Redwood Trust Inc

NYSE:RWT

Earnings Call Analysis

Redwood Capitalizes on Housing Finance Shift

Redwood celebrates 30 years, focusing on strategic positioning for an upcoming finance cycle. The firm has boosted capital, achieving a 5-10% expense reduction (ending on the high end), with plans for a similar cost cut in 2024. Partnering with large capital providers has optimized liquidity and earnings, while bank partnerships have expanded, including nearly 70 new or renewed jumbo flow relationships. The loan purchase volume of $1 billion enhances Redwood's market share, which has grown to approximately 5%. Securitization remains robust, with two transactions in Q4 and two thus far in 2024. Despite high-interest rates and a drop in quarterly fundings to $343 million, the firm has successfully diversified and managed its investment portfolio, looking forward to deploying excess capital and supporting a dividend during the transition to a mortgage banking model with anticipated earnings accretion.

Strengthening Market Position Despite Rising Interest Rates

The company saw a 17% drop in quarterly fundings in the face of high interest rates. However, the company is not fazed by this setback and instead is focused on capitalizing on increased gross margins, which rose to 111 basis points in the fourth quarter, surpassing the historical target range of 75 to 100 basis points. The diversification of activity across banks and non-banks, along with strong securitization markets, has provided $1.2 billion in loans locked for the quarter. This demonstrates an impressive market share growth in the competitive jumbo market from a historical 2-3% to an estimated 5% in the latter half of the year.

Opportunities Arising from Traditional Lenders' Challenges

Many traditional lenders are withdrawing from certain segments of the commercial real estate market, presenting the company with a unique opportunity to welcome new clients through its platform, CoreVest. This could potentially lead to growth once lending conditions stabilize.

Adjusting to Market Dynamics and Exploring New Products

The company continues to adjust its strategies to address reduced sponsor demand and high rates, which led to a decrease in quarterly fundings. Nevertheless, there's been a positive uptick in term loan funding volumes and growing interest in loan products such as debt service coverage ratio loans, single asset bridge, and build for rent products. The company is utilizing whole loan sales and securitization to increase financing capacity, anticipating the benefits of these adjustments to materialize over the next couple of years.

Investment Portfolio Optimization and Risk Management

The firm has made significant progress in actively managing its investment portfolio; it has completed multiple securitizations and sold non-strategic assets to manage risk effectively. Despite increased delinquencies in certain portfolios, the company remains upbeat about the credit performance of its residential consumer assets, which comprise the majority of its investments. Importantly, the company is mitigating challenges in its multifamily bridge portfolio by actively managing loans and eyeing opportunities to refinance suitable portions.

Improved Financial Performance and Capital Strategy Shift

A remarkable rebound was seen in fourth-quarter GAAP net income, jumping to $19.3 million from a negative $32.6 million in the previous quarter. The increase in earnings is mainly attributed to positive changes in investment fair value and stable net interest income. However, earnings available for distribution decreased slightly due to a dip in mortgage banking activities. The firm is strengthening its balance sheet by generating capital through securitizations, reducing overall leverage, and adjusting its capital allocation to boost prospects in the residential consumer mortgage banking market. Moreover, a significant reduction in general and administrative expenses signals a commitment to further cost savings.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the Redwood Trust, Inc. Fourth Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the call over to Kaitlyn Mauritz with Investor Relations. Please go ahead, ma'am.

[Kaitlyn Mauritz, executive]

Thank you, operator. Hello, everyone, and thank you for joining us today for our fourth quarter 2023 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer.Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions and 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 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 are provided in our fourth-quarter Redwood review, which is available on our website, redwoodtrust.com.Also, note that the content of today's conference call contains time-sensitive information that are only accurate as of today, and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances.Finally, today's call is being recorded and will be available on our website later today.I'll now turn the call over to Chris for opening remarks.

[Christopher Abate, executive]

