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Text: 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.
Also note that the content of this conference call contains time-sensitive information that is accurate only as of today.
The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances.
Finally, today's call is being recorded and will be available on the company's website later today.
Though we are closely monitoring the latest Delta variant of the coronavirus, the entire organization has been energized to see the reopening of the economy, continued strength in the housing market and exceptional performance and growth in our business.
Strong operating income and rising portfolio valuations drove exceptional financial results for the second quarter, including GAAP earnings of $0.66 per diluted share, well in excess of our $0.18 per share dividend for the second quarter.
This contributed to a 6.5% increase in our GAAP book value to $11.46 per share at June 30th.
The results we've generated thus far in 2021 are reflective of a business that can expand profitably, while successfully serving it's mission of making quality housing accessible to all American households.
As you know this mission emphasizes borrowers whose needs are not well served by government loan programs or potentially not at all.
Our residential and business purpose lending teams together target the non-agency mortgage market, the segment of the market that many who recently ignored in large part due to the absence of Federal Reserve stimulus.
The non-agency market represents the residential mortgage universe outside of government-backed mortgage programs.
By targeting this market rather than a specific borrower profile as we had in the past, our business is not tied to the direction of the homeownership rate.
Instead Redwood now offers a comprehensive product mix that serves both non used to be consumers and housing investors alike, and it's a big market.
Many of forecasted residential non-agency origination volumes have significantly increased in 2021 from the $435 billion of originations in 2020.
That's only beginning to reflect the potential from a regulatory pullback for non-owner occupied loans, something that can provide a significant tailwind to our sector going forward.
Our results remain strong in the second quarter despite market conditions that were significantly more challenging than they were in the first quarter.
Rising interest rates reemerged in the residential lending space, largely as the result of uncertainty and whether the Fed will alter it's support for the agency mortgage market.
The sharp competitive forces that arose as a result along with the corresponding decline in refinance activity triggered a contraction in margins across the industry.
Exaggerating the effects of strong competition were signs of pro-cyclical and supply chain inflation with the shift in yield curve driving significant hedging and execution costs for those managing large mortgage pipelines including for us.
Against this backdrop, in the second quarter, we still locked close to $4 billion of jumbo loans at margins in the high end of our historical target range.
The business purpose lending market also became more crowded in the second quarter with new competitor using the rate sheet to buy their way into the space, particularly for lower balance bridge and rental loan products.
The shift out of apartment living and toward single family detached homes as a trend had shown no sign of ebbing despite the recent reopening of most major metros.
This has led to a shortage of high quality homes with aggressive demand from both investors and consumers alike.
In many regions rent growth has been significantly outstripped by home price appreciation highlighting the scarcity value of quality housing in the multiple constituencies focused on acquiring single-family homes.
Leveraging a well-earned reputation as a nimble and reliable lifecycle lender, CoreVest our BPL platform eclipse $500 million of fundings for the quarter and a balance of single family rental and bridge originations.
The sustained performance through this challenging backdrop showcased our strategic foundation and is the essence of what makes Redwood unique.
Our mortgage banking businesses offer highly complementary products that drive durable earning streams.
And our investment portfolio continues to offer significant upside as the economy recovers.
Our credit discipline and ability to create our own assets remain key differentiators.
Our strategic foundation has facilitated returns that are significantly outpacing our growing dividends.
In the first half of 2021 approximately 70% of Redwood's adjusted revenue was driven by our mortgage banking operations with the remaining 30% from our investment portfolio.
We expect mortgage banking and by extension our taxable subsidiaries to continue to be a strong earnings driver going forward.
The revenue generated through mortgage banking is nearly double the percentage contribution of recent years and highlights the ongoing shift in our business model as we adapt to changing market conditions.
It also supports continued expansion of book value over time, the retain earnings acting as a zero cost avenue for capital formation that has reduced our marginal need for funding and stands in contrast to others in the space, manage their balance sheets.
By continuing to reinvest in our infrastructure, both organically and through partnerships our path to realizing transformative scale is clear.
Across our enterprise, we've cultivated a talented and inspired workforce, we have embraced technology to serve our customers more quickly than ever before.
