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

Good afternoon, and welcome to the Redwood Trust, Inc. Fourth Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's fourth quarter 2022 earnings conference call. With me on today's call are Christopher 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 or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report 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 are provided in our fourth quarter Redwood review, which is also available on our website at redwoodtrust.com. As a reminder, the company's financial statement audit for the year ended December 31, 2022, is not yet complete, and the results we are reporting today are unaudited and may vary from the company's audited financial results for the year ended December 31, 2022, presented in our annual report on Form 10-K for 2022, including due to the completion of audit procedures relating to the valuation of our deferred tax assets at December 31, 2022. The company's 2022 annual financial statement audit is scheduled to conclude on schedule in late February in advance of our Form 10-K filing. Also note that the content of today's conference call contains time-sensitive information that's only accurate as of today, and we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. I will now turn the call over to Chris for opening remarks.

Thanks, Kate, and thanks to everyone for tuning in this afternoon. We're excited to have the opportunity to speak with you today in our fourth quarter results and also update you on our performance in the first month or so of 2023. We'll also touch on how we view the opportunity in front of us for the remainder of the year. As you probably suspect, I'll cover off on the high points, and then Dash and Brooke will handle our business and financial performance in greater detail. The fourth quarter rounded out a year that brought about sudden change to the mortgage markets in a manner that was markedly different than we've seen through previous downturns and past housing cycles. In 2022, the Federal Reserve's efforts to curb inflation, led to the most pronounced jump in rates in over 40 years, largely freezing mortgage refinance activity and profoundly affecting consumer behavior in the housing market. Significant increases in rates, severe spread widening and ongoing bouts of volatility characterized much of the second half of the year. While our results during this period certainly didn't meet our expectations, we focused on prudently protecting our book value, managing risk and positioning our company for the path forward. As we all know, long-term focal points such as these are sometimes only fully appreciated in hindsight. With such a challenging year now behind us, we resolved to break the huddle in early January and quickly build momentum towards our 2023 priorities. That's exactly what we've done, realizing a welcome uptick of activity and a few accomplishments worth noting that have helped to improve our GAAP book value thus far in 2023. Already this year, we completed a preferred stock offering, reopening a segment of the market that has seen little activity last year while expanding our balance sheet to an alternative source of capital. Next up, we completed a sale of $213 million of business purpose lending or BPL loans to a top institutional partner at accretive terms for both firms. The sale of this pool of loans was a bellwether of sorts for us and created forward momentum for the platform that has positively impacted our new loan pricing and reaffirmed our BPL business potential to build from last year's record volumes. In tandem with our BPL loan sale, in late January, our residential team completed our first Sequoia securitization in over a year. Once again, this deal helped reset the market and has now influenced a significant expansion of the RMBS issuance calendar by other sponsors, a good fact for all market participants. Investor demand for our securitization was the strongest we've seen for any private label deal in over a year, and it allowed us to increase bond prices and boost our GAAP gain on sale. Through these actions as well as other optimizations across our balance sheet, we grew our unrestricted cash position to just over $400 million at February 7. This robust liquidity puts us in a strong position when considering our future debt maturities will allow us to proceed opportunistically in our markets, including through M&A and other accretive investments. Accompanying this boost in available capital has been a significant reduction in our go-forward operating expenses. As Brooke will touch on, the primary focus here has been to reduce costs that can flex with loan volumes. We've been very strategic in this regard, managing costs while preserving full optionality to take advantage of market conditions as opportunities arise. As we think about capital allocation going forward, we expect consumer mortgage volumes to remain challenged as the majority of homeowners are not financially incentivized to refinance their existing home or move to a new one with the prospect of assuming a much higher mortgage rate. In response, we have reduced working capital allocated to our residential mortgage banking business by about 70% throughout 2022. We acknowledge that January brought about some much needed stability to the market, which was partially due to a modest decline in mortgage rates. It's simply too early to tell, however, if this is the start of a trend or simply pent-up demand following a slow fourth quarter. In the meantime, strategic focus of ours remains tending to our seller base and ensuring we have products that meet their needs as the market evolves. This includes refinement of our expanded prime products as well as investor products that cater to consumers who own second homes or looking to finance a single rental property. Despite our belief that consumer mortgage volumes will remain under pressure in the near term, there remains heightened demand for BPL products in a sector that is very much still in growth mode. BPL borrowers, unlike consumers aren't locked into low 30-year rates and are therefore not content to sit on the sideline. They are transaction-oriented executing on business plans and require liquidity from our loan products to fuel growth. The demand for rental is still elevated, we continue to see investors actively seeking the range of solutions we offer. Rental market has been tasked to providing more alternatives for households, including multifamily, build-for-rents and workforce housing. Our focus remains on originating BPL loans secured by assets with strong fundamentals and quality sponsors. That's why we remain particularly bullish on our BPL business even with faced with the prospect of a potential recession in 2023. Perhaps the overall positive market sentiment at the start of the year matters most with respect to our investment portfolio as it remains a primary driver of our book value. While the fourth quarter mirrored much of 2022, with further credit spread widening, thus far in 2023, the story has been different. Market prices for securities have begun to firm up, reflecting lower mortgage rates, increased housing market activity and positive deal flow in securitization markets. I'd like to continue emphasizing that the vast majority of mark-to-market declines we incurred on the portfolio in 2022 remain largely detached from the underlying cash flows, with the book continuing to display strong credit fundamentals and low overall delinquencies. With a weighted average year-end carrying value of $0.62 to principal face value and a projected forward loss adjusted yield of 15%, our investment portfolio had approximately $500 million or $4.33 per share of net discount at year-end that we have the potential to realize the earnings over time. While the path of home prices and its impact on mortgage credit remains the critical question for 2023, we believe our portfolio construction with many seasoned assets and significant HPA realized to date makes it resilient to a wide range of downturn scenarios for the economy. With our strong cash position, we remain intentional about steering capital and resources towards markets that we believe perform better in this environment and assets we believe to be undervalued, including Redwood's corporate debt and equity. We repurchased $88 million of our own securities in 2022 and have continued to be active in doing so in 2023. We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our upcoming 2023 convertible bond maturity and remain opportunistic in repurchasing elsewhere across our convertible debt stack. While uncertainty is likely to linger well into 2023, we believe we're in the late innings of this Fed cycle, we remain confident in our ability to navigate further challenges with the pillars of our diversification, strong balance sheet, and most importantly, our people. Our platform offers a compelling opportunity and a unique access point to invest in a very dynamic housing market. And with that, I'll turn the call over to Dash Robinson, Redwood's President.

