Redwood Trust, Inc. (RWT) CEO Christopher Abate on Q1 2022 Results - Earnings Call Transcript

Apr. 28, 2022 10:30 PM ETRedwood Trust, Inc. (RWT)
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Redwood Trust, Inc. (NYSE:RWT) Q1 2022 Results Conference Call April 28, 2022 5:00 PM ET

Company Participants

Kaitlyn Mauritz - Senior Vice President of Investor Relations

Christopher Abate - Chief Executive Officer

Dashiell Robinson - President

Brooke Carillo - Chief Financial Officer

Conference Call Participants

Bose George - KBW

Donald Fandetti - Wells Fargo Securities

Steven DeLaney - JMP Securities

Douglas Harter - Credit Suisse

Stephen Laws - Raymond James

Eric Hagen - BTIG

Kevin Barker - Piper Sandler

Operator

Good afternoon, and welcome to the Redwood Trust Inc., First Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded.

I would now turn the call over to Kaitlyn Mauritz, Redwood’s Senior Vice President of Investor Relations. Please go ahead, ma’am.

Kaitlyn Mauritz

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood’s first quarter 2022 earnings conference call. With me on today’s call are Chris Abate, Redwood’s Chief Executive Officer; Dash Robinson, Redwood’s President; and Brooke Carillo, Redwood’s 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 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 maybe 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 first quarter Redwood review which is 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. Redwood 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, for opening remarks.

Christopher Abate

Thank you, Kate, and thanks to all of you for joining us today. On our fourth quarter earnings call in February, we approached our commentary with a cautious eye on changing market trends in the mortgage sector that had signaled its plan to raise rates. The conflict between Russia and Ukraine was just beginning to be a headline. And markets were reacting with fear over anticipated uncertainty in the volatility ahead.

As a point of reference, markets were estimating four to five rate hikes this year back in February. Today, many market observers are expecting nine rate hikes. Additionally, the 10-year treasury rate has risen over 120 basis points since year-end and the spread between the two year 10-year has collapsed from 80 basis points to zero by the end of the first quarter. Mortgage rates may soon eclipse 6% highest level in over a decade. All of this is remarkably occurred in a span of just a few months.

In these markets, there is truly nowhere to hide and it is times like these that help differentiate competitors in a way that can’t be easily seen during periods of extreme fed accommodation. That is why we are so pleased with our performance during the first quarter which included GAAP earnings at $0.24 per diluted share, representing an annualized ROE of 9% and book value of $12.01 per share, effectively flat since year-end. This is despite fixed income markets turning in their worst performance in over 40-years.

We also paid a $0.23 per share quarterly dividend unchanged from the fourth quarter, and are generating strong cash flows and earnings to sustain or grow that dividend going forward. All told, the resiliency of our mortgage banking businesses, coupled with another quarter a very strong fundamental credit performance across our investment portfolio has resulted in balanced financial results and otherwise a lopsided quarter for the broader mortgage sector.

What has become clear early in 2022 is that this will be a year of great transition for the industry. In addition to the rise in benchmark rates, the fed which has effectively become the world’s largest agency mortgage rate, has signaled that may begin aggressively paring back its 2.7 trillion of MBS holdings. Navigating those dispositions will be an ongoing challenge for market participants, particularly those who benefited the most from the feds accumulation of MBS over the past few years.

As a company with over 27-years of public company performance, we pride ourselves in our ability to perform across cycle. We structured our business complementary and diversified strategies to help manage against volatility, while enabling us to continue providing solutions for our partners and durable returns for our shareholders. For instance, our 2019 partnership with CoreVest solidified our presence in the business purpose lending market, and as to-date far exceeded our expectations, both quantitative and qualitative.

The investments we have created in business purpose lending helped to turbo charge the modernization of our investment portfolio. We are now a leader in both single family rental and bridge lending with the ability to offer our clients a breadth of product options after needs evolve. Despite the rapid rise in interest rates, we have seen a continued uptick in demand from BPL borrowers and a desire for additional products that address their evolving needs.

This is why we are very excited today to announce the acquisition of Riverbend Lending. Riverbend is a leading bridge lender that provides financing to experienced real estate investors who acquire residential and multifamily transitional properties. This acquisition is a step forward and solidifying our market leading position and reflects our conviction around the strength of our business purpose lending platform and its prospects for future growth.

Housing inventory remains at historic lows, most notably the inventory for turnkey housing stock, which eliminates the execution risk making a home moving ready for perspective homebuyers. As a reminder, our bridge loans carry a short duration, typically 12 to 18-months, they generate current income, and they have conservative leverage points, all compelling trades for investors in today’s market.

Following the closing of the acquisition Riverbend will be integrated into CoreVest and will add incremental scale, geographic footprint and its client network the CoreVest’s existing platform. Our team at CoreVest has done a remarkable job scaling the business into the market leader it is today and we remain committed to continuing to grow organically through product development and expansion of our client base in a market that maturing, but remains fundamentally fragmented.

The current macroeconomic backdrop provides an opportunity to lean in further to our BPL business and Riverbend an emerging leader in its own right represents an important step towards furthering these growth plans at a safe but enhanced pace.

Riverbend is led by a phenomenal team that we are excited to have joined the Redwood Family. I will let Dash go into more detail around the transaction. But I wanted to emphasize how it fits into our playbook and positioning our platform for the long-term, your incremental scale, best in class products, and attractive investments for a portfolio, all of which drive value for shareholders.

