Redwood Trust - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 GAAP diluted EPS was -$0.07 and EAD was $0.13 per share, driven by negative investment fair value changes on bridge loans and higher benchmark rates; book value per share fell to $8.46 from $8.74 in Q3.
• Operating momentum remained solid: Net Interest Income rose 8% sequentially to $27.6M; Sequoia locks grew 4% QoQ to $2.32B with 57% QoQ increase in flow volume; CoreVest fundings increased 9% QoQ to $501M.
• Liquidity and capacity strengthened: unrestricted cash was $245M, excess warehouse capacity reached $4.7B at 12/31/24; Q1’25 to-date, RWT distributed ~$1.4B of Sequoia loans and ~$400M of CoreVest loans and priced $90M senior notes due 2030.
• Dividend raised to $0.18 (+5.9% QoQ); management expects EAD and dividend to converge over “the next few quarters,” supported by NII growth and volume scaling; estimates were unavailable via S&P Global at time of writing.

What Went Well and What Went Wrong

What Went Well

• Sequoia execution and distribution: $2.5B distributed (three securitizations totaling $1.1B and $1.4B whole loan sales); gross margins remained well above the 75–100 bps target range, aided by tighter spreads and hedge outperformance.
• CoreVest momentum and efficiency: $501M funded (+9% QoQ), with term volumes up 43% QoQ to $227M and record single-asset bridge (SAB) production; segment EAD ROC of 25% in Q4.
• Strategic positioning with banks and product expansion: management highlighted growing bank portfolio opportunities and broadened Aspire to expanded-credit products, citing AI-enabled process efficiencies and large TAM.

Management quotes:

• “We expect further progress towards our core operating goals... Our focus on strategic bank relationships and innovative new loan products positions Redwood to continue growing market share and enhance earnings power.” — CEO Christopher Abate.
• “January locks totaled just over $1 billion, 35% ahead of Q4’s pace... distribution strength is... tailwinds... stepping stone for further growth.” — President Dash Robinson.

What Went Wrong

• GAAP swing to loss: Total non-interest income fell sharply to $17.6M from $44.2M in Q3, with -$25.5M investment fair value changes and lower HEI income as HPA slowed; GAAP net income to common was -$8.4M.
• CoreVest net income dipped despite higher volume due to non-recurring fee revenue in Q3; Q4 GAAP net contribution fell to $1.5M from $5.7M in Q3.
• Book value decline and EAD normalization: BV/share decreased to $8.46; EAD per share fell to $0.13 from $0.18 due to absence of one-timers and HEI normalization; management cited seasonality and rate dynamics as drivers.

Transcript

Operator (participant)

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

Kaitlyn Mauritz (Head of Investor Relations)

Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's Fourth Quarter 2024 Earnings Conference Call. With me on today's call are Chris Abate, Chief Executive Officer, Dash Robinson, President, and Brooke Carillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions, and include risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements.

On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is provided in our Fourth Quarter Review, which is available on our website, redwoodtrust.com. Also note that the contents of today's conference call contain time-sensitive information that is only accurate as of today. We do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. And with that, I'll turn the call over to Chris.

Chris Abate (CEO)

Thank you, Kate. Welcome, everyone, to Redwood's Earnings Call. We look forward to reviewing our fourth quarter performance today, as well as sharing some perspectives on the direction of both Redwood and our industry in 2025. On the back of the November elections, the last few months have borne witness to an unprecedented dynamic in interest rates, the start of a Fed easing cycle that has coincided with a nearly 100 basis points rise in the 10-year Treasury yield. Inflationary rhetoric from the new administration and the prospect of significant government borrowing has acted as a catalyst to keep mortgage rates elevated well into the new year.

Brooke will spend more time on our financial performance, but it's worth highlighting that our full-year results demonstrated significant progress, returning our operating businesses to strong profitability and delivering a 5.7% total economic return amidst three separate 100 basis points swings in Treasury yields. We also significantly improved our operating efficiency and raised our common stock dividend in each of the final two quarters of the year. As we approach 2025, we'd like to remind our shareholders of our long-held view that most challenges and opportunities in our markets get their start in Washington, D.C. With such a significant shift in governing philosophy from the new administration, much is likely to change in the arenas of housing policy and regulation. The vast majority of this we expect to benefit Redwood.

Though mortgage rates remain elevated and overall housing activity will likely remain flat in 2025, we see several strategic opportunities that could drive sizable market share gains for our platform, supporting greater earnings power. Our top strategic priority remains capitalizing on the downsizing of mortgage activity within the banking sector, something that has significantly accelerated in recent weeks. Three large regional banks have already spurred nearly $10 billion of seasoned mortgage pools to change hands, a trend that we expect will continue throughout the year. The logic supporting our view is intuitive. With continued higher-for-longer rates dampening prospects for near-term origination growth at banks, the risk-reward dynamic of funding fixed-rate mortgages with deposits over an extended period has more banks revisiting their mortgage strategies. As such, we expect the build-out of our bank seller network to begin paying increased dividends.

Of note, banks represented 40% of our locked volume in 2024, doubling from 2023 and up from just 8% prior to the regional bank crisis. Divestment from mortgage lending also reflects the prospect for many banks to redeploy capital, notably through M&A. After largely being stymied the past four years, increased activity in M&A could shake free large mortgage pools once they are marked to market under M&A accounting rules. When paired with expected consolidation amongst non-bank originators, this is a meaningful opportunity for Redwood, with a recognized track record for closing acquisitions in pursuit of our strategic objectives. As persistently higher mortgage rates and a constrained housing supply impede the path to homeownership for many American households, demand from our top institutional loan sellers for non-traditional loan products has grown significantly.