Thank you, Kate, and thank you all for joining us today for our fourth quarter earnings conference call. As I often do, I'll begin with some commentary around Redwood's broader strategy and market positioning before Dash and Brooke cover off on our operating and financial results.In 2023, Redwood entered its 30th year as a public company. We took this milestone as an opportunity to complete a corporate renewal of sorts and to position the firm for the next big housing finance cycle. Though the last mile of the outgoing cycle has been stubborn, especially given the early-year sell-off in rates, our goal has never been to perfectly time a trade. Rather, we're working to ensure that the winds of change in housing finance are squarely at our backs as market activity begins to pick up and regulatory changes begin to take shape.Putting it all together, we are on the precipice of several operational and strategic milestones that will help drive our story and our earnings in the decades to come. A big part of last year's renewal was to strengthen our capital position. This included reoptimizing capital allocated across our business lines and building a significant pool of unallocated excess liquidity to be squarely for offense as market trends begin to shift. We accomplished this through the completion of a number of financings in the fourth quarter, as well as an inaugural unsecured debt offering in the first quarter of 2024.A second facet of our renewal was to boost our operating efficiency. As Brooke will highlight, we achieved our goal of a 5% to 10% expense reduction in 2023, landing on the high end of that range. In 2024, we have a similarly ambitious goal of further boosting efficiency through scaling our businesses and continued cost reductions. As we mentioned previously, over the course of the last year, we began deemphasizing direct portfolio investing in favor of coinvestments and joint venture partnerships with leading private credit institutions. This strategic shift carries with it a number of benefits to our shareholders.First, these ventures are formed with large capital providers who have long-term strategic allocations to our core product offerings. Second, these joint ventures create a preestablished and reliable takeout for our products that enhances our liquidity and pricing power, ultimately resulting in more predictable revenues and profitability. This includes not only investment returns but also recurring fee streams earned in overseeing these joint ventures. Finally, these partnerships help us organically scale our operating platforms at a much faster pace than we could achieve on our own, ultimately strengthening our franchise and supporting further earnings power from our platforms. The establishment of new and accretive joint ventures is not merely an aspiration of ours. After announcing one such arrangement in 2023, we expect to continue forging partnerships with additional light vehicles in the near term for 2024.When it comes to sourcing the raw materials to feed our joint venture partnerships, we remain optimistic that the prospect of major bank regulatory rule changes, coupled with the balance sheet pressures that many depositories already face, will compel more of these institutions to partner with Redwood. This should in turn open a vast spigot of loans for our operating platforms that for years went straight to bank portfolios, often without the underwriting rigor demanded by the capital markets. Though the proposed Basel endgame regulatory changes continue to receive an onslaught of opposition from paid lobbyists, it does not change the fact that many banks still require additional risk capital or an outside capital partner to prudently manage their asset-liability exposures associated with long-duration mortgages.Furthermore, the long-predicted stresses now emerging from bank CRE portfolios make the solutions we offer all the more accretive. With this in mind, we see banks looking for solutions and not waiting around for regulations to be finalized. This is evidenced by the number of banks we are now onboarding and the volume growth we are beginning to see and expect to increase over the course of 2024. This growth is notwithstanding any additional benefit that would come with a sustained decline in mortgage rates. We ended 2023 having secured new or renewed jumbo flow relationships with almost 70 banks.Onboarding new banks can be challenging due to the workstream changes that working with an outside capital partner often requires. But as these value partners make the transition to working with us, they've been [ won ] over by the expertise of our talented team, our speed to close, and our seamless execution. As our engagement with banks ramps up, it's important to note that our commitment to our deep base of non-bank originators has never been stronger. The message we emphasize to all our origination partners, whether banks or non-banks is the same. You will operate more safely, reliably, and efficiently with a trusted partner in Redwood.Complement our focus on first-thing residential loans, we've continued to invest in our new home equity investment platform, Aspire. Today, home equity remains the largest untapped market in housing finance. With housing affordability at its lowest level in decades, homeowners continue to look for innovative ways to access the equity in their homes as opposed to moving. Since launching Aspire last year, we have grown our operating footprint with plans to extend to as many as 15 states in the coming months. To further address the opportunity we see in home equity, we also launched a traditional second-lien mortgage product to our network in January. Combination of second-lien loans and HEI has resulted in a unique, coordinated solution set for our origination partners.Our residential investor loan platform, CoreVest, is also beginning to benefit from the pullback by banks in anticipation of higher capital requirements for investor loans. As we noted last quarter, we have been advancing negotiations with several banks on partnership opportunities that would allow us to access their existing pipelines with an eye towards offering our broad product set and deep capital markets experience.As we think about the year ahead and observe a period of heightened stress for many commercial real estate borrowers, it's worth reminding our shareholders that our business remains squarely focused on residential housing finance, whether single-family or multifamily-focused. All of our assets are mark-to-market through our GAAP income statement, offering confidence that our GAAP book value reflects prevailing market conditions. This is important to convey as industry concerns continue to mount over the adequacy and trajectory of CECL based accounting alternatives.As we take stock of these past 30 years, we're extremely proud of the role Redwood has played in providing liquidity to parts of the residential housing market not well served by government entities. The long-term support of our shareholders has allowed us to continue pursuing our corporate mission of making quality housing, whether rented or owned, accessible to all American households. Our business is built upon the belief that the best opportunities are usually found through initiatives that others won't pursue or trends they perhaps don't foresee.In fact, we believe that there is no one better positioned to support the changing housing finance landscape than Redwood. We're excited to share our thoughts on what we see as this unique opportunity for our business, as well as our current market outlook and corporate strategy at Redwood's upcoming Investor Day, scheduled for March 19.I'll now turn the call over to Dash.

[Dashiell Robinson, executive]