One great example of this approach is last quarter's launch of our early stage investment platform RWT Horizons.
This is something Dash will touch on in more detail.
As we look ahead, we continue to raise our game, invest in our people and infrastructure and attack our markets with the service standard that continues to separate us from our competition.
We're excited by recent changes in the regulatory landscape that have made the non-agency mortgage market more relevant than it's been in many years.
Our goal is to build a business that serves an important public mission and scale profitably and generates a very attractive return profile for our shareholders.
Our second quarter results reflect continued strategic progress and strong operating momentum.
While our comprehensive non-agency market footprint benefited from ongoing strength in the housing and credit markets, we coupled these macro tailwinds with homegrown ingredients, both new and familiar.
Our team's usual crisp execution was complemented by meaningful progress with our technology infrastructure, both organic and through new partnerships already bearing fruit.
In sum, the final product was another quarter of significant outperformance.
As Chris referenced, benchmark rates remain an area of acute focus for the markets.
The uptick in rates during the second quarter has almost fully retraced, however, uncertainty around the level of government support for agency mortgages may very well moderate the amount of borrower refinance activity, we typically see in this kind of rally.
Against this backdrop, it's important to unpack the key drivers of profitability across our platforms.
As Chris noted, the markets we serve continue to grow as the path of home prices, evolution and consumer demand for housing, and important regulatory trends are driving an expansion of non-agencies true potential footprint.
And while we're not immune from moves in MBS prices versus benchmark rates, our diverse distribution channels and unique product mix allow us to benefit from different drivers of demand.
Case in point, while margins compressed elsewhere in the market during the second quarter we enjoyed durability in our margins with sustained strength in volume across both residential and business purpose lending.
In fact an ebb in demand for agency mortgages represents another potential tailwind for our business.
Mortgage originators are still ramping up capacity to address the pent-up demand from jumbo borrowers, and as home price appreciation has increased nationwide along with consumer preference for single-family detached rental housing, our suite of BPL offerings remains in high demand and our residential business geographic footprint continues to expand.
Our equity is now at its highest level in at least a decade pushing more loan demand above the conforming loan limits and into Redwood's addressable market.
As we note in our updated investor supplement, there are now 13 states in which we have a lot more loans year-to-date than in each of the two years prior to the pandemic.
Collectively, locks in these states represent 35% of our year-to-date volume, a trend we continue to track with great interest.
Overall market observers now forecast single family home price appreciation for 2021 to be 14% and 16% for existing and new homes respectively.
Even if this moderates is expected into 2022 we expect the trend to continue of more locations across the country evolving into non-agency markets.
Another key driver is the regulatory environment.
The evolving rules are likely to meaningfully increase the Qualified Mortgage or QM cohort a significant boon for high quality expanded credit borrowers.
Furthermore, caps in place since earlier this year on GSE purchases of non owner-occupied loans could expand on non-agency market by an estimated $25 to $35 billion per year.
And there is likely more of the non-agency market can do to help address broader access to credit and the associated impact on first time homebuyers and low-to-moderate income borrowers overall.
Also critical to the equation is the availability of high quality rental housing including single family detached, an issue solved in part by an increase in custom built projects.
As we discussed on prior calls, housing supply has not kept up with demand and building material costs moderating remain high contributing to significant price escalation on home.
Single-family homes for rent can meet the demand for expanded space in desirable neighborhood at a monthly payment that more consumers can afford.
Reflecting these supply demand dynamics, single-family rental occupancy rates remain at record highs with a weighted average of 95% for all US single-family rental homes, and single-family rents have remain meaningfully more than multifamily rents since early last year.
Our second quarter results reinforce this broader backdrop.
Operating highlights for the quarter included reaching our second highest level of jumbo locks ever and our highest BPL volume since late 2019.
As Brooke will elaborate on book value increased 6.5% driven by a mix of asset appreciation through fair value changes and retained earnings from mortgage banking income earned at our taxable REIT subsidiary.
Collectively, our platforms distributed $3.6 billion of loans through direct loan sales and 4 securitizations.