And turning to our investment portfolio was a big contributor to our books value stability in the quarter. Despite severe moves in many asset classes. The bearers repeating our portfolio is different. As we have long emphasized our investment portfolio has been uniquely constructed overtime with assets to take a view on housing credit fundamentals are less sensitive to some of the whipsaw moves we see in the interest rate markets.

And our outlook on housing credit remains strong, given rising home equity, low unemployment, and record low housing inventory. Volatility leads and entry points and we will continue to opportunistically add to our portfolio where we see strong return potential.

Our residential business a foundational piece of Redwood’s core strategy established itself as a true leader in the space over three decades. That is product offerings speed to purchase, securitization and distribution.

This leadership set on top of prudent risk management has set our residential team apart both over time and particularly in the most recent quarter, as we are able to quickly and efficiently distribute our fixed rate loan inventory, as mortgage rates grows dramatically.

Because of our positioning, we are able to continue to lock loans competitively throughout the quarter while there is step back from the market, resulting in our residential lock volume declining only 7% from the fourth quarter of last year versus industry wide projections of a 25% or greater total decline for the period. We did this while preserving our gross margins at levels near or long-term historical range.

Sufficed to say we are extremely pleased with how our residential business performed relative to what we suspect was one of the worst quarters for the industry and many years. As Dash will touch on our ability to refresh and expand our offerings earlier this month, further demonstrates our leadership and ability to address the constant evolution of consumer needs.

I will now transition to RWT horizons, a venture that we launched in early 2021, which has become a crucial part of our overall investment strategy. And about 14-months, we have made 21 investments in 18 early stage Fintech and proptech companies that have a direct nexus to our business, and are innovating across multiple facets of today’s housing market. These investments have put Redwood in a unique position to be a first call for many technologists looking to turn their innovations into thriving business opportunities.

Already, we are seeing the progress of this initiative, which has begun contributing to the bottom line well ahead of schedule. At quarter end we had 25 million of capital committed to our horizons investments, and two of our smaller investments completed follow on raises at significantly higher valuations during the first quarter.

And in April, another one of our early horizons investments completed a new funding round that is expected to result in a pre-tax gain on our investment thus far of approximately 10 million. We expect to recognize that income as part of our second quarter GAAP earnings.

Before I hand the call over to Dash, I would like to reiterate the current markets offer important opportunities for us to further differentiate our business, particularly as we position Redwood for new chapters of growth. While each of our business lines address different facets of the housing market, taken together, Redwood offer shareholders a comprehensive and highly durable non-agency strategy that cannot be easily replicated.

And with that, I will turn it over to Dash, who will take us through the operating businesses and our investment portfolio.

Dashiell Robinson

Thanks, Chris and good afternoon, everyone. As Chris mentioned in a quarter characterized by substantial volatility, Redwood delivered solid financial results, supported by disciplined risk management and uniquely diversified revenue drivers now further enhanced by the addition of Riverbend to our franchise.

As Chris mentioned, we believe this is a great acquisition for our Company, and another step forward and solidifying our leadership position and BPL. Founded in 2017 by principals with whom we have had a long working relationship, Riverbend has established itself as a top financing provider to sponsors seeking to redevelop and sell both single and multifamily properties. Their product suite is highly complementary to CoreVest unique mix of bridge and SFR lending products.

Riverbend lends in 33 states with a particularly deep footprint in California and the Pacific Northwest, total territory for growth and BPL lending. The platform originated $1 billion of loans over the 12-months ended March 31st. For the loyal client base, we believe we can serve even more deeply with our full complement of loan products.

Riverbend riverbed has historically originated for sale, developing deep distribution channels and keeping a portion of their economics on the run in alignment with our home loan buyers, a valuable distribution channel that we intend to utilize going forward.

Brooke will comment in a moment on the acquisitions expected accretion to our earnings over the near to medium term. We look forward to working with the Riverbend team and welcoming them into our family of companies.

As Chris referenced momentum and demand for business purpose lending products has remained strong even with the move higher and benchmark rates. CoreVest delivered another quarter of record volumes in Q1 funding $920 million of loans, up 25%, compared to Q4. The first quarter is funded volumes were split close to evenly across term and bridge products with an increase in multifamily across both asset types.

Across both single and multifamily, we estimate a total addressable market for BPL of approximately $100 billion. A powerful statement as to how many potential BPL borrowers remain underserved.

We get asked frequently about competition in this space, and while certainly the past few years have shown an increase in the number of market participants, CoreVest continues to set itself apart with its product suite, speed of service and deep client base all strengthen with Riverbend coming on board.

BPL first quarter mortgage banking results reflect robust growth and origination fees offset by the impacts of spread widening since year-end. In keeping with volume trends fee revenue grew 25% during the quarter, and we were able to distribute over $300 million in home loans prior to much of the market volatility.

While continued spread widening through quarter end is estimated to impact execution on our SFR loans and inventory, we believe the market has begun to find its footing, particularly for loan products with compelling credit attributes including cross collateralization and extension risk mitigated by maturity is more analogous to fixed rate CMBS loans.

BPL assets both bridge loans and subordinate SFR securities remain a growing part of our portfolio capital allocation and contributed to the stability of our book value amidst the volatility. We frequently referred to our investment portfolio overall as one that is hard to replicate. And this remains the case today, both in terms of credit quality and value stability in choppy markets.

