RWT - NYSE

Good afternoon, and welcome to the Redwood Trust First Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. I'll now turn the call over to Kait Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's first quarter 2023 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 that 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 might 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 first quarter Redwood Review, which is also available on our website redwoodtrust.com. Also note that the content of today's conference call contain time sensitive information that are 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'll now turn the call over to Chris for opening remarks.

Thank you, Kait. Good afternoon, everyone. I appreciate you joining us today for Redwood's first quarter earnings call. I'll begin with some introductory remarks about our first quarter performance and the market opportunities in front of us before handing the call over to Dash and Brooke to discuss our operating and financial results. Overall, it was a very productive first quarter for Redwood. In light of continued stress in the mortgage sector, we were pleased to end the quarter with a positive economic return for shareholders. Our GAAP earnings were $0.02 per diluted share for the first quarter, and our non-GAAP earnings available for distribution were $0.11 per share. Our GAAP book value per share was $9.40 at March 31, down about 2% quarter-over-quarter. Since March 31, we continue to protect book value and estimate our current book value is flat from quarter end. The notable improvement in first quarter earnings was largely driven by healthier mortgage banking activities, including almost $1 billion in whole loan distributions across our Residential and Business Purpose Lending platforms. These dispositions freed up meaningful capital and left us with relatively light inventories, particularly in Residential Mortgage Banking, where we've chosen in recent quarters to be very conservative with our capital and market positioning. This is in light of the rapidly rising rates and subsequent volatility the market has endured over the past year. In step of the reduced capital allocation, we took further steps in the first quarter to reduce costs, allowing our operating platforms to run more efficiently going forward. With continued low leverage, strong financing and robust liquidity, our balance sheet today remains strong and will allow us to be flexible and capitalized in market opportunities. As a result of our actions in the first quarter, we boosted our cash and cash equivalents by approximately 60% from year-end 2022. We have also made significant progress in developing private capital partnerships that we expect to greatly enhance our liquidity and production opportunities going forward. Away from Redwood's results in the first quarter, conditions within the broader financial sector warrant attention, particularly as these conditions lend themselves to investing opportunities. As you know, extreme disruption and dislocation in the banking sector has dominated financial headlines since March. A reckoning is now underway amongst the regional banks, something we expect to reset the competitive landscape in mortgage finance in the coming quarters. This will benefit both our Residential and Business Purpose Lending businesses, as well as create third-party opportunities for portfolio investing. As a non-bank mortgage aggregator, our residential business has operated since the mid-1990s on the belief that 30-year fixed rate mortgages should be match funded through securitization or other prudent asset liability strategies. As a result of extremely accommodative Fed policy in recent years, some banks chose to effectively ignore the interest rate risks associated with owning mortgage loans by funding them with deposits, often unhedged. The resulting asset liability mismatch for banks which had not been seen since the S&L crisis, helped to fuel below-market mortgage rates when the Fed started hiking, admittedly proved difficult to replicate in the private securitization markets. This created a headwind for non-bank constituents was a key rationale behind our conservative posture in Residential Mortgage Banking in recent quarters. But the music has now stopped for many depositories. With the dust far from settled, we can offer a few early takeaways through the spectrum of efficient markets. One, bank cost of capital is rising. Two, liquidity remains at a premium. And three, reliable counterparties such as Redwood are positioned to emerge as the leading mortgage finance partners to banks. Over time, we expect the market to function more rationally as the head prior to the extremely accommodated Fed easing cycle we experienced with the COVID pandemic. Our residential platform has competed as an aggregator that has served a deep bench of investors who reliably buy our RMBS bonds and whole loans. While nothing changes overnight, we are seeing early, but definitive signs of a fundamental shift in bank asset allocations that we believe will anchor our go forward residential conduit strategy. We expect an increased appetite by certain banks to sell newly originated loans, which would otherwise be held in their portfolios. This may also lead to more strategic dispositions that present us with scalable investment opportunities. As always, the reliable and user-friendly relationships we have developed over time will be valuable as this channel evolves. In addition, so long as credit risk can be priced appropriately, liquidity concerns for regional banks are likely a tailwind for our BPL platform and provide an opportunity for us to diligently gain market share as we customize products to serve our best customers and identify areas where our liquidity will be at the highest premium in coming months. As changes unfold in how mortgage debt is financed, we also remain focused on the evolving landscape in underlying homeowner equity. Over the last several years, we have steadily grown our investment in HEIs or home equity investment options, which allow consumers to tap into this store of value without adding to their monthly debt burden. With first mortgage rates still elevated and access to second-lien financing largely constrained to the best credits, consumer demand for HEI remains very, very strong. In our minds, this marketplace as currently situated is not fully equipped to meet the moment, putting Redwood in a unique position to truly institutionalize the product to better align consumer and investors. Looking ahead, we see a number of compelling opportunities in front of us that support our long-term vision. Our strategic positioning across both of our operating platforms as well as our investment portfolio will likely evolve as we progress through 2023 due to the shift in the markets that began in March. We believe that the diversification of our model, the ability to rotate nimbly between our role as an issuer and an investor remains a competitive advantage, as does our experience navigating complex market conditions over many cycles. With that, I'll now turn the call over to Dash.

