Redwood Trust, Inc. (RWT) Earnings Call Transcript & Summary

Thanks for joining us for our latest state of the CRE webcast period. My name is Richard Hill. I'm Head of U.S. Commercial Real Estate Research at Morgan Stanley. I'm excited to have that the management team of RedWood Trust to discuss the state of the housing market. Our webcast last September is one of our most well attended. I'm looking forward to hearing from the Redwood management team on how the housing market has evolved over the past 6 months. It actually pretty surprising to think that September was 6 months ago. In some respects, it feels like a year ago, in other respects, it feels like 3 months ago. As a reminder, we'll be taking Q&A over the webcast link. So please feel free to submit your questions. Before we jump in, a brief housekeeping item as usual for me. Please note that this webcast is for institutional and corporate client base and Morgan Stanley employees. This webcast is not for members of the press. If you are a member of the press, please disconnect to reach out separately. Please also note that this webcast is not for retail and individual wealth management clients. For other important disclosures, please see Morgan Stanley research disclosure website. If you have any questions, please reach out to your Morgan Stanley sales representative. So Lisa, I'm going to turn it over to you for a quick introduction of who is on the call today from the Redwood management team.

Thanks, Richard. I am Lisa Hartman. I'm the Head of Investor Relations here at Redwood Trust. Also on this webcast is our CEO, Chris Abate; President, Josh Robinson; and CFO, Collin Cochrane as well as the CEO of CoreVest, RedWood Company focusing on business purpose lending. Before we get into Q&A, I also wanted to remind people that certain statements made during this webcast with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations or and assumptions that involve risks and uncertainties that could cause actual results to differ materially. Please refer to the company's annual report on Form 10-K for a description of some of the factors that could have a material impact on the company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements. On this webcast, 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 Redwood review, which is available on our website at redwoodtrust.com. The contact of this webcast 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. And with that, I'll turn it back over to you, Richard.

Great. Thanks, Lisa. So Chris, maybe I can start with you. I thought one of the really interesting ways that we started the call last time, and I'd like to start the same way. It's just an elevator pitch on Redwood trust. I'm certainly familiar with Redwood. I think you have a very unique perspective on the housing market holistically. But maybe we could just start off with who is Redwood? And how have you evolved over time?

Sure. Well, thanks, Richard. Thanks for having us. It's good to be returning champion in this series, and thanks to everybody who's logged in. Since we talked last summer, we've continued to evolve. And we're short of embarking upon what we like to think will be a Netflix style transformation of the firm. We've been long known as a housing investor, largely focused on consumers in the jumbo space. And we've really broadened our reach over the last year to be covering the entire landscape of the non-agency market. And we'll get into Beth's business through this discussion. But the non-agency space is growing. It's a $3 trillion plus market. It's growing for a few reasons. One, I think everybody on the call is aware of significant home price appreciation over the past -- particularly the past year, but really the past 5-plus years. And when you look at the rate of HBA across many regions of the country, it's significantly outpacing, conforming limit increases for the GSEs. So when we think about the non-agency space, which is really anything outside of the programmatic approach from Fannie and Freddie that market is growing significantly inorganically, but it's also growing from a regulatory perspective because what. seen over the past few years through regulation and the GSE regulator is a scaling back of the mission creep at the GSES. So things like investor loans second homes, other things that may not be squarely within the mission of the government-sponsored enterprises. Those businesses are being largely scaled back. And so that's creating another big opportunity for us to grow. We're very focused on the market as well as our share. And the way that we've evolved the business is to become a kind of world-class operator in the space, in a space that's largely still fragmented and not institutionalized. So there is no GSE in the non-agency space. In fact, when we look at our securitization platforms, one is Sequoia and the other is capital. We actually issue more deals on a broader spectrum than anyone outside of the GSEs. We've done well over 100 transactions to date. And we've completed a few already in the first quarter. So it's an exciting time. We're being very responsive to the needs of both consumers and investors. Our focus is very much on single family housing. We cover multifamily, but the business is really positioned to take advantage of this major shift towards single-family detached living, frankly. And we think much of that is secular. You've seen this work from a home phenomenon. And I think the thing that's really interesting about it is the infrastructure that's been built to facilitate long-term or permanent work from home scenarios for a big source of the country. I think for just announced today that 30,000 employees will be allowed to work from home permanently. So while we do expect a return to work as we get to the other side hopefully of COVID and we're seeing vaccines rolled out. I think the infrastructure that's been built over the past year to facilitate work from home is going to dramatically change people's living options. And we're seeing just a major transition from urban living to suburban living even rule living, which those markets are squarely what we serve. So we're excited about market the opportunity. We're really excited about our market positioning in the future of the company and as a leader in the space. We're focused on all the things. You would imagine we would be to be transformative, particularly technology. We've got a lot to talk about there. We've had a number of exciting releases. We're making major investments in technology, which we think help us to really, as I said, institutionalize the space. And there's just a lot to do. So it's a lot of fun right now. It's certainly -- it's a great time. We talked last just sort of -- we hadn't even really exited the wave of COVID and shutdowns last summer, things were just starting to feel a bit better. Since then, we've really opened things up. We had a tremendous fourth quarter. We saw record volumes. Both businesses, kind of firing on all cylinders. And so we've entered the year in a major position of strength. And I think the focus is to really shift the curve to be operating faster, reliably and really make a big difference in how housing finance in the country. So I'd call that the opener -- a little bit more than an elevator pitch, but that's really at a high level of what the company is about.