Thank you, Chris. I will now cover the performance of our businesses before handing it over to Brooke to cover our financial results in more detail.Residential mortgage banking continued its strategic momentum notwithstanding a modest quarter-over-quarter reduction in volume, driven largely by seasonality. As Chris articulated, even though the timing and substance of the Basel endgame rules will inevitably evolve, bank management teams are prioritizing the ability to distribute 30-year fixed-rate mortgage risk as the economics for retaining these loans have changed dramatically, given the end of the era of cheap deposits. This takes commitment and time, especially in aligning the standards of the capital markets with internal processes and approach. As such, we're pleased to be actively engaged profitably with sellers that control an estimated 60% of jumbo market share, including 70% of the largest 20 banks with active mortgage businesses.Overall, for the fourth quarter, we locked $1.2 billion of loans at gross margins of 111 basis points, up from 80 basis points in the third quarter and above our historical target range of 75 basis points to 100 basis points. Approximately 25% of the quarter's volume was bulk activity with both banks and non-banks. Over 55% of the quarter's total lock volume came from banks, up from 38% in the third quarter. We purchased $1 billion of loans close to 15% through our unique program with depositories that allows us to settle loans directly into securitizations, optimizing our capital usage. We are complementing our bank activity with a continued focus on independent mortgage bankers, or IMBs, a critical group of partners whose business models have always centered around distribution to capital partners such as Redwood. All in, we estimate our $2.8 billion of locks in the second half of 2023 to represent approximately 5% of total jumbo market share compared to our historical range of 2% to 3%.While higher interest rates continue to impact overall industry volumes, we still believe our strategic progress is just beginning in deepening our partnerships with large market players. As such, we see significant opportunity to deploy further capital into this strategy as we support our banking partners and grow, including through the home equity financing products that Chris highlighted. Brooke will speak more to this when she covers our outlook for capital deployment.Finally, for this segment, securitization markets continued to be favorable and we followed our 2 fourth-quarter Sequoia transactions with 2 more thus far in 2024, backed by approximately $800 million in loans. Receptivity for these deals has been strong and this execution has supported further momentum in locks, which quarter-to-date totaled $750 million with continued strong credit characteristics, including 772 average FICO and 72 average LTV, and an average gross coupon of 6.96%.As Chris mentioned, the broader pullback by banks is also a potential tailwind for CoreVest. The last few weeks have brought refreshed dialog around risks in commercial real estate portfolios of banks and other large portfolio lenders. The fundamental challenges that exist in certain commercial segments have driven many traditional lenders to the sidelines, opening up a potentially attractive client funnel for our platform once lending conditions normalize.CoreVest continues to prioritize lending strategies backed by single-family and smaller balance multifamily properties, the latter typically 20 units or less. Reduced demand from sponsors amidst persistently high rates caused quarterly fundings to drop 17% from the third quarter to $343 million. Term loan funding volumes increased 10%, however, and we continue to commit capital to our single asset bridge or SAB platform and further develop other bridge product offerings. Notwithstanding the fact that rates remain elevated, we see runway to grow term production, including in the potential to refinance portions of our bridge book, as sponsors work towards stabilization.We continue to see several areas of heightened interest from real estate investors. After launching our debt service coverage ratio, or DSCR loan product in the third quarter, we saw a 20% increase in fundings in the fourth quarter for these loans alongside a 30% quarter-over-quarter increase in SAB production. As was the case in Q3, borrowers were also engaged around our renovate to rent and build for rent products, including aggregation lines, typically the dominion of banks that support lease-up strategies, once certificates of occupancy are procured. Our investor loan products continue to attract attention from capital partners. We distributed $111 million of loans through whole loan sales and sales to the joint venture that we closed in mid-2023. Our fourth quarter bridge loan securitization was also a significant achievement, in that it allowed for increased capacity to finance our various loan types, flexibility we expect to be valuable over the next 24 months as lending conditions evolve.Turning to our investment portfolio, our activities since the end of the third quarter reflect progress in the evolution of our capital deployment thesis, including active portfolio management to recycle valuable capital and manage risk. Over the past several quarters, we have spoken regularly of the significant value embedded in our broader investment portfolio. This includes the net discount to face value within our book and relatedly, our ability to harvest additional capital given low levels of leverage and continued strong credit performance. The fourth quarter brought meaningful progress on this front as we completed 3 securitizations out of our investment portfolio. These transactions included a resecuritization of our reperforming loan book, our first-rated securitization backed by home equity investments and a $250 million revolving transaction backed by bridge loans.We have also continued to optimize our portfolio mix through the continued sale of non-strategic assets. Credit performance within our portfolio remains strong overall. As Chris emphasized, our portfolio is backed squarely by residential credit, much of it seasoned and created organically through our operating platforms, with over 85% of our overall capital underpinned by single-family housing. Our RPL, jumbo and single-family rental loan portfolios all saw stability or declines in 90-day plus delinquencies since the third quarter as borrowers remain motivated to preserve the equity in their homes and protect their advantageous interest rates.Performance in our single-family bridge portfolio, which now represents close to 60% of the overall bridge book, has remained resilient. Our SAB portfolio, an area of anticipated growth, continues to pay down as expected and we are replenishing our revolving bridge securitizations predominantly with new SAB production. Additionally, sponsors continued progress with built-for-rent projects, many of which are now in the lease-up phase. As we highlighted in last quarter's earnings call, the multifamily bridge portfolio remains a key focus area as borrowers grapple with the prospect of an extended period of higher rates. This portfolio largely finances sponsors seeking to do modest amounts of improvement to the property, drive rents and either sell or refinance. Loans were originally underwritten with average debt yields close to 9% and are underpinned by units fetching around $1,000 per month or less in rent, a portion of the market less exposed to the upcoming delivery pipeline.While fundamentals behind these strategies, notably occupancy rates and equity in the properties, remain strong, 90-plus day delinquencies have increased, driven largely by sponsors facing increased costs who lack the resources to bring the project to stabilization. This creates opportunity for fresh capital that we believe is supportive of ultimate recovery to our loan. The book remains actively managed and for approximately 30% of the portfolio we have seen sponsors inject fresh equity or perform under recast terms, and we estimate an incremental 20% of the multi-family bridge book qualifies for a term refinance today.And with that, I will turn the call over to Brooke.

[Brooke Carillo, executive]