Thank you, Chris. I'll focus my remarks on the performance across our three segments before handing it over to Brooke to cover our financial results in more detail. To start, it is worth noting that our investment portfolio now represents just under 90% of our allocated capital up from approximately 75% two years ago. This reflects an increased focus on attractively priced direct portfolio investments and a deliberate slowing of locks in the residential business given overall market conditions. During the first quarter, we remained judicious in deployment, putting approximately $60 million of capital to work and organically created in third-party assets with target return profiles in the mid-teens. As Chris emphasized, we believe that the opportunity set for continued deployment is compelling and our teams are actively monitoring both the primary and secondary markets for opportunities where we have a competitive advantage, including in securities, more senior in the capital structure and with a shorter duration than we typically analyze for purchase. This relative value began to reemerge in March when events with the regional banks pressured credit spreads wider for more liquid instruments driven by concerns around increased supply of MBS from FDIC auctions or other bank selling. Our existing portfolio performed well despite this broader price action. Underlying credit trends and valuations in the book were stable in the first quarter. We saw healthy cash flows and delinquency rates remained largely unchanged from the fourth quarter of 2022. Credit performance within our residential securities, namely those backed by jumbo and re-performing loans has remained particularly strong with delinquencies in our Sequoia portfolio now below 1% and a notable decrease in 90-plus day delinquencies within our larger RPL holdings. Fundamental performance in these portfolios continues to outpace originally modeled expectations. Given these trends, it is a worthwhile reminder that 70% of our net portfolio discount, which at quarter end totaled $460 million or $4.10 per share sits in our jumbo and re-performing loan investments. The average LTV of loans underlying our residential securities portfolio adjusted for estimated home price appreciation realized to date, stood in the low to mid 40s at March 31, 2023, demonstrating the amount of equity that sits within these investments. Overall, delinquencies in our BPL portfolio also remain low, both versus historical performance and our initial underwriting. But given financial stresses in the market, activity for our BPL asset management team has picked up. Consistent with overall market trends, we are seeing construction timelines increase for certain borrowers and are closely following the recent high-profile workouts in the multifamily space. Trends in the commercial real estate sector more broadly underscore the importance of sponsor quality and active asset management in our BPL portfolio, and the feedback loop from our team remains critical in building our go-forward pipeline and focusing on sponsors with the experience and financial wherewithal to see their projects through. Our best production in the first quarter remained largely consistent with recent trends, as low housing inventory and constrained affordability continue to create a natural support for rental demand. We funded $438 million of BPL loans in the first quarter, roughly flat to the fourth quarter, with a similar production mix of 40% term and 60% bridge. Looking ahead, we are positioned to capture market share intelligently as certain competitors react to lower overall volume with more aggressive lending terms and as other step back from the market in light of recent regional bank disruptions. Key wins provided early momentum in the first quarter for our BPL platform, including a large loan sale in mid-January to a repeat buyer. We also continue to sell the majority of our single asset bridge loans to third parties with the remainder, primarily included in bridge loan securitizations to replenish repayments. As loan sales become a more meaningful part of our distribution strategy within BPL, we have seen an uptick in investor interest in these loans that we view as an important catalyst to further growth. As the quarter played out, market turbulence picked up and sponsor sentiment became more selective. That said, we are seeing certain top borrowers begin to put fresh capital into traditional single family renovation strategies in markets that have already seen a leg down in price largely on the West Coast. With others continuing to break ground on longer term build for rent projects, including in southeast markets where rental demand remains relatively strong. While multifamily has seen relatively muted activity other than refinance activity at stabilization, it remains to be seen how the recent stress in the office sector, which in our view hasn't yet hit a crescendo, will influence multifamily as a fellow commercial asset class. Our residential business entered 2023 with just over $600 million of loan inventory on our balance sheet, the vast majority of which was distributed through the two Sequoia securitizations we completed during the quarter with net loan exposure at March 31, 2023 of just over $70 million the lowest since mid-2020. We are well positioned to lean into the likely recutting of the mortgage originations landscape, which we expect to include an evolution of our flow acquisition business and renewed opportunities to source portfolios in bulk. Chris covered in detail the opportunity with the regional bank fallout, but I would add that success there will require more than running the traditional loan pricing models. We are likely witnessing a fundamental shift in how 30-year fixed rate mortgages are funded, whether they be non-agency whole loans, or more liquid agency MBS. This will require creativity in how loans are aggregated and prepped for sale or securitization, and an evolution in the optimal pools of permanent capital that fund home ownership. While it will take time for the market to reach its new equilibrium, this all reached through well for a seasoned operator like ourselves whose key competitive advantage is the ability to efficiently connect various parts of the housing finance market. I will now turn the call over to Brooke to discuss our financial results.