Our Aspire platform, which we launched in early 2024 to provide innovative solutions for homeowners to unlock their home equity, was recently broadened to include expanded loan products that serve prospective homebuyers requiring alternative methods to demonstrate the ability to repay under underwriting standards. For those less familiar with this segment of the market, this focus represents a sizable, addressable market for both our existing seller network as well as new originators to Redwood. In the last few weeks, Aspire has been acquiring such loans, leveraging our track record as a reliable source of liquidity through best-in-class operations and common-sense underwriting practices. The market for these alternative loan products continues to grow but remains ripe for disruption through artificial intelligence and other emerging technologies we're focused on to reduce cycle times and expand the funnel of qualified consumers.

We are also in the early stages of a new administration that has emphasized the need for policy reform to address housing affordability and accessibility. GSE reform is once again a topic of discussion, and while privatization would take extraordinary resolve from the federal government over an extended period of time, addressing lower-hanging fruit such as GSE mission creep and overall government overreach in housing is a viable possibility in the near term. To put GSE expansion into perspective, loan limits for GSE-insured loans have increased by 60% over the past five years, compared with just a 10% rise in average household income. A much more rational approach would ensure that loan limits align with actual purchasing power and redirect more of the GSE's efforts to addressing core impediments to homeownership, particularly for low to moderate-income homebuyers.

Such progress and realignment would directly benefit our Sequoia platform, as we are best positioned to provide extremely competitive mortgage rates for non-conforming borrowers. As many in the industry know, our non-conforming mortgage rates have been at or lower than comparable conforming rates in many instances. We are optimistic that new housing regulators may reverse what has become known as an era of enablement for the GSEs to unnecessarily crowd out the private sector, and we look forward to playing a key role in de-risking the American taxpayer as the administration works towards greater privatization of housing finance. It's hard to overstate the scale of opportunity these trends can bring to bear for Redwood, making our recent strategic progress all the more critical. Beyond our securitization and whole loan distribution competencies, our strategic joint ventures with large private credit institutions have set us further apart from our competitors.

After finalizing our second joint venture in the middle of last year, we have already surpassed the $1 billion threshold of cumulative fundings into our JVs, on top of the billions of dollars of loans that we have securitized or sold to third-party investors in 2024. Our distribution capabilities have helped drive the rescaling of our operating businesses, positioning us to set ambitious new benchmarks for volume and distribution across our Sequoia and CoreVest platforms in 2025. For our shareholders, the key takeaway is our commitment to profitable growth, both within our core business and through new initiatives aimed at expanding access to credit for more American households. Looking forward, we remain focused on identifying and seizing transformational opportunities, whether via emerging technologies like AI or in established lending classes such as homebuilder finance, where we believe compelling entry points now exist.

With the recent addition of a new Chief Technology Officer, we are well-positioned to scale these initiatives in the year ahead. Before I hand the call over to Dash, as a California-headquartered company, we want to take a moment to express our deepest sympathy to all those who lost their homes in the devastating fires that swept through the Los Angeles area in January. While we anticipate minimal financial impact to our business due to our limited exposure to the directly affected regions, we are reminded of the significant losses experienced by homeowners and tenants across the state, including some with ties to our workforce and a small number who have received financing through our platforms. Our servicing team is actively engaging impacted homeowners, and we are profoundly grateful to the first responders, firefighters, and countless volunteers who have selflessly assisted all those impacted.

Their efforts are a testament to the power of community and the vital role we all play in rebuilding, restoring, and protecting the dream of homeownership. With that, I'll hand the call over to Dash.

Dash Robinson (President)

Thank you, Chris. I'll cover our operating results before handing the call over to Brooke to conclude with our financial highlights. Fourth quarter closed out a year of meaningful strategic progress for our recently rebranded Sequoia platform. While mortgage rates rose 50 basis points during what's typically a period of seasonal slowdown, locked volume increased 4% from the third quarter to $2.3 billion. This growth was on the strength of our highest flow locked volume since early 2022 and increased activity with independent mortgage bankers, or IMBs, which rose 23% quarter-over-quarter. Notably, with mortgage rates still hovering at around 7%, this momentum has continued into the new year. January locked total just over $1 billion, 35% ahead of Q4's pace and almost two and a half times January 2024 levels.

The quarter's results rounded out the strongest year for the platform since 2021: $9 billion of total locked volume, with close to 40% sourced in bulk form and activity with 175 total sellers. Notably, no flow partner represented more than 7% of full-year production volume. We expect this granularity to drive further volume growth in 2025, as the dynamics Chris described may draw more sellers to seek to transact in more significant size, particularly amongst the 120 depositories now in our network. In all, during the fourth quarter, we distributed $2.5 billion of Sequoia loans, more than half in whole loan form to 10 different counterparties, and the remainder through three securitizations.

This was our most active quarter for loan sale activity since the first quarter of 2022 and included several large sales to banks, a good reminder that while on balance, the depository footprint in mortgage lending continues to ebb, broader loan growth needs are compelling certain banks to add to their mortgage portfolios, leveraging their relationship with Redwood to do so. We expect this distribution channel to remain a tailwind in 2025, as many of these partners have indicated a desire to transact more programmatically. Our securitization activity on the quarter was also a highlight, as we priced one deal each across 30-year fixed, agency-eligible investor, and adjustable-rate mortgages, or ARMs, important versatility in an evolving market.

