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

Thank you. financial results conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require Operate assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natasha Fothery, SPNA Leader. Thank you. You may begin. Natasha Fothery Thank you, Operator. Hello, everyone.

joining us today for Redwood's second quarter 2026 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer, Dash Robinson, President, Carrillo chief financial officer and Abhinav Asana our chief technology officer Before we begin today, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions, which include risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K and quarterly report on Form 10-Q, provide the 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. Reconciliation between GAAP and non-GAAP financial measures are provided in our second quarter Redwood review, which is available on our website, redwoodtrust.com. Also note that the contents of today's conference call contain time-sensitive information that are accurate only as of today. We do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded. It will be available on our website later today. With that, I'll turn the call over to Chris for opening remarks. Thank you, and good morning, everyone.

Redwood exceeded $8 billion in mortgage banking volume for the second straight quarter. We did over 20 securitizations in the first half of the year. We ended the quarter pricing three securitizations in a single week, one for each of our operating platforms, the first for Redwood in our 32-year history. That makes us happy and a little nostalgic about how productive the company operates these days relative to the past, when two to four securitizations a year was deemed just fine by market standards. Broadly speaking, it's no secret the housing finance business has been a lot less forgiving for this current generation of mortgage practitioners, first in over 40 years not to benefit from a long-term bull market in interest rates, which served as an invisible tailwind for both the lucky and the smart. Home affordability and supply headwinds, both closely linked to high interest rates and regulation, have impacted the addressable mortgage market and how mortgage businesses fundamentally operate. Today's environment is higher operating efficiency and capital turnover in a deep strategic mode that can drive growth despite home sale activity still coming in at multi-decade lows. As investors seek to align with the long-term winners of this extended rate cycle, we're prioritizing a few key differentiators that are worth mentioning. Let's start with technology. We are rebuilding Redwood as an AI-native housing finance platform for proprietary systems developed by our own engineers and embedded directly into our workflows. Our multi-agent AI systems help teams retrieve answers quickly and apply the same intelligence to complex tasks including seller financial reviews, guideline comparisons, and contract analysis. The result has been faster expert reviews, greater consistency, and greater scale. There are people in the loop on every key decision. This is still early innings, but the capabilities we are deploying are proprietary, compounding, and changing how we operate. Early indications of the operating leverage from technology are already visible. Direct expenses were 64 basis points as a percentage of volume for the first half of 2026, already a 28% improvement from full year 2025. Annualized time savings from our 2026 AI-enabled automation initiatives increased to approximately 23,600 hours, up more than 50% from the first quarter 2026 baseline. meaningful impacts on due diligence costs, rate sheet pricing, and guideline analysis. We also extended our unified technology platform, supporting Sequoia and Aspire to enable HELOX as a new Sequoia product. The bottom line is this. If you're wondering who the AI winners and losers are going to be in housing finance, we'll put 90% annual volume growth with consistent margins up against anyone operating in the housing market today. a market that has been operating at overall volumes down 50% from 2021 levels. As many of you know, our RWT Horizons Venture Fund complemented, in certain ways, significantly accelerated our growth in mortgage banking in recent years. Representing less than 2% of our capital, Verizon gives us access to more than 25 early-stage companies across the mortgage and AI ecosystem. During During the quarter, we invested in Prometheus, an artificial intelligence company developing an artificial general engineer, while another AI company in our portfolio priced a financing round that