Redwood Trust, Inc. (RWT) Q2 2025 Earnings Call Transcript

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Overview

The earnings call reflects a mixed sentiment. While there are positive aspects, such as strong returns in Sequoia and optimism about margin expansion, there are concerns about legacy asset losses and management's reluctance to provide specific guidance. The Q&A session highlights uncertainties, particularly around asset sales and market conditions, leading to a neutral outlook. Without a market cap, it's difficult to predict strong reactions, but the balanced positives and negatives suggest limited stock movement.

Key Financial Performance

GAAP net loss $100.2 million or $0.76 per share for the second quarter. The net loss was primarily driven by the decision to accelerate the wind down of the legacy portfolio and the associated fair value changes.

GAAP book value per common share $7.49 at June 30, 2025, compared to $8.39 per share at March 31, 2025. The reduction was due to repositioning charges and fair value adjustments.

Core segment's earnings available for distribution (EAD) $25 million or $0.18 per share, equating to a 14.5% annualized ROE. This is compared to $28 million or $0.20 per share in the first quarter. The decline was due to market volatility and persistently high interest rates.

Mortgage banking revenue Increased 88% compared to the same period last year. This was driven by strong performance in Sequoia and Aspire platforms.

Sequoia Mortgage Banking segment net income $22 million and a 19% annualized ROE. Jumbo loan lock volume grew 15% sequentially to $3.3 billion.

Aspire loan volumes $330 million, nearly triple the prior quarter's level, driven by engagement from a growing network of originators.

CoreVest Mortgage Banking segment net income $6 million and an annualized EAD ROE of 34%. The increase was due to higher volumes, particularly a 20% increase in higher-margin term loan production.

Redwood Investments segment net income $12 million compared to $25 million for the first quarter. The decline was due to more muted asset valuation gains.

Legacy investments loss $104 million for the quarter, primarily driven by incremental negative fair value adjustments and accelerated asset sales and resolutions.

Total recourse financing Increased to $3.3 billion from $2.9 billion at March 31, primarily due to growth in short-term secured borrowings supporting increased jumbo volumes.

Unrestricted cash Approximately $302 million at the end of the quarter.

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Operating Highlights

Sequoia Jumbo Loans: Locked $3.3 billion in jumbo loans in Q2, a 15% increase from Q1, marking the highest quarterly flow since 2021.

Aspire Platform: Lock volume tripled sequentially to $330 million, with July activity surpassing Q2 levels. Expanded mandate includes acquisition of broader loan products and direct origination of home equity investments.

CoreVest Lending: Funded over $500 million in loans in Q2, its highest volume since mid-2022, with strong growth in term loans and smaller balance residential transition loans.

Market Share Expansion: Redwood expanded loan acquisition volumes and market share due to retrenchment by banks in mortgage lending. Reviewing over $55 billion of seasoned bulk jumbo pool opportunities from regional banks.

Bank Partnerships: Increased demand from bank partners for capital-efficient solutions, with active relationships covering 80% of the jumbo origination market.

Legacy Portfolio Wind Down: Accelerated wind down of legacy multifamily bridge loan portfolio and other non-core assets, resulting in $0.79 per share in fair value and repositioning charges.

Capital Reallocation: Harvesting $200-$250 million from legacy investments by year-end 2025 to redeploy into higher-quality, scalable operating platforms.

Share Repurchase: Repurchased 2.4 million shares since June 2025, with authorization increased to $150 million for further buybacks.

Strategic Transition: Transitioning to a scalable and simplified operating model, focusing on high-return mortgage banking platforms.

Housing Market Reform: Positioned to benefit from potential GSE privatization or federal housing policy shifts, aiming to expand the private sector's role in housing finance.

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Risk or Challenges

Legacy Portfolio Wind Down: The decision to accelerate the wind down of the legacy portfolio resulted in significant fair value and repositioning charges, leading to a reduction in GAAP book value per share. Legacy investments, including multifamily bridge loans and third-party securities, have underperformed due to rising interest rates and are a drag on forward earnings.

Market Volatility and Interest Rates: Persistently high interest rates and market volatility have impacted asset valuations and created challenges in achieving target returns, particularly for legacy investments.

Bridge Loan Portfolio Performance: The legacy bridge loan portfolio, primarily originated in 2021 and 2022, has been a material drag on earnings due to higher delinquencies and underperformance caused by changing market conditions and higher interest rates.

Regulatory and Policy Uncertainty: Potential changes in housing market reform or GSE privatization create uncertainty, although the company is positioning itself to benefit from these changes.

Economic and Housing Market Conditions: Subdued housing activity and signs of housing stress in select regions pose challenges to growth and credit risk management.

Leverage and Liquidity: Increased recourse leverage ratio and reliance on short-term secured borrowings could pose risks if market conditions deteriorate further.

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Guidance & Outlook

Capital Reallocation: The company plans to reallocate $200 million to $250 million of capital from legacy investments to higher-earning core platforms by year-end 2025. Long-term, the target is to reduce capital allocation to legacy investments to 0%-5% by the end of 2026.

Stock Repurchase: The company has increased its stock repurchase authorization to $150 million and plans to aggressively repurchase shares until the share price reflects the platform's earnings potential.

Mortgage Banking Growth: The company anticipates continued growth in its mortgage banking platforms, with capital allocation to these platforms increasing by over $200 million in the past year. The platforms have generated GAAP returns exceeding 20% for four consecutive quarters.