The ARM securitization was backed by the seasoned bank portfolio we acquired in the third quarter of 2024 and was completed less than two months from settlement, highlighting our speed to execution on pools originally funded for a bank balance sheet and not capital markets distribution. In total, 2024 was our most active securitization issuance year in over a decade, evidenced by the depth of demand from investors for our established top-tier shelf that issues at a reliable cadence. Year to date, we have already distributed $1.4 billion in loans, largely through two securitizations that achieved strong execution and continued whole loan sales. Our distribution strength is just one of the tailwinds we believe makes our estimated 5% market share in 2024 a stepping stone for further growth.

Our ground game with banks is unparalleled and positions us to capture a meaningful portion of the potential wave of supply that Chris discussed. Another emerging competitive advantage that we've highlighted recently is the expansion of our Aspire platform to include a full suite of expanded loan products that we have begun to acquire from our seller base. This recent commentary from the Fed reinforces a patient stance on further rate cuts. We expect more sellers to address higher-for-longer market conditions by expanding their product offerings. We estimate our current seller base originated over 30% of the $80-plus billion of these types of loans originated industry-wide in 2024, a critical running start for this product launch and a key competitive advantage for Redwood's growth into the space. CoreVest, our residential investor platform, also made key advancements in 2024, highlighted by volume growth, efficiency enhancements, and broadening of distribution channels.

Fourth quarter fundings totaled $501 million, up nearly 10% from the third quarter and our highest volume since the third quarter of 2022. Despite the backup in rates, origination activity remained balanced between term and bridge loans. Term loan production was up over 40% from the third quarter and comprised 45% of total quarterly production, in line with our historical targeted balance between bridge and term originations. Single Asset Bridge, or SAB, volumes rose slightly to another record quarter of originations. We continue to invest in growing originations in both SAB and DSCR loans, our smaller balance products, as they remain well-bid by investors and represent large, addressable markets and an attractive opportunity for wallet share growth. January represented more forward momentum for the business, as fundings eclipsed December volume and were close to double those of January 2024.

Strategic progress in this area will be keyed by distribution, which remains a strength of the platform. CoreVest distributed $507 million of loans during the quarter, largely to our joint venture with CPP Investments and into whole loan sales. We placed $375 million of loans into JVs during the fourth quarter and through January have contributed over $1 billion to these vehicles life to date, an important milestone as we pursue similar structures to drive growth across the enterprise. In November, we completed our first securitization with loans from the CPP joint venture, a $300 million transaction backed by bridge loans and structured with a 24-month replenishment period. Overall, repayment velocity in the CoreVest portfolio was up 20% from the third quarter, with over $400 million of paydowns, including $320 million in the bridge portfolio.

90-plus day delinquencies in the bridge portfolio improved by 10 basis points as we continue to successfully execute on the cohort of resolutions we anticipate finalizing over the near term. Delinquencies in the term loan portfolio moved marginally higher, in part driven by smaller pool size and net of 80 basis points of resolutions with minimal realized loss severity. As Brooke will further describe, delinquencies and associated fair value changes remain concentrated in multifamily bridge loans that we largely stopped originating in mid-2022. Delinquencies in the single-family cohort of our bridge portfolio remain below 4%. Across our broader investment portfolio, higher benchmarks drove modest reductions in fair value, but credit performance remained strong, most notably across our jumbo and reperforming loan portfolios.

These positions collectively represent nearly 70% of our portfolio's net discount to par and are backed by loans whose borrowers continue to protect the substantial embedded equity in their homes. As our secured financing against these securities continues to delever, there are windows to unlock this net discount and further optimize overall capital allocation, supporting growth in our operating platforms and funding the associated long-term investment opportunities. And with that, I will hand the call over to Brooke.

Brooke Carillo (CFO)

Thank you, Dash. To build on our earlier discussion around branding, I want to highlight an important update to our segment naming that you will see reflected in our earnings materials. We've aligned our business units with their branded identities to better reflect their market positioning and strategic focus. Our residential consumer segment is now Sequoia, residential investor is now CoreVest, and our investment portfolio is now Redwood Investments. Turning to our financial results, we reported GAAP earnings of negative $8.4 million for the fourth quarter, or negative $0.07 per share, compared to positive $13.1 million, or $0.09 per share, in the third quarter, reflecting fourth quarter GAAP ROE of negative 3%. Specific to the fourth quarter, fair value changes primarily reflected the mark-to-market on our larger balance multifamily bridge loans and the impact from higher benchmark interest rates on our reperforming loan securities.

For the full year 2024, we reported GAAP earnings of positive $47 million, or $0.32 per share, equating to a GAAP return on equity of 4.1%. With the decline in GAAP earnings, Q4 book value per share decreased to $8.46. For the full year 2024, we delivered a total economic return of 5.7%, inclusive of our common dividend, which we increased twice in 2024. Earnings available for distribution, or EAD, for the fourth quarter was $18.4 million, or $0.13 per share, compared to $25.2 million, or $0.18 per share in the third quarter. This sequential decline primarily reflects the absence of non-recurring other loan income and the normalization of HEI contributions, the latter of which had benefited from higher-than-modeled home price appreciation in the third quarter.

Excluding these factors, the core earnings drivers of our business remained stable quarter-over-quarter, with consistent performance across net interest income, mortgage banking, and other income, and G&A expense. Net interest income increased 8% from the third quarter to $27.6 million in the fourth quarter, which represented a nearly 40% increase year-over-year, supported by the $525 million of capital we deployed on the year. Fourth quarter income from Sequoia mortgage banking activities was $16.8 million, a slight decrease from the third quarter, as gain on sale margins remained well above our historic target range of 75 to 100 basis points, though slightly below the elevated levels from the third quarter. Full year return on capital improved from 10% in 2023 to 22% in 2024.