That's helpful. And for the record elevator pitch is research speak for tell me a little bit about your company in a very detailed way. So I appreciate that. So I wanted to revisit your perspective on the housing market. It's the housing market that use my words is on fire right now. Assume it remains really bullish, but there is some, dare i say, concerns creeping into the dialogue that accelerating home price appreciation is not sustainable. That's not our view. By any means, by any strange of imagination, we actually wrote a couple of weeks ago saying, this time really is different, we mean it. But how are you thinking about the housing market, especially given the backup in interest rates. A lot's happened over the past 2 months, never mind the past 6 months. So if we can just walk through what you fundamentally think about housing right now, that would be really helpful.

Sure. And there's another topic that we could talk a lot about. So I try and keep it somewhat brisk. But housing is and remains very strong. Our business is always, at the end of the day, been credit oriented. So when we take risk, we're not drawing lines through massive home price appreciation curves and just assuming that the good times low forever, it is a cyclical business at the end of the day. But we're at in this cycle, there is just technically speaking, very strong tailwinds. We've got a major shortage of single-family housing relative demand. You need about 1.5 million units a year just a run-in place based on homes coming offline and being rebuilt versus household formation. And we're still -- it's been years since that supply-demand dynamic has been in balance. It's still not in balance. So demand continues to outstrip supply. Household credit is and remains strong. Borrowers aren't nearly as leveraged as they were in the last crisis. We're making some of the highest quality loans we've made in the history of the company across both businesses. So the risk posture, I think, is remarkably different than it was during the last crisis. And just in general, people are living with their means, their savings rates are much higher. And when we think about where we sit on -- from a recovery standpoint, a lot of the recovery that you have observed, the people on the call have certainly witnessed has largely been a financial asset, Wall Street driven recovery as opposed to a mainstream recovery. And that's exactly why the government just passed the [ $2 trillion ] stimulus package. So we've yet to see any of that money. We're just starting to see that money injected into the economy. But as the country has vaccinated and people sort of get back to normal, again, just a large tailwind behind the consumer behind economic growth and recovery. And all of that, at the end of the day, I think, well for our business and for our outlook on housing. It is cyclical. But again, I think at this point in the cycle, there's still quite a bit of room to run.

Got it. And so just talking about interest rates quickly. One of the things that we've observed, and I think has missed on people, is despite the rise in home price appreciation, homes actually remain really affordable. And yes, there's been a backup in interest rates, but it's not thus far meaningful enough for the consumer to look at and say, "Oh my God, I'm not going to buy a house. Do you agree with that? What's right about that what's wrong about maybe a segue, what are the biggest opportunities and risks for the housing market. And I want to transition to maybe your other businesses. Well but how do you think about interest rates? And is it really risk? And if not, what is the risk?

Yes. There's the headlines, which rates have backed up, but people focused on our business or in our business, peel back the onion a bit. And by and large, certainly in the non-agency space, the vast majority of the cohort remains in the money, if you will. For example, I would say, on average, the average coupon on our supply portfolio of residential consumer loans is north of 4%. Current mortgage rates are in the low 3s. That's more than enough incentive to refi, especially for larger balance loans. So I think we're in an earlier inning than perhaps the broader conforming space is. But rates still remain very attractive. And I for one and am a believer that at some level between the Fed Chair and the former Fed Chair, which is sitting at treasury, I don't think that they're going to compromise this recovery by way of rates getting out of control. That's just my personal view. I think it would be a shame to offset all of this fiscal stimulus with a tightening of monetary policy or de facto tightening. So I'm confident that rates remain relatively low. And where things stand right now even with the backup, most of our business today, north of 60% is [ refi ]. And we would expect that to continue based on just looking at outright existing rates versus trend rates.