Over 70% of the investments in our portfolio are organically created through which we control the credit process from day one, and have held the securities for the long-term. These include the subordinate bonds issued off our residential and SFR shells whose loans have an average seasoning of over four years. But delinquency is now trending consistently around 2% reflective of their high quality underwriting and the substantial additional equity that has built up through amortization and home price appreciation.

This durability of our investment portfolio also applies to the recent backup and benchmark rates. The expansion of our housing thesis in recent years, most notably into BPL assets and securities backed by reperforming loans as meaningfully changed the convexity profile of our books and reduced underlying extension risks.

Our BPL investments consist of shorter duration predominantly floating rate bridge loans, as well as securities backed by call protected cross collateralized SFR loans with a five to 10-year term.

Our RPL securities, predominantly our SLST security structured in partnership with Freddie Mac, represent close to 30% of our portfolios capital allocation, and are backed by loan season 15-years or more.

The SLST securities we own were originally underwritten to single-digit prepayment speeds with actual performance significantly outperforming modeled expectations due to both natural housing turnover and credit clearing of the underlying borrowers.

Due to their seasoning, our subordinate credit investments overall now represent a fixed percentage of their respective capital structures with stable credit profiles, able to sustain the potential slowdown in HPA as a result of the rapid increase in borrowing costs.

While certain parts of our investment portfolio naturally underperformed during the period, most notably CRT. This was partially offset by our interest only securities, including Sequoia MSRs that outperform enter the interest rate backup.

The market for new issue securitizations was challenged during the first quarter as credit spreads began to move in sympathy with benchmark rates. We often comment on the importance of having both well established securitization shelves and a deep network of whole loan buyers that values our track record of quality underwriting.

The first quarter was no exception, but we completed one Sequoia securitization early in the first quarter backed by approximately $700 million in loans, achieving attractive execution. The remainder of our distribution was in whole loan form. A durable whole loan sales strategy requires end-to-end coordination across the business, the hallmark of both our residential and BPL platforms.

Collectively during the first quarter, we sold over $2 billion in jumbo and SFR loans to a broad array of institutional investors, many of them repeat partners attuned to our high level of service. This allowed us to come into the second quarter with lower loan inventory aided by our ability to process and fund loans more quickly than our peers.

Ultimately, our distribution and execution allowed us to successfully move whereas while others became weighed down by inventories struck coupons well below prevailing market levels. We have already distributed the vast majority of this type of production, including through whole loan sale executions in April at levels we estimate to be significantly accretive to securitization.

The speed of our execution remains a clear differentiator for both of our operating platforms, we will often process loans three to five times more quickly than the competition. This time increases market risk, which in this environment has in our view, whereas many competitors to reevaluate risk appetite and product mix. Opening a window for us to continue gaining market share safely and profitably when the time is right.

As always, we will evaluate the most efficient course of distribution and expect both securitization and whole loan sales to remain key parts of the equation. This distribution balance a lot our residential mortgage banking platform to log a productive quarter amidst unprecedented challenges in the consumer mortgage space overall. As Chris articulated, gross margins were maintained near historical long-term range on near consistent volumes versus Q4.

Purchase money loans in Q1 increased to 65% of locks versus 59% in the fourth quarter. The purchase money percentage has continued to increase into April consistent with the strategic rationale behind our rollout earlier this month of new expanded prime products to complement our core offerings.

These new offerings include a unique bank statement program with terms and underwriting criteria designed to meet the CFPB’s qualified mortgage definition, among other things and important driver of securitization profitability.

Since the onset of the pandemic, the number of self employed borrowers has increased substantially. And we believe these new programs will translate into better pricing for our sellers and more affordable loans for borrowers.

With loan officers no longer able to rely on GSE refinance volumes and the industry well underway and right sizing capacity. We see these new products as a key avenue to increasing our market share by providing additional options that loan officers can use to service their customers.

Reinforcing the unique diversity of our revenue drivers enterprise wide, RWT horizons just completed an important quarter in its evolution, including the appointment of a full time Chief Investment Officer.

In addition to direct return on our investments, a critical benchmark for Horizon success is the impact of the underlying technology on our broader business, building off of our momentum and leveraging its technology to put remittance information from Sequoia deals on blockchain.

We were pleased to see liquid mortgage recently consummated a partnership with canopy Another early horizons investment to leverage blockchain and reducing redundancy in the loan due diligence process.

We also recently completed a data sharing and licensing agreement with another portfolio company focused on providing analytics to the single family rental market. This progress foreshadows real change to accepted practices and ways in which we use data to underwrite risks more nimbly.

While RWT Horizons is only a year old and speaks for only a small percentage of the firm’s capital. We have established ourselves as a leading investor in the Fintech and prop tech areas, validating our thesis that technology entrepreneurs value strategic thought leadership, not just capital and picking partners.

I will now turn the call over to Brooke Carillo, Redwood’s Chief Financial Officer.

Brooke Carillo

Thank you, Dash. As Chris highlighted, we reported GAAP net income of $31 million or $0.24 per diluted share in the first quarter, representing a 9% overall annualized return on equity for the quarter and covering our $0.23 per share dividend.