Fourth quarter income from CoreVest mortgage banking activities was $9.6 million, a decrease from the third quarter, as higher volume was offset by more normalized margins. Full year adjusted return on capital improved from negative 3% in 2023 to positive 17% in 2024. Our improved return on capital for both operating businesses year-over-year was the result of our focus on growing volume in an efficient, capital-light manner. This allowed us to reduce the days we held loans on balance sheet for Sequoia and reduce our working capital for CoreVest by roughly 30%. G&A expenses decreased from the third quarter, primarily as a result of lower compensation expense. Fourth quarter G&A was effectively flat relative to the same period in 2023, despite significantly higher volumes in our operating platforms.

To that point, net cost to originate for CoreVest improved by 28% in 2024 relative to the prior year, and Sequoia's cost per loan improved by 59% relative to 2023. In both cases, these improvements were to levels better than our target efficiency ranges. We continued to fortify our balance sheet and build our liquidity. Our unrestricted cash as of December 31st was $245 million, which grew with the $90 million senior unsecured bond offering that priced in January at the tightest yield to Treasuries we have achieved in that market. In the fourth quarter, we also completed a transaction to effectively extend a portion of our convertible debt maturities. Together with other actions taken, we have reduced our convertible debt as a percentage of equity from 65% just two years ago to 31% at the end of 2024.

We reported total recourse leverage of 2.4 times for the quarter, down slightly from 2.5 times in the third quarter. Recourse leverage in our investment portfolio remained low at 0.8 times. At December 31st, we had excess warehouse financing capacity of $4.7 billion, more than double from $2.1 billion as of year-end 2023, given the continued growth and scale of our operating platforms. We expect to increase our capacity further to support our growth ambitions in 2025 and continue to see strong confidence from our lenders in our ability to seamlessly upsize our facilities, ensuring we can efficiently absorb the portfolios that we anticipate will come out of banks. Looking ahead, we anticipate significant growth in our mortgage banking businesses in 2025, even amidst elevated interest rate levels. As Dash noted, January lock volume for Sequoia exceeded $1 billion, primarily driven by flow business.

Given this momentum, we currently anticipate a 30%-plus year-over-year volume increase, supporting a target return on capital of approximately 20% for that segment in 2025, with substantial upside potential from large bank portfolios distributed by regional banks. CoreVest's early 2025 performance suggests run rate volumes approaching $2.5 billion annually, facilitated by a strategic focus on growing Single Asset Bridge and DSCR originations, a $60-plus billion market where we have substantial ability to grow share. These volumes would underpin a mortgage banking return of 25%-30% in 2025 for our CoreVest mortgage banking segment, given the capital-light nature in which we run the business. Meanwhile, the recent expansion of the Aspire mandate gives us access to the $100 billion addressable market for expanded credit, with potential for 2025 volume to exceed $2 billion, with run rate returns in line with Sequoia's target return on capital.

As there's a lot of market volatility and policy developments unfolding, we will keep the market apprised of our outlook for 2025 later in the first quarter. And with that, operator, we will now open the call for questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Bose George with KBW. Please proceed with your question.

Bose George (Managing Director)

Everyone, good afternoon. Actually, I wanted to ask about the current run rate, EAD, relative to the dividend. You obviously hit it last quarter, but now it's back down again. How do you think about just the run rate, the cadence, the drivers of the EAD getting to the dividend, and just the timeline that you're expecting now?

Brooke Carillo (CFO)

Sure, Bose. I'll start. This is Brooke, and then I'll hand it over to Chris. Some of this was in my prepared remarks, but in terms of the kind of quality of EAD, I think sometimes the headline doesn't tell the full story. We mentioned in our prepared materials that our home equity investment option income was actually down a couple of pennies below what we would expect from just what we see in terms of kind of our baseline assumptions for that portfolio and market drivers. So if we had normalized for what we expect from baseline inflation, EAD would have been roughly $0.15. And we had mentioned, actually, in Q3 that EAD was a little bit ahead of schedule, given some one-timers that I mentioned.

In the quarter two, we had elevated margins on certain of our products within CoreVest, and then also kind of a one-time non-recurring fee. But just in terms of drivers that we see of EAD from here, we feel really confident about progress. Net interest income has been a really positive story, and we see drivers of that to continue to increase. The bridge yield compression that we've seen recently has slowed. SOFR will be a continued story into the first quarter that will be positive. We saw a 50 basis points decline on our cost of funds in the quarter, and that will really have a full quarter impact in the first quarter. And then you recently saw our $90 million senior unsecured offering deploying that capital will continue to drive net interest income.

We mentioned really positive early volume drivers for our operating businesses at those more normalized margins will also continue to support EAD. And there's a decent amount of capital optimization to continue, especially as we continue our bridge resolution activity within CoreVest, which will support our EAD further as we redeploy that capital into our operating businesses.

Chris Abate (CEO)

Yeah, I would.

Bose George (Managing Director)

Sorry.

Chris Abate (CEO)

I just also quickly add, Bose. It's very important to the board that we pay an attractive dividend from a current income perspective, and obviously, you can see in our financials that we've got a significant amount of liquidity, so we're tracking towards that dividend on an EAD basis, but I'd also say that I think with EAD and adjusted earnings metrics, there's a lot of apples and oranges comparisons across the industry. When I look at our book performance over the past few years versus some others in the industry, I think we've significantly outperformed. On an economic basis, sort of neutralizing some of the adjustments, we feel really good about tracking.

Bose George (Managing Director)

Okay. Yeah, that's helpful. Thanks. But just in terms of the timeline to, I mean, do you guys think about, whatever, one, two, three quarters, it's like a timeline to the EAD sort of equaling the dividend? Is that something we should?