Market Opportunities: The company is reviewing over $55 billion of seasoned bulk jumbo pool opportunities from regional banks and expects further opportunities from bank M&A activity and potential GSE privatization.

Aspire Platform Expansion: The Aspire platform is expected to grow significantly in the coming quarters, with July 2025 activity already surpassing Q2 2025 lock volume. The platform's broadened mandate includes expanded loan products and direct origination of home equity investments.

CoreVest Growth: CoreVest funded over $500 million in loans in Q2 2025, its highest volume since mid-2022. The platform is positioned for prudent growth with strong borrower loyalty and elevated demand for its production.

Earnings Growth: The company anticipates consolidated EAD returns to increase to 9%-12% by year-end 2025, enabling dividend coverage and further earnings growth in 2026.

Housing Market Reform: The company is preparing for potential transformative housing market reforms or GSE privatization, which could expand the role of the private sector in housing finance.

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Shareholder Return Plan

Share Repurchase Program: Redwood Trust has recently begun repurchasing its common shares, buying back 2.4 million shares since June 2025. Following the second quarter earnings release, the company plans to become more aggressive in repurchasing shares, supported by an increased stock repurchase authorization to $150 million from the Board of Directors. The company expects to utilize this authorization more extensively as it frees up capital through its strategic portfolio transition. The repurchase program is aimed at addressing the undervaluation of the company's share price and is supported by the potential for strong mortgage banking returns at increased scale.

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Key Q&A

Q:When we think about that 9% to 12% EAD for 2026, should we calculate that based on the $7.49 of book value? Or should we strip out the 20% of the capital that's still going to be in the legacy piece at the end of the year?

A:That's a blended number inclusive of the legacy portfolio. So you would calculate on our full book value.

Q:In terms of the home equity investments that were moved into the legacy piece, can you talk about that portfolio and what changed?

A:The only thing that changed is speeding up the evolution of our operating model. The HEI book on balance sheet had appreciated over the years, and the decision was made to recover that capital and deploy it into operating platforms. There are trailing off of HPA in many sectors, and the process is underway with more updates expected in Q3.

Q:Do the losses this quarter incorporate what you expect to take as these loans are being disposed? Are you comfortable with the marks on these legacy assets?

A:Yes, the marks reflect actionable levels. The company leaned in on the marks to reflect conviction in transitioning the operating model. Challenges remain with some assets, but the focus is on recovering $250 million and redeploying it quickly based on opportunities.

Q:What types of prices versus the prior marks do you expect to sell the bridge loans and legacy portfolio at? Who are the potential buyers, and how has the appetite been?

A:The $200 million to $250 million includes the overall legacy investments portfolio. The marks reflect actionable levels, and liquidity is varied. Buyers include those interested in portfolios or individual notes. The focus is on expeditiously unlocking capital for redeployment into mortgage banking opportunities and share buybacks.

Q:Can you discuss the drivers behind the Sequoia gain on sale margin and whether it could remain above the 75 to 100 basis point target in the near term?

A:The company has been able to generate strong returns in Sequoia, with optimism that margins could remain elevated. Pricing is tight, and efficiencies from regimented issuance have driven margins. However, the company is hesitant to forecast above the long-term average.

Q:Can you help compartmentalize the $0.79 loss? How much of it is future cash flow or losses recognized over a longer time, and how much is due to disposing under-earning assets?

A:The loss is largely driven by older vintage multifamily and early '21-'22 vintage bridge loans. A portion is due to fundamentals and HEI. Marks reflect active resolution strategies, and the decision to move on from legacy investments was deemed the right one for the company.

Q:What is the expected payback period for the capital redeployment, and how does it justify the upfront hit?

A:The company plans an aggressive buyback posture, with capital redeployment into operating platforms and share buybacks being instantly accretive. The payback period is expected to be very short, with some resolutions seen inside a one-quarter period.

Q:Under what scenarios could margins in the jumbo channel expand, and do originators have the capacity to handle increased demand when rates fall?

A:Margins could expand by bolting on bulk pools and opportunistic pools from banks. The market has capacity due to slow activity, and wallet share has been growing. Seasoned portfolios and discount pools also present opportunities for margin expansion.

Q:What is the feedback or outlook for the bridge portfolio in light of tariffs and higher input costs? Could a Fed rate cut be a catalyst for refinancing opportunities or mark-to-market upside?

A:A Fed rate cut and recompression in cap rates could help. Input costs like lumber have eased, and sponsors' ROEs remain healthy. A reduction in mortgage rates could increase business velocity and provide ancillary benefits.

Q:What is the sensitivity to a Fed rate cut in terms of NII?

A:There is modest sensitivity, with benefits expected from fixed-rate Sequoia pipelines and floating liabilities. The company has been locking more ARMs, which could also benefit from rate cuts.

Q:How does the company plan to maximize the opportunity in the prime jumbo segment when rates fall and refi activity picks up?

A:The company is focused on market share and wallet share growth. If rates fall, the company expects to preserve its share and accelerate business. Strategies include closed-end seconds and other ways to bank the consumer.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the exact prices expected for the sale of bridge loans and legacy portfolios, as well as the specific payback period for capital redeployment. Additionally, they were hesitant to forecast above the long-term average for Sequoia margins, citing market uncertainties.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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