quarter, primarily due to a reduction in our workforce that we implemented in late April. So I expect some incremental savings from costs specific to these and other activities in the second quarter. We also anticipate an increase in variable loan acquisition costs as the volume and revenue at our operating businesses continue to improve. As we begin to gain more clarity on the operating environment and the pace of recovery from this pandemic, we'll be better able to assess the new baseline for our platforms and evaluate the opportunities to begin redeploying an appropriate portion of our substantial cash position to generate incremental earnings. So with that I’ll conclude prepared remarks. Operator, please open the call for Q&A.
Operator, Operator
We will now start the question-and-answer session. Our first question comes from Eric Hagen of KBW. Please proceed.
Eric Hagen, Analyst
Hi guys. Good to hear from you. Hey, is there both a yield and a blended cost of funds that we should think about in the portfolio going forward? And then, I realized the loan portfolios are marked at deferred value, so it's maybe just a little bit more challenging to tease apart what would ordinarily be a loss reserve. But what are the loss rates that you expect in the business loan portfolio in the Sequoia choice portfolios? In other words, if you were required to post a reserve for those, what would those numbers look like?
Dash Robinson, President
Hey, Eric, it’s Dash. I can take those. Thanks for the questions. As to your first question, from a yield perspective, on our subordinate securities to Collin’s point, based on our basis and where we’re originating loans to, we are seeing yields to our basis well into the double digits, in some cases, mid-teens or higher, for some of the more subordinate securities that we hold. On the whole loan side, particularly in business purpose lending, before those loans get financed, just on a raw asset yield basis, those yields are anywhere from 5% to 6% for SFR loans and then higher single digits for bridge loans, 8% to 9% or higher. From a cost of funds perspective, we detailed this in the review, so you can take a look at that as well. But our recourse debt blended cost of funds is about 4.7% now, which includes our unsecured converts, and it takes up a little bit higher than that when you blend in some of the non-recourse financing that we procured during the quarter. So that's how you can think about those. So there's still a good access spread particularly on the bridge portfolio. And then obviously, when we securitize our SFR loans and our jumbo loans, we’re availing ourselves with a more permanent cost of funds, which is far lower than that in the securities market. From a loss perspective, like I said, we haven't provided any formal guidance on that. We've continued to see delinquencies overall really remain quite stable. They've picked up a bit clearly over the past few months. But in general, we've been really, really hard with the overall trend in delinquencies, particularly with – in terms of the loans in forbearance in Sequoia. That range remains in the 6.5 to 7 point range, in general, as a percentage of the overall book. About half those bars are current. And as we mentioned during the prepared remarks, we will see over the next several months how those borrowers perform as they roll off of forbearance.
Chris Abate, CEO
Yeah, Eric, this is Chris. I'd also add, when you think about reserving, and we don't book reserves in that sense as you as you noted. There's incidents and there is severity, and I think on the incident side, the book has performed better than our expectations given where the economy's gone to. On the severity side, you have to look at the single-family housing sector, and I really think it started to deter from not only commercial but multi-family. The housing market has remained very strong and sales are up. So I think from a severity perspective, just given the average LTVs of the book, we're in pretty good shape.
Eric Hagen, Analyst
Okay. That was good. That was really helpful. And you understood that you guys are starting to get your footing back in the jumbo origination side. But what again on sale margins look like right there in that market right now? And how much origination volume do you think you could support on that channel until you get up and running in the fall?
Chris Abate, CEO
For the margins – liquidity still building in the market, so certainly, you know, we're seeing margins recover. We ended June essentially having cleared out our entire inventory. And at this point, we're locking loans, but the ramp has been pretty impressive. As far as – as far as what we can support, we're in a – we're in a place where we can support pre-crisis levels. The team is in place, and I think really the story there is going to be the pace of recovery and jumbo and based on what we've seen, even these past few weeks, we're pretty optimistic heading into the fall. You're going to see a pickup in activity.
Eric Hagen, Analyst
Did you guys – thanks for that Chris. Hey, did you guys say what your book value was through July?
Chris Abate, CEO
We didn't. It's up modestly. We didn't – we didn't say the number, but it's up maybe a few percent.
Operator, Operator
The next question is from Stephen Laws of Raymond James. Please go ahead.
Stephen Laws, Analyst
Hi, good afternoon. I guess, I want to start, the investor, the BPL side, a single-family rental loan portfolio demand for that asset seems class extremely strong – seeing those stocks of the SFR managers do, are certainly working well. Curious, I know, Dash, I believe your prepared remarks mentioned some other capital in that space. Can you talk about what the competition's like? Is it institutional capital trying to provide financing? Is it more local either hard money lenders that have been recapitalized or where's that competition coming from on that front? And how do you – how do your yield through coupons you're able to get today compared to where you were doing the similar SFR loans say in January, February?