Thank you, Dash. We reported GAAP net income available to common stockholders of $3 million or $0.02 per diluted share compared to negative $0.40 in the fourth quarter of 2022. Book value per share for the first quarter was $9.40 compared to $9.55 in the fourth quarter, reflecting a quarterly economic return on common equity of approximately 1%. The primary drivers of book value during the first quarter were a positive $0.07 from basic earnings per share and unrealized gains unavailable for sale securities, which reflected credit spread stability, and therefore, essentially flat investment fair value changes for our portfolio during the quarter and our $0.23 dividend per share. Importantly, a 100% of our earning assets are mark-to-market on a quarterly basis, and therefore substantially all unrealized gains and losses are reflected in our book value. Earnings available for distribution or EAD was $0.11 per basic common share as compared to negative $0.11 per share in the fourth quarter, resulting in an EAD return on common equity of 5%. The change was driven by a $0.29 per share quarter-over-quarter increase in mortgage banking income, reflecting improved distribution execution. Overall, GAAP net interest income was stable versus the fourth quarter. The nominal reduction was primarily from lower net interest income from mortgage banking due to lighter average balances and higher financing costs from the increase in SOFR. This was nearly offset by lower corporate debt expense and a higher yield on corporate cash. Importantly, economic net interest income continued its recent momentum, increasing $1 million from the fourth quarter levels, primarily due to higher income from bridge investments. Unrestricted cash and cash equivalents of $404 million at March 31 exceeded our marginable debt and were held in short-term treasuries, money market funds and accounts at global money center banks. While our liquidity position remains robust, the portion of our unallocated capital, which we categorize as corporate, grew by over $200 million given the cash we raised on the quarter and other capital we continue to hold as risk capital or for contingent liquidity needs. Optimization of this capital is inherent in our outlook for EAD growth. Recourse leverage declined on the quarter from 2.8x to 2.3x as we sold or securitized almost $1 billion of loans previously financed with recourse warehouse lines. We repurchased $33 million of corporate debt and raised $70 million in gross proceeds from our inaugural preferred equity offering. In fact, since the beginning of the fourth quarter, we have repurchased an aggregate $82 million of our convertible debt across our 2023 and 2025 maturities resulting in $2.4 million of realized gains. We successfully renewed two maturing loan warehouse financing facilities with key counterparties and established a new facility to finance previously unencumbered Sequoia MSR investments. We further fortified our financing position during the quarter by consolidating exposure with our strongest counterparties and extinguishing underutilized facilities, specifically related to our residential business where we have held inventory levels materially below our historical levels. With these actions, we retain significant excess capacity, approximately $3.5 billion to support the continued growth of our businesses. We continue to thoroughly analyze indirect counterparty risks given the recent banking crisis. General and administrative or G&A expenses decreased from the fourth quarter as a function of recent personnel and non-compensation cost reductions firm-wide. G&A expenses for the first quarter of 2023 included approximately $1 million of severance and related expenses. Lastly, we wanted to provide perspective on our outlook for EAD and our quarterly dividend. Over the past year, we have continued to reposition our capital and strategic focus towards investing activities relative to aggregation activities. Our in-place investment portfolio carried an expected 17% forward loss adjusted yield as of March 31, and we continue to see increased deployment opportunities going forward. While 2023 started with positive momentum, the near-term impact from the banking crisis that unfolded in late March has moderated the near-term outlook of our operating businesses, and thus we anticipate EAD to remain below our current dividend levels over the next few quarters. Subject to determination by our board, we expect to lower our quarterly dividends in the second quarter in line with recent changes made in the broader mortgage rate sector this year. A major factor behind this change is the prospect of tremendous capital usage opportunities as a result of stresses at regional banks. Several banks have recently signaled to us a renewed need for an established partner to acquire their residential loans. Our businesses should therefore be positioned accordingly. And with that, operator, we will now open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. On the last comment you made Brooke about the opportunity from regional banks. Can you just talk about is that relatively newer production that would be higher coupon? Is that kind of older, lower coupon, and how do you think about the relative attractiveness of those loans?