Thank you, Chris. Following a turbulent 2022, we entered 2023 ready to take advantage of current market dynamics and drive accretive results across our operating businesses and investment portfolio. I will focus my commentary on the recent performance of these segments and our current outlook and positioning before turning the call over to Brooke for an overview of our financial performance. Our investment portfolio, which now represents 84% of our allocated capital and remains a key driver of our dividend, continue to deliver strong fundamental performance in the fourth quarter, notwithstanding further unrealized fair value changes that impacted book value. Cash flow durability remained robust across the book, an important input into our ability to realize the net discount and carrying value that Chris referenced. Delinquency rates were stable to improving across the portfolio. For our organically created assets, a book that includes BPL loans and securities and retained bonds from our Sequoia shelf, quarter-end 90-plus day delinquency rate stood at 2%, down from 2.1% at the end of Q3. Elsewhere, delinquency rates on our core reperforming loan positions, what we refer to as SLST also improved, with 90-plus day delinquencies 0.5% lower quarter-over-quarter. Even with the recent slowing in HPA and modest home price declines in certain markets, equity continues to build in these underlying loans as borrowers remain consistent in their payments. In aggregate, we estimate that the loans underlying our securities portfolio have LTVs of approximately 50%. Results have also been favorable in our home equity investment option portfolio or HEI, the majority of which is either securitized or financed through the warehouse line that Brooke will touch on. Life-to-date speeds on our securitized portfolio have been approximately 20% and realized returns have been strong, protected in part by an average discount to initial home value of approximately 18%. This allows the holder of the HEI to withstand meaningful downward pressure in home prices before incurring loss of investment. Notwithstanding fundamental performance, fair values in our investment portfolio were once again impacted by spread widening during the fourth quarter in sympathy with trends across the market. As Brooke will describe in more detail, these adjustments continue to be largely unrealized and have begun to reverse meaningfully year-to-date. As Chris referenced, our portfolio's net discount to face now stands at $4.33 per share, the realization of which comes into clearer view of each passing quarter of performance. We remained active in optimizing our capital deployment during the fourth quarter, putting approximately $100 million to work across organic and third-party investments and repurchases of our near-term convertible debt maturities at attractive discounts. While spreads have stabilized meaningfully year-to-date, we still see ample opportunity to deploy capital accretively across our operating platforms, third-party securities and our own capital structure. Our operating platforms have quickly turned the page on 2022 with strategic progress in the early weeks of the year, reversing some of the volatility induced P&L from the fourth quarter. In business-purpose mortgage banking, while broad market headwinds persisted through the end of the year, the team knocked some key wins that are already paying dividends in 2023, including advancing the Riverbend integration, growing our whole loan distribution capabilities and adding a new non-recourse borrowing line for bridge loans that meaningfully enhanced our overall financing flexibility. We originated $424 million of BPL loans in the fourth quarter, down 26% from Q3, but in line with our estimated volume trend for the market overall. Our production mix for the quarter between BPL bridge and term loans rebalance compared to other quarters in 2022, as more sponsors opted to lock in long-term fixed rates where possible in lieu of shorter-term floating rate bridge debt. BPL term production volume was up 36% quarter-over-quarter, driven by a significant increase in term multifamily funding. The fourth quarter's fundings rounded out full year production volumes of $2.8 billion, a record year for the platform that let increased importance to diversifying our distribution channels to position ourselves appropriately for 