Good afternoon, and welcome to the Redwood Trust Inc., Fourth Quarter 2018 Financial Results Conference Call. During management’s presentation your line will be in a listen-only mode. At the conclusion of management’s remarks, there will be question-and-answer session.

I will provide you with instructions to enter the Q&A queue after management’s comments. I'll now turn the call over to Lisa Hartman, Redwood Senior Vice President, and Head of Investor Relations for opening remarks and introduction. Please go ahead. .

Thanks Didi. Hello, everyone. Thank you for participating in Redwood's fourth quarter 2018 financial results call. Here with me today are Chris Abate, Redwood's Chief Executive Officer; Dash Robinson, Redwood's President and Collin Cochrane, Redwood's Chief Financial Officer.

Before we begin, I wanted to remind you that certain statements made during management's presentation with respect to future financial or business performance may constitute forward-looking statements.

Forward-looking statements are based upon 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 could cause actual results to differ from those that may be expressed in forward-looking statements.

On this call, we will 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.

They are included to aid investors in further understanding the company's performance and to provide insight into one of the ways that management analyzes Redwood's performance.

Reconciliation between GAAP and non-GAAP financial measures is provided in both our fourth quarter earnings press release and Redwood Review available on the company’s website www.Redwoodtrust.com. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today, February 14, 2019.

The company does not intend and undertakes no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris for opening remarks..

Thank you, Lisa. And good afternoon, everybody. In fourth quarter of 2018, kept a transformational year for Redwood Trust. We lay the ground work for the strategic initiative that we outlined at the beginning of the year. And we began the early phases of executing on our vision.

The secular shifts we've observed in housing continue to influence consumer behavior and we believe we are well positioned for the associated opportunities that lie ahead. We are focused on maximizing our strategic value to the housing market by expanding our footprint in areas that optimize core competencies in housing credit.

Competencies that include product development and structuring expertise, as well as speed and reliability for our partners. We view this is a path to sustainable and profitable growth for our shareholders. The end of 2018 brought heightened levels of market volatility adversely impacting valuation across both equity and credit markets.

As a result, our book value declined approximately 3% in the fourth quarter, consistent with the estimated range we previously disclosed last month. The decline was driven largely by marks in our securities book and overall underperformance of mortgages.

The impact to spread widening was cushioned by our modest leverage and by the overall resiliency of our credit focus portfolio, which remains well supported due to strong performance of underlying borrowers.

On the positive side, price volatility helps to reinforce the importance of cash flow durability which remains a continued strength of our investment portfolio. As many of you are aware, markets have regained their footing thus far in 2019 and year-to-date we estimate that we've recovered nearly half of last quarter's book value decline.

Our fourth quarter earnings was significantly impacted by market adjustments, we are very pleased with the positive trends of our core earnings per share, a great reflection of how our business has been operating. Core earnings for 2018 totaled $1.78 per share, up 27% versus 2017 and on capital base there was almost 20% larger.

This in part reflected our ability to put the proceeds from our July equity offering to work accretively. We are now hard at work doing the same with our subsequent equity raised in January. Additionally, dividends per share for 2018 exceeded the prior year by 5.4%.

Essential to our efforts is our investment portfolio's continued ability to source and structure opportunities that our competitors cannot easily replicate. During the fourth quarter, we deployed $235 million into new investments, bringing our full year deployment to a record $810 million.

Over half of the fourth quarter's investments were sourced on a proprietary basis versus through traditional dealer channels. Highlighting our investment activity was the completion of our purchase of subordinate securities from Freddie Mac that were backed by re-performing loans.

Our continued activity in subordinate securities and business purpose real estate loans and our recent investment in legacy access servicing that Dash will describe in more detail. Our efforts in cultivating strategic relationships were prudent in 2018 and we expect this to be a key differentiator for us moving forward.

Our investments suite with Freddie Mac continues to grow with momentum across both the single family and multifamily sectors carrying over into 2019. Exercising our option to acquire the remaining interest in 5 Arches further expands our access, the business purpose real estate lending space.

In area of housing that we believe offers accretable and scalable returns to our shareholders. This acquisition underscores our conviction in the space and our view of 5 Arches operational and cultural fit. We look forward to welcoming 5 Arches team into the fold next month.