Chris Abate (CEO)

Yeah, we feel like we've got a good line of sight this year to those converging, but again, as far as the level of the dividend goes, part of that is feedback from shareholders, current income. We've got really strong liquidity, but when we look at NIM growth, and then we put out some. I think Brooke included some guidance in her remarks around volume growth. We've seen even in January across the business lines really strong volume growth. We've already done two Sequoia deals priced, so we feel like all of these sort of forward-looking metrics are there for us, and I'd say over the next few quarters, we would expect those to converge.

Bose George (Managing Director)

Okay. Great. Thank you.

Operator (participant)

Thank you. Our next question is from Crispin Love with Piper Sandler. Please proceed with your question.

Brad Capuzzi (VP)

Hi, this is Brad Capuzzi on for Crispin Love. Just two quick ones for me. In terms of BPL, can you just discuss the competitive environment and how it's shifted at all as rates have backed up?

Dash Robinson (President)

Sure. Hey, Brad, it's Dash. I can take that. I would say it's evolving. I would say it's more of a tailwind at this point for us, just based on the depth of our products and also the depth of our capital. I think when you combine all the products we're doing across term and bridge, SAB, DSCR, and combine that with our distribution, I think that's, frankly, a very rare combination in this market. We're looking to add talent. We're able to add talent from competitors at this point based on how the market has evolved. I would say BPL, in general, tends to be a bit more rate agnostic on an overall industry basis. So there's still good volume out there.

SAB and DSCR, as I mentioned, and Brooke too, are areas where we have a lot of room to the ceiling, frankly, in terms of grabbing market share without having to compromise on credit standards or pricing. So we view all of those as tailwinds. BPL has always had a lot of different lenders in the space, different shapes and sizes, but we feel really, really good about our combination of product mix, reliable execution, and probably most importantly, distribution.

Brad Capuzzi (VP)

Thanks. And then I know the team touched on this a little bit in the prepared remarks. But if you could just give an insight as to where you expect leverage to trend into 2025 and how comfortable you are with the current liquidity position, that'd be helpful. Thank you.

Brooke Carillo (CFO)

Yeah, absolutely. Our residential pipeline will be the largest driver of the band of leverage that we have around kind of two to two and a half. It could even go up to three or beyond, depending on where we are in quarter-end timing with disposition activity of some of these larger portfolio activities. I think in our prepared remarks that we mentioned, we are seeing billion-dollar-plus trades. So that could provide some just very near-term dynamics around leverage at quarter-end as we finance those and then distribute. But we feel really good about our liquidity position. We ended the quarter with $245 million of cash. Subsequent to that, we did the nearly $100 million bond offering. We have $325 million of financeable yet unencumbered assets. And so we have significant dry powder from our perspective to continue to fund the business.

We've also done some very creative non-recourse financing activities that have refi'd away from some of our recourse debt and actually brought in capital. So I feel really good about our liquidity to take advantage of the operating environment right now.

Brad Capuzzi (VP)

Great. Thank you.

Operator (participant)

Thank you. Our next question is from Eric Hagen with BTIG. Please proceed with your question.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Hey, thanks. How are we doing? Question on the jumbo. Do you guys feel like there's still room for the credit box to expand? Or just based on your thresholds for risk, you feel like you're already maybe operating at the upper end of that risk spectrum? And then when you guys target bulk packages of loans from third parties, is the risk profile similar to what you originate yourselves?

Dash Robinson (President)

Yeah, hey, Eric, it's Dash. Good questions. I'll take them sequentially. I think in the core jumbo business, there's probably some room, but I would probably point to Aspire, the launch we did about a month ago, as probably the best answer to your question in terms of our view that there's a very large existing addressable market for alternative types of loan products that we feel we can purchase and underwrite very, very well. Non-QM was probably an $80-plus billion market for total originations last year. It was the largest non-agency securitization market last year as well. As Brooke articulated, we expect that TAM to grow to probably $100 billion this year.

When you think about where rates are, some of the dynamics with housing accessibility, we think those products, when underwritten well, could be game-changing for our footprint in the space, which is exactly why we've expanded the Aspire mandate. For sure. I mean, I think within our core jumbo business, we've always had pristine products. DQs remain about 20 basis points or so. I think the launch of Aspire is probably the best evidence we feel like there's a huge TAM out there that we can access well. In terms of your question on bulk, obviously, it depends on the seller. It depends on the seasoning. I think with more of those seasoned pools, you tend to get lower mark-to-market LTVs, generally out-of-the-money coupons, lower GWACs versus on-the-run production, probably to state the obvious there. It depends.

Generally, what we've seen has been really pristine credit, delevered borrowers, where it really is just about speed to execution and the ability for a seller to have confidence in a buyer like us to execute.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Yep. Good color, Dash. Thank you. When you guys highlight the fact that the unsecured debt has come down to, I think you said, 30% of the capital stack, how has that maybe changed your philosophy about capital allocation, just call it this year? I mean, do you feel like it gives you more flexibility to capitalize the bridge portfolio a little further or more generally? I mean, is there ways to optimize the leverage in the bridge portfolio any further from here?

Dash Robinson (President)

There definitely is, and I think that will continue to be a priority for us this year, not only in terms of loan-level resolutions, but also how we finance that portfolio. We definitely improved that in 2024. There's more room to go, which is a huge focus for us, particularly on the bridge portfolio. As it relates to the broader capital structure, I think, yes. As you know, a lot of what we've done is optimize our secured leverage, which has helped us reduce our unsecured financing, particularly our converts. Obviously, the $90 million offering that Brooke referenced was also unsecured. But what that allows us to do, Eric, I referenced this a little bit at the end of my remarks, is, since those are secured, as those delever, there's room to relever those. We've done that a fair amount over the past few quarters.