Thank you, Dash. We reported GAAP net income of $19.3 million for the fourth quarter or $0.15 per common share compared to negative $32.6 million or negative $0.29 in the third quarter, resulting in a fourth quarter GAAP return on equity of 7.3%. The significant quarter-over-quarter increase in GAAP earnings was largely driven by $15 million of positive investment fair value changes compared to negative $42 million in the third quarter. This reflected the impact of declining rates and spread tightening on our investment portfolio, coupled with continued strong underlying performance of our residential consumer assets.Net interest income, or NII, was essentially flat this quarter as a modest improvement in bridge NII was offset by lower portfolio NII from securities sold and higher interest expense on new financing activities. As we said in the third quarter, we still anticipate recovering a portion of the associated interest with bridge nonaccrual loans. Overall, NII is expected to trend higher beginning in the first quarter. While GAAP earnings improved in the fourth quarter, the net effects of the common dividend and equity issuance caused book value per share to decline 1.5% from the third quarter to $8.64. Importantly, we achieved a positive total economic return of 0.3% for the fourth quarter.Earnings available for distribution or EAD was $7.1 million or $0.05 per basic common share for the fourth quarter as compared to $12.6 million or $0.10 per share in the third quarter. The decrease in EAD was primarily due to lower income from mortgage banking activities in the quarter. Income from residential consumer mortgage banking activities decreased slightly in Q4 as the effects of seasonal factors on jumbo lock volume were somewhat offset by a 31 basis point improvement in margins. Income from residential investor mortgage banking activities decreased from the third quarter as bridge fundings were lighter and spreads on term loans normalized compared to the third quarter where spread tightening benefited loan inventory.Note that in the fourth quarter of 2023, we evolved the calculation of EAD, removing the previously presented line item titled Change in Economic Basis of investment. Additionally, we changed the presentation of our income statement to add HEI income net, which was $11.7 million this quarter and was previously captured within investment fair value changes net line item. Income associated with HEIs attributable both to embedded accretion from underlying options on homes and periodic fluctuations in value from factors like home price appreciation is all captured in our non-GAAP EAD measure. As previously discussed, we've continued to fortify our balance sheet and build our liquidity. [Technical Difficulty] Our unrestricted cash and cash equivalents as of December 31 were $293 million. This represents a cash position that is $190 million higher since the end of the third quarter.On last quarter's call, we pointed to the low recourse leverage we carry in the investment portfolio and the opportunities that affords us to raise organic capital. Our securitizations during the fourth quarter underscored our ability to capitalize on that dynamic, and we ultimately generated $125 million of capital from those financings as well as the 2 new BPL lines that we established in the fourth quarter, which gave us additional flexible capacity. Importantly, the term financing activities from our securitizations allowed us both to reduce our marginable securities repo and our allocation to third-party portfolio assets while preserving investments on balance sheet that represents the majority of our $2.68 of portfolio discounts. As a result of all activities on the quarter, we reported total recourse leverage of 2.2x, down slightly from the third quarter. Importantly, recourse leverage in our investment portfolio decreased from the third quarter and was 0.9x at year-end.At December 31, we had excess warehouse financing capacity of $2.1 billion, which we've since grown to $2.6 billion to date. We expect to increase our capacity further to support the continued growth of our operating businesses. In addition to our existing cash position, we have approximately $318 million of unencumbered assets today that remain a continued potential source of capital, which can serve both to fuel growth of our mortgage banking businesses or continue to repurchase corporate debt across our term structure. We have delevered our capital structure through accretive convertible debt repurchases as well as the organic capital created and common equity issued through our ATM program. From the beginning of 2023 through today, we have retired over $200 million of convertible debt, reducing our amount of convertible debt outstanding by approximately 30%. We are also taking advantage of the opportunities that we see in front of us today in mortgage banking. As such, during the fourth quarter, we viewed the opportunity to raise common equity as a value-accretive strategy given the blended mid-teens deployment returns we see today. In light of the growing opportunity for residential consumer mortgage banking, we increased the capital allocated to the segment by $150 million since the first quarter of 2023, which we expect could grow another $50 million to $75 million in the near to medium term. The decision to raise capital for this opportunity comes with a significant focus on the anticipated earnings accretion and future book value growth these earnings should create for our taxable subsidiary.We began last year by guiding the market that we would lower general and administrative or G&A expenses by 5% to 10% from 2022. While G&A increased quarter-over-quarter, primarily as variable and long-term incentive compensation increased commensurate with the improvement in quarterly GAAP earnings, we ended 2023 with $128 million of G&A, which represents a 9% reduction year-over-year. We remain committed to controlling operating expenses to achieve further cost savings of another 5% to 10% this year and sustained profitability while balancing strategic long-term opportunities. Looking ahead, we feel confident about our strategic positioning given our excess capital. We look to continue opportunistic deployment of capital into products with attractive return profiles that are complementary to our mortgage banking businesses to support the dividend while we transition to a more capital-light model and mortgage banking returns crystallize at scale. And with that, operator, we will now open the call for questions.

[Operator]

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

[Richard Shane, analyst]

I'd like to talk about the dynamics on the origination side in the residential consumer mortgage banking business. Obviously, there was a bit of an uptick in the quarter on margin. You cite that it's above sort of the historical average. I'm assuming that, that is a function of the movement in rates and that being favorable to gain on sale. And if you could talk about that dynamic and what you're seeing in the first quarter, that would be great. But more importantly, I'd love to talk about sort of what you've seen through the channel. Are you seeing as capacity comes out, originators being more disciplined about margin and delivering loans that are more valuable as they're not chasing volume as they would at the inflection in the cycle.

[Christopher Abate, executive]

Sure. Rick, it's Chris. Yes, just to talk about resi for a few moments. We feel extremely good about our trajectory. Some of this is in the context of housing market, housing finance market, that's been extremely challenging. The origination market is probably the smallest it's been in a number of decades. So to be taking market share against that backdrop, we feel really good about some things I'll mention in the last 6 months, we've locked loans with 135 unique sellers, which has to be a record for us. Nobody represents more than 5% of our production. When you think about other aggregators, it's often the case that a few originators are responsible for half or 2/3 of production, so to have 135 in the last 6 months with nobody more than 5%, you start extrapolating that to, as this market starts to turn around, Obviously, we had a sell-off in rates to start the year. But at some point, in 2024, rates should flatten out and start going down. So how we're positioned for that is extremely good from my standpoint.So that's a big part of what we're bullish about. I would say we did 5 securitizations in the fourth quarter. We've done a few resi deals in the first quarter. I think spread tightening has been part of the gain on sale story. Our deals have been met with very robust demand. And I think people are really starting to get behind the story, particularly in consumer, which is exciting. So I think, for us, today's call, a lot of it is what's behind us versus what's ahead of us. And I think for resi and particularly for the balance sheet, as Brooke laid out, we're not staring down ALCO challenges that the banks are dealing with resi mortgages at cost. We're not dealing with commercial mortgages and CECL reserves. We all know the trajectory there. I think most people think that there's quite a bit of pain to go. So having done what we've done over the past year with the balance sheet and just putting ourselves in a position, I think we have something like $285 million of excess capital as of today to really go on offense. I think our story is a little bit differentiated from what you might see elsewhere as far as what's behind us versus what's ahead of us. But certainly, outside of seasonality factors in the fourth quarter, we're really excited about the volume trajectory of our resi business. It's still a really tough market. But again, to have some of these underlyings that we're seeing really foundational for this business to take off, particularly as rates start to stabilize.