values our initial seed investment at approximately 27 times our cost. Our dual approach of adopting AI inside Redwood and investing directly at the frontier of technology remains a long-term strategic initiative. Product depth and distribution are another important part of the story. At Sequoia, newly launched products now represent more than 30% of our quarterly lock volume. Fire also grew more than 30% sequentially in the non-QM space, while Corvus is building momentum in its smaller balance offerings for experienced housing investors. Taken together, Redwood today has been dearly less dependent on any one product or on any mortgage refi cycle. It also differentiates earnings model in comparison to model line operators, with revenues more tied to MSR values and associated customer retention. Our model, conversely, built around efficiently aggregating loans from across our broad network and distributing them to long-term investors through securitizations, all-on sales, and strategic partnerships. Our bank relationships further strengthened that position. Large depositories leaned into mortgage volume during the second quarter, even at the expense of margins, underscoring that bank behavior is already evolving as the Basel III endgame is finalized. Lower capital charges and high-quality mortgages may have been a necessary regulatory impediment for banks to re-engage, but they are certainly not the only constraint. The ultimate decision by banks to boost origination activity remains risk-based, and to repeat ourselves, the mortgage risk that banks see sweets most consistently cite to us as top of mind is convexity, not credit. Redwood enables our bank partners to generate fee income and retain their clients while transferring their interest rate exposure to us while they retain and continue to grow the customer relationship. June 30th, Redwood acted as a dedicated capital partner, 70% of the top 50 banks in the United States. Our ability to help banks manage ongoing mortgage exposures differentiates Redwood and reinforces our essential role throughout the banking system. In summary, business we operate today is fundamentally different than it was 20, 10, or even two years ago. Advanced technology and operating efficiency, more comprehensive products, diversified distribution, premier institutional capital partnerships, and a shrinking legacy portfolio position us to grow going forward through a wide range of market environments, long-term value for shareholders. Not just when all boats are rising, as they do when interest rates fall, but through challenging rate cycles where hard work and innovation make the difference. And with that, I'll turn the call over to Dash to discuss our operating results. Thank you, Chris. Our second quarter operating performance reflected the combined benefits of product diversification, capital efficient distribution channels, and an opportunity operating framework that's fully integrated with core AI initiatives at the center of our strategic blueprint. The result was an eighth consecutive quarter of mortgage-banking returns north of 20%, increasingly fertile ground for continued capital redeployment away from our non-core portfolio holdings. At Sequoia, second quarter lock volume totaled $5.6 billion alongside several noteworthy product and distribution benchmarks. On sale margins were 92 basis points overall, in line with the first quarter's 96 basis points, despite substantial macro headwinds in April and May, and broader indications of pronounced margin compression across the industry. Distribution remained well aligned with production, most notably with a Castle Lake joint venture coming online in late June, nine Sequoia securitizations, and $1.2 billion of whole loan sales, almost all to banks. Sequoia's production mix included over 65% purchase money loans. The strategic position in Chris' reference has emerged as an important buffer against profitability headwinds for non-bank operators that are often coupled with reduced housing activity and renewed vigor from bank portfolios. This is in large part attributable to how our platform as a non-bank has positioned itself within the depository ecosystem. When business drivers, including those influenced by capital rules, need a bank to buy or sell mortgage loans, we are most often the first call. The deep bank relationship drove the launch of our medical professional loan program, now offered broadly to our seller network with great early success. including a second MedPro securitization earlier in July that priced well inside of our inaugural issuance. The recent launch of our HELOC program builds on our optimism that deeper