Dash Robinson, President
Thanks, Stephen, for the question. I would say that, if you think about SFR, specifically, the barriers to entry, by our estimation, are significantly higher than with other types of business-purpose lending, like bridge. There's a deeper group of bridge lenders, largely, however, who've been focused on different products than we focus on, traditionally, the more – bit more single asset versus a lot of the products that are articulated that we tend to focus on there. But yeah, it's a bit of both. We have seen some of the traditional stuff refinance competitors reenter the space who typically fund themselves with some amount of third-party capital in terms of their production. Those are the folks, who would see probably on the smaller loans, including smaller balance SFR loans and certainly some bridge. Then as you get into larger loan balances, specifically our single-family rental over. And as you know, we can do loans as large as $40 to $50 million or higher, but tend to be in that sweet spot of $3 million to $5 million. For the larger loans we continue to compete with some banks and insurance companies as well. There is a lot of demand from certain insurance companies that understand the asset class there. But our sweet spot that $2 million to $5 million or so remains pretty uncrowned, frankly, which we're thankful for. And as relates to how we continue to manage our risk going forward. There are a lot of private debt structures that we can avail ourselves of to complement securitization, which could be a very interesting complement to how we refinance the business going forward. In a lot of insurance capital and other capital in the space, that could be a direct lender also potentially interested in partnering on some lenders as well which could be a nice diversifier for us going forward. So there's definitely a lot of demand for it. From a coupon perspective, we are easily 75 basis points to 100 basis points or so higher in rate than we were earlier this year. And that's taking into account the fact that benchmarks are lower as well. We recognize that as markets normalize that could come in a bit. But for now, that's where we are and trying to stay with.
Stephen Laws, Analyst
Great and then you've pushed on the financing side a little bit. So far you've got the securitization. So the regular view as we afraid what we get through ahead of the call, but I think it said on the bridge side, you've got to the two-year committed financing facilities that are built on margin now in place for the 600 million to 700 million of bridge loans is that correct?
Dash Robinson, President
Yeah. We termed out almost 90% of the bridge book and not only a non-marginal but also non-recourse fashion. Those are two arrangements which effectively match. And there is a little bit of replenishment capability in there, which is nice to support some of our go for production. But from an overall capital allocation and capital management perspective, it was a great achievement to be able to get the vast majority of that book turned down now non-recourse in the second quarter, which is what that's referencing.
Stephen Laws, Analyst
Great, and for my last question, what should we expect in terms of origination volumes moving forward, given the customer activity in May and June? Is the limitation more about the ability to securitize, or is it primarily about finding loans that fit your criteria? What’s the outlook for near-term and possibly medium-term origination volume on the PPE side?
Dash Robinson, President
Sure, I would say we did over $400 million in the first quarter, which was down from about three quarters of a billion in the fourth quarter of last year. We expect to significantly increase what we accomplished in the first quarter and hopefully reach numbers closer to that Q1 figure over time. The main constraint lies in the workflows. As I mentioned, sometimes it takes longer to complete loans due to internal appraisals, procuring title, and similar factors; this process is taking longer than it has in the past. From a volume perspective, the most significant challenge is working through these process elements, but the team has done an excellent job. We have re-engaged with these products more actively, selecting specific opportunities in bridge financing, and we are observing how those markets rebound. Our sponsors are eager to invest more capital due to the trends we're seeing. Therefore, we anticipate that our existing sponsors will deepen their involvement while also bringing in fresh capital. We are optimistic that the Q2 numbers will show significant growth in the next few quarters.
Operator, Operator
The next question is from Steve Delaney of JMP Securities. Please go ahead.
Steve Delaney, Analyst
Thank you. First, congratulations on all the hard work and the results in tightening up the balance sheet; a lot was accomplished this quarter. I want to clarify the $3 per share figure, which indicates about $350 million in value that could be recovered beyond what was achieved in the second quarter. I'm trying to understand your balance sheet, which shows a billion in loans and $1.2 billion in other types of securities and investments. Can you help me focus on the $350 million, specifically one or two main asset classes where you see the greatest potential for recovery? That would be helpful. Thanks.
Collin Cochrane, CFO
Sure. Steve, just to clarify that $3 per share is versus the 12-31 mark, which as I mentioned also have some embedded upside based on the natural credit trajectory of our portfolio. But I would say the areas that drive most of that number are reperforming loan investments. There are a few securities that we own beneath the Freddie Mac term financing. As well as our organically created support and securities, both in Sequoia that were below that securitization. There are some other elements to that number, but those three areas are the majority of it. As we hopefully continue to see solid performance across those books, as mentioned in the call, there's definitely from our perspective, potentially much more upside in those discounts.