Hey, Doug, it's Chris. I'll take a shot at that. We're very constructive right now on the opportunity to work with regional banks. I'm sure that's generated a lot of discussion, but we have a long history of working with banks. Our conduit historically was anchored to banks. In recent years with all of the Fed loosening of monetary policy, we've seen what's happened with banks sticking more non-agency loans and portfolio. Obviously we expect that to change and we can go into that. We started to have some early discussions which are now underway, but I think the big opportunity for us is to go forward new production. We think that sort of re-anchoring our conduit to banks as opposed to independent mortgage banks. Having a good balance, but more banks is a big opportunity for us. So over the next few quarters, we're going to work towards that. I do expect portfolio opportunities to emerge, but as you know, most of what's sitting on bank balance sheets right now is lower coupon collateral, which is obviously – its fair value is at a significant discount. So to the extent that collateral comes out, maybe it'll take a rally in the tenure to do so. But we would certainly be in a position to portfolio season mortgages as well and securitize them. So I think it's both, but I think what we're most focused on now is the go-forward.

And you mentioned in your prepared remarks that bank cost to capital increasing, I guess, where do you see current bank rates on jumbo versus kind of what you see as this securitization or loan sale exit. Are we at kind of a point of convergence yet or is the bank yield still below that?

Well, there's one or two banks that stick out from the pack. But I would say for the rest there's been a significant convergence towards what I would call a market execution. I think securitization today and non-agency is probably high-6s, low-7 mortgage rate as far as what clears the market. I think banks are converging towards that and we all know the story of the banks today, which is the cost of deposits are going up. If you have zero cost capital, you can price mortgages pretty low, and that's what we had seen. One of the reasons why we have pulled back or gotten a lot more conservative on the residential side with our conduit. Now we're seeing that change and I think the big picture is that 30-year fixed rate mortgages really belong with companies like Redwood. We can talk about the reasons, but I think the banks are realizing that as well. I think regulators are realizing it. And as that transitions that should be very good for our volumes, but it's not going to be a light switch, it's not going to be an overnight change. It's something that we expect to work towards over the coming quarters.

Great. Thank you, Chris.

Your next question comes from Eric Hagen with BTIG. Please go ahead.

Hey. Thanks. Hope all is going well. Can you say what kind of dividend yield or payout on book value you see as a sustainable level based on the dividend commentary you gave towards the end there? Thanks.

Yes. We think the business is in somewhat of a state of transition based on the significant changes that we're all seeing play out, particularly with the banks. I think where Brooke was going with her commentary was sort of realigning our dividend in step with what you've seen across the sector, which is probably in the 20% to 30% range as far as a decline from current levels. As you know, we have no issues with paying the dividend. We've got significant cash. It's just getting it to a level that we think is sort of balanced. And obviously, as the business starts to transition, that will hopefully start going higher. But I think our thinking, as far as where the Board will be to declare the dividend, likely in June is probably in the neighborhood of 20% to 30% lower than it is today.