[Richard Shane, analyst]

Got it. Chris, just to circle back. What I'm curious about is, obviously, we've seen demand for your channel partners, the originators decline. 2023 was a lot about rationalization of supply. What I'm curious about is when you speak to your channel partners, are they at a point now where they feel that supply and demand have achieved an equilibrium that is attractive for them to, I mean, obviously, having a strong exit is important. But is there enough volume and economics for them on a sort of equilibrium basis to make the business attractive again?

[Christopher Abate, executive]

Well, I think obviously, a big part of our business is the IMBs and the non-bank originators. It's only been in the last 6 months or so, where banks, I think we're up to 70 banks, which we're active with, have been part of that dynamic. I think both are in different spots. I think with IMBs, some of them have gotten ahead of others as far as capacity corrections, I think there is some pain to go for some. For banks, I think it's really the capital partnerships. We are working with a number of regionals, and it's really about working with loan officers and understanding the value proposition that we can bring. But certainly, I think our pricing has been aggressive. We're looking to take share at this point, but it's still a very challenging market. I don't think anybody's completely out of the woods from an origination standpoint, because there's still a lot of capacity out there. The NBA and others estimate excess capacity. I haven't seen the numbers recently, but we're definitely not, I think, at a point of equilibrium. But for us, for our business, as I mentioned earlier, we've sort of dealt with our balance sheet. We feel great about our capital position, and so we're in a fortunate position to be really aggressive to the extent we want to be, and take market share, which we're doing.

[Richard Shane, analyst]

Perfect. That's exactly what I was looking to hear.

[Operator]

Next question comes from the line of Don Fandetti with Wells Fargo.

[Donald Fandetti, analyst]

Can you talk a little bit more about the outlook for multifamily delinquency trends, they ticked up a little bit. And I guess maybe more broadly, I know investors are worried about supply in some of the kind of hotter multifamily markets. Can you talk about what your thoughts are?

[Dashiell Robinson, executive]

Sure, Don. It's Dash. I can take that. I may spend just a minute on the bridge portfolio broadly because the contours of that book have migrated not insignificantly over the past year. I talked about sort of the pivot in our production mix over the past 5 to 6 quarters, really focusing in more on single-family strategies and bridge, which was really the original thesis of the business going back a number of years. So I think broadly, we've been pleased with the overall performance of the bridge book. I think we're clear eyed about some of what's going on in the multifamily market. Just some context for how the book overall has performed, then I'll touch on multifamily. Last year, we saw over $800 million in paydowns in the bridge book, cumulatively, which is about 40% of the balance of the bridge book entering 2023. We're continuing to see some really good buoyancy in the single-family strategies, both with SAB, which is an area, as I mentioned, we're continuing to grow from an origination standpoint as well as build for rent, which is underpinned by generally 1 to 4 unit housing. Those projects are progressing. They're in lease-up mode in many cases. And we're starting to see real opportunity to term those loans out as well, which again is the original thesis for those types of loans to help the term funnel.I think in multifamily, a few things, I talked about this in the prepared remarks. We are generally financing sort of BB minus type of multifamily. Our average rents in place are about $1,000 a month right now that reflects, in many cases, 15% to 20% growth in rents from our sponsors since acquisition. But we're certainly cognizant of some of the headwinds overall. We do think that, that piece of the market is less exposed to some of the supply funnels that we're seeing for deliveries over the next year or 2. But we certainly have seen some sponsors run into issues. I do think when we look at the book, as we've always talked about getting ahead of issues but also being able to delineate between sponsor issues and project issues. And there is an important difference there. I think the delinquency uptick you've seen in the book really reflects issues with sponsors that are 60%, 70%, 80% of the way through a project and have just simply run out of the resources to finish it. But there's a lot of meat on the bone. And I think what we've found is significant interest from the sidelines and getting involved in projects. We took a few properties [ REO ] this quarter. We have significant interest in those. We anticipate having those under contract soon. And we have some loans which we're working through actively right now where either the sponsors are bringing fresh capital to the table or we're finding fresh sponsorship to do so.I would point back just in closing for the response, what I said in the prepared remarks, the multifamily strategy for bridge, we've been significantly more selective over the past 5 to 6 quarters. It's been less than 15% of our overall fundings in that period of time. Most importantly, though, we feel like we got our arms around the book, and we've made significant progress with a good chunk of it. Almost 1/3 of it has had active or fresh equity infused or is performing under some recast terms over the past 2 quarters. We think another 20% outside of those is eligible for a term refi today. We have a portion that are delinquent and the rest are really leasing up and running their projects. And so I think we're cleareyed about the broader headwinds. I think we feel good about the markets we're in and the fact that our projects have meat on the bone for fresh capital. But certainly, this is going to be an area we expect of continued close focus from us over the next 2 or 3 quarters.

[Donald Fandetti, analyst]

Got it. My follow up is just on the dividend. Do you feel like you're kind of at the right level here?