We are facing similar market headwinds to what we've described before; mortgage banking still posted a record year in 2018 with over $7 billion in whole loan purchases. Even though volumes came in at the lower end of our forecasted range, full year returns from our mortgage banking platform were above the high end of this range.

The mortgage industry broadly has been adopting for several quarters now to the impact of higher rates and associated slowdown in home purchases and refinance activity. Our overall performance in mortgage banking in 2018 reflects the diversity of our sourcing and syndication channels, and our continued efforts to use our capital more efficiently.

These competencies will be increasingly critical as competition for newly originated jumbo loans remains fierce. Recent news out of Washington regarding GSE reform also continues to command our attention.

While the pay sub change remains uncertain since the new year we've seen renewed focus from both the administration and Congress and how the mortgage market should be structured going forward. And outline provided earlier this month by senate banking Chairman.

Crapo touches on many critical themes including a level playing field for guarantors and sellers. While the potential array of outcome remains quite broad, we believe a platform like ours with core strengths in structuring, pricing and syndicating mortgage credit risk stands at benefit in a market that welcomes more competition.

As we plan for the remainder of 2019, our focus remains on creating durable investment cash flows and that supporting our book value and dividend growth. Our integrated businesses are squarely focused in residential housing credit, areas where we've deep experience and a longer track record than any of our modern day competitors.

And with that I'll turn the call over to Dash Robinson, Redwood's President. .

Thank you, Chris and good afternoon, everyone. The fourth quarter was one of sustained momentum for Redwood across our business lines despite the market wide volatility we saw towards the year end. We took advantage of attractive prices adding several line items to the portfolio at compelling levels.

But the main theme continues to be sourcing and structuring our own investments that others cannot easily access. As Chris mentioned, we believe this type of capital deployment will continue to drive our earnings per share with an eye towards higher sustainable dividends for our shareholders.

To that end, the investment portfolio followed a record third quarter with another strong showing in the fourth quarter deploying $235 million of capital and as Chris mentioned, bringing total deployment for the year to a record $810 million.

The investment mix continue to reflect our focus on thicker subordinate positions where we earn an attractive premium versus traditional on the run securities in the primary and secondary markets.

During the quarter, we deployed over $50 million into additional multifamily B-Piece, $30 million to complete our investment in Freddie Mac issued subordinate securities backed by re-performing loans. And $83 million into a unique opportunity in excess servicing.

As part of the excess servicing investment, we took a majority stake in a newly formed vehicle that owns or is committed to purchase excess servicing cash flows and servicing advances from over 200 legacy non agency mortgage securitization with up to $15 billion of total unpaid principal amount.

The average age of the underlying loan is approximately 13 years. Our partner in the joint venture is servicing the loans in the underlying trust.

Unlike newer vintage mortgage servicing rights where returns are more depended upon voluntary prepayments fees, returns on this investment will likely be driven by the servicer's ability to efficiently work with delinquent borrowers and ongoing credit performance of the loans overall.

The joint venture is utilizing non recourse debt to help finance the acquisition of the associated servicing advances. Other capital deployment for the fourth quarter included $22 million in Agency CRT bonds, $12 million in mezzanine and multifamily securities issued by Freddie Mac.

And $21 million in RMBS including securities from the Sequoia transaction we completed during the quarter. Going forward, we remained well positioned to continue expanding our presence in the areas of housing where our capital can be put to work most accretively.

Following up on more recent multifamily BPs investment, earlier in the first quarter we completed our participation in a fund that have to purchase short term floating rate live renovation multifamily loans from Freddie Mac.

Over time, there will be the opportunity to convert the fund investment into subordinate securities issued from a Freddie Mac sponsored securitization. Our commitment $78 million in total was only 25% funded and closed representing a subsequent capital deployment opportunity in the coming months.

Additionally, we continue to advance our efforts in the business purpose real estate lending space. As Chris mentioned, in January we announced our decision to complete the full acquisition of 5 Arches, a specialty running platform focused primarily on single family bridge and single family rental loans.

This represented the culmination of over 12 months of working with the 5 Arches team, allowing us to validate our market thesis and confirm cultural and operational fit. The 5 Arches platform has continued a strong trajectory, finishing 2018 with over $800 million in total originations including over $200 million in the fourth quarter.