Most notably, our book value per share proved resilient, declining less than a half a percent to $12.01, leading to an economic return of plus 1.5%. Our book value performance for the full quarter was in line with the move we indicated through the end of January on our fourth quarter call, which is particularly notable given the historical volatility experienced during February and March.

Given the strong relative performance of our book value during the quarter, I want to begin by highlighting that the stability was attributable to the diverse characteristics and quality of the assets within the investment portfolio.

Returns on our investment portfolio held up relatively well. We saw less than a $0.10 per share decline, quarter-over-quarter in the investment fair value changes and other mark-to-market income that drive EPS.

Our negative duration assets, namely our MSRs and IO securities act as a natural hedge and provided book value protection, as interest rates increased significantly in the quarter and prepayments flow, offsetting fair value declines from our Sequoia sub and seasoned jumbo loans.

Strong carry and continued strength and overall credit performance offset generally wider spreads and drove a 16% return on invested capital for the investment portfolio segment. We have seen this resiliency continue into the second quarter. As we currently estimate our book value is down between 0.5% to 1% in the month of April, bringing the total year-to-date book value estimated change to be inside of 1.5%.

Same with the investment portfolio, we deployed 128 million of capital with bridge loans representing about 50% of the total and home equity investments largely being the balance. We also made a $25 million commitment to an investment vehicle that serves the mission of providing quality workforce housing opportunities in key Bay Area urban communities. Delinquencies and investment portfolio remain near post-pandemic low, portfolio LTVs have moved lower and home equity is at historic highs.

Moving on to our operating results relative to the fourth quarter. Net interest income was up $3 million as we experienced a full quarter benefit of the investment portfolio deployment in Q4 specifically bridge and follow-on investments in season mortgage servicing rights.

And we received $8 million of yield maintenance payments on capital securities, as underlying loan prepayments increase. This partially offset a $5 million decline on the quarter and accretion of our available for sale securities given that higher rates and slowing prepayments impacted the near to intermediate prospects of calling those securities.

In terms of our non-interest income, or mortgage banking activities net declined by $20 million collectively, during the quarter as spreads widen for both securitization and whole loan sale execution and rate volatility increased throughout the quarter, relative to the fourth quarter G&A decreased by $4 million, driven by lower variable compensation commensurate with our GAAP earnings, which led to a relatively durable efficiency ratio despite lower volume quarter-over-quarter.

The residential mortgage banking segment generated a 10% return on capital during the quarter, which was unchanged from Q4 on similar themes. We saw continued pressure on our gain on sale margins as our pipeline was impacted by widening spreads and hedging costs significantly increased quarter-over-quarter. However, our operational excellence and conservative approach allowed us to maintain a lower inventory of loans than would be typical otherwise.

Turning to our business purpose mortgage banking segment. As Dash mentioned CoreVest had another record quarter for volume of 25%, capitalizing on the momentum from late last year. While fee income from bridge was higher on the quarter. The single family rental pipeline was more heavily impacted by interest rate and spread volatility.

Despite the significantly lower contribution from BPL mortgage banking, the bridge assets that are organically created from our platform were highly accredited to the investment portfolio, generating a 17% annualized economic return. Accordingly, we will continue to allocate more capital to bridge production, and the addition of Riverbend to our platform enhances our ability to do so.

Following up on Dash’s commentary, we expect the platform to generate attractive returns for our shareholders. Given we do not expect to close acquisition until later in the second quarter to obtain necessary change of control approvals, we expect the Riverbend platform to contribute between $0.15 to $0.20 of earnings as a run rate by 2023, which translates to a mid teens expected ROEs inclusive of the full consideration paid for the platform.

We maintained excellent strength in our capital and liquidity position during the quarter. We ended the quarter with over $400 million of unrestricted cash and $140 million of investable capital compared to $150 million at year-end. Leverage came down on the quarter from 2.4 to 2.1 times on lighter residential mortgage banking inventory I mentioned previously.

Looking across our debt maturities, we were new facilities representing two billion of capacity in the first quarter, with only 550 million rolling later this year and we maintain 2.3 billion of excess capacity in our loan warehouse facilities which sufficiently addresses our financing needs. We also have no corporate debt maturity upcoming in 2022.

We had a highly productive quarter as we renewed four residential loan warehouse facilities, and initiated two additional lines. In business purpose lending we renewed one facility and lended two others and liquidity to finance our BPL production remains robust.

A consistent theme across our financing activities that we saw favorable terms, either through procuring lower cost of funds, increasing advance rates or adding more product flexibility. Throughout the quarter, we were able to seamlessly transfer 81 million of bridge loans to our first fixed rate RPL securitization, bringing up incremental capital.

As we move through the second quarter and 2022 more broadly, we remain on track with the long-term goals and objectives we laid out at our Investor Day last September. Near-term interest rate volatility is impacting the timeline, given the significant repricing of all financial assets that is transpired under the new rate regime. While, of course, the environment is uncertain we believe that our current capital and future earnings profile position as well to continue supporting business growth ahead.

Based on expectations for current returns were seen in today’s market that meet our risk tolerance, we expect adjusted ROE for our business to range between 8% to 12% in the near to medium term, and overtime trend back to the 15% blended return we spoke about at Investor Day. We continue to explore the potential upfront side from Horizon, other strategic investments, and any subsequent M&A from our ROE outlook.