[Brooke Carillo, executive]

Yes, I think in our prepared remarks, we did touch on just our overall liquidity position. I think over the last couple of quarters, we have had moments where both mortgage banking contributed to line of sight for earnings to be covering the dividend, or in this case, the portfolio really carried the weight I think last quarter, we did make some comments at the outset on both just the amount of deployable capital we have today. I think that is probably the single greatest contributor outside of a near-term significant recovery in mortgage banking to give us line of sight back towards the dividend.That combined with some of our commentary on a continued expense target should provide additional support for the dividend as we go forward. We also have a couple of tailwinds with respect to net interest income just from that capital deployment, and a continued recovery in some of our original accruals.

[Operator]

Our next question comes from the line of Kevin Barker with Piper Sandler.

[Bradley Capuzzi, analyst]

This is Brad Capuzzi on for Kevin Barker. Just trying to size up the opportunity of potentially partnering with homebuilders given housing dynamics. I know you mentioned last quarter you're seeing home builders pivot from a for sale to for rent strategies. Is this a dynamic you're still seeing play out? And is this something you would look to do, partnering with homebuilders going forward?

[Dashiell Robinson, executive]

Yes, this is Dash. That's a great question. We look to do that through each of our mortgage banking channels, and one of the reasons we try and do that is I think some of the trends we saw 3 to 6 months ago are probably reversing again. Candidly, if you think about just the strength of the bid, promoter occupants with continued buoyancy in HPA. I think some of those trends have probably reversed, but that's a big opportunity for resi mortgage banking, and it's still one we see in BPL. But I think the dynamics between just where cap rates are going broadly, and then the owner occupied bid, those can invert depending on the quarter. And so we still actively look to do that in both channels for that exact reason, which is those dynamics tend to shift quarter to quarter.

[Bradley Capuzzi, analyst]

And then last one for me, I know you guys mentioned it, but can you just talk a little bit more in detail on the traction on the jumbo side, given the large opportunity with the banks facing a high degree of uncertainty?

[Christopher Abate, executive]

Yes, I mean, other thoughts there. Just given the traction we have with so many banks at this point, it's really become less relevant, some of the regulatory changes that people banter about. I mean, obviously, we went through the common response with the Basel endgame proposed changes. That's going to take a long time to play out. But in the immediate term, when you've got 4.5%, 5% deposit rates, the era of zero-cost capital at banks is over. And it's not nearly as profitable to portfolio loans. And in fact, there's quite a bit more risk just given how much thinner the NIM opportunity is. And so what we're hearing from banks is a capital partner makes a lot of sense, irrespective of what the risk capital rules might say in the future. And so that's emboldened us and makes a lot of sense when you think about it, because Redwood is not an originator, as we like to say. And banks can keep their customer relationships, we can buy servicing, we can let them keep servicing.And one of the ways we've added a lot of value, I would say, over the past year, is helping banks get acclimated to the capital markets, loan file completeness, readiness. Just a lot of things that you can do, parking loans and portfolio, you can't do selling loan files and loans into the capital markets. And so helping banks work through that has been a big part of the value add that we present. And I think that's been appreciated. So what we're hoping is that the durability of that opportunity is there. And I do think that as we invest the time and the resources to get banks plugged in and online, I think that's a lot of effort on both sides. As I said, as rates start to stabilize and come down, we're really excited about what that means for our business.

[Operator]

Our next question comes from the line of Doug Harter with UBS.

[Douglas Harter, analyst]

Can you talk about either from an environment perspective or from a cost perspective, what you need to see happen for the investor mortgage banking to deliver sustainable, attractive ROEs?

[Dashiell Robinson, executive]

Sure, Doug, it's Dash, I can take a swing at that. Great question. Obviously, huge area of focus. I think there's a few things going on in that space right now. As you know, we have a very diverse product set, which I think is helpful to us. We've seen really, really good progress, particularly in our single-asset bridge effort. Just for context there, we did about $200 million of that product last year and $40 million in January. So the volume trends there are heading in the right direction. We talked about growth in DSCR, things of that nature. We were very pleased with the 10% quarter-on-quarter growth in our term book. But I think the reality of it is we're being very selective there. I think we're trying to be respectful of what the market is telling us in terms of just demand drivers and where capital is flowing.There's a reality of that business, particularly on the term side and to an extent bridge where uncertainty around rates, where rates are sort of re-elevated as they are today, but there's a lack of overall conviction around where they're headed, is a reality we have to continue to work through in that business because unlike in residential, these loans, as you know, are not freely prepayable. So borrowers are making a call on interest rates for lack of a better term when they lock in these loans and when there's so much uncertainty, you've had a 40, 50 bps backup, in the tenure, you can make as good a case the tenure is going higher, as lower in next quarter or 2. And that sort of uncertainty is a bit of a headwind. But I think in general we're trying to pick our spots. So I think lower rates and some conviction that they'll stay lower is helpful. But I also think in terms of where capital is flowing, we're just being choosier around opportunities. We see a lot of deals come across our desk every day that frankly may fit other people's risk profiles better than ours. We talked about the de-emphasis of multifamily over the last 5 or 6 quarters. I think that's a decision we're very pleased with, if you look at how things have evolved in that space.So we're going to continue to pick our spots and really leverage the depth of our products. We do think our existing bridge book continues to be a great source of opportunity for term refinance. That's a huge focus area for our sales team and our sales team is busy. Maybe the average loan balances are going to be a little bit smaller than they were a couple of years ago, but we feel very good about how we're positioned, particularly when you bring in the opportunity for the banks as another funnel. We haven't talked as much about that in residential investor as we have in jumbo, but that's a big opportunity. It's one we're well positioned for, but we don't want to rush back in, say for areas like SAB, where we're really leaning in. We're going to continue to be, I think, selective, because I think we're going to be paid to be more selective through time here in 2024.