Understood. So maybe this is a question for Beth or Dash or Collin. But can you talk about how the evolving housing market, if you will, has impacted your residential versus your business purpose lending business.

Sure. I can kick that off for [indiscernible] and then turn it over to Beth for some commentary as well. There are some differences in how the current rate environment has or could impact our residential versus business purpose lending, not only in terms of the upfront decisioning of the borrower, but also the ongoing ability for that borrower to cover their debt burden. So there are some slight differences there, which I think are worth highlighting. Firstly, for resi, I would highlight a couple of things. First of all, underscoring Chris's point around where current mortgage rates are versus where a good chunk of the cohort is in jumbo. As Chris said, our book is just about 4% on average from a gross coupon perspective. We're locking loans right now in the low 3%s, very low 3%s. And so there's a significant amount of refi incentive that remains there. And from a debt-to-income perspective, we'll talk -- I know, I think, a little about this a little bit later, but debt ratios for our jumbo loans are probably high [ 20s, low 30s ]. So even with the drift up in rate from the recent lows, which were in the high [ 2s ]. From a debt-to-income perspective, they're still very, very strong coverage at these rates for the consumer taking these loans out. So that's worth mentioning as well. And sort of in keeping with Chris' comment about just overall household leverage and debt. There's a lot of cushion and sort of tailwinds that make this modest rise in rates we've seen recently, very digestible from an underwriting perspective. So I think that's important to and then 2 other things, then I'll let Beth take it. Consistent with what Chris was saying about just what this pandemic has created from a housing turnover perspective in terms of folks demanding more suburbs, roll, et cetera. A lot of that is not -- that's not a rate driven desire. And so whether mortgage rates are at $2.90 or $3.25 or even a bit higher, those sorts of lifestyle decisions are driven out of [indiscernible] my personal preference. And so it's not as elastic to whether a mortgage rate is at $3 or $3.25. Those are really personal special decisions that people and families we're making, which I think are somewhat agnostic to rates at some level. And so that -- a lot of the demand we've seen, while it's certainly been helped by rates, it was driven by a lot of other things that have nothing to do with prevailing mortgage rates are today. And then lastly, one potential upside for our business, which we've talked about before, as rates do or if rates continue to tick up, we would expect to see more focus from originators on some of the expanded prime products, which in prior years have been a significant part of our acquisition footprint. We rolled out choice about 5 years ago, which is still a prime product, just slightly expanded from our select product. That's been a de minimis part of our versus the past several quarters, originators are just not as focused on it, given the opportunities largely with conforming [ refi ] and now with jumbo. But to the extent rates continue to back up, we would expect more interest there and more uptake, which could be also a meaningful supplement for a growth engine for our overall purchases.

Got it. Go ahead.

Sorry, I'm just going to add for the business purpose loans, I think there are a couple of nuances on that view that actually are unique to purpose space, right? We're actually pricing more based on spread than rate, even though, obviously, it's a combination with swaps moving up so much as they have right now. And spreads are gapping a little bit, but we're still at really unbelievably tight spreads for what we have seen even in the past year. So the business purpose, sponsor is actually seeing at lower rates than they have seen kind of on a historical basis. You're also seeing rental increases right now in the market that are driving their net operating income higher. And so it's still incredibly accretive even at the current rates for them to be doing this and acquiring properties. The other thing is while I absolutely agree that home prices have not become unaffordable yet and probably won't in the near term. As they become more unaffordable, it actually helps the rental market even more because it just gives people another option for housing that meets the criteria they're looking for that's driving some of HPA. And so kind of to Dash's point, it's a view that they have about where they want to live and how they want to live, that's moving them into certain types of housing. The fact that we can be agnostic as to whether it's purchase or rental, I think helps us in the overall scheme of financing credit in the housing market.

Got it. That's helpful, guys. So all 3 of you have touched upon the borrower. But I want to dig into this a little bit more. Specifically, can you speak to the borrower profile that you're seeing? I ask this because our research suggests that homeownership, believe it or not, is strongest for under 35-year olds. And that's usually not the case. So we are seeing a lot of demand. So I'm wondering are you seeing that sort of demand from a younger demographic than maybe what you saw 3 years ago, 5 years ago, never mine, 10 years ago?