Looking ahead, we see potential growth in ROE to come from the same tools we have utilized in the past, including capital efficiency and operating leverage as our mortgage banking businesses scale. Our investment portfolio utilizes a model 1.3 times terms of leverage today, with opportunities to optimize in several key areas including virgin RPL.

Over 70% of our bridge portfolio is financed with warehouse debt, which we have the potential to improve through higher advanced rate nonrecourse financing structures. In addition to these we see ROE potential from the fact that we have over 1.1 billion of floating rate assets, nearly 40% of which are owned for cash, or finance with attractively priced fixed rate debt, and a rising rate environment provides an earnings tailwind for our business.

Furthermore, net of first quarter gains remains potential upside of roughly $2.15 per share in our portfolio through book value upside from discount securities, as underlying performance continues to improve.

And with that, I would like to turn it back to the Operator to open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bose George with KBW. Please go ahead.

Bose George

Hey guys, good afternoon. Actually, the first question, just can you talk about where coupons are on the loans of CoreVest, and then just how you kind of manage the risk with the big move up in rates and spread widening relatively quickly this year?

Christopher Abate

Sure. Hey Bose, this is Chris. I think Dash now tag - as far as the move up, we were really deliberate to start the year in getting out ahead as best we could, of what seemed like a big rise was coming in rates and obviously that occurred.

We moved our first securitization to the very front of the deal calendar for the year in residential that turned out to be a very good decision, because deals are progressively priced worse since right up through today and we really we are very intentional and leveraging our whole loan distribution.

The thing about securitization, one of the reasons why we only did one during the quarter was because you need to go through an accumulation process, and basically bulk up to get to a critical mass. With our whole own channels, we are able to move risks more quickly, and stay as close as we could to current coupon.

So that was really the story in the first quarter. And potentially others approached it differently. But I think we weighed about as good of an outcome as we could have and it is positioned us really well, going forward even though we still expect a fair amount of volatility.

Dashiell Robinson

On the coupon side Bose, it obviously does vary by product and overlay. But for jumbo, I would say coupons are probably in the low to mid-five maybe a bit higher right now, depending on the specific product.

And for bridge, they are still in the higher single digits. The vast majority of our bridge book is floating rate and so depending on the path of LIBOR, those rates would continue to tick up. And then for the term, single family rental, the five and 10-year product, it is higher fives potentially touching 6%. We have had a bit of a net rally here the past few days, but that is the general zip code for coupons -.

Bose George

Okay great, that is helpful, thanks. And then just given the continuing volatility in the second quarter. Can you just talk about sort of similarly managing risk or is it sort of the same kind of playbook in terms of more cash sales, et cetera?

Christopher Abate

I think for now, it is going to be a similar playbook. One thing I will say is because we were able to protect book value, so effectively in the first quarter it has positioned us potentially to get a little bit more aggressive. We will see - I think we like most are looking and hoping for some stabilization with respect to rates, but we will take whatever comes our way, and we continue to lock loans each day.

And as the market sort of corrects, we plan to stay out ahead of it. So I think it is going to be a similar approach. But I also do think we are through the worst of it, the market is correcting to fed policy faster than ever. And so I think that, we get through another fed meeting soon and hopefully we start to see some good opportunities to leg in further.

Bose George

Okay great thanks and good job protecting the values for it.

Christopher Abate

Thanks Bose.

Operator

Thank you. Our next question is from Don Fandetti with Wells Fargo. Please go ahead.

Donald Fandetti

Yes, I guess how your BPL mortgage banking, it sounds like the - looks like the margins were impacted by spread widening on the inventory. Can you talk about the near-term profitability of that segment? And then also, can you talk about the gain on sale margin expectations near-term for the residential mortgage banking?

Dashiell Robinson

Sure. For BPL your right a lot of the story in the first quarter was just the move in spreads. We were able to get a couple of large whole loan sales off at levels that we thought were accretive to securitization at that time and before the increased volatility set in but spreads did continue to widen throughout the quarter.

But we have adapted, as Chris said, we are very nimble with our pricing and our rate sheets, and we think where we are currently pricing, probably in the SFR book, the risk is certainly responsive to where we sit today.

And we are at really all time widespread perspective, particularly at the top of the capital structure for securitization. And that is why we are continuing to make sure we remain balanced between securitization and hold on sale.

There is some real scarcity value in our line to on the SFR side, the quality of that product, no one really else is producing it in scale and so that is a lot of the reason why we have had really good success working with whole loan partners, in addition to the traditional securitization route.

The other big thing about BPL margins is just, really the emergence of bridge over the past few quarters. We had another record quarter for bridge, there continues to be real macro demand and tailwind for that product from our sponsor group, Chris touched on it.

Those are great for fee generation, and carry little to no actual duration and we continue to innovate on ways to finance those going forward, which will be accretive to NII and ultimately margins as well.

So just the balance of bridge and the depth and of course onboarding Riverbend and the ability to add another billion plus a year potentially production to the mix is really exciting for us. So, we position ourselves accordingly from a product mix perspective and of course, as Chris said, just the nimbleness of being able to reprice the risk is frequently is we are able to.

On the jumbo side, we were really pleased with where margins came in, in Q1, essentially at the low end of our historical ranch. We do see them going forward consistently there this quarter, a lot of it will be indexed, again, to the strength of the whole on distribution.