Volumes that exceeded our expectations when underwriting the initial investment. Completing the transaction will allow us to earn the full economics associated with the bridge and single family rental products, including borrower points and gain on sale.

The latter which may become increasingly compelling as financing markets for this asset type continue to mature. Most importantly the acquisition provides us access to all 5 Arches loan production, allowing us to continue creating accretive credit investments for our portfolio.

As Chris mentioned, we believe 5 Arches core competencies will become increasingly relevant to the housing market and enhance our overall value to the marketplace. I echo Chris and welcoming their team on to our platform.

Additionally, during the fourth quarter we continue to opportunistically rebalance the portfolio, rotating out of lower yielding assets, capturing $9 million of previously unrealized gains and bringing up approximately $58 million of capital for redeployment. Portfolio sales were focused in the season Agency CRT securities and mezzanine RMBS.

Our mortgage banking platform continues to execute effectively in the fourth quarter, managing headwinds that have continued into 2019.

While we mortgage rates dipped late in the year and have remained relatively steady year-to-date, industry volumes have remained under pressure as the overall pace of home buying slows and most existing borrowers still have rate below those available today.

As Chris described, we will continue to manage the business in anticipation of increased overall competition. But what maybe lower overall industry origination volumes in 2019.

During the fourth quarter, we generated margins in excess of our long-term expectations of 75 to 100 basis points driven by our ability to utilize both securitization and whole loan channels to distribute risk.

In addition to completing one Sequoia securitization in the fourth quarter, our 12th for the year overall, we sold over $800 million of loans for the second consecutive quarter, helping to fill what remains strong demand for prime jumbo loans from portfolio lenders.

We often speak of the value of keeping our whole loan sales channels open and active even when securitization markets are particularly favorable. The second half of 2018 validated that approach. And we expect to continue deepening this partnership in 2019. Additionally, our sourcing channels remain well diversified with a base of over 190 sellers.

In the fourth quarter, our overall mortgage banking purchase volumes moved in step with the broader markets totaling $1.6 billion, a decrease of approximately 13% from the third quarter. That said, full year volumes were 20% higher than in 2017. And full year Redwood choice volumes of $2.3 billion were almost 75% higher than the prior year.

This reflects what we believe is a continued deep addressable market of high quality borrowers. The nature our pipeline in the fourth quarter continues to reflect the overall market trend of heavier purchase money volume. 73% of our volume represented purchase money transactions, similar to the third quarter and up 64% for full year 2017.

Now to recap our financial results, I'll turn it over Collin..

Thanks Dash. And good afternoon, everyone. To summarize our financial results for the fourth quarter, our GAAP earnings were negative $0.02 per share compared with $0.42 in the third quarter and core earnings were $0.39 per share consist with the third quarter.

Our loss in the fourth quarter was primarily driven by negative market valuation adjustment in our investment portfolio, resulting from spread widening late in the year.

Core earnings reflected growth in portfolio net interest income from continued capital deployment and solid mortgage banking results, which approximately offset by lower core gains relative to the prior quarter. For the full year, GAAP earnings were $1.34 per share and core earnings were $1.78 per share.

Our core earnings were driven both by strong mortgage bank results and by record capital deployment in our investment portfolio, which contributed to 13% increase in economic net interest income in 2018, along with meaningful gain as we continue to optimize our portfolio.

Looking forward in 2019, we are focused on continuing to grow economic net interest income through accretive capital deployment and portfolio optimization but could see lower gains given the portfolio's current composition.

Our GAAP book value declined approximately 3% during the fourth quarter to $15.89 per share, primarily due to the negative market valuation adjustments on our investment. Adding back our dividends, we generated an economic return of negative 1.4% for the quarter, which brought our full year economic return to positive 7.8%.

As Chris mentioned, cash flows and credit fundamentals in our investment portfolio remains strong and since year end we have seen credit spread begin to firm up. Similar to the third quarter, we completed several new investments in the fourth quarter that continue to change the complexion of our balance sheet.

As Dash mentioned, we added to our multifamily B-Piece investments during the quarter and invested in the securitization at a season re-performing loan. Those securitization are now consolidated onto our balance sheet. Additional information on these investments and their impact on financial statement is included in or Redwood review.