Yes, we're starting to see some of that, and I'll let Beth way as well because to her point, there's an important relationship here, obviously, between the owner-occupied and demand for rentership. The midpoint of millennial, the millennial age packet right now is probably 30 to 31. So if you're sort of in the middle of that cohort, which is a significantly large cohort and is growing. And I think by some estimates is now the largest cohort from a population perspective in the country. They've -- a lot of them have passed sort of psychological bright line of entering their 30s. And what does that mean for household formation and things of that nature. So we're certainly seeing some of that. I would say, though, that if you compare this generation to prior ones over prior decades, there's definitely still a lagged effect between the activities that this cohort is doing that would drive household formation. Obviously, things like getting married, having children or other things like that. And I think some of that remains just personal choice as it relates to the desire to be nimble and not necessarily own homes and just be more nimble and flexible in terms of financial, but also location. So I think that's still part of it. But yes, certainly, as the a cohort ages, we are starting to see more of an uptick in that age group, but probably not at the pace that prior generations would have once they reach a certain nature.

Understood. Beth, would you add into that?

Yes. Look because the group is so large, I think it goes back to Chris's original point about household formation, the household formation rate is high because for a lot of different reasons, but also its highest in that cohort where you're seeing the younger people kind of finally getting to the point where they can get out. And I think it's actually fueling both markets. We're certainly seeing in the rental market, a lot -- a larger number of that same age group going into rental housing. And I think it's just because of Dash's point that it's a really large group, right? And so I think you're going to continue to see them fueling probably both sides of the market. As the household formation rates continue to ease, and you don't see an offset in new housing stock. And you're certainly not seeing an offset in new housing stock at the kind of smaller, more affordable level that this group would probably be interested in.

So I want to put that question on its head. We talk a lot about the rising tide and millennials disease, which is really real. But baby boomers have lifted their houses for longer for a variety of different reasons. Can you talk about maybe more the cell homes versus this rising tide? How do you think that changing of the guard happens? I have a lot of questions, are you -- are you seeing sale-leasebacks and single-family rental space. So big broad open into question, but maybe you can talk through what you see from baby boomer selling? And is there enough demand from millennials disease?

Yes. I'll start, then best to chime in as well because I think that is an important point you're making. The baby boomer generation is certainly a ripe 1 to continue to potentially move into rentership status out of owner occupied. And there are structures out there for sale leasebacks where those consumers can stay in their homes. But obviously, some of the burden of responsibility shifts as ownership does. I think it gets back to -- Beth's really important point on supply. And the builders continue to have great momentum. Their sentiment still seems to be pretty strong, notwithstanding this recent backup in rates. And I think what underscores your question is there's just -- there's still insufficient housing, particularly when you think about this desire to leave the more densely populated areas, some of which we should acknowledge will ultimately reverse. I don't think our thesis in housing is that dense urban centers will continue to get less dense perpetually, but still, there's been -- there's this sleeve of demand within the suburbs that, I think, has exacerbated a pre-existing housing shortage that existed well before COVID, as you know, something we were talking for years even before the pandemic set in. And so from an absorption perspective, I think we continue to feel really, really good just from a supply demand imbalance ratio in those metrics. But you're absolutely right, as the baby boomers continue to age, that cohort becomes in part of a more logical rentership versus the large.

And look, Richard, I think your question for single-family rental is kind of spot on in that there's been actually a bunch of new strategies. Still family rental is not 1 flavor, right, like any other part of the market. And there have been actually a bunch of new strategies to address exactly what you're saying. There are definitely companies coming in, doing sell leaseback. There are companies coming in saying, hey, take the home you want to live in long term, we'll rent it to you and give you an option to buy. There are other ones that are doing it in a way that there's some share depreciation. So yes, there are a lot of new innovative ideas coming into this space, mostly to address the concern that you're kind of putting out there. There are going to be a lot of different ways to move between rental and ownership over the next 5 to 10 years. We'll just see how they evolve. But certainly, those type of ideas are percolating and coming out in a bunch of different new companies with different strategies.

Yes. That's helpful. Guys, and Dash, specifically, you talked about credit characteristics and credit characteristics remaining pretty strong. But I don't think there's a lot of transparency, at least with the type of loans that you're making. We all are familiar with Agency GSE loans. But what are you seeing credit characteristics in your book, both for loans that you've already made and maybe new loans?