But the other point is, when you look at securitization execution at jumbo, it really is sort of a tale of two cities, there is still a lot of our competition that is trying to flush out the lower coupon mortgages, which obviously have a very, very different convexity profile than the current coupon production that we are able to flow in.

We talked in the prepared remarks about how efficient we have been at really clearing out the lower coupon and so, when we think about securitization and jumbo or whole loan sale for that matter, it is important to recognize that the product that we have is a very different cash flow profile for investors, whether it is AAA’s or whole loan buyers and that is a very helpful buttress for margins, particularly given what rates have done so quickly.

Donald Fandetti

Got it and then I have quick accounting clarification for Brooke. Brooke let’s just say on your residential loan portfolio, because you fair value the loans. What liabilities do you offer fair value? is it only if it is securitize even Sequoia, where your fair value in the loans and the debt and for that leaves loans that aren’t securitized with fair value, but there is no offset from the debt financing. Do I have that right?

Brooke Carillo

The vast majority of our residential securitization, we fair value both under the - election and then just in terms of the impact of fair valuing these all of the hinge loss or benefit is also captured within the mortgage banking as close through our GAAP PNL as well.

Donald Fandetti

Got it. Okay, thank you.

Operator

Thank you. Our next question is from Steve Delaney with JMP Securities. Please go ahead.

Steven DeLaney

Thanks for the question. And congratulations, folks on just an amazing performance in what was a crazy market across the entire mortgage universe. So, props to the balance sheet, props to you guys. A lot of things have been covered Riverbend and I’m curious about the bridge. I think a great addition obviously the floating rates and those products generally you are - well I guess depends on your securitization and whether you do gain on sale, but obviously the commercial mortgage REITs on those floating rates, they don’t do any mark-to-market when they finance with CLOs. Maybe that is a question in its own right for you guys on when you think about bridge going forward. But was really going to ask Dash, is you obviously have kind of your resi bridge your renovate resale product, you have probably got some small multifamily. But does Riverbend also move into other small balance commercial property types as well, given their geographic breadth, et cetera?

Dashiell Robinson

Yes, it is a great question Steve. In general, what is really exciting about the acquisition, obviously, besides the people and the cultural fit is really two things. Number one, the products that Riverbend is in and the geographies where they are deepest are areas where we are just not as deep.

And so sort of the first order of creativeness is just the products that they have very little overlap and product type and borrower, frankly, to CoreVest current footprint, and then geographically, they are just deeper in areas that we think are really attractive.

But the second order of fact, which frankly, is not included in some of the accretion numbers that Brooke articulated is being able to serve that client base more deeply that Riverbend brings to us. They are doing some smaller ticket transitional multi, we would expect as a combined enterprise that will continue to grow. There is a ton of demand there from borrowers and some really attractive opportunities.

But there is other stuff as well, CoreVest bridge platform is very unique in terms of the products that are focuses on versus maybe the rest of the traditional lending community built for lend, lines of credit, things like that just products that serve different needs for sponsors.

And so pushing those products out through the Riverbed network, in addition to the single family rental, we think is going to be particularly creative and exciting. So the direct answer to your question is yes, we would expect more small balanced multi elsewhere and commercial probably not. But you know that is an area that that Riverbend already is in and we would expect them to do more of now.

Christopher Abate

And Steve, I would also add, these are great portfolio assets.

Steve Delaney

Yes. That is what I was thinking from a risk management standpoint yes.

Christopher Abate

So these are a big reason, these BPL investments are a big reason why our book has been, so resilient with this huge run up in rates. So, that is, Riverbend is a great whole on distribution platform today, but having the opportunity to put more of those assets on our balance sheet is pretty attractive.

Steve Delaney

Yes. And I mean, just on my initial comment about CLOs, I mean, you have been selling a lot of that product on the bridge part product, but do you envision that, if you were to do that at scale on your balance sheet, do you envision that that would ultimately involve a nonrecourse securitization structure around that on the financing side?

Brooke Carillo

Yes, it is a very good point, Steve. So we have balance sheet at most of our bridge loans, today, we have about 1.2 billion of loans on balance sheets. We did do our first bridge securitization back in the fourth quarter in October and it has certainly been a highly accretive fixed rate financing, that we continue to have revolving capacity to place more of those floating rate loans as we have been originating an increasing portion of our overall mix within bridge.

And one thing I would note too, 30%, of what Riverbend has originated and 30% of what we did to in the first quarter was on the multifamily side, there is a lot of accretive type of non-recourse financing structures there that we continue represented some of that capital optimization that we referenced in our prepared remarks. So, we do - to circle back to your point, or that we do fair value all of our bridge loans, but they do sit at the read and have been as Chris mentioned, that a very nice ROE earner for us.

Steve Delaney

Great. Thank you all for your comments.

Christopher Abate

Thanks Steve.

Dashiell Robinson

Thank you Steve.

Operator

Thank you. Our next question is from Doug Harter with Credit Suisse. Please go ahead.

Douglas Harter

Thanks. Can you just talked about the competitive dynamic in the various origination mortgage banking businesses kind of how competitors might have fared in the more volatile period and whether that puts you in a better competitive position or the same competitive position kind of going forward?

Dashiell Robinson

I would say overall, we expect to be in a much better competitive position, particularly in residential. What is happening in residential is there was a lot of, new issuers, many of them, originators, who entered the space, very recently and obviously with this type of volatility and such a rapid rise in rates, the outcomes for the sector in the first quarter very, very challenging.