Yes. Got it. That's helpful. Thanks. My second question here is about the relationship you see between your leverage and the valuation and your unsecured debt, your ability to access that market more generally. Like how do you think about your leverage from that standpoint and whether there's like a threshold you feel like you're targeting to protect the valuation in the unsecured portfolio?

Hi, Eric. Yes, I can start with that. I mean, I think in general the reduction that we saw in the first quarter in our recourse leverage was attributable to the significant amount of dispositions that we were able to successfully clear. I think when we last tapped the unsecured market on the preferred side, I think we saw a bit of a capital structure arbitrage there. And we certainly welcome raising additional perpetual equity capital in the context of those yields that we last saw. But the last time that we accessed the convertible market, I would say that, we really were seeing secured financing alternatives and unsecured kind of on top of one another and that has reversed the course a bit. We are seeing healthier secured financing. We freed up about $140 million of cash just in January at an effective cost of capital in the kind of mid-5 to 6 area that was at or above our mark, so accretive to book. So I think in terms of addressing the 2023, we already have the cash that's been invested in short dated treasuries to do so. And when we think about our 2024s with $400 million of cash on hand and only $275 million of unsecured debt maturing through 2024, we have – what we view to be a significant amount of cash on hand plus the $314 million of unencumbered assets we have that could raise another conservatively a $100 million to address that 2024s as well. But that means that our 2024s are yielding around 24%. We've been buying back other longer dated maturities just on an kind of a more appealing risk adjusted basis relative to other investment portfolio opportunities. So right now, we're fairly focused. I think we have – in my commentary, I said we have a lot of capital optimization to do, just to make sure that we're focused on our dividend and continuing to focus on them for shareholders.

Yes. Got it. That's helpful. Thank you, guys.

Next question, Steven Laws with Raymond James. Please go ahead.

Hi. Good afternoon. Brooke to follow-up on the financial questions, can you maybe talk about net interest income, basically flat sequentially? If we trough, do you expect to grind any lower from here? Kind of how should we think about the NII as we move through the middle of the year?

Yes. Steven, I think we said last quarter that we saw Q4 is a fairly good run rate. So obviously, we had a very, very modest reduction from the fourth quarter about 400,000. We remained really focused on economic net interest income too, which was $1 million higher than GAAP. Sorry, it was up $1 million over the fourth quarter and almost $8 million higher than GAAP net interest income. That's both a function of discount accretion and other kind of effective interest from assets that's not captured in our GAAP net interest income. And mostly, I think the upside in NIM from here is, is in and around the capital deployment opportunities that we're seeing to continue to grow the investment portfolio, which was sitting at a 17% forward yield at the end of the quarter.