Sure. Well, the hallmark of our program for years has always been, obviously, very, very high credit quality, and we have done some work to expand the box, so to speak, like I was referencing with our Redwood Choice product, but it really is all prime quality borrowers that we have focused on. And I would say, recently, for some of the reasons I articulated a few minutes ago about just where sellers and ellos are focused. The loans that have come in the past several quarters are some of the best quality we've seen. Talking mid- to high 700s FICO, sub 70 average LTV, like I've mentioned, sub 30% debt income ratios. And so that performance continues to be really strong. Our delinquency performance through COVID, we really feel good about. And obviously, it's continued to strengthen here over the past several quarters with forbearance requests coming down pretty significantly, almost to 0. And all of that. So that said, we do think there's room and we would -- we are very constructive on products that serve a broader swap of consumers, like I was referring to earlier. It's just a matter of getting sellers to focus on it and prioritize given where the capacity constraints are in the system and frankly, just the relative -- for whatever the past couple of quarters has been the relevant profitability of doing a GSE loan with that direct subsidy versus private label. But we do expect that to shift. But the bottom line is that proof is in the pudding in terms of our performance, which we've talked a lot about publicly, the quality of the credits, both the ones that were in the book cove and certainly the ones that have come in over the past 12 months or so, we feel really, really good about this.

We've spent some time talking about single-family ownership, single-family rentals to a lesser degree, multifamily properties. But I'd like to revisit 2 points. First of all, do you consider each asset class siloed? Or is it important to view it holistically? And as you can consider that question, how do you consider your capital allocation process today? If you had the tick, I love all my children the same, but to different degrees at different points in time. That's a joke, you can a lot with that. Can you just talk through your allocation process through the various different property types?

Sure. I'll touch quickly on the first -- on your first question and then let Collin talk about the capital allocation. From our perspective, it's imperative to look at these markets and the risk rewards holistically. Frankly, for all the reasons we've been talking about for the past 30 minutes because ultimately, it's 1 market. And while the loan structures differ and at some level, then the borrowers differ and to some extent, drivers of performance differ. These trends and themes inform each other. And like Beth articulated, an uptick or a downtick in demand or supply in 1 market impacts the rest of our book, potentially in the other direction. And so we have to be consistent and how we think about the risk, how we think. We're serving our users, which markets we want to lead into, what sorts of products. And we feel really, really strongly that we can't do that intelligently without a holistic look in borrower demand, what our sellers are telling us, et cetera. So it really has to be a really coordinated conversation for us to serve the market properly, but also for us to manage risk appropriately as well.

Yes. And that in terms of the capital allocations, we do have capital allocated across all those different subsectors of housing that you mentioned. But we do think it's equally important to understand our allocations of capital between our operating business -- operating businesses, both resi, BPL and our investment portfolio because together, those 2 businesses create diverse earnings streams that support strong shareholder returns on both book value growth at the operating businesses and an attractive dividend from the investment portfolio. And recently, our primary focus has been on allocating capital into our operating businesses because that's where we've seen the strongest opportunities for growth and the strongest ROEs. At year-end, we had about 35% of our equity allocated to our operating businesses. And in our recent outlook, we noted that we expect to generate returns North of 20% on that capital. Our investment portfolio has the rest of our capital. And again, that is allocated throughout the different subsectors of housing. And currently, the most attractive opportunities that we see to deploy capital there is within the assets that we're creating organically, in particular, in BPL because those tend to be larger assets relative to the jumbo securities that we also retain in that part of the business. And in our outlook, we noted that we expect the generic returns on capital of 10% to 12% within our investment portfolio. And that is what [indiscernible] supports our dividend, which I'll note, we've recently increased to 14% here in the first quarter.

Got it. And so look, I'm struck by just a lot of tailwinds for the housing market, which, look, I think it's well known, but strong demand backed by strong borrowers, credit fundamentals and rent rates. I guess the question that I'm considering is what's the next big thing for the non-agency space? Unfortunately or fortunately, we all deal with public company then public investors always want acceleration. What you did last year isn't good enough. So what is the next big thing, and I'm going to make a flippant comment, everyone wants to be a technology company these days. So how is technology go for your business forward. I don't know if that's for Dash or Chris, but I'll turn it over to either 1 of you.

Sure. I can take that. And I'll make a couple of initial comments, then I actually I think it makes sense for Beth to elaborate on the CoreVest business because just to carry on your comment, we acquired CoreVest about 1.5 years ago for many reasons because we view them as a technology company for a lot of reasons which Beth can elaborate on. So I'd say this, technology is without question at the center of what we're focused on. And from our perspective, we think non agency, has a ton of green space to be further disrupted, whether it's automating workflows, taking redundancy out of processes, et cetera. But -- and a lot of our work around this, frankly, started with the CoreVest acquisition. So I'll let Beth go through some of that and just the culture of innovation there. And then I'll have some comments on the residential piece as well.