[Douglas Harter, analyst]

Great. And then I believe, Chris, you mentioned that you kind of viewed that you had $285 million of excess capital today. Is that kind of factoring in the remaining '24 convertible maturity or just wanted to make sure I heard that number right?

[Christopher Abate, executive]

No, not fully. I think we said we had $396 million of cash as of last week, we have $318 million of unencumbered assets. So we kind of need to factor all of that into the convert maturities. But I think the headline is we feel very well capitalized right now. As we mentioned, we completed 5 securitizations in the fourth quarter. So we feel like we are in a position to get significantly more aggressive at a time when I think a number of our competitors are facing pretty substantial headwinds.I do think that having the benefit of taking lumps with fair value accounting, I think about where the stock is trading versus book and the quality of book. That's something that I think differentiates this business to a certain degree. So I think we're feeling certainly very good about the converts, but also very excited to be deploying capital opportunistically. And we very much see a path towards covering the dividend. We've got a lot of ways to get there. We haven't spoken much about the JV opportunities that we foresee, but those are things that, behind the scenes, are in later innings.So we're excited about things that we can get done in the first half of the year, if not sooner. So that's at a high level where capital is at.

[Operator]

Our next question comes from the line of Kyle Joseph with Jefferies.

[Kyle Joseph, analyst]

Just wanted to pick your brain on the, I know it's early, but on the closed-end second-lien product, just how you're thinking about the size of that market margins versus the existing book and whether that's a bigger opportunity or how you see that versus [ HELOC ]

[Christopher Abate, executive]

?Well, closed-end seconds is a product we've rolled out very recently in early 2024. The way we're attacking that market is a combination of a traditional product, like a closed-end second along with HEI, which is something we're still very bullish on. As I mentioned in my remarks, home equity is absolutely the biggest untapped market in housing finance. We're all over that internally, and I do think to a certain degree the path of rates will be a big factor, but you're seeing it's very tough to move. Mobility is extremely constrained, with the vast majority of the country having termed out, if you will, their homes at 3%, 4%, or 5% rates. So I think we're not as focused on HELOC as we are closed ends, but I think we're very focused on that sector and Aspire, which is our HEI startup, homegrown startup, we expect originations there to go up, hopefully precipitously as we get licensed in more states and get the business scaled through origination network.

[Operator]

Our next question comes from the line of Stephen Laws with Raymond James.

[Stephen Laws, analyst]

A couple of follow-ups. First, talking about the delinquency metrics kind of ticking up some on the multi or the CoreVest side. Can you talk about the outlook, say, over the next 2 to 3 quarters? As you continue to work through that, where do you think those peak? And talk a little bit about resolution timelines, do you expect to take losses as you resolve these? Do you feel like the collateral there supports your attachment point and maybe touch on the build-to-rent that went into REO that, I believe the footnote said is under contract for sale this quarter. Maybe it's already happened, but can you give us an update there and whether you expect to take a loss on that?

[Christopher Abate, executive]

Sure. I think broadly, Stephen, we'll probably stop short of predicting where DQs are going, but I think we continue, as I mentioned, to feel very good about the real estate that's underpinning us. The resolutions that we've had, generally have had either no severity or severities in the single digits where we've had them. Speed and honestly, creativity of resolution and just the discipline around that process is important. The properties that we took REO over the past couple of quarters, we did so cooperatively. Our loans are structured with a lot of different hooks that can incentive borrower to ease a resolution more quickly, rather than waiting the customary year or 2 for foreclosure, depending on the state that you're in.So I think we're pleased with that. Importantly, we have a lot of demand for the real estate, and it's because, like I mentioned earlier, in general, there's a lot of meat on the bone in these properties. There's a lot of capital on the sidelines that I think senses an opportunity and is beginning to deploy. We haven't closed that build for rent project. We expect to do that soon. We don't expect much of any loss on that. We have 2 other build for rent projects that are actually leasing up where we got actually some reverse inquiry interest this morning through a broker that's interested in purchasing those particular projects.So the good thing is for our book, particularly with the demand drivers for leasing and the fact that in many of these cases it really is just down to lease up as opposed to a significant amount of operational risk with renovation, I think we feel good about the general outside demand to step in and recapitalize projects. But most importantly in terms of the book in general, a lot of sponsors are sticking with it. They're driving rents. In the vast majority of cases, they're replenishing reserves. They're doing all the things required to get these projects over the goal line. And as such, we talked about 50% of the book in what we feel is really good shape in terms of performing or eligible for a term refund.So we'll see how things go. Like I mentioned, we're cleareyed about some of the headwinds that remain in that space, but given how the book is situated, we're optimistic for overall good outcomes.

[Stephen Laws, analyst]

Appreciate the comments there. And then to follow up on the liquidity question that's been touched on a couple of times, can you talk about whether you've used the ATM any year to date, how you think about valuation of issuing off that, issuing stock at various levels versus book, given what investment returns are as you deploy capital, maybe update us on what's remaining under that authorization and whether you expect to re-up that?

[Brooke Carillo, executive]

Yes, great questions. So a couple of things. We have not utilized the ATM year to date. We did, and I explained some of our rationale there. A lot of the proceeds that we raised in the fourth quarter really net earmarked for the growing opportunity in residential. I think we used about net $50 million of capital for resi, which has really grown every quarter throughout the year, throughout 2023. We effectively issued around close to 90% of tangible book. Based on that math, we were looking at kind of, if you look at mid-teens blended returns, that's a pretty rational payback period. We think based on the earnings accretion that really drives our future book value growth through our taxable REIT subsidiaries over time.And so it was kind of that math that we were looking at that drove the ATM utilization, we also look at it really comprehensively with some of the other actions taken on the financing front. It was kind of a broader deleveraging that we've done of our capital structure to really term out some of our convertible debt, reduce our marginable securities repo, and just kind of net reduce our overall convertible debt maturity stack, all of which we think is very accretive to our shareholders over the long term.We continue to look at the residential mortgage banking opportunity really on kind of an earnings accretion basis to continue to fund that opportunity. I would also just note that we're very cognizant of how we deploy those proceeds and over what time period to make sure that we are crystallizing our assumptions on that earnings accretion. So the ATM does afford us a nice way to somewhat match fund proceeds. With that being said, our stock is off of levels where we were issuing in the fourth quarter.