Great. And then Chris or Dash, I forget which one of you mentioned in your prepared remarks, but talked about, I think pretty low inventory of current mortgages, I think that was held-for-sale for jumbo. Can you talk about the pipeline on the BPL and very strong contribution there for mortgage banking in Q1 and how we should think about volume margins or maybe just net contribution from that segment here in the next couple of quarters?

Sure. Steven, it’s Dash. I can take that. Yes, it was a solid volume quarter for BPL obviously pretty consistent with the fourth quarter. And we talked in Q4 about what we viewed as the opportunity to sort of build upon our volumes in 2022. We still see notwithstanding the flat volumes quarter-over-quarter, some real potential upside later in the year. One of the things we pay particular attention to is you can appreciate is just the relationship between the term and the bridge pipeline. We were really pleased to see term volumes up about 30% quarter-on-quarter. They're an increasing percentage of our production mix over the past few quarters, and we would expect that to continue for a few reasons. Number one, benchmark rates being well off their highs from a couple of quarters ago. Those coupons in the high-6s, maybe low-7s are working a lot better than they were with the tenure over 4%. We are starting to see more momentum out of our bridge portfolio in terms of feeding the term business, which is always how that business – those businesses were meant to work together as you know. So we're pleased with that. With bridge, the overall funnel is smaller than it was a few quarters ago. As you know, just overall activity, particularly in the smaller balance, multi space or multi in general is certainly down. But we are seeing new and interesting opportunities in bridge, obviously what's going on with the builders and pivoting to for rent away from – for sale strategies, that's a big opportunity for us in terms of financing some of those folks directly or folks that they sell to. And obviously just the depth of our relationships, the high repeat customer business well over 50%, those are all helpful. But with bridge, it really comes down to picking our spots with an overall pie that's been – that's smaller than it has been over the past couple of years.

Great. Appreciate the comments this evening. Thank you.

Next question, Bose George with KBW. Please go ahead.

Hey, everyone. Good afternoon. Actually just wanted to follow-up on the BPL sort of the size of that market. Actually in the Redwood Review in the slides, I mean, it looked like quarter-over-quarter the size of the overall market, you guys increased it. Is that right? And just curious what was driving that?

We thought it's pretty consistent. We obviously with our suite of products, we serve customers sort of across the spectrum, folks that own one or two stabilize single-family homes all the way to folks that are owning and operating larger multifamily properties. So I think we see the overall pie as about the same. We probably added in a couple of additional facets of the market a few quarters ago, specifically multifamily. So that may be what you're seeing Bose as we've expanded some of the multifamily products with some partnerships we've built. So that maybe the increase there that you're seeing. But overall, particularly as Chris said, with what's going on with the regional banks, we view that as a big tailwind with BPL too and that's definitely going be on the call in the next few quarters.

Okay. Great. Thanks. And then actually just going back to the dividend and EAD, can you remind me the discount accretion that does flow through EAD?

That's correct.

That's right. Okay. Great. Thanks.

Next question, Steve Delaney with JMP Securities. Please go ahead.

Hello, there. Can you hear me?

Yes.

Hello. Okay, great. Having to come in through the cellphone today, apologize. Look, shareholder letter was really insightful. This quarter you had – certainly had a lot to talk about with what's going on. Dash, I think you mentioned that you sort of tightened up your borrowing relationships a little bit. And should we read into that, that maybe you've moved away from regional bank relationships there and trying to focus primarily on the global New York banks. Maybe just a little color about the change you did make in your financing. And also can you comment one way or another on whether you have – or had – whether you have any ongoing borrowing relationships with FRC? Thanks.