Sure. Kind of the good news, bad news was when we started CoreVest, there was no technology available of any shelf anywhere that would have helped us because it was kind of meter residential nor commercial. I mean, there were certainly commercial loans, but we couldn't find anything that actually have that kind of one-to-many relationship or that could actually work that was off-the-shelf. And so really, from the beginning we have built this out as a really an end-to-end program that we highly customized whatever solutions we could find on technology space. And because the market has been evolving so fast, too, over that period of time, we've really built in our entire culture around this constant iteration on that technology. And so I could tell you that we have certain technology initiatives. But we always have a 2-week technology initiative happening every single 2 weeks, we have a new agile sprint iteration that's coming out. And what that's enabled us to do is to really scale with a smaller number of people and to scale specific to a type of product, a type of industry that didn't actually really exist because it's not that we went out and built some large weapon system. We took things that were already cloud-based. We took things that were already in the market, but we highly customized them and capped it in this end-to-end. And I think we've been unique in our ability to start from the sourcing all the way through to the securitization on 1 system. Don't we type things. We don't send people back and forth. It really is an automated process and has been from the beginning. And it's because we didn't know any better. Because there wasn't something else out there. There was no legacy that I had to deal with or that we had to customize or recreate. We really did start from scratch, and it really has worked for us. But I think it's worked for us not because we built something that was so perfect. We build things that are wrong one-time like anyone else. It's worked for us because we have this notion of a constant iteration, and we're going to continue to evolve as quickly as the market is, so that we're never doing types of things that aren't automated, that when we bring a process in, when we bring a vendor in, when we bring whatever in, it's coming into this very holistic technology-enabled environment.

That's helpful. And I think Dash you had a follow-up questions or comments about the resi market?

Yes, absolutely. So Beth's touching on a couple of really critical points holistically within our enterprise. One of which is just the technology tiers and how we think about the various ways in which we leverage organic work internally, but also external partners. And on the residential side as well, over the past several quarters we've been extremely active. On the organic side, we rolled out Redwood rapid funding, which is a technology-enabled process, which will get a select group of our sellers access to more accelerated funding time lines, which has been really popular here in the early innings, and we're excited to continue to grow that. We're working from a customer acquisition, but also retention perspective on an application for our sellers that will give them more real-time information into where their loans sit in the diligence process. So we're leveraging, obviously, more mature technologies outside our 4 walls to be able to do that. So we're excited and we talked about that briefly on our last earnings call, and that will be rolling out soon and is currently in pilot. And then lastly, we've talked a fair amount recently about Redwood Horizons, which on our most recent earnings call, which is an effort we're all really, really excited about, which is a fund that is -- will be organically seeded that we'll focus on investments in more nascent technology companies that are focused on efforts to really disrupt existing sort of accepted practices for how non-agency mortgages are made, try and disrupt the value chain. But also situations where we think strategic partnerships like that can be accretive to both of us. We can bring our market contacts, our book of business to help these companies grow, and we can obviously leverage technology that they're innovating on to rethink how we do things. To Beth's point, it is consistently iterative process. And so a lot more to come there, but I did want to underscore Beth's remarks by saying our approach to technology really is multi tiered. It's organic. It's partnerships with the more mature players out there. And then most recently, it's the work we're doing on horizons, which is more further upstream, trying to get in the spot where the science sort of becomes the technology so to speak and to get further upstream with some of those things and continue to try and be ahead of the curve.

Yes. Helpful. I have one more question, and then I want to turn it over to Q&A. We do have some questions in the Q&A queue. I remind everyone, if you would like to ask a question, please feel free to submit it. As you think about Redwood in the future, how are you growing your business. Is it growing the pie? Or are you just capturing more market share? So one of the big questions that I always think about when I'm -- with companies that I cover and don't cover. So how are you growing now? Is it -- is it a bigger pie? Or is it a bigger market share? So Chris, how would you address that?