Following a historic first quarter, our residential business registered $3.9 billion of lock volume in Q2.
As anticipated, purchase money loans were a key driver and represented a 60% share of the quarter lock volume.
Despite the interest rate backdrop and competitive pressures impacting GSE eligible production, the business delivered margins at the high end of our historical target range of 75 to 100 basis points reflecting the diversity of our distribution channels and strength of our pipeline management amid broader market volatility.
During the second quarter, we sold $1.8 billion of loans and completed 3 Sequoia securitizations for $1.5 billion.
While we saw moves in rates during the quarter and a dramatic flattening of the yield curve after the June Fed meeting, the end-to-end coordination and efficiency with which our teams function remain a true competitive advantage.
The flexibility of our securitization program coupled with whole-loan distribution facilitates further scale as collectively they allow us to be in the market consistently.
During the second quarter, we were once again faster to market than the competition and distributing our pipeline.
Another encouraging metric was the contribution that Redwood Choice, our expanded prime product made to volumes.
Choice represented 15% of our locks in the second quarter, up materially from 5% in Q1.
Choice represented as much as 40% of our locks pre-pandemic, a reminder of how meaningful this channel can be.
In recent public remarks we continue to emphasize changes to the QM rules that we believe will be a key tailwind to Choice's reemergence.
If adopted safely the new roles focus on mortgage rate as the determinant of QM status will allow another sleeve of high quality borrowers to qualify more easily for competitive rates, an important step that underscores the true potential of the non-agency market to serve a deeper bench of consumers.
We are actively engaging with our seller base to bring this to fruition.
These macro trends also reflect meaningful talents for CoreVest, our business purpose lending platform.
The second quarter was particularly productive in BPL as we advanced several key initiatives, most notably completing our strategic investment in Churchill Finance.
CoreVest originated $527 million overall in the second quarter, up 37% from Q1.
Our funding mix consisted of $312 million of single family rental loans and $215 million of bridge loans.
Bridge production was up over 60% from Q1, an increase for the fourth consecutive quarter driven by increased usage by borrowers on lines of credit and several build-for-rent and multifamily loans coming online for funding.
The origination mix for BPL.
In the second quarter reflects the strength of our multi-product strategy, which results in high levels of repeat borrowers, including those that utilize more than one of our loan products.
In all, 67% of total originations in the second quarter were from repeat customers and the pipeline remains strong with a consistent mix of new loans and refinance opportunities.
SFR production remains strong in the second quarter with fundings up 23% from Q1.
As we discussed on our last call, the pipeline remains robust and execution has benefited from increasingly constructive securitization market.
We completed our first broadly syndicated CoreVest securitization of the year in April.
achieving all time tights on credit spreads with a deep bench of investors.
That record proved short-lived.
Last week's follow on transaction once again priced at all time tights including a spread of 57 basis points on the AAA-rated securities.
As we've seen many times before, this type of execution inevitably breeds additional competition, which we view as an opportunity for CoreVest to continue differentiating itself as the BPL market's lender of choice.
We have high expectations for our forthcoming refresh client portal, especially it's new user interface, which will make it even easier for our clients to upload documents and track progress of their loans.
Additionally, we continue to press our advantages as a nimble lifecycle lender, we're finding a product suite to continue serving the end-to-end needs of a deepening cohort of sophisticated housing investors.
Highlighting this progress is our partnership with Churchill which we expect will diversify our sourcing channels with a particular emphasis on smaller balanced single-family rental and bridge loans.
We have now closed our first purchase of bridge loans and SFR loans from Churchill and see an attractive near-term pipeline to complement our direct lending products.
In periods of increased competition, it's important to reinforce the value of an institutional platform like CoreVest in a market that in many ways is still developing.
We have now completed optional calls on two CoreVest securitizations, refinancing many of the underlying loans with a platform made 5 or more years ago.
Many borrowers have now been with the platform for at least that long as CoreVest continues to support their growth and evolution.
That sort of track record matters and has immense intangible value on the field of play.
Our newest initiative RWT Horizons is doing its part and keeping pace with our enterprisewide progress.
Since formally launching Horizons earlier this year, we have completed 5 investments in our assessing an exciting pipeline of new opportunities.