Shifting to the tax side for a moment, our total taxable income was $0.37 per share in the fourth quarter, a decrease from the third quarter mainly reflecting lower income from our TRS? Focusing specifically on re-taxable income, we finished the year with $1.38 per share for 2018.

This exceeded our dividends of $1.18 per share for the year and as a result we expect to utilize approximately $16 million of our REIT NOL for 2018, leaving us $39 million to carry forward. Turning to the balance sheet and our capital position.

After raising approximately $25 million under our newly established ATM program during the fourth quarter, and taking into account their capital deployment, we ended the year with around $85 million of capital available for investment.

Moving into 2019 with the proceeds of close to $180 million from our recent equity follow-on offering, and after taking investment activity into account, we estimate that end of the January; we had approximately $190 million of capital available for investment.

We expect the majority of this capital to be deployed towards investment in multifamily loans and securities, securities issued offered Sequoia, business purpose real estate loan and other mortgage credit assets. Regarding leverage, our recourse debt-to-equity leverage ratio was 3.5x at the end of fourth quarter.

While there is increase from the end of the third quarter due to capital deployment and a higher balance of loans held for sale, we estimate that subsequent to our equity raise, this is come back down to around 3.1x.

We generally expect to continue to operate with a recourse leverage ratio closer to 3.5x, once the proceeds from our equity offering is fully deployed. I'll close with the 2019 financial outlook. For 2019, we remained focused on increasing our capital deployment across the broader housing credit market.

Pursuing investments that drive higher net interest income and overall return for shareholders. Building off new operational efficiencies and being responsive to market conditions, we expect to reallocate capital from our mortgage banking business towards REIT eligible investment in our portfolio.

More details on this specific for each of our business lines are included in the Redwood Review. Separately, I want to touch briefly on our recent announcement to complete the full acquisition of 5 Arches. We expect to close this transaction in early March and plan to incorporate 5 Arches into our financial statements in the first quarter of 2019.

As a reminder, we initially invested $10 million in 5 Arches in May of last year to purchase 20% minority investment. Incremental consideration for the full purchase will be $40 million which is less than 2% of our overall capital base.

And will be paid in a mix of cash and stock with the substantial portion contingent on production volumes over the next two years. 5 Arches was profitable in 2018 and while we expect our direct platform investment to be accretive to earnings in 2019, the larger impact will come from the access it gives us to their growing origination pipeline.

With this investment, we believe we can deploy $200 million to $300 million of capital in business purpose loan investment that would generate returns in the low to mid-teen.

In terms of how it will impact our financial statement, as a capital laid operating business with close to 100 employees, adding 5 Arches will bring a new stream of fee revenues into our earnings along with expenses to support activities in our operating expenses.

We will have more details on these announcements when we report our first quarter results in April.

And with that I'll conclude our prepared remarks? Operator, why don't we start the Q&A?.

[Operator Instructions] We will take our question from Doug Harter with Credit Suisse. .

Thanks. Collin just wants two prior clarifications on that kind of available capital number.

Does that include that 190 does that factored in the $40 million or so to pay for 5 Arches later this quarter?.

That is not included 5 Arches but it does include the commitments we entered into in the fourth quarter that have not been fully funded yet. So those have been taken into account that number but not 5 Arches. Again the portion of the 5 Arches -- is in cash, Doug. So there is a portion of that will be funded in equity..

Okay. So I shouldn't think of -- as for 40 reductions to that number. .

That's right. .

Got it.

And then I guess as you think about the ability to continue to sort of optimize the investment portfolio going forward, how much more activity do you think could see there and what types of return, pick ups do you typically see as you're rotating into to newer assets?.

Sure. Hey, Doug. It's Dash. I can take that. That's obviously a dynamic process depending where market prices are in general I would say that absent events like the volatility we saw in the fourth quarter, the investments that we have again driven by the continued strong performance. They tend to roll down the curve very, very well.

And so every quarter as this position season, many get upgraded, many of our subordinate Sequoia bonds get upgraded as they continue to delever in season, you start to see yields compress and so in many cases the bonds that we sell you all mid high single digits and we are deploying that capital into low mid double digit returns.