Well, right now, it's both. I think a year ago it was very much market share focus. But now clearly, the pie is growing as well. A year ago, it seems like an eternity ago, but we've only been strategically aligned with Beth and the team at CoreVest for a little over a year. And that was a major strategic initiative to address a huge aspect of the non-agency space that Redwood in our consumer focus hadn't touched. So that's been obviously very successful. We -- the past few quarters have been tremendously positive and our deal executions have been fantastic. So we've broadened our reach across the sector. But with these investments in technology, and I'm glad Dash hit on horizons because we are not only disrupting from within, but we are actually partnering on offense with innovative start-ups that are focused on solutions that can help institutionalize the space. And if we can do that, we can operate more quickly, more reliably and essentially be a better partner for our clients. And that's really what the business comes down to. Just a general transition away from a more passive credit investor, and we can talk about kind of where the company has been and to generate returns on financial assets today, especially if you're acquiring them versus creating them, the leverage you need to use and the bogeys, there's -- it's just a very challenging time to be an issuer to be facing clients, to be facing loan officers and actually accessing the raw material that ultimately creates these assets. That's where we're positioned today and where our capital is moving towards. Collin mentioned something to that effect. But we're definitely moving towards these operating platforms and just the fundamental focus and structure of the company is evolving in that direction.

Okay. Chris, I want to stay with you for the first question that we have coming in. Because I think it speaks to, frankly, the hard work that Redwood has undertaken over the past a 12, 18, 24 months to -- as the person said, dramatic steps to protect the franchise. And while it might have been painful, kudos to you. So can you talk about sort of the lessons you learned? And maybe elaborate on the Netflix style transformation, what that actually means. I've used that term before with other businesses and I'm always intrigued by it. And I think I know what it means. But can you just elaborate on it. So I think that's an exciting concept.

Yes. I mean, for us, it's a gradual transition away from what people typically associate with a mortgage REIT, which is passive investments, leverage, not necessarily being in a position to face clients, and consumers and operate. So I think what we encountered last year actually helped fast forward this evolution of the company and really kind of cleared the slate. We were able to essentially transform our balance sheet without actually raising any dedicated outside capital. So we're actually pretty proud of that to this day and Q1 2021 to have kind of pounded a way out of a crisis where our sector received no federal support at all. We're proud of the fact that we were able to do that, but it was a bumpy road. And I think lessons learned there or just where the company's capital is most accretive and how we generate returns. And I think we put some guidance out that our investments in our operating platforms, we expect to generate north of 20% ROEs. And that's -- these aren't levered financial assets. These are high turnover repeatable source of earnings. So just the makeup and the quality of our earnings, I think, is significantly different than it's been in the past. And the transformation is really, it just speaks to how much -- how disruptive the non-agency space is. When you think about the conforming agency space, it's highly automated, there's really only to liquidity providers, Fannie and Freddie. So the guys are all similar. The pricing is all similar. That makes for an experience where you can turn and automate production very quickly. We are basically -- we've opened the hood on every aspect of our work streams and are in the process of just fundamentally changing how loans are purchased or created in the non agency sector. And that's what's really exciting about the work and why our technologists are very excited, and we're attracting talent to the company. We're making these investments. And I think that rather than some potential competitors, which actually prefer this disaggregated approach because inefficiency can often result in margin to the extent you can take advantage of it. We are very much squarely focused on the mission, which is creating more access to higher-quality homes for consumers and investors. And I think just getting some of the inefficiency out of the space is the key to unlocking that value, and it sort of speaks to affordability and things Redwood can do to be part of the solution.

Thank you for that, Chris. Dash, a question for you on migrations. We've obviously seen a migration to the suburbs. We would argue that, that's just an acceleration of trends that were already in place prior to COVID-19. But the question is twofold. Do you expect this out migration to reverse post-pandemic? And if not, which regions are likely to see permanent urban help migrations?

Yes. It's a great question. The short answer is we expected to at some level in some quantum reverse. There's still -- there's still an attractiveness to being in an urban setting, which hasn't fully gone away. But I do think from a return perspective, you will see potentially some modicum of impact in terms of what urban centers look like several years from now versus today. But we're certainly not underwriting our business plan, assuming that the outflow from urban to suburban will continue because as schools reopen and all the ancillary things reopen, there's still a desire to be in those sorts of environments for people that are comfortable. Prior to the pandemic, we were having the exact opposite conversation where there was significant demand to see -- to be more densely living together or living in close proximity to work. You saw across the country, markets like the Southeast, in particular, significant investment in downtowns, in central business districts. And I don't think our expectation is that, that trend will fully unwind. We've certainly seen a significant outflow to the suburbs. And while we think that will continue in some effect, we definitely are not of the view that it won't reverse at some level. We do expect people to return to those areas. What that means for other parts of the commercial real estate market, I think, remains to be seen. That's not a comment on office occupancies and hotel demand. But I do think in terms of where people want to live, I don't think we've seen a full reversal from some of the attractiveness of being an urban setting that we saw pre-pandemic.