So, we would expect some degree of shakeout candidly, and we see it every cycle. We have been in the business for many, many years. And I think the number of issuers will decline significantly over the course of the next few quarters, certainly over the next year, which would really help us from a competitive standpoint in resi.

And BPL, it is still a very nascent space and we have started out as the leader in the space and we continue to be and with the acquisition of Riverbend. To some extent, we are just expanding our footprint. And I think, a lot of people are attracted to the space, but there is just so much to do.

You know, we think it is $100 billion annual origination market across products and so there is just significant upside there and the loans take a lot of skill and strong relationships to do well. And those relationships have proven to be very durable from a client perspective.

So, we feel very, very good about the competitive landscape and if anything, these difficult periods really help us just solidifying, our place and we certainly expect that to play out over the course of the year.

Douglas Harter

Thanks.

Operator

Thank you. Our next question is from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws

Hi good afternoon, thanks. Brooke question on the potential securitization call gains. Can you talk about the current environment and I don’t know if it is prepayment slowing. So maybe some deals are paying down more slowly or if it is in the market to look at kind of refinancing some assets. But can you talk about that look for securitization call gains and maybe timing on how we should think about those rolling into the numbers?

Brooke Carillo

Yes, it is a good question. We still have - we put out updated disclosure on the amount of call activity to be that we could see, we still have over two billion of additional loans to become callable that we are modeling in the next two years.

We have just given that we have seen consistently higher prepayments and kind of environment that we are more broadly staring into, I think we have pushed out some of the timing for when we could realize those calls, we have about 600 million of loans that we think would become callable through the end of the year. So it is, there is still a really healthy potential in terms of book value outside of a $0.34.

And when we look at the weighted average coupons that are underlying those near-term calls are still, competitive with where we see current coupon today. So I think we are just monitoring the opportunity, a little bit more cautiously than we have in the last few quarters. And so we did have about a $5 million decline in our net interest income from the accretion on those calls. And that is something that you could continue to see decline over the next one or two quarters as the push out the timing of those gains.

Stephen Laws

Great, thanks Brooke. Chris kind of looking bigger picture, we have covered most of our questions on the BPL side, but if you think about the residential side and a Dash mentioned some bank statement loans. And in past calls, I think we have talked about kind of expanding credit or near prime and maybe some home equity products, just given the home price appreciation, but can you talk about some other products that you guys maybe think there is an opportunity in or what you are seeing on the residential side of the business instead of the BPL side?

Christopher Abate

Sure. Well, certainly we have been very interested in home equity, and it is something we have talked about in past quarters. I think we will have a better update when we talk again, in the summer. But that is an area where we are the portfolio has been very focused. We did just relaunch our product suites, sort of to the market in April on the residential side, the refresh choice. And then you are right, we did, we did launch a bank statement product.

One of the interesting things there is, we are focused on QM, and loans that meet the standard. We have spent a lot of time with various stakeholders to make sure that those are structured appropriately, with the right number of months of verification and things that we need to securitize those well, because we think that the QM product will really boosts the liquidity of the space and how those execute in the PLS markets, which should benefit everybody.

We also have been focused on hybrids and arms, just really expanding the playbook and being responsive to the market. So I think we are really in a good position in resi and we are getting a great response rate from our seller network. There is tremendous interest in training and learning about the products.

And I think the, what the market really needs in residential is just some rate stability at this point. When you look at the TVA markets, certainly, when you look at CRT, then obviously, prime jumbo, it is just hard for investors to know what the right price is to pay for bonds. And as long as that dynamics in place, some of these rollouts will take time, but the interest is there. And we certainly feel like we are leading in the space.

And so I think we are going to have a lot of really interesting and potentially surprising results, positive results from these rollouts to talk about in the coming months. But we are still in a - you know, the market still in a spot where, it just really needs some guidance from the fed and just to know, where that current coupon should be.

Is it 5.5, is it six, is it higher? So those questions will be answered in the coming weeks and months. But I think what we are investing in now is just the products and the infrastructure to really continue to take share. And that is one thing that we are very proud of in the first quarter as when you look at our lock activity that was very similar to the fourth quarter where the market declines, we expect to be very, very significant. So hopefully, that that keeps up and we can continue to grow the business.

Stephen Laws

Helpful color. Thanks Chris. I appreciate it.

Christopher Abate

Thanks Stephen.

Operator

Thank you. Our next question is from Eric Hagen with BTIG. Please go ahead.

Eric Hagen

Hey thanks guys. I’m jumping on a little late here, so thanks for squeezing me in. A couple here, In the CoreVest SFR portfolio, can you say how much rental increase is embedded in the value of the assets just roughly? And then, do you guys see a risk that, forgive me if you addressed this already but do you see a risk that lenders adjust haircuts or margins on warehouse loans or do you guys feel like there is enough supply of capital out there, and leverage across the system is, I guess, stable enough where that really isn’t an issue right now?

Christopher Abate

Thanks, Eric, all I will take your SFR question and let Brooke address your question on the warehouse piece. In terms of how we - I mean, to move it to the front of the funnel, when we actually size and underwrite SFR loans, we are pretty conservative about how we think about rents, we tend not to think about rental increases as part of the underwriting or loan sizing picture.