product offerings will continue to drive resilience during periods of upward pressure on rates and volatility, reach stable margins, increase relevance to our deep seller network, and our ability to support two-way flow between bank portfolios. Also key to this positioning is Aspire, whose establishment 18 short months ago was designed to leverage existing strengths by offering a well-underwritten, flexible suite of expanded products to a broader network of originators. Aspire delivered over $2 billion of lock volume during the second quarter, another record for the platform, up 31% from Q1. Market observers expect non-QM originations to reach $150 billion in 2026, up 20% from last year and reflective of a growing cohort of high-quality borrowers that access credit differently than the traditional W-2 employee. This implies a run rate market share for Aspire of approximately 5% to 6% that we seek to go to 10% by year-end 2026. Through a relentless commitment to product innovation, accretive distribution, and technology, including recently announced progress with AI-powered pricing and guideline analysis tools. Institutional investor demand continues to support the non-QM sector's growth in general, but Aspire isn't specific. The business completed its second and third securitizations issued under the SPIRE shelf during the second quarter, with the risk retention and support in the tranches once again syndicated profitably to third-party investors. At June 30th, 60-plus state delinquencies within a SPIRE securitized population were less than 10 basis points. Subsequent to quarter end, we executed definitive documentation for an Aspire dedicated joint venture with Crayhill Capital Management, a leading structured credit investor. the vehicle has the potential purchasing power of up to eight billion dollars of loans underscoring demand for Aspire's products and an important early validation for the business Similar to our other joint ventures, it provides a source of recurring revenues with added performance fees upon reaching stated return thresholds. Each of our platforms now operates with a dedicated joint venture with key benefits to our operating leverage and revenue durability going forward. Corvest, our direct originator focused on lending to housing investors, funded $410 million of loans during the second quarter, down approximately 5% from Q1, as higher rates weighed on portions of the pipeline and legislative uncertainty now largely settled, impacting certain key pockets of market activity. We remain disciplined while borrowers and developers assess the evolving regulatory and legislative landscape. With the landmark housing bill now passed and built for rent carved out from institutional ownership limitations, activity is beginning to reopen an area that has largely paused. Corvus remains well positioned, supported by its longstanding focus on experienced sponsors below the largest institutional segment. A key milestone for Corvettes during the quarter was its first term loan securitization since 2023, since which time our term loan production has largely been sold in whole loan form. The $268 million transaction priced accretively to Lone Sale Economics and was placed with close to two dozen discreet investors. A market response that underscores the deep demand for the platform forms origination activities. The team also entered into a new servicing arrangement later in the second quarter, designed to reduce administrative demands and lower servicing costs over time. launched a targeted business development initiative to expand lead generation. As immediately realizable returns and mortgage banking continue to sit well above 20%, the value of continued reallocation away from our legacy investment segment remains significant. At quarter end, allocation to this portfolio totaled 12% of overall capital, down from 15% on March 31st, and 63% lower than one year ago when we the accelerated wind-down of this position. Early in the third quarter, we commenced formal marketing of a substantial portion of our remaining legacy bridge loans, and continued to progress individual line items through to resolutions, unlocking capital and reducing associated secured debt. Thus far in the third quarter, we also priced a new financing arrangement for the remainder of our home equity investment portfolio. That pro forma we expect to reduce segment capital to below 10%. 90 day plus delinquencies in the unsecuritized legacy bridge portfolio were roughly flat versus March 31st, and the priority remains fully moving on from this position as quickly and efficiently as possible to support further growth of our core activities.