Beth, a question for you. A couple of questions for you, actually. But one specifically about managing single-family rentals versus multifamily. Candidly, I think it's a question about management costs and efficiency but also CapEx. And it's a Boogie man that comes up in a lot of my discussions with single family rentals, I have my views on it. But do you have any concerns about single-family rentals being less efficient to management [indiscernible] in the multifamily? And if so, how can that be mitigated?

So I think when we started, we definitely did. And we certainly on the road, particularly, as you already highlighted, on the CapEx side. It is 100% true that there are -- you have 100 homes, there's 100 boilers, and you have 100-unit multifamily you have kind of one large boiler. But it has been -- what we've seen over the past 7 or 8 years. And what you can certainly see, if you look at any of the public SFR companies as well, the cause of actually operating [indiscernible] is pretty significant. So your net cost is actually going down. In fact, right now, in the past year, I think the net cost single-family rental has actually been lower because turns are unbelievably low right now.

I think that's completely spot on in terms of the turnover rate. I don't think people recognize that people are choosing to live in single-family rentals and they're viewing these at homes and what that does for expenses. Dash, we only have a couple more minutes, but 2 more questions, I think, direct to you. The first 1 is the [indiscernible] in the room that everyone's talking about, which is interest rates. And we talked about earlier that it's not really that disruptive yet, but is there a level of interest rates in you would become a little bit more concerned about disrupting the momentum in the housing market? Or is there just a lot of moving parts that you have to consider beyond interest rates?

There certainly are a lot of moving parts. It's hard to put an exact number on it because, again, our book currently is probably 75 bps in interest rate above prevailing rates today, and a lot of those mortgages were made rather recently. So [indiscernible] 30 to 40 points ago in HPA. I think the biggest potential overhang is just uncertainty and volatility. So if rates do trend up at some mode I would underscore Chris' earlier point about the new administration and our view that the likelihood that policy will continue to mitigate the long end going up too much too soon. But I think some of it is just the speed with which interest rates move around. And so what's hard for anyone, whether that's consumers or companies like ourselves to manage it, is just the volatility and the uncertainty. And so when we see interest rates settle and even tick up, suddenly, it's a much different landscape than when they're bouncing around and when there's uncertainty to about how the markets will respond to Fed policy. And we've seen some of that certainly in the past couple of months. So I think it's more of a confluence of things. It's hard to put an exact note rate on it, but it's certainly something that we're -- we always keep a close eye on it.

Then one final question, and I want to give Chris the last word. There's some discussion that as home price continues to accelerate, it's going to become unaffordable. And therefore, it's going to restrict buying. I'm going to put my words to interject our thoughts into this, and you can tell me if I'm wrong. But I think that's portion the debate. But we think what the market continues to miss, which you alluded to, is there's just a tremendous amount of demand coming for housing, and there's just not enough supply of it. So while we can talk about affordability being restricted as home price appreciation increases, I think the debate will -- has to and will shift to the demand side of the equation. Is that a fair characterization? So Dash, I was looking to you then. I was going to get Chris last word on that.

Sorry. Okay. Yes. Yes, I think that's very fair. I think and to the point we've been making earlier, the supply demand is important, and we feel like we're positioned to be able to meet that demand regardless of who it's coming from, whether it's another occupant or an investor, which I think is really, really important. So I think we see it similarly. There's -- for our businesses to succeed and for us, for our credit book to continue to do well and for our businesses to continue to grow. We're not relying on double-digit HPA, which I think is another important piece of things. We certainly saw that last year, it was 10%, 11%, and we've seen a significant run-up in-house in the past 5-plus years as Chris referenced, but that is not a requisite for our operating businesses to continue succeeding or for, in our view, our loans to continue performing.

Got it. Well, guys, we're right up against our hour. I appreciate your time. Chris, let me turn it over to you for any final words.

Well, I appreciate everybody's time. It's always fun to connect and thanks to Morgan Stanley for facilitating this. We are already a very interesting time in the market and the evolution of the company. We know who we are. We know who we are at $2 a share. We know who we are at $30 a share. We know exactly what we're focused on. And ultimately, it's customer-focused and continuing to reinvent the company and make sure they're responsive to the changes in the market. That's how we've been doing it for 26 years, and that's how we'll continue to do it.

Great. On behalf of Morgan Stanley, thanks for joining us today. Thanks for everyone that participated in the webcast. And we look forward to continue partnership. Thanks, everyone. We'll talk you soon.

Thank you.