So that's obviously not always to be the math. But when you think about what we've historically optimize and when you think about where we are putting incremental capital to work in a lot of things that three of us described a few moments ago, that's generally the strategy when we think about repositioning the portfolio. .

All right, thanks. And then just last one for me. I guess given kind of the recovery in market so far in the first quarter, and I guess how are you looking at kind of their execution between whole loan sales and securitization to --.

Yes. We -- the securitization markets have firmed up a bit since the end of the year. I would still say on balance we see favorable conditions in both. We did sell over $1.5 billion of whole loans in the second half of the year. We are continuing to pursue those paths.

We are always going to look at it on a best execution analysis; we will continue to do that. We've completed one Sequoia transaction this year. We anticipate doing others and we are about to have a deal in the market as well for choice.

But beyond that I think there continues to be really strong demand from whole loans, and from whole loan buyers which we are going to continue to avail ourselves. .

Yes. I would add, Doug, that I think a year ago the securitization market relative to the whole loan market was meaningfully stronger. We completed 12 Sequoias last year. This year they are much closer in parity. So it's not going to be as obvious what we do with loans. The good news is as Dash mentioned, they are both profitable.

And having multiple forms of distribution allow us to continue to optimize that, that execution. .

We will go next to Bose George with KBW. .

Hey, thanks. Good afternoon. This is Eric on for Bose. A follow up on the capital deployment. Just maybe you can give some detail around the timeline for the $190 million and as a side card of that just maybe walk through the lever returns that you are seeing across the menu of investments that you would be looking at to deploy that into? Thanks..

Sure. Thanks Eric, this is Dash. We are already actively deploying those proceeds that we raised a few weeks ago. I touched on a few of those including the multifamily bond with Freddie Mac which is a real time capital deployment opportunity which we continue to invest in real time. Similar to the excess servicing investment I described.

There is incremental capital to be deployed there. So we expect as we mentioned when we did the offering a few weeks ago, we expect that capital to be deployed fully within the next three months. But it is -- we are hoping the front load that as much possible obviously will be opportunities we have in front of us that are available in the market.

I would say returns are consistent with what I articulated in response to Doug's question, low to mid double digit on capital are what we are seeing in what we project. In some cases, we are using leverage on those investments and sometimes not. There is sort of variety there.

So that's how we see things generally in terms of the deployment opportunities. .

Got it, that's helpful, thanks.

And then maybe you can just kind of tease apart for us the impact of credit spread widening in the Sequoia portfolio versus the third party investments during the last quarter?.

Yes. I would say the majority of the spread widening was away from Sequoia. In terms of mezzanine securities that we hold certainly did have spread widening. Those are generally long duration securities and so they contributed too. Some of the book value movement we had in the quarter.

Away from that largely it was some of the CRT investment that we have as well as some of the mezzanine securities we hold from Freddie Mac multifamily. As well as within FHLB book as well in terms of how mortgages overall performed during the quarter. These are more the areas that drove it.

Obviously, as Chris articulated from a credit performance perspective, we continue to feel really good about all those investments whether its Sequoia or third party but that's really where the majority of the book value movement came from. .

Got it. Great. And then last one just maybe you can give us some color on how much of rate incentive current jumbo borrowers have in your portfolio? And maybe even across the market would be helpful too. And then I mean how should we think about the earnings sensitivity of that jumbo portfolio given a pick up in refi activity? Thanks. .

Yes. I mean so mortgage rates have gone lower on a relative basis but candidly they are still high enough that we don't expect any significant amount or refinance activity in the near term that would move our book or business in on director or the other.

I think we expect it should be - it continues to be something a 70% purchase split between purchase and refi activity. The one thing I would say on the mortgage banking business is we are very focused on capital turnover and efficiency at this point.

So it's continuing as the portfolio expands, it's continuing to become a smaller capital footprint for us. And we certainly expect to earn double digit returns on net capital.

But as far as the swings in refinance activity or mortgage rates goes, we actually expect that to have less meaningful impact on our overall portfolio book of business, which is good from our perspective because we tout the durability of the cash flows.

And some of the stability we've been able to add over the past few quarters despite the fact we took a significant amount of mark-to-market adjustments in the fourth quarter on a relative basis from an industry perspective, 3% decline in book value was actually quite modest.