Most recently our direct investments include liquid mortgage, a platform focused on leveraging blockchain technology to bring efficiencies to the non-agency market, and a tech enabled residential construction management firm.
At this early stage, it's exciting to witness tangible progress with our new partners.
Liquid mortgage recently procured a key patent covering the vast majority of its business plan, a big step in our collective efforts to apply blockchain technology to the non-agency ecosystem.
Rent room and rent butter also both had productive quarters and are meeting or exceeding their planned product development and rollout initiatives.
Most critically these partnerships reflect the intellectual collaboration that drive true alpha for all parties involved.
We are engaging directly with liquid mortgage and developing the work streams required to safely put mortgages on blockchain, and together are working to engage other key stakeholders across the industry.
For rent room and rent butter two investments sourced through CoreVest borrower network, we are facilitating synergies with our broader client base.
We're thrilled to be working shoulder to shoulder with those standing on the frontier of innovation in our markets.
As previously noted, our second quarter 2021 results reflect the durability of our model and continued strength across our entire platform.
We reported GAAP book value per share of $11.46 at June 30th, a 6.5% increase relative to the prior quarter end.
The primary drivers of the $0.70 increase in book value per share or GAAP earnings of $90 million or $0.77 per basic share, partially offset by our quarterly dividend of $0.18 per share.
We are pleased to have maintained a strong momentum for the first quarter, generating a total economic return on book value of 19% for the first half of 2021.
Our economic return spotlights not only our growth in book value, but also to our growth in our dividend which we raised by another 13% in the second quarter.
These are particularly strong results this quarter from our business purpose mortgage banking operations, which delivered a 52% after-tax operating return on capital with the net operating contribution of $20 million, which is up 80% from Q1 on a 37% increase in origination volumes.
Income from residential mortgage banking operations decreased from historic first quarter level while still delivering an after-tax operating return of 17%.
Even as loan purchase commitments were down 22% Q2 still marks our second highest volume on record.
To reiterate Dash's point, gross margins remained at the high end of our historical target range despite a challenging macro backdrop the impacted securitization execution and increased hedging costs relative to the first quarter.
Turning to the investment portfolio, we had $49 million of positive investment fair value changes primarily from our RPL assets, even further spread tightening, and improved credit performance this quarter which I'll expand upon shortly.
Net interest income increased approximately 20% or nearly $5 million from the first quarter of 2021 due to higher average balance of loans and inventory at our operating businesses, higher yield maintenance income from SFR securities, growth in our bridge loan portfolio and a decline in interest expense from our investment portfolio.
Shifting to the tax side, we had retaxable income of $0.11 per share versus $0.09 in the first quarter, primarily on higher net interest income.
Our taxable REIT subsidiaries earned $0.27 per share in Q2, down from $0.47 in Q1.
The decrease was primarily driven by lower mortgage banking income, partially offset by lower operating expenses and resulted in a $5 million lower tax provision for the quarter.
On a combined basis, our operating businesses generated an annualized after-tax return of over 28% in Q2, utilizing $483 million of average capital.
As a reminder, these earnings can either be reinvested back into our operating businesses or paid as a dividend to the REIT.
This quarter we continued our focus on higher margin businesses that produced strategic asset for our investment portfolio.
Specifically, we deployed $45 million of capital to Brisbane during the quarter and $50 million to SFR securities in core loans.
Year-to-date we've net reduced the size of our third party investment portfolio through opportunistic sales.
Working capital for our mortgage banking businesses represented less than 30% of our allocated capital, but produced approximately 65% of our adjusted revenue for the second quarter.
As Chris mentioned, the proportion of adjusted revenue from our mortgage banking operations has been growing in recent years and has facilitated returns that are significantly outpacing our growing dividends.
Total portfolio returns rose by a combination of improved credit and faster prepayment speeds on securities we hold at a discount to face value.
Higher prepayment speeds continue to benefit these portfolios and allow us to accelerate our call options within Sequoia and CoreVest Securities.