2023. We sold $92 million of BPL bridge and term loans during the fourth quarter and over $220 million more in January, recycling capital for a growing go-forward pipeline across our products. Distribution and profitability on new BPL term production has been particularly strong as we complement a best-in-class securitization platform with a deeper whole loan buyer base attracted to the structure and quality of our loans. Importantly, the overall improvement in sentiment in January carried over to our sponsors, we are once again leaning in on refinance opportunities or taking advantage of more constructive conditions to put fresh capital to work, either through traditional acquisition channels or newer partnerships emerging as a result of dynamics between the for sale and for rent markets. Our progress in loan distribution has proven well timed amidst both improving sponsor demand and significant uncertainty around funding capacity at certain of our competitors. Additionally, we continue to optimize financing on our bridge loan portfolio. Inclusive of the $335 million financing line we completed in December, at year-end, 100% of our bridge portfolio continued to be financed on a non-marginable basis, with 70% of the financing also non-recourse. We maintained substantial excess capacity to support new production and future funding obligations on existing loans. Notwithstanding more favorable market conditions and the equity backing our BPL loans, given the overall environment, we continue to expect increased engagement from our asset management team to 2023, including with bridge loan sponsors seeking to refinance and managing earlier-stage delinquencies within the term loan, which were up modestly at year-end. As we have previously highlighted, our overall origination footprint in 2022, focused largely on sponsors with some sort of real estate stabilization strategy. Approximately 90% of originations were either bridge loans to sponsors improving and leasing up single and multifamily properties or fixed rate loans on already stabilized loans. Given our progress in integrating Riverbend in the past 6 months, we expect to round out that production mix with an increased emphasis on single asset bridge loans, focused on repeat customers of the Riverbend platform with strong liquidity profiles and track records. Importantly, capital markets distribution for these types of loans is relatively mature and we are well positioned to broaden our whole loan buyer partnerships and begin leveraging existing accretive financing to keep more on balance sheet. Our residential mortgage banking business maintained its defensive posturing in the fourth quarter, locking $43 million of loans and managing our lowest level of inventory since early to mid-2020. This was by design as jumbo mortgage rates during the quarter moved off their 7%-plus highs down to the 6s, an improvement but not enough to drive purchase money volumes higher in an environment in which refinance demand remains substantially muted. Improved market conditions in January allowed us to reverse much of the fourth quarter's widening of our residential inventory, which at year-end stood around $660 million and currently sits at roughly half that amount after several small whole loan sales and a successful completion of our January Sequoia issuance, our first in over a year. Execution on the securitization was indicative of improved market sentiment, with final pricing meaningfully through where the pipeline was carried at year-end. In monitoring market sentiment, we believe we will be able to further distribute the remaining pipeline at favorable levels. As Chris mentioned, capital and costs allocated to our residential business have been reduced commensurate with recent transaction volumes. However, we have preserved the optionality to lean back in as conditions warrant to continue serving our seller base, including through enhanced rollouts of our expanded prime product offerings. The recent exit of one of the largest players in the correspondent market highlights the durability of our partnerships even after a period of reduced activity as many of our sellers continue to prioritize capital efficiency and continued rightsizing of costs, they put as much value as ever in our consistent speed and reliability. I will now turn the call over to Brooke to cover our financial results.