Hi Steve, it’s Brooke. I can take this one. Yes, I said in prepared remarks that we consolidated a bunch of our financing exposure with our strongest counterparties. A lot of what we extinguished in terms of capacity was frankly just underutilized facilities given where resi volumes have trended the last few quarters. But we are certainly focused. We put out a pie chart in our Redwood Review too, just around having our largest financing exposure with the largest money center banks. We are all learning lessons from the evolving banking crisis. But I think for us it's very important we're continuing to do evolving counterparty risk management as every news headline unfolds. But yes, we feel really good about where our financing is focused today and the structure of those financing agreements.

Thanks, Brooke.

And we do not have any borrowings with FRC, answer to your question on that.

Thank you, Dash. Well, Dash, the next one was coming to you anyway. The conversation about strategic dispositions rather than just sort of on the run – just building a pipeline on the run and putting more capital work faster. We know that BlackRock has the mandate on MBS sales from SIVB and SBNY. Do you know if there are any residential whole loans in those portfolios? And has the FDIC been communicating with the Street about potential whole loan sales from those portfolios?

Hey, Steve. Well, the answer is yes. There are whole loans. There is commercial loans. The challenge continues to be the bid offer. These banks – a lot of these – this collateral is held at a significant loss. And so I think the instructions to BlackRock, obviously I don't know them. But it seems like it's – there's no mad dash to liquidate the inventory. And so I think they're kind of working the pipeline, so to speak. So right now, certainly there is been some lists that have come out. I think things have traded pretty well. Things that have traded, have traded pretty well, but it's mostly AAA RMBS, some of the easier more liquid collateral. The whole loans, I think, I haven't seen much in the way of whole loan distributions, so that's something we're still waiting for.

Waiting to see. And do you think that with what's going on – the duration problem that you touched on in the shareholder letter. I lived through this S&L crisis over 30 years ago, and you would've thought that asset liability management would've evolved. But it doesn't appear that it really did. Do you think that there could be regulatory pressure on the banks broadly? Going forward, as a result of this, where they're just not going to be allowed to hold that those type of 30-year fixed rate loans and a significant percentage of their asset mix?

Yes. I mean whether they're allowed or not, just to rewind the clock, if you go back to the great financial crisis and how the banks repositioned. They more or less got out of mortgage credit, no more subprime. The Ginnie business was effectively seated to the independent mortgage banks. And then what they did effectively over the years was they started accumulating home loans. And there was a few reasons for that. One was the Basel treatment. And two, which has turned out to be a really big one, is they were able to hold them at cost and not have to mark them to market. A big difference with us is, we've got – in our balance sheet, I think we have $63 million of unrealized losses on a $13 billion balance sheet. So everything we do is mark-to-market. It goes through the P&L more or less, and kind of what you see is what you get. So I think that just given the severity of these unrealized losses, similarly to how the banks repositioned after the great financial crisis, which was a credit crisis, I think here, the prospect of adding more 30-year fixed rate exposure, just doesn't make a lot of sense. And one of the reasons why the Redwood's of the world were created is, is we're just a better holder of that risk. We match fund through securitization. When you look at our balance sheet, we're not funded with deposits obviously. And so to me it's – we're a very logical partner for the banks. We have been for many years. And I do expect there to be a change. I just don't see much upside for banks wanting to add to this risk position at this point.

Very good. Thank you. And appreciate the comments from all three of you. Thank you.

Thanks, Steve.

Next question, Henry Coffey with Wedbush Securities. Please go ahead.

Yes. Greetings, I always enjoyed going after Steve. Because I'm sort of concerned about the same thing and it's really not the GFC you need to go back to. But like Steve said, it's going back to the 90s and seeing this. Are there any – I really have two questions. Are there any factors out there that would create more urgency with the banks? There's a very impolite phrase we use. But banks have a tremendous capacity to hold on to underperforming assets. But is there anything a foot that would put them in a position to say, no, you have to sell these at market, you have to recognize the losses and you have to move on and get on with life because there's also a drag to earnings that it's gone last several years for some of these institutions?