Just the nature of that debt allows us to access more capital more quickly in terms of how that's structured. That capital is going right into the operating businesses. As it relates to the unsecured that we've been sort of legging into, one difference I'd call out is some of the optionality. As you know, with converts, they tend not to be callable or may be callable a very short period of time before their maturity. The unsecured debt we've legged into here over these past three issuances has been five-year non-call two, which was really, really good prepayment optionality for us and allows us to optimize that part of our capital structure much sooner than we otherwise would have with doing more convertibles.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Thanks for the great color. Appreciate you guys.

Operator (participant)

Thank you. Our next question is from Steve Delaney with Citizens JMP. Please proceed with your question.

Steve Delaney (Managing Director and Senior Equity Analyst)

Sure. Hi, everyone. Thanks for taking the question. I guess, Brooke, just for starters, I think when you guys first started talking about the segment and you had a lot of moving pieces, I just want to applaud the decision to kind of with Sequoia, CoreVest, and Redwood, just to have all the consumer mortgage products and Sequoia, the investor products and CoreVest. That really will help us, I think, as we set up our models and just explain the company to tie the products, to kind of brand the products, I guess, is what I'm saying, and connect your segments to the products like that. My question is, rates really matter today. I mean, I can't remember a time in my career where people spend as much time talking about rates and what the Fed's going to do and what the 10-year is going to do.

And it just seems like the whole stock market is trading off rates. So it's kind of, as an analyst, it's kind of frustrating, but rates really do matter. And I guess to that point, Dash, could you give us an idea of where you're pricing 30-year prime jumbos, owner-occupied? It can be a range if you don't want to. I assume you probably have these rates on a website somewhere. I'm just curious where that rate is, owner-occupied, prime jumbo, 30-year fixed. Where are we today? What's the range of the coupons on those mortgages?

Dash Robinson (President)

Sure, Steve. It moves around day to day, obviously, but I would contextualize it as probably high sixes. Depending on credit overlay, it may touch a seven handle right now. That's where we sit today.

Steve Delaney (Managing Director and Senior Equity Analyst)

Okay. Six and a half.

Dash Robinson (President)

Steve.

Brad Capuzzi (VP)

It's 6.47 probably in that ballpark.

Yeah, and just thinking back, Dash, over the last six to 12 months, where has the low been? I mean, I'm trying to get a sense for where we are today versus the bottom and how many people are sitting around waiting for rates to go back down 50 basis points.

Dash Robinson (President)

The recent lows over the past 18 months, there was probably a very short period of time when it was back to a five handle, very, very high fives, but it's largely bounced around in the sixes. When the 10-year was up sort of closer to 5%, our rates were probably very low 7, 7.25, or thereabouts. That's the range. And to your point, Steve, that range over a 5-6 quarter period of time, I think, underscores just all the movements and rates that the market's been grappling with to your point.

Steve Delaney (Managing Director and Senior Equity Analyst)

No question. We had that huge bond rally in September. I think the lows in the 10-year were in September, and now we're 100 or so basis points above that. Well, that's helpful just to kind of get a sense of it's kind of what I expected, but I wasn't really sure where jumbo was pricing versus conventional and that type of thing. So, all right, that's helpful. I don't think I have anything else right now. Just we can pray for some rate relief, but I think it sounds like you guys have a business that's working with where rates are today. And I think that's the most important thing, is you're not depending on 50 to 100 basis points lower to run your business.

Chris Abate (CEO)

No, actually, Steve, I would accent that by saying, as rates have held out higher for longer, we're seeing great opportunities from banks, some of which have announced exits from various facets of the mortgage business. I think we've proven to be really effective at pipeline risk management, and our deals, our Sequoia deals, continue to price at the tightest levels in the sector. There's been five or six issuers so far this year. Both of our deals have priced the tightest, at least according to my records, and that gives us an advantage in not just gain on sale margins, but how we can bid some of these big pools, billion-dollar-plus pools that we're now starting to see, so actually, the rate environment has created opportunities that we wouldn't see with a rally.

But obviously, I think the sector and certainly the housing market would be well served by some rate relief. I don't see the catalyst in the near term.

Dash Robinson (President)

Yeah. I'm afraid you're right. Well, thank you all for the color. Appreciate it.

Chris Abate (CEO)

Thank you.

Operator (participant)

Our next question is from Doug Harter with UBS. Please proceed with your question.

Doug Harter (Equity Research Analyst)

Thanks. Chris, I know you touched on this during your prepared remarks, but if we could just get into a little bit more around your comfort that the banks are going to continue to look to kind of offload mortgage if there is kind of regulatory relief and how much of that opportunity is kind of truly more interest rate and risk management versus regulatory capital relief?

Chris Abate (CEO)

Yeah. Doug, the Powell, I think, actually spoke to a conviction on getting the Basel III rules sort of back reproposed. So that actually may happen sooner than later, but certainly, it will be more capital neutral. I think the real driver right now is the rate environment and, as I mentioned, just the lack of a catalyst for rates to come down. I think these banks are just looking out. They're not seeing much production growth in mortgage as an asset class, moving resources, moving capital. The M&A picture has changed overnight for banks. We could see a lot more M&A starting this year, and for all those reasons, I think mortgage is up for grabs. We saw, which has been in the news, a $9 billion pool that came to market a few weeks ago, which we bid on behalf of Redwood.

We've seen others come up, and we're working on a few right now. So behind the scenes, there's actually a lot happening that gives me a lot of optimism that in addition to our flow run rates, which Brooke spoke to, we'll be able to supplement that with some pretty sizable bank portfolio trades. And I think for us, the most interesting part is that we're live already with a number of these regional banks, which means the technology, the purchase agreements, all of the vetting, all of the safeguards, all of that is in place. So when we bid, we can stipulate a close timeframe that's very, very accelerated. So I think we expect to be very competitive in the coming months on that front. And there are some banks that are buying loans from us. So everyone has different needs and different buckets to fill.