So that's what we are giving towards and you will probably have better information our next quarter's call as the spring selling season takes hold and we see people come out to buy homes. .

Got it. Thanks Chris.

Maybe I can press you on your book value quarter-to-date?.

I think we mentioned we think as far as spreads go we've recovered about half. So I would say all else equal. There are a lot of things that impact book value but from mark to market adjustment perspective we recovered about half of the spread widening that we incurred in fourth quarter. .

And next we will hear from Steve DeLaney with JMP Securities..

Thank you and congratulations to the new team for a strong start in your first year. I guess I heard comments about headwinds and refis, I am curious last year you started the year with a goal of $7 billion to $8 billion of purchase volume in your core prime channel.

I was curious are you thinking about providing any targets or guidance at some point as the year goes along? Or is it kind of wait and see situation? Thanks..

Hey, Steve. It's kind of wait and see. At this point, we think that volume will be down from last year. We don't think that the -- there is still a lot of cyclicality in the market and there is still lot of capacity that needs to be corrected. There is strong demand from money center banks. So what we don't do is we don't want to chase volume.

I think what we are mostly focused is being really, really efficient. So some of the metrics we will talk about is capital and turnover and operating efficiencies. We've got a tremendous platform. It's incredibly valuable and critical to what we do. We are absolutely committed to our mortgage banking initiatives for the long run.

But we are -- we've seen this happen many times it's cyclical business and we just want to make sure we are positioned for the long run. And I think right now if volumes lower than last year that's okay with us..

Yes. I am definitely hearing the point the theme of creating long duration proprietary investments rather than maybe allocation capital just to support volume and definitely more of an investment rather than a volume focus for sure. That's coming through loud and clear.

You did in 5 Arches handout, oh, gosh, I remember what that was, a month or so ago when you announce that. And you did mention $900 million to $1 billion there in the BPL.

And I am just curious is there sort of framework for that production, how you plan to finance or structure that and do you see any of their production being sold off on a whole loan basis or is it all for your balance sheet?.

Thanks, Steve. This is Dash. Those are great question. In terms of financing I would say a few things. For single family rental the plan remains to avail ourselves of long term non recourse financing in that space as we reach critical mass.

We are currently financing those loans with two warehouse lines in the same way we refinance our jumbo production before those go into Sequoia transaction.

I would say there, there are opportunities both in the rated securitization space as others have tapped as well as interest from other more private lenders in a similar environment or we could effectively term out on a non recourse basis, our investment there. So we are assessing both of those.

And they both have efficiencies as we continue to ramp the portfolio. The bridge, the short-term bridge is the story that's evolving as well. We are currently financing those loans on multiyear warehouse lines, we -- to answer your second question we intend to begin stepping in and speaking from more of their production.

They do currently sell some loans away and we are currently assessing what the right mix of that is going forward considering demand for these loans in the market remains very, very robust, particularly given their short duration and relatively high coupon. So that's right. That's something we applies and keep our options open for us.

As Collin articulated the opportunity to deploy more capital and we put $200 million to $300 million range out there is extremely compelling to us, but similar to the way we run the jumbo business, it's constantly looking at the market and trying to identify efficiencies in where other buyers are bidding his paper versus where we can create our own investments.

And I think the analysis for the bridge product will be very, very similar. I would say that one piece that's evolving in that market is securitization. There has been a handful of -- to this point on unrated securitization done in the bridge space. Some of them are revolving where the insurers allowed replenishing repayment and some of them static.

The metrics there appear very compelling versus where traditional warehouse repo is available. And so we are assessing that. There probably a better time before we feel like we are ready to go and actually securitized these loans. As you know there is lot that goes into that preparation.

But that something that we will certainly keep a close eye on and plan towards. So I think we are going to keep our options open. We would -- we certainly love to speak for the majority if not all of their production. But we are going to do what's in our best economic interest.

And again from what we feel is relatively modest acquisition price, we feel like we have a lot of attractive options with their platform and with the market in general. .

That's great color. And I can tell you guys have thought through this. And you do have a lot of optionality as you mentioned. My final one just to close that on.