I will now turn the call over to Brooke to discuss our financial results. Thank you, Dash. Turning to our second quarter results, we reported a gap net loss of $3 million, or $0.03 per share, compared with a $0.07 per share loss in the first quarter. Book value per common share was $6.90 at June 30th. The 3% decline from $7.12 at March 31st was primarily driven by marked market changes and ongoing carry costs within our legacy investments portfolio, as well as the $0.18 dividend paid to common shareholders. On a non-GAAP basis, consolidated earnings available for distribution, or EAD, was $20 million, or 15 cents per share, compared to 21 cents per share in the first quarter. The quarter again reflected two distinct trends. Our core segments remain highly profitable, generating $34 million of earnings available for distribution, ending in 18.5% annualized ROE, while legacy investments generated a $14 million EAD loss. Turning to our segment results, aggregate mortgage banking net revenue remained essentially flat despite a roughly 6% decline in production, reflecting stable to improving margins across the platforms while direct expenses declined. The result was a 33% annualized return on average capital for our operating platforms with capital efficiency continuing to improve. Average capital required per dollar of production fell to roughly 2.6% in the first half of 2026 from about 3% a year ago, underscoring the scalability of our mortgage banking platforms volumes grow. Prior to corporate allocations, Sequoia generated $32 million of gap-need income compared with $38 million in the first quarter. The sequential decline was primarily volume-driven, as purchase commitments declined 9% while the 92 basis point gain on sale margin remained near the high end of our historical target range. Cost per loan improved to 17 basis points from 18 basis points demonstrating that we maintained operating discipline as volumes moderated initial loan transfers to castle Inc occurred near quarter end and therefore we expect the partnership to begin affecting capital velocity and see economics more visibly in the second half of the year Aspire generated $7 million of gap-net income, up $5 million sequentially. Block volume increased 31% to a record $2.1 billion, while gain on sale margins increased to 101 basis points from 73 basis points as securitization spreads normalized and hedge performance improved relative to the first quarter. this growth was achieved with improving capital efficiency, resulting in a 33% annualized return on capital for the segment. Four of us generated $1 million of gap-net income compared with $3 million loss in the first quarter, which had included approximately $5 million of restructuring charges. excluding acquisition-related expenses, EAD contribution for the segment increased to $3 million. Net revenue rose 8%, reflecting improved term loan execution, while direct operating expense declined meaningfully following the actions taken earlier this year. Net cost to originate was 96 basis points in the second quarter, up from 79 basis points in the first quarter, reflecting modestly lower fee and income relative to expenses, along with 5% lower quarter-over-quarter volume. Redwood Investments generated approximately $1 million of gap net income compared with an $8 million loss in the first quarter. The improvement reflected a more constructive valuation backdrop across portions of the retained portfolio and lower expenses, although the segment continued to experience south fair value pressure in selected bridge and SFR investments. We deployed... 72 million of capital into investments sourced from second quarter securitization. Because much of that deployment occurred late in the quarter, its earnings contribution should be more impactful in the third quarter. During the second quarter, we refinanced a portfolio of retained securities at an all-in cost of funds approximately 150 basis points below the prior financing. With approximately $1.5 billion of secured portfolio debt callable over the next 12 months, we retain a meaningful optionality to reduce funding costs as opportunities arise. Legacy investments generated a $23 million gap loss, which included $12 million of negative fair value changes, primarily on legacy bridge loans inclusive of realized resolution activity. Financing, marketing, and structured sale initiatives DASH discussed are intended to release capital for higher returning uses and reduce the negative carry still embedded in consolidated EAD. Based on the current return differential between legacy and our core segments, we estimate that each 100 million of capital successfully redeployed could improve consolidated EAD ROE by approximately 200 to 400 basis points through reinvestment in our operating platforms or potentially share repurchases at appropriate levels. Operating expenses were down 21% on the quarter, with G&A declining to $38 million from $49 million. Approximately $7 million of the reduction reflected restructuring charges recorded in the first quarter, with the remainder primarily attributable to lower compensation and variable expenses. More importantly, first half adjusted expenses represented 64 basis points of production compared with 88 basis points for the full year 2025, as volume growth continues to outpace expense growth. expect some natural variability in quarterly expenses, but the structural efficiency gains reflect in cost per loan trends and expenses relative to volume remain intact. Recourse debt declined by approximately $150 million to $4.5 billion, while recourse leverage declined modestly to five times. More than half of recourse debt supports mortgage banking inventory that turns rapidly through securitizations, full loan sales, and joint ventures, with loans held for an average of approximately 26 days in June. of the quarter with $192 million of unrestricted cash, approximately $100 million of unencumbered assets, and $3.7 billion of excess warehouse capacity. In the last year, we have renewed or added approximately $4.4 billion of capacity, and the senior notes issued in the quarter further extended our unsecured maturity profile. And with that, I'll turn the call to the.