Thank you, Dash. In my comments today, I will provide an overview of our GAAP and non-GAAP results for the year and quarter ended December 31, 2022, and discuss select quarter-to-date metrics relating to the first quarter of 2023. We reported GAAP book value of $9.55 per share, reflecting an economic return on equity of negative 3.9% for the fourth quarter. The primary drivers of book value were a $0.40 loss in basic earnings per share and our dividend of $0.23 per share. GAAP earnings were impacted by negative investment fair value changes of $0.21 per share, which continue to substantially reflect unrealized mark-to-market changes. Earnings available for distribution was negative $0.11 per share in the fourth quarter as compared to $0.16 per share in the third quarter, driven by a loss of $0.28 per share from mortgage banking due to credit spread widening on both the residential and BPL inventories. More specifically, our lower marks on our inventories reflected a lack of activity and available distribution channels at year-end, a trend, as noted by Chris, that has reversed thus far in the first quarter. Overall, GAAP net interest income decreased from the third quarter due to lower mortgage banking inventory as volumes and average balances declined in the fourth quarter, while our cost of debt increased, partially offset by higher average coupons for our bridge loan. As Dash mentioned, during the fourth quarter, we closed a new $150 million borrowing facility for HEI investment, which contributed to the increase in interest expense. Importantly, economic net interest income was nearly $6 million higher than GAAP, primarily due to higher average balance of economic investments from capital deployment. Liquidity was solid as of year-end and has been building. Unrestricted cash and equivalents increased by $141 million to $400 million from December 31 to February 7. This is a function of various activities already covered, such as the $70 million preferred stock offering as well as whole loan sales, securitization and financing optimization efforts. As we noted in our review, we also see incremental opportunities to generate over $100 million of liquidity beyond our existing cash position by financing a portion of our $300 million plus of unencumbered assets. While our total recourse debt balance of $2.9 billion was unchanged quarter-over-quarter, the decline in tangible equity drove a modest increase in leverage from 2.6x to 2.8x. Given the financing and capital markets activities we conducted thus far in 2023, our estimated total recourse leverage ratio fell to 2.2x at February 7. This decline in leverage is also attributable to our repurchase of nearly $60 million of convertible debt since the end of the third quarter, contributing both to reduced interest expense and realized gains for our shareholders. With respect to the term structure of our liabilities, we have $1.8 billion of recourse leverage maturing in 2023. As financing markets remain orderly, we foresee no issues rolling these facilities in normal coolers. To further illustrate, during 2022, we renewed or established 18 financing facilities, representing $6 billion of total financing capacity. In terms of our outlook, we are currently estimating book value to be up 2% through February 7 in both GAAP and EAD earnings to re-approach our dividend level for the first quarter. We see several factors that support the return to more normalized return levels for the business throughout 2023. With the mark-to-market changes we've experienced, we are carrying the investment portfolio at a forward yield of approximately 15% and credit spreads affirming. Across both mortgage banking platforms, we have largely cleared the inventory overhang from last year, which further improves our gain on sale and volume outlook. Furthermore, in business-purpose lending, we are building on our origination volumes from 2022 and are seeing profitable execution fueled by improved distribution alternatives. Our nimble capital allocation has underscored the diversity of our revenue streams and our ability to optimize the business dynamically based on where the best risk-adjusted returns are in the market. We have a variable cost-driven model, which has allowed us to reduce operating expenses at the residential mortgage banking segment by 40% year-over-year, reduced capital allocated to the business by 70%, yet preserve the optionality of a flagship platform that has historically generated ROEs in excess of 15%. Given the changes we've made, even with a smaller opportunity set, maintaining our historical market share and margins are sufficient to generate normalized returns for this business. And finally, in response to the challenging market conditions we faced this year, we have been focused on rationalizing our overall operating footprint. General and administrative or G&A expenses increased slightly from the third quarter, primarily due to employee severance and related transition expenses. However, for the full-year 2022, G&A expenses were down 20% relative to the prior year. Pro forma for expense reduction initiatives completed since September 30, we currently expect 2023 run rate G&A expense to be 5% to 10% lower than full year 2022 comparable level, in line with our guidance on last quarter's earnings call. We expect these changes to our cost structure to lead to improved profitability in 2023. And with that, I will turn the call over to the operator to open the line for Q&A.