[Stephen Laws, analyst]

Great. Appreciate the comments and look forward to seeing all of you next month.

[Operator]

Our next question comes from the line of Eric Hagen with BTIG.

[Eric Hagen, analyst]

How are you doing? Going back to your comments around the NIM and looking at the cost of funds on Slide 32, how much of that balance would reprice and over what kind of time frame, if the Fed were to cut interest rates?

[Brooke Carillo, executive]

We have, I would say, a pretty pro rata maturity schedule for our recourse leverage that really rolls throughout 2024 on a somewhat balanced basis. And so a lot of our repo lines are a year in nature. But one of the most important things that we did in the fourth quarter was with the amount of debt that we raised into the first quarter with the unsecured debt is a lot of it has pretty attractive prepayment flexibility and optionality with largely it being callable within the next 2 years.So we really do think it's a good option on where we are in the rate landscape because we're either going to crystallize those returns through mortgage banking in the near term at attractive gain on sale margins or put on longer-term investments at pretty attractive return profiles here.

[Eric Hagen, analyst]

Right. Essentially all of the securitized debt is fixed rate, is that right?

[Brooke Carillo, executive]

Yes, that's correct.

[Eric Hagen, analyst]

Okay. And in the investment portfolio and the capital allocation on Slide 29, do you feel like you can draw any more leverage against that portfolio and which assets are held unencumbered at this point? What kind of advance rate do you think you can draw against us?

[Brooke Carillo, executive]

Good question. Sorry, I didn't mean to cut you off. As Chris mentioned, we have another, as of today, we have about $318 million of unencumbered assets that centers largely around some of our organically created subordinate securities through CAFL and RTL, that we've created through our mortgage banking initiatives. Same with on the sequoia side, we have some of our reperforming loans, securities, other multifamily. A lot of what we did last year was selling some of our less strategic or fixed rate third-party assets at a gain into this environment, just given that they were fixed rate bonds that were largely nonstrategic and didn't carry as well as the rest of the investment portfolio. So I think that we think there's a couple of hundred million to raise there, just given the advanced rate. Some of these are securities or assets that are already financed elsewhere. And so we have pretty tangible data points around lenders appetite for those assets. And then some of them we just have chosen not to finance to mitigate some overhang of interest expense.

[Operator]

Our next question comes from the line of Steve Delaney with JMP Securities.

[Steven Delaney, analyst]

So, Chris, you mentioned the upcoming 30-year anniversary. So how many of those 30 years have you been sitting at Redwood?

[Christopher Abate, executive]

Well, if you count the dog years, it's a lot more than 30. But I think it's 18 or so.

[Steven Delaney, analyst]

Okay. Gosh, I was going to be in the 20s, but I was [ dating ] you. Sorry about that. No, seriously, congrats for both the company, obviously, for that great record over all that time, and for your longevity and leadership there as well. Well done.Just looking at the jumbo volume in the last 2 quarters of the year, 1.6%, 1.2%. Would you think next year, if we were to, for now, until we see some potential rate relief, which we may or may not get, would you guys think $5 billion to $6 billion is a reasonable starting point for jumbo production next year or am I being too conservative?

[Christopher Abate, executive]

No, I think that $6 billion range is definitely something we think is achievable. Obviously, rates are the big question mark, and so we can't predict the path of rates. But I do think that what we're seeing below the surface really gives us confidence that as rates start to flatten and come down, the business is in a great position to scale. There's so much to do still with banks, I feel like we're just kind of scratching the surface. We're just getting banks online various stages. And as I mentioned in my remarks, when you look at how the business changed after the great financial crisis, the vast majority of the jumbo business sort of moved on to bank balance sheets. And we think that's going to change. We think the regulations are going to change, but we also think that the incentives that banks had to do that are no longer present. You no longer have zero-cost capital. You've got a lot more scrutiny from an asset-liability management perspective, you've had some banks go down, so for us, you've got this massive jumbo portfolio opportunity that we haven't seen in 15 years.So irrespective of kind of rates, we're just very excited to be looked at as a capital partner again for that piece of the business that just hasn't been up for grabs, if you will, on the PLS side, people ask why securitization volumes stayed low after the great financial crisis. It wasn't because there were no jumbo loans being originated, it was because they were all ending up on bank balance sheets. So to the extent that changes, it's going to mean really great things for us and the PLS market. So that's really why we're excited. We think that there's structural changes happening with how capital is going to flow through the sector.We noted that that also applies for the investor loan business as well. For CoreVest, we're seeing great inbound from banks who are now dealing with CECL challenges. So there's just a lot of headwinds out there. And to be sort of, hopefully, on the other side, a lot of that is why we're probably optimistic on today's call.

[Steven Delaney, analyst]

I tell you that duration, that 30-year fixed rate duration, whatever it works out to, belongs a lot better in bond portfolios in Boston and LA than it does on bank balance sheet as far as for the stability of the financial system as a whole. So no question. Thanks for the comments.

[Operator]

Ladies and gentlemen, this does conclude our question-and-answer session. It also does conclude our conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.