I think the real franchise value is in the relationships and just having all of that plumbing in place and having the trust factor still.

Doug Harter (Equity Research Analyst)

Very helpful. Thank you.

Operator (participant)

Our next question is from Don Fandetti with Wells Fargo. Please proceed with your question.

Don Fandetti (Managing Director)

Yeah. Question. If I look at all the different areas of potential new investment originations portfolios, it just seems like there's significant opportunities for new investments. In a perfect world, you'd have a ton of capital. How do you manage this from a risk management perspective so that we don't get in a scenario where you bring out a big portfolio and the securitization markets widen out? How are you thinking about that?

Chris Abate (CEO)

Yeah. I mean, across the business, to start with BPL, we've established these joint ventures. We could potentially establish more. That's always a focus area. And so for some of those larger loans, which you would see in BPL, having established capital partners to risk share and to support that business has been huge. And that's really freed up our capital to increase our mortgage banking velocities across the franchise. In the Resi business, we are seeing these big portfolio trades, which we think these are franchise creative opportunities for us. So we want to be able to bid consistently in the market. And as Brooke mentioned, we've got an excess of financing right now. I think a lot of banks are aware of the opportunities that we're seeing through some of these regional partnerships and are very willing and able to bank them.

But the securitization markets are a big part of the story and the distribution. We'll continue to supplement that with insurance partnerships or other joint ventures, pension funds we may look at. But right now, the capital picture, I think, here is as good as it's been in quite some time. Our cash position, our recourse leverage, and then sort of the off-balance sheet capital that we can speak for through partnerships makes me feel really good about going on offense and being aggressive in 2025.

Don Fandetti (Managing Director)

Got it. And then on the Aspire Home Equity, can you talk a little bit about. I assume that's similar where you're either selling and securitizing. Can you talk about the margins in that business as they might. You talked about the $2 billion-plus potential new investments.

Dash Robinson (President)

Yeah. Hey, Don, it's Dash. I would contextualize those target gross margins in the same vein that we've historically targeted for Sequoia, sort of that 75 to 100 basis points range on the expanded product loans that we're buying from our seller network and soon-to-be-expanded seller network with new partners. We'll likely start with whole loan sales. There's a very robust and deep demand for those sorts of products. There's also a very vibrant securitization market. As we mentioned earlier, a joint venture partnership or similar capital partnership is very much in the cards for that business, as Chris articulated. But that's how I would think about gross margin targets for Aspire.

Don Fandetti (Managing Director)

Got it. Thank you.

Operator (participant)

Our next question is from Rick Shane with JPMorgan. Please proceed with your question.

Rick Shane (Managing Director and Senior Equity Analyst)

Hey, everyone. Thanks for taking my question. I have a couple, actually, this afternoon. When we look at the mortgage banking results for the fourth quarter, income was down slightly from the third. But what's interesting is that the mix really shifted more net interest income this quarter than last, less banking revenue. When we look at the locks and commitments, they were roughly the same. So it doesn't really explain it. Is this a function of holding the loans through the fourth quarter, given the volatility in year-end stuff, and then that's driving the pickup in Sequoia securitization volume in Q1?

Brooke Carillo (CFO)

I'm happy to address that. We've talked a little bit about the last few quarters, just how we've evolved our financing and hedging strategy for the business. And I think that's really what you see in terms of an overall stability and kind of a net contribution of Sequoia, but different aspects of how that's coming through the bottom line. Last quarter, we said our gain on sale was really half of it or so was attributable to the kind of large rally we had at the end of the quarter in rates. And so that's some of the difference. But it was really hedge outperformance and some of our positive carrying hedges that were showing up through NII that are the result of a composition shift.

Rick Shane (Managing Director and Senior Equity Analyst)

Got it. And the reason I asked the question is the capital efficiency slide disclosure is a little bit different this quarter than it was last. And so in my conclusion from sort of comparing them, it does look like perhaps you held the loans a little bit longer in the fourth. We're just trying to think about how to sort of plot this out going forward.

Brooke Carillo (CFO)

I think one dynamic you saw in the fourth quarter is that we sold a large portion of our loans in the form of whole loan sale. That tends to be a slightly longer settlement timeframe than our inside monthly securitization cadence, and a lot of those settled right in the beginning of the year, so you are right to point that out. I think going forward, we certainly hope it's a solid blend of the two distribution channels. We'll look to whatever is the most accretive, but that could extend our days on balance sheet slightly. I think it is. In general, you have seen a large pickup in our capital efficiency for the business over the last couple of quarters. We've really driven down our cost per loan.

We see a lot of the dynamics that drove NII and at least mortgage banking NII for Sequoia to persist through the first quarter as well.

Rick Shane (Managing Director and Senior Equity Analyst)

Got it. Okay. That's very helpful. Thank you. Second question. When we look at the delinquencies, they were flat for three of the four categories. CAFL was up noticeably after being up in the third quarter as well. Is this seasonal? Is this concentrated in any particular regions? How should we interpret the increase in 90-day DQs in that product?

Dash Robinson (President)

Hey, Rick. It's Dash. I can take that. I don't think it's necessarily seasonal, but I would emphasize that with those sorts of portfolios, because they're stabilized, a lot of the times, this is just borrowers sort of dealing with short-term collection issues or short-term OpEx increases and getting back onsides, which is what we largely expect with this uptick. That book actually prepaid reasonably quickly during the fourth quarter. So about 30 or 40 basis points of that increase is also just a smaller pool size. We haven't securitized those loans in about a year and a half. We've been largely selling them either into joint ventures or, frankly, to insurance companies. And so part of the uptick is also the fact that it's a smaller pool size quarter-on-quarter.