[Operator Instructions] Our first question comes from Stephen Laws with Raymond James.

I guess, first I want to touch on the conduit business. I don't remember a year where we've seen it kind of move like it did, is volatile through the year. As you look forward, what do we need to see to kind of see more stabilized margins there and solid profitability, although obviously, on lower volumes? And what you've seen in the first Sequoia deal and some other transactions in the market year-to-date, do you feel we've turned the corner there? Or kind of what's your outlook on margins and margin volatility as we move to '23?

Steven, it's Chris. Good question. I think for resi, in particular, obviously, it was a really tough year for mortgage banking and volumes and there's pretty well-known reasons for that. As far as turning the corner goes, I think the first thing that we got down this year was the Sequoia deal, we saw a much, much greater demand for the issuance. It was the first deal that we've done in over a year. And I think that as demand returns in the PLS markets, that will create greater confidence, certainly for aggregators like ourselves to begin acquiring and leaning in on rate. Now that said, we're still, I think, aways off in rate as far as where most people would be interested in reifying homes versus where current rates stand, north of 6% and in some cases, 7%. So, I think we're cautious in declaring victory here in the first quarter as far as things fully stabilizing. But we've built some optionality. As Brooke said, we've taken a lot of capital out of the business. And one of the great things about Redwood is we're a 29-year-old business, and we've got the ability to shift capital and resources to their highest and best use. And so I think when it's not a tremendously a great time to be issuing, it's usually a good time to be investing. And so I think we've created a lot of optionality there to be an investor in resi. And so I think in 2023, we're going to proceed cautiously. Hopefully, we can continue issuing. We'd like to issue another securitization here at some point in the next -- in the coming months. But in the meantime, I think we're focusing on growth areas across the business and Dash had a lot of comments on the BPL business earlier on. And I think that for a lot of reasons, that business is something we're going to focus on in the first couple of quarters of the year.

And maybe to follow-up on one of the options on the resi side. The home equity investments, you've seen the deck, new financing facility put in place in the fourth quarter. Can you talk about the opportunities there? Is that an area you view as attractive now? Or kind of how do you force-rank your options for the investment side as far as new capital being deployed?

Yes, I think it's very exciting. That's a great example of some of the optionality that we've built into the platform. Certainly, if people are not incentivized to move or refinance their homes, they'd like to extract trapped equity within their homes. And anybody that's bought a home in the last 2 or 3 years is sitting on quite a bit of equity by and large. And so our HEI initiative is really meant to sort of modernize the home equity process and we'll have a lot more to say about it, I think, in the coming months. But certainly, we see strong demand. We've completed the securitization in the past and Brooke's team completed a financing, a warehouse financing of that product very recently. So, we're excited about things starting to institutionalize there and we expect that to be a big focus area of ours in 2023.

Our next question comes from Rick Shane with JPMorgan.

I'd love to talk a little bit about how to think of the residential mortgage banking income line and the loss in the fourth quarter. I'm assuming that because of the execution that some of that was mark-to-market from pipeline from the third quarter. And I'm wondering with the Sequoia sale in the first quarter if some of that's sort of been reversed. I'm just trying to understand the locks and the purchases and the fundings and the timing of everything.

Sure, Rick, it's Dash. I can take that. You're right. It was largely the resi mortgage banking outcomes for Q4 were largely a result of the mark-to-market on the book we held at 9/30. And as we noted, we locked a little over $40 million of loans in Q4, so the position did not move meaningfully between 9/30 and the end of the year. So, the revenue outcomes for resi mortgage banking were really a result of just spread widening in the market. You're right. And some of Brooke's commentary on book value also includes an improvement in the carrying value of the pipeline here in January or in the early part of the year, half of which has been realized through the Sequoia deal that we executed. So, the position since 9/30 has been fairly easy to trace just because we did -- we added to it barely in Q4. And you're right, much of that has reversed thus far in January with the Sequoia execution of the prospects, as Chris said, of doing another one.