We settled the call rights on three Sequoia securitizations and one capital securitization during the second quarter, acquiring $83 million of seasoned jumbo loans and $45 million of seasoned SFR loans all at par, which benefited book value by $0.05 per share.
We estimate about $250 million to $300 million of expected call activity across capital and Sequoia through the remainder of the year and we estimate at current market conditions the underlying loans can generally be sold or resecuritized well above their par value creating further potential upside to earnings and book value of approximately $0.68 per share for 2021.
Furthermore, we project another $2 billion of loans that could become callable by the end of 2024 with the majority of those currently expected to occur by the end of 2022, and that could potentially add another $0.63 to $0.65 per share on average to book value depending on execution.
Net delinquencies in our portfolio continue to improve with new forbearance requests near zero.
Specifically Choice and RPL securities experience improved 90-day delinquencies during the quarter with select remaining flat from Q1 and absolute low levels of 80 basis points.
It's worth noting the improved delinquency trends with our RPL securities portfolio experiencing 60-day delinquencies now below pre-COVID levels, and voluntary prepayment speeds continue to well exceed our original modeled expectations.
LTVs in the portfolio are low and continue to improve or hold stable and average coupons aren't excess of our current mortgage rate which should provide options to help distressed borrowers and keep actual losses low.
At quarter-end, our balance sheet and funding profile were in excellent shape following several liability and capital management actions taken during the quarter.
We added over $750 million of financing capacity to support growth of our operating platforms including the refinance of a $242 million bridge loan financing which contributed to a roughly 100 basis point cost of funds improvement for our overall investment portfolio.
Importantly, the second quarter marked another record for Redwood with combined $3.3 billion of residential whole loan sales and securitizations underscoring our ability to source and distribute in side.
Our recourse leverage was marginally higher at 2.2 times at the end of the second quarter as we incurred additional warehouse borrowings to finance higher loan inventory.
At June 30th our unrestricted cash was $421 million, which is over half the size of our outstanding marginable debt, and at quarter end, our investable capital was $175 million, not including $100 million of incremental capital generated from a secured term financing we closed in early July.
I'll close with an update on our 2021 financial outlook.
We continue to see upside potential in our book value from here both from anticipated call activity in our investment portfolio and through our ability to grow and retain earnings at our taxable REIT subsidiary.
We encourage you to review the supplemental quarterly materials we published earlier today, which provide more detailed and refresh guidance for the remainder of the year to highlight some of the key inputs that support our financial narrative.
Confidence in our ability to achieve our guidance of grounded in a sustainable trend we're seeing across our businesses.
As Chris and Dash have outlined, the key themes that will drive our performance include, increasing our wallet share using technology to drive efficiency, allocating more capital to our higher ROE operating platforms, continuing to create value through the investment portfolio and using partnerships M&A and other growth strategies to further efforts in our target markets.
As we look ahead, we remain on track to keep pace with the robust volumes we've seen through the first half of the year anticipating another $6 to $8 billion of jumbo lock and approximately $1 billion of BPL originations for the second half of the year, which would have nearly doubled the volume of that business year-over-year.
For perspective, the second half volumes on the residential front approach our full year volume just a couple of years ago.
We've demonstrated our ability to successfully grow not only our origination volume, but also our market share and we believe we can continue to do that across our platform and in each of their underlying channel.
Small changes in market share can have a meaningful impact to our overall profitability and scale and that's what we're planning to do over time.
For the remainder of the year, we anticipate generating an adjusted return on allocated capital between 20% to 25% from our mortgage banking operations, and 10% to 12% for the investment portfolio.
As credit spreads have tightened fairly significantly and fair values have since increased this forward yield on the investment portfolio, which is in line with our forecast at the beginning of the year reflects improvements in our financing costs and capital optimization.
And finally, in terms of the potential sources and book value upside we began the year with $444 million of net accretable discount in our portfolio, and even after growing book value of $1.55 per share or roughly $175 million since that time we have approximately $2.60 per share or $300 million of remaining discount in the portfolio that we have the potential to recognize over time.

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q2 gaap earnings per share $0.66.
gaap book value per common share was $11.46 at june 30, 2021, up 6.5% from march 31, 2021.

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