Yes. I mean, you know to answer that as best I can, there could be regulatory changes that push banks towards liquidating collateral. My sense is that's probably not in the interest of the system at this point. I think that when you look at the balance sheets of the small banks, the big banks, the regional banks, any of them that were sticking mortgage loans in portfolio fixed rate long duration product is dealing with the same issue to varying degrees and some greater than others, and we know who those are. But I think the – as far as what might incentivize them to liquidate. As I mentioned, rally in the tenure, shrinking some of those unrealized losses to the point where liquidating becomes more palatable is one thing. I don't foresee a major shift where the sector kind of purges the risk because I think candidly speaking, a lot of these banks, if you mark-to-market the balance sheet are probably underwater. So to me the real answer is kind of over a period of time to differing circumstances as those losses perhaps shrink, the incentive to move on might go up.

Yes. That's what we saw in the early 80s. They just sort of dragged it out forever. Is it fair to say though, based on some of your comments around this subject that the mortgage side, the residential mortgage side, the jumbo mortgage side will become a larger piece of the business over the next sort of six to 18 months, say, and predominate more than the business purpose lending? Or do you think it's a more of a balanced equation?

I think we like it to be a balance, but we expect to have the capital to grow each sort of independently as significantly as we can. I definitely think these changes cyclically could be very, very good for Redwood. As I mentioned, we've been at this for 29 years and buying and distributing jumbo mortgage credit risk among other products is a hallmark of what we do. I also think to your earlier point, the NIM story and the NIM drag is going to be big for banks as well. And so one nice thing about Redwood is we're very, very focused on distributing risk. We completed two securitizations – residential securitizations this quarter. And we basically have cleared all of our inventory or significantly cleared it. So basically what that means is that the loans that we're accumulating today are on the run current mortgage rates. We're not sitting with 3%, 4%, 4.5%. Really it's – what that does is it allows us to be more aggressive and not having to worry about clearing out some of that risk. So we're actually in a great spot, a healthy spot to grow. And I do think these changes, they won't happen overnight. But I expect this to be very positive for our business.

I think on multiple fronts, you convinced us that you have ample liquidity and capital resources and we've certainly seen it in the buybacks and the cash build, et cetera, et cetera. Is there any sentiment in the Board to take a more, say a deeper dividend cut, so book value could continue to grow? I know you said you probably don't think you'll be earning the dividend over the next few quarters. But is there a thought process – I mean, we know you have the capital, we know you have the cash, but is there a thought process to go much deeper into the cut and get book value growing again?

It's something we're really trying to triangulate around the right answer. EAD is one piece of it. But as you have alluded, we think we're going to have great uses for the capital, accretive uses. And so I think right now, we've been envisioning something in that 20% to 30% cut range. Again, that's sort of factored into what we've seen in the sector and knowing that there's not a precise level that just given some of the volatility in the market and some of the transition that's underway in our businesses. But to me, we're trying to triangulate around all of those factors and certainly growing book is, is the goal. So that will be…

No. I mean, it's a tough call. I wouldn't want to have to be. I don't think I could make it do a good job of pulling it off. But thank you very much.

Thank you.

Next question, Kevin Barker with Piper Sandler. Please go ahead.

Hi. This is Brad Capuzzi on for Kevin Barker. Just a quick question for me. You mentioned on the prior call you expect run rate G&A to be down 5% to 10% from 2022 levels. We're seeing the cost reductions coming through. Can we just get an update on your expectations for how expenses will progress for the remainder of the year? Thanks.

Thanks for the question. Yes, I think we're still on track. The guidance that we gave last quarter was really that we would be kind of – our base G&A would be around $120 million to $130 million for the quarter. We still had some modest level of severance and related transition items in this first quarter's number, which we should have for another quarter here as well. The biggest beta that we'll have around that guidance is really where we end up on variable expenses. Those were down 60% last year versus 2021, but most of those are really tied to volume in performance-related comp both on the cash side and in our equity comp. So – but those would fluctuate with financial results. So I think the guidance that we put out last quarter is best case thinking still.

Thank you. Appreciate it. That's all for me.