And again, looking at the loan sales in the fourth quarter, it was only $131 million. So, there was presumably a realized loss on the $131 million, but the remainder, whatever the outcome is on the Sequoia transaction, we'll see in a few months?

Yes. I mean we -- whether it was mark-to-market adjustments or realized losses, we reflected the value of that pipe at December 31 and I think that is the right way to think about it. Since then, things have firmed up quite a bit in resi. We wanted -- we anticipated that and we prepared to issue that transaction right out of the gate. So, it was a successful deal. And those again are some of the green shoots we did see in that space with investor demand, especially back for AAAs to feel confident to really lean into our rate sheets because ultimately, we control the volumes. It's just a matter of all the pieces coming together around inventories and volatility.

Look, there are a lot of moving parts here. But at the end of the day, the economics at Redwood are really determined by credit performance. You've alluded to related to the securities portfolio, no deterioration, no variance versus model. Can you talk a little bit and provide some additional insight in terms of what you are seeing pockets of strength, pockets of weakness in residential mortgage credit at this point from a credit perspective?

Yes. I mean I'll touch on consumer resi quickly and then Dash can touch on BPL because at the end of the day, all of our businesses are, as you said, somehow tethered to resi credit. Our consumer resi book, which is our traditional jumbo, our expanded line and our RPLs or reperforming loan books just continues to perform remarkably well. Delinquencies have been essentially flat and in many cases, declining. These are largely seasoned loans, most of which have participated in significant HPA over the past few years. Just looking at some numbers, our Select book, our estimate for average HPA adjusted LTV is under 40, Choice is around 40, just over 40 and the RPL book is in the mid-40s. So, when you think about our embedded discounts there, which again for Select is [ $28 million ], Choice is [ $34 million ] and RPL is [ $278 million ]. They're sitting on significant, significant home equity before any of these physicians incur meaningful losses. So, we continue to feel very, very good about where the book is positioned. Certainly, including with some downside scenarios with a recession. And I think we're -- our job is just to keep maintaining, monitoring the book and managing credit. But why don't I let Dash speak to BPL, which is the other piece of the puzzle.

Sure. Thanks, Chris. I would say similar to the consumer part of the book, the empirical performance within BPL remains really, really good. Bridge delinquencies were down from where they were earlier in the year, now just over 2%, very strong level. The single-family rental book, which is largely securitized, as I mentioned in my prepared remarks, we saw a slight uptick in early-stage delinquencies in that book at year-end, that has been trending in the right direction already year-to-date, just with our asset management team as they always are, just engaging very directly with borrowers. So just as a reminder, on the bridge portfolio, the vast majority around 90% of what we finance are in some shape or form rental or stabilization strategy. And so while the durability of the cash flows remain really, really good, what we do is look around the corner and try to anticipate where the areas of stress are going to be. And we try and guard that upfront with our underwriting. Our multifamily loans are typically underwritten to close to a 9% debt yield or higher. We're very careful about how we trend rents and all of that's overlaid. We're focusing on the most sophisticated sponsors with the best liquidity. I think the reality, Rick, even as rates have come down, the 10-year sits right now, probably 55 basis points below its peak from Q4. The reality is across the bridge space, there will likely be sponsors that need to come out of pocket by a few LTV points to refinance into an agency loan, et cetera. Our focus is making sure we're with sponsors that have the capital to do that and they're executing on their business plans. We have a lot of bites at the apple, as I think you know, in terms of our draws and ensuring that reserves are rebalanced and we're revaluing properties. And so as we -- as more and more of those data points come in, we're more and more heartened by how those sponsors are executing. But that's the areas you can imagine of increased focus here. Rental growth has obviously tapered a bit. We expect that, but we're still seeing strength in average hourly earnings, which is a direct input into how we think the underlying tenants are going to perform. So again, the empirical performance has been really, really good, but that's -- all that stuff that I just mentioned is really top of mind for us for the next few quarters.

Our next question comes from Eric Hagen with BTIG.