back to the operator for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Rick Shane with JPMorgan. Please proceed with your question.

Good morning, guys. Can you hear me? Yes. Excellent. Sorry, I couldn't tell if that's fun with me. Do we have a new system over here? Look, and it's 5 in the morning. Look, you guys are making progress in terms of reallocating capital. There's $195 million left. You're talking about getting down to 10% by the end of this quarter. Realistically, how much of that $195 million do you expect to be able to realize? Obviously I think there's some friction as we saw this quarter. And as the business descales, there may be further just operating losses associated with it. So how much of that sort of $195 million melting actually will go into the remainder of the business over the next couple of years?.

Hey Rick and Sash, I can start. So a couple of pieces in your question. We expect to continue trending towards the capital in the legacy investment segment below 5% by the end of the year. That's how we've been guiding the market for a few quarters now. As we said in our prepared remarks, we actually did a transaction this week, which we think pro forma will bring allocation segments, that's definitely progress. As I also mentioned in the prepared remarks, You know, we're currently working on a disposition plan for a large portion of the remaining unsecuritized bridge loans, which we'll hopefully have more to talk about Q3 earnings. So we believe we're still on track, you know, to have that segment below 5% of capital by the end of the year. We've set We're trying to be balanced between disposition speed and execution, but also recognizing just the significant accretion of redeployment. of that capital. As we can elaborate on, we're highly confident that as that capital continues to come out of that segment that we will have a place to go with it immediately. We're still doing eight billion plus volumes in mortgage banking, and we're bringing on new joint ventures. All of which speak to the fact that those are all tailwinds for us to continue to grow market share and mortgage banking. As Brooke articulated, the decisions around continuing to unlock that capital, we have to weigh the right execution, but also the fact that there's 14 to 15 cents a quarter in of negative carry and opportunity cost within that segment that we think is immediately realizable through the retirement of secure debt, like I mentioned, and also the immediate redeployment. So we feel like the opportunities are there.

to redeploy very efficiently as we continue to wind that book down. Got it. And how much so look, you guys executed a transaction at the beginning in the third quarter, as you talked about. presumably when you were valuing the portfolio at the end of the second, you were probably pretty close to that execution so you had a good sense of value. How much of the second quarter mark was was informed by the execution of the third quarter deal. Because again, I'm trying to understand, like we saw capital allocation decline during the quarter, partially a portion of reallocation, but also partially a function of a decline of capital. And so that's what I'm trying to understand here sort of of that 195, how do we think about what flows into the rest of the business going forward?.

Rick, I would say every asset in our legacy book at this point, we're down to a couple handfuls of loans here. So these are really distinct. So the execution I think that we had in the third quarter of last year is helpful, but we definitely were looking at what our resolution strategy was for each of the assets at 630, and that definitely informed our mark.

Yes, the transaction you're, I think, referring to, Rick, was for the remainder of our HEI position, and certainly the mark. at June 30 was informed by that execution, which we've since completed, so that's very much in line. as it relates to the legacy bridge portfolio, um, you know, Brooke is right. Obviously, as we say, every quarter, that book is fair valued. It's, it's marked where we feel, um, like we could execute it, but we're going to be obviously responsive to, um, um, you know, to what the market tells us in terms of disposing of the rest, again, with an eye towards where we can redeploy that capital quickly and, you know, reduction of the secured debt that's influencing some of the carry costs that Brooke articulated.

I've taken a lot of your guys' time. Thank you guys very much. Our next question comes from Doug Harder with BTIG. Please proceed with your question.

Hi, good morning. This is actually Will Nesta on for Doug this morning. I know you mentioned in the release talking about having a more cautious operating posture early in the quarter. And given the move hiring rates early this quarter, I was hoping you could talk about how you're thinking about bettering the operating posture. banking volume sensitivity to rates and kind of with volatility versus higher rates. How you guys are thinking about that right now?.

Yes, we definitely were more cautious. in the second quarter, certainly earlier in the quarter, Rates were very, very volatile and there was a lot of geopolitical uncertainty, as everybody well knows. In June, things felt more stable and we leaned back in. I think we said 40% of our Q2 volume was in the month of June alone. that's pretty good validation that we've got recurring revenue streams from these businesses, really durable volume opportunities. And obviously we're going to be risk-minded as we pursue them, but we saw things pick back up when we decided to lean back in in June, and I think we saw more of the same in July. you know, in the past week or two rates have backed up. Um, obviously we're looking at a four 63 ish 10 year. Um, and, uh, Mortgage rates are close to their one-year high, I suppose. So all of that we need to factor in, but I think by and large we feel pretty good with our position today and our ability to continue to grow volumes. We can't control what's going on in the macro environment, and we need to continue to be responsive to what we're seeing on the ground. But I would say July has been a fairly strong month from a mortgage banking perspective, and we're hoping that we can maintain that momentum in August and September.