Steve Delaney, Analyst
Okay. So those are your major asset classes, particularly Sequoia and single-family rental. What you're indicating is that while these generate net interest margin for you, you also have a fair value on the retained bonds. I see those as permanently locked loans. On one side are the loans, and on the other side is the securitized debt. What I'm understanding is that you are indeed fair valuing the structures as well. Is that correct?
Collin Cochrane, CFO
That's right. Both in Sequoia and in our Corvette securitizations in capital, we sell a decent amount of premium into the market either through IO securities or I bonds and that the offsetting discount is largely embedded in our support and securities, which is where all that credit convexity profile comes in. So, when Sequoia prepays pick up significantly, you start to see those structures delever, and some of that optionality starts to unlock itself over time, which is definitely something we saw in the second quarter.
Steve Delaney, Analyst
Understood. Okay. That helps a lot. Now, I'll follow up with Collin on that later. When you started, you mentioned being in a position to think about offensive strategies. Regarding initial capital allocation, should we primarily consider that in the third-party segment? It seems like you're still in a stage where you need capital for any substantial volume of Sequoia or CoreVest securitizations.
Chris Abate, CEO
Hi, Steve. It's Chris. Good to hear from you. Our focus is primarily on the operating platforms, specifically on accumulating and originating loans, leveraging the strengths of our team. On the third-party side, we are being strategic. There have been notable improvements in credit opportunities, and while we're selective, the third-party market remains active alongside the government-sponsored enterprises. Significant capital needs will largely come from our business lines. We are making progress with CoreVest, and loan volume began to increase midway through the second quarter. We are also starting to see similar trends in the residential sector, with indications of increased activity as we approach fall. Consequently, we anticipate funding more loans, and we have successfully transformed our balance sheet, allowing us to diversify our access to financial resources. Overall, we feel positive about our capital situation. Additionally, one of our major capital expenditures in the second quarter was the repurchase of convertible debt.
Steve Delaney, Analyst
Yeah
Chris Abate, CEO
That's essentially a risk-free asset for us. From our perspective, those returns were immediate. Even now, those prices remain considerably higher than par. We'll keep an eye on that. We have a buyback authorization in place, so we are confident about our future deployment. However, our main focus remains on our operating businesses.
Kevin Barker, Analyst
Thank you. Good afternoon. Just a follow-up on the capital question. Could you stack rank your capital allocation priorities between buying back stock, buying back – reallocating that capital into certain investments and what you see as the most attractive today, given where your stock trades or where your debt trades and the opportunities that exist out there? Thanks.
Chris Abate, CEO
Hey Kevin. It's a pretty fluid dynamic at Redwood. We don't think about it ideologically; we're constantly looking at relative value and certainly earlier in the second quarter, the most detached piece was the convertible bonds. We were able to buy back a significant amount at really healthy discounts that had a double effect of realizing some economic gains, but also reducing our leverage and improving our leverage ratios. So, on a relative basis, that was very attractive last quarter. Obviously, we've seen a big jump in our book value as of the release today. We'll continue to monitor the stock; we do have the authorization. So that's something we'll follow. But I think we're most focused, as I mentioned, is in the operating platforms, because we're seeing growing demand for the loans we buy or originate. The business feels much healthier today, and we want to make sure that we've got the capital in place to fuel those businesses and as I said, get back to doing what the teams do well. So, I think it'll continue to be fluid, but all three are big opportunities for us.
Kevin Barker, Analyst
You might have $300 million in unrealized losses that could potentially be recovered depending on market conditions. Do you believe you can recoup those? If that's the case, it seems your equity is trading at a substantial fair value compared to your book value. When considering that investment, it appears that the return on equity or return on investment might be higher from buying back stock rather than reinvesting it elsewhere. Can you clarify the difference between how you perceive the return on investment for new initiatives or opportunities compared to the perspective on your own company or equity?
Chris Abate, CEO
Yes, the one caveat with the stock is that there are practical limitations on both the amount and the timeline for buybacks during open periods. We are also restricted by our board's authorization. These limitations could change, but buying back stock is not as straightforward as repaying debt. The size of the opportunities is important, as our current operating businesses are critical for our long-term strategy. We appreciate the potential recovery and increase in book value from unrealized losses on existing investments, but maintaining our market presence and leadership is essential. We will continue to engage in the markets, rebuild our platforms, and remain active. I believe we can effectively manage all these aspects. Additionally, we were involved in third-party investments today and have strong coverage in that area. Our decision-making is ongoing and flexible, and if a relative value opportunity arises, we are ready to seize it.
Kevin Barker, Analyst
Thank you. That's really helpful. Thank you.
Operator, Operator
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