And so when we size loans, there is obviously the increases that we have seen have been - have certainly been tailwinds to value, but they are not part of the base underwriting process for us. And the portfolio has performed really, really well, frankly and it doesn’t need to see the rent increase that we have seen in the past few years to have hung in there, our average LTV is still in the high 60s.

So it is clearly part of how a lot of our sponsors think about things and particularly with higher rates, just making sure that that math still pencils for the combination of home price appreciation and rental growth, and just what is going on with cap rates in general and single family rental, but from our perspective as a lender, as you know, we are underwriting to get paid back. Right. And we don’t tend to price in rent increases, and into that analysis for the SFR book.

And Brooke, do you want to?

Brooke Carillo

Yes. And on the financing side - Eric it is a great question. I think, we had a lot of good anecdotal evidence around this in the first quarter, because we did have two billion of facilities that we renewed. And so I think it is probably a combination of yes, we do feel good about liquidity in the system from our financing providers.

But I think also just Redwood specifically, probably speaks to the strength of our capital base, especially our risk performance during this time, and our ability to - structured our debt and the way that we have has, we think have significantly protected acts and environments like today.

We still have - we are sitting with about over a third of our financing is committed. We have a significant amount 100% on the business purpose lending side that is financed with non marginable debt. That is continued appetite that we see from our financing providers. In general, over 80% of our debt is either non-marketable term non-recourse or both. And we have considerable excess capacity today, we have about 2.3 billion.

So I think as we sit today, we just feel really good about the position of our book as it relates to how our debt is structured. And overall, our leverage continues to be very low and as trended downward as I mentioned on our prepared remarks.

Eric Hagen

That is helpful. Thank you guys very much.

Christopher Abate

Thanks.

Dashiell Robinson

Thanks Eric.

Operator

Our next question is from Kevin Barker with Piper Sandler. Please go ahead.

Kevin Barker

Good afternoon. thanks for taking my question. I just wanted to follow-up on the $10 million pre-tax gain that you are recognizing from an investment and RWT horizons. Could you gave additional color on like what your cost basis was on that investment, was it an exit of a business and then see if there is any other investments that you see out there that that could be manifest?

Christopher Abate

Sure. I don’t think that we have or we will provide cost basis detail at this time. What I can say is, it was one investment. And it was a $10 million - approximate $10 million pre-tax gain, the total allocation or the total deployment for horizons at quarter end, for all of the investments was 25 million. So I can confirm it was a single investment of the total.

That was a another valuation round. So it was not a monetization. But we didn’t expect necessarily to start seeing these types of rounds this quickly. So that is been a very positive development. It really validated the investment thesis, frankly and why we started with horizons.

In a reminder, it is sort of a dual benefit, we expect to make money on these investments, certainly. But we are also supporting with capital, technologists that have an ability to disrupt our sector. And so if our sector is going to be disrupted, we want to be the disrupter. And the person supporting those initiatives.

And so we have been very picky, very selective about the partners that we work with, but they all do have an access to what we do. And we think that frankly, the return potential here is very significant. And there is great potential option value to growing this portfolio as part of our broader investment strategy.

Kevin Barker

Okay. And then maybe a follow-up on one of those investment strategies, liquid mortgage, you did a securitization on the blockchain late last year. Could you just provide any color, are you looking to do further securitizations, on the blockchain with liquid? And then also, is there any third-party interested and potentially being executing securitizations on the blockchain with liquid?

Dash Robinson

Yes, so Kevin, is Dash. We have done since the first Sequoia deal we work with liquid mortgage. We have put all subsequent Sequoia deals on there. So we have a number of them, I think, close to half dozen at this point. That leverage that technology for remittance information we do. We are working as well, as you might imagine, in parallel for the CoreVest securitizations to leverage the same technology. We think that will be an exciting development for that part of the market.

And the second answer to your question, definitely a big part of the value add for the partnership is when we sort of put a stake in the ground and do something other people certainly take notice. And we have been certainly actively working with liquid to help them engage others. From our perspective, the more adoption for stuff like this, the better.

As we have talked before, having the remittance information on blockchain really is just step one. I talked to my script about the partnership with canopy which we think will meaningfully evolve, how due diligence works for hold on. So we are still in the really early innings here and yes, from our perspective, it is about the ecosystem, and the more we can help other people adopt in, we think the better things would be.

Kevin Barker

Great. Are you seeing additional demand from investors for this type of delivery mechanism? Just given the performance that you have seen from the Sequoia platform?

Christopher Abate

Yes, we are. We have gotten a ton of interest, the liquid mortgage platform is just - it is a pioneering platform and I think the intrigue about how transformational we can be to the securitization spaces is really excited, Sequoia investors in particular. We get a lot of feedback and interest. People like ourselves is curious about what the next round will look like.

And quarters like the first quarter, that is not going to be the headline, the headline has been the rapid rising rates and the associated bond math with fixed income investments. So that is certainly on investors’ minds, but folks that have been with the platform for many years, know our bonds, know Redwood. They are really looking past that and thinking about how these innovations are going to impact the shelf. And those are really great conversations to have and I would say the excitement level around what liquid could do has never been higher, frankly.

Kevin Barker

Thank you for taking my question. Have a good evening.

Christopher Abate

Thanks Kevin.

Operator

Thank you. Ladies and gentleman there are no further questions at this time. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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