I think I have 3 questions so just bear with me here. I mean how would you say the return on capital and securitizing both the jumbo and BPL compares, say, now versus a year ago when spreads were at some of their tightest levels? And then is the capital that you have in the jumbo segment more or less kind of the minimum that you envision just given where the market is? Is there any scale that you can achieve with the capital that you have there if origination volume improves? And do you see Wells Fargo exit -- their exit from the correspondent channel being an opportunity? And then on the originations and BPL, how often would you say agency funding is a viable takeout for those loans? I think I just heard you mention that in some cases, it is. Like is there any connectivity to the fact that GSEs have risen for those loans? And in cases where it's not an agency loan, which does supply the takeout, what is the source of capital that typically does?

Well, we'll try to divide and conquer here. On the resi front, spreads, obviously, were quite a bit tighter a year ago. But I think the bigger story is what's happened in the past few months. And in early December, mid-December, prime jumbo AAAs were trading 2 to 3 points back of agencies. Now, it's closer to 1.625 or so. So, there's been a big snap back, which has significantly improved the economics of securitization. Again, for us, that's a very good sign. But running that business and leaning in on rate involves a lot of different moving parts, one of which is you've got to carry fixed rate mortgages with an inverted yield curve, you're incurring all of the spread volatility. So, getting up and down in a securitization requires additional risk, frankly. So, I think what we're trying to do is continue to get more efficient with that business. And we mentioned that we lowered the capital by 70% over the course of the year. As we look to distribute our remaining sort of last year inventory, we think that capital number can go down further, it could probably go down to something closer to $50 million. And really what that does is it creates a nice base case to lean back in when we're ready to go. And that money doesn't disappear, they can be redeployed and all of this sort of pencils out into the $400-plus million of unrestricted cash that we've amassed here in the last few weeks and months. So, all of that can be deployed. It can be invested. It can be used to buy back debt, buy back stock. So, I think the goal of the fourth quarter was, in some sense, a modest restructuring to get us in a position to kind of go back on offense, which is exactly what we've done to start the year. On the Wells front, which I think you referred to. I think that's a tremendous, tremendous long-term opportunity for us and for our long-term minded shareholders. That's somewhat of a bellwether of sorts. I would say Wells by and large, has been the largest correspondent aggregator in non-agency, particularly jumbo since the great financial crisis. So, exiting that space really is a profound opportunity for us and potentially others. So, it's not an overnight shift. But I think for -- again, for a company that's heading into its 29th year, our business is the resi business. And as things evolve here, we expect that to significantly support our competitiveness in the space with a major, major force like Wells stepping back. So, I do think that's very notable and potentially a very big long-term tailwind for us. But in the near term, the real emphasis is the Fed, its stability in rates and particularly in housing and the economy that we're most focused on.

Eric, to take your questions around BPL, if you sort of divide the bridge portfolio into 3 areas, multifamily, build-for-rent and then the single-family stabilization strategy, I would say, in the majority of cases on the multifamily side for a sponsor that wants to hold on to the property and has the capital tenor to do that, Plan A would likely be most of the time an agency or a HUD takeout. Some of that, as you know, is going to depend upon the nature of the underlying tenants, the affordability angle, things of that nature. Agency and HUD takeouts are we see that very commonly to the extent the sponsor wants to stay in the investment. And -- but many of our multifamily sponsors, I'd say most do focus on tenants where the GSEs and UD are actually in a spot of continuing to lean in around housing affordability and things of that nature. So, those have historically led to more favorable execution outcomes that we would expect that to continue, notwithstanding your point around the GP just given where the mission footprint is with the GSEs. We have often refinanced multi into our own term product, which we securitize. That tends to occur when the GSEs hit their caps, which they have annually, as you know. We also can do that when a sponsor is stabilized and views it as more efficient to refinance private label as opposed to waiting the number of months of seasoning required by the GSEs at certain stabilization levels. So, we do see opportunities like that. On the build-for-rent side, some of those are eligible for agency. That depends upon how the property is parceled. And then typically for single-family bridge stabilization strategies, it's a win-win for us to be the takeout. That's a huge source of our term business, which we securitize as our bridge book or sponsors refinance with us into a longer-term fixed rate.

Our next question comes from Derek Sommers with Jefferies.