Rick Shane (Managing Director and Senior Equity Analyst)

Got it. Okay. That makes sense. Last question, and since I'm sort of, I think, at the tail end of this, I hope you guys will indulge me one last one. When we think about the Aspire product and we compare it to the traditional Sequoia product, the traditional Sequoia product had extremely low losses and, more importantly, I think, a very, very low beta to the mortgage credit cycle. That is really the inherent strength of that product. I'm curious when you think about Aspire, and it sounds like it's largely home equity, but it also sounds like it may be some high LTV and maybe some lower FICO scores. Can you give us some context on that? Is the potential here that it is a higher returning product for you, but also has this higher standard deviation of returns over the cycle?

Chris Abate (CEO)

Yeah. I'll start, and we can see where it goes. But Aspire, just taking a step back, it's become a big initiative of ours because the institutional seller base that we operate has started to onboard more of these products. So as we've been in this higher-for-longer environment, I think the prospects of a refi wave that many large originators, top 10 originators, were hoping for or waiting for. I think they're not waiting for anymore. And as a result of that, they're refocusing on more specialty products, non-QM products, DSCR, bank statement, second liens, as you noted. So really an expansion from the traditional 30-year fixed jumbo, etc. So I think because of that, it's interesting. The non-QM space has really been a focus of bespoke originators, specialty originators.

What we're seeing is sort of the blue bloods of the industry get really focused on these products, which is great for us because we're completely plugged in there and, in many cases, a top one or top two buyer of their mortgages. So it was really an expansion that started with originators that we planned to sort of pick up that business. But it's really we ran Redwood Choice. We had branded our expanded program in past years. This isn't wildly different. We expect credit performance to be very, very strong. Since these could be higher LTV or they could be alternative underwrites, certainly, we would expect the performance not to meet sort of the super prime jumbo experience, which I think Dash mentioned was around 20 basis points.

We still are very early innings, and we don't have a lot of performance history with these products at Redwood. So it's going to take some time to see how things shake out. But I wouldn't think of this as a huge deviation credit-wise from what you've seen from us. We expect these to be really good credits. And I think the real shift is just seeing these product classes being onboarded by the really large institutional originators as opposed to some of the smaller originators that have been leading the charge here in the past.

Rick Shane (Managing Director and Senior Equity Analyst)

Chris, it's really helpful context. Thank you, guys.

Chris Abate (CEO)

Thank you.

Operator (participant)

Thank you. Our last question is from Jason Weaver with JonesTrading. Please proceed with your question.

Jason Weaver (Managing Director and Equity Research Analyst)

Hi. Afternoon, everyone. First, I was hoping you might be able to characterize a bit of what your conversations are going like. I know that GSE reform is probably a long-dated prospect, but how are you thinking about expanding either the seller network within Sequoia or expanding wallet share and how your negotiations with those partners are going right now?

Chris Abate (CEO)

Our network, we already do business with the vast majority of the industry. Our originators are originating agency mortgages, non-agency mortgages, and so we feel very plugged in across the board. I do think that GSE reform or privatization is a long ways away. We commented in our prepared remarks that our advocacy in Washington will be focused on sort of the DOGE approach to GSEs, which is mission creep and loan limits. We think it's crazy that the government is subsidizing $1.2 million mortgages. Those are the types of things that I think could change in the near term that have been enabled by regulators over the past few years. That's business that we've spoken for years and years and have done a great job serving that market.

So for me, it's more, what can we do to refocus the GSEs on core mission activities, let the private sector fill in the gaps? And if the GSEs do move towards privatization, that would level the playing field for us. So we've been operating in the private sector with no subsidies of any kind. And if that playing field gets leveled, we feel extremely good about our capacity to compete, our securitization infrastructure, all of those things. But I'm not sure that our seller base will change significantly. Outside of through the Aspire initiative, in addition to our current sellers, we'll probably add a host of special originators as well that we'll buy loans from.

Jason Weaver (Managing Director and Equity Research Analyst)

Got it. Thank you. And one other just slight modeling question. Saw some overhead relief in the run rate in G&A from last quarter. Aside from just volume issues and seasonal patterns, are you seeing any efficiency efforts there that you expect to persist?

Brooke Carillo (CFO)

Yeah. The decline that we saw in the fourth quarter was really driven by lower compensation expense. A lot of our variable compensation and equity compensation is very closely aligned with performance. So the performance in the fourth quarter translated to lower OpEx there. I think in terms of as we go forward, we've pointed to several markers for how we're gauging the KPIs of our business across our operating platforms and Redwood as a whole on how we've been driving efficiency over the last year. I think a lot of that was as our operating businesses were subscale and we were pulling back volumes and cutting costs accordingly. I think as you see expense, as we move forward, a lot of it will be very tied to profitable growth of our operating businesses and variable compensation that follows performance.

Jason Weaver (Managing Director and Equity Research Analyst)

All right. Thanks for that, Brooke. Okay. That's it for me. Congrats on the quarter and good luck to you.

Brooke Carillo (CFO)

Thank you.

Chris Abate (CEO)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Kaitlyn Mauritz for any closing comments.

Kaitlyn Mauritz (Head of Investor Relations)

Hey, thank you, everyone, for joining our call today. We appreciate you taking the time to hear our view on the quarter and outlook for 2025. As we mentioned, there's a handful of materials on our website in the form of the Redwood Review and the shareholder letter that we encourage you to take a look at. And thank you again. Have a good evening.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.