Got it, thanks. And then just one more. I know you talked about your technology investment and how that's helped to improve expense efficiency. I think 64 BIPs you guys had mentioned. I was hoping you could talk about where you see that number trending, if you see more potential upside there, progress you can make on that side.

Or is there a particular level that you guys are comfortable with on that? Why don't we – this might be a good opportunity for Robin up to chime in on, you know, a few of the efficiencies we've been focused on. And then perhaps Brooke could follow up with some of the numbers.

Thank you, Chris, and thank you, Doug, for the question. I think the important part to recognize is that Redwood has been very thoughtfully investing in technology, especially AI, over the last eight years. 18 months, I would say, and we've started to see some of that result in compounding value proposition for the company. We've been investing in foundational AI platforms, as Chris mentioned in his prepared remarks. not bolting on AI where we look at incremental or small minor changes in how we do our business. We are rather looking at how we rethink the operating model in itself. And so as we built our platforms, we've kind of reengineered how our operating platforms and business platforms function. conduct business. And so, to that effect, we've not only added efficiencies in terms of where we see waste in the process, but we also have now eliminated parts of the function that no longer make sense to our business. And in doing so, we've been able to... provide value as we grow our businesses and the The more important part to think about is as we scale our business, These platforms are designed to handle volume as we grow and operate at efficiencies that are going to be significantly much larger than where we are today.

Brooke? Yes, the only thing I would add is that the improvement, you know, thus far from 25, as they have been driven by first by just the scalability of our platforms and the amount of market share we've gained. and so volume has certainly helped that. Secondly, our variable expense structure has provided a large benefit here, and we're really starting to see technology start to carry some of its weight here on the improvement. I think the next... 10 to 15 basis points improvement will probably be driven more by tech than continued scalability of our platform. But we imagine this ratio will continue to decline as we efficiently fund our loans via... at some of these technological enhancements that Chris and Avonav and Dashall mentioned today in their prepared remarks.

Great. Thanks for taking my questions. Our next question comes from Marissa Lobo with EBS. Please proceed with your question.

Good morning. Thanks for taking my questions. Just thinking about gain and fail margins, you flagged that banks were competing aggressively in Q2, but Sequoia margins were better than we expected. So how much of that resilience was mixed versus pricing discipline? And as banks lean in further, you know, how should banks.

should we think about how the gain on sale margins evolve? Yes, we observed, and certainly we're still kind of midway through earnings season here, but we definitely observed the large money center banks leaning back in, whether that was front running, the anticipated capital rule changes, we're not certain, certainly 20, 30% sequential gains in volume. you know meaningfully lower margins at least from what was disclosed sort of indicate to us that you saw some some leaning back in it'll be interesting to see what overall industry volumes do for the quarter We did a pretty good job of maintaining our volumes or demonstrating consistency, even while staying risk-minded. And part of staying risk-minded is preserving margins and not chasing volume. So I thought we did a good job of that during the quarter. Our business has really been built to be a holistic partner to banks, and In July, we actually locked a very large bulk sale to a regional bank. We've been mostly buying loans from banks over the past few years, but there could be two-way flows. The real essence of the franchise is the relationship itself and the technology implementations, the LO training, all those things that go into a partnership. So if the banks want to lean in, particularly the regional banks, and they want a capital partner to help them do that, you know, We're very much focused on serving our clients. That said, we don't necessarily see housing activity meaningfully higher and certainly refi activity. had trended down over the past quarter. So, you know, these do look to be kind of market share battles between perhaps the banks and the non-banks from an originator standpoint. And, you know, we'll look when the smoke clears in Q2 earnings season to kind of see where overall volumes landed.

Got it. Thanks for that. Can you provide any color on book value performance quarter to date?.