You got to read the shareholder letter over the years with Redwood, if you don't read all 50 pages of the review but there were several comments in there about higher sustained dividends over time. And I think about your current dividend, it's supports out about 7.5% yield on book value.

And I am just curious if you guys have a goal or target of where you think to give yourself another couple of years of trying to optimize things. Do you feel that there is room to move the dividend to where it would offer a higher yield on your book value something more maybe 9% to 10% range? Just curious if that seems realistic to you guys..

Hey, Steve. I mean I can tell you we are engineering towards that. I don't want to be overly provocative and cite a number or commit ourselves to anything.

Certainly without our board but as far as how we are thinking about the portfolio and our capital allocation bolting on different asset classes within housing and when you put it all together we are very, very conscious of the yield on the book. And sustainable cash flow that drive sustainable dividends. So it's very much a goal of ours.

We cited it; you cited it correctly in the shareholder letter. I think as we see economic non interest income go up which is something we are focused on through capital deployment we will have more and more durable cash flows and been in position hopefully to do that. But it is very much a focus of ours to get the yield higher. .

And our next question will come from Stephen Laws with Raymond James. .

Hi, good afternoon, thanks for taking my question. A lot have been hit on but I want to follow up on two. I guess those just asked about Steve but on a flip side of it, I think you covered the asset and leverage capital for the business purpose loans.

Can you talk about the 5 Arches acquisition, how that rolls into operating expenses? I think if I remember --I forget -- hit the right point in the review, I think you guided the like $48 million or $50 million of kind of operating expenses for this year.

Does that include 5 Arches for the --10 months is that not included and if not how much that we think about adding to that operating expense to reflect that..

Yes, Stephen, this is Collin. The numbers that we have in the review and the outlook is actually just our corporate overhead. So the operating expenses associated with each of our business lines are included in the returns that we gave the projections for the business line. So that number is just a component of our overall expenses.

And it doesn't include any expenses for 5 Arches either. That will end up once we kind of work through and figure out how we are going to integrate that into segment. That will integrate into one of the business lines. And so that will be separate from our corporate operating overhead.

And we weren't planning on providing any additional numbers on the call today. But we will be providing numbers as I mentioned in terms of how to think through 5 Arches in our consolidated finance statement in the first quarter.

One of the points I made in my script was that when you step back at a high level and when you look at investment of 5 Arches it's just under 2% of our total capital. So the overall net impact setting aside kind of the gross revenue and gross expenses that we will bring on.

Just from the underlying business platform itself won't move the needle meaningfully from the get go. So the more meaningful part as Dash discussed is going to be from the investments that are generated from that business that moving to the portfolio.

So, again, we will have some more detail on that in the first quarter but the numbers you've seen there is just a corporate overhead. .

Stephen, one think I would just add to that quickly, 5 Arches was profitable in 2018 and the numbers that we've been quoting here and that we put in the little -- in the pack we provided when we announced the intention of move forward and acquire the rest of platform, those are more of the raw asset returns.

They don't include the other additional economics that I mentioned in the prepared remarks to internalizing the economics of 5 Arches can bring to bear. So as Collin articulated we will have lot more to say after the transaction closes when we talk about the first quarter, I would just want to reinforce couple of those points as well. .

No, I appreciate that. And then kind of looking at the opportunity is, is this what you need to be fully be in operating -- there business purpose loan space, so you are out there looking for other partners or other acquisition.

Is this the platform that I think further maybe $900 million from the presentation a month ago in loans? Can you grow that towards where you want to get to for annual basis or do you need to continue to make acquisition to add on to this business line?.

Yes. I don't know, obviously, we will always keep our options open. I would say for the next little bit, everyone's plate is quite full. We are making sure that this integration goes properly and we onboard the platform on ours in a prudent ways. So that has obviously our main focus for the next little while.

I don't think expanding this effort needs to involve M&A. As we've talked before there are opportunities to roll this products out to our existing sale network. There are other originators of these sorts of loans that we talk to and could potentially become correspondence of the 5 Arches.

And so I think what that platform brings us is a very attractive competency in terms of the ability to originate the borrower network, the vast majority of their production is with repeat borrowers. The majority of their production is in-house. They do have broker's relationships. So there is a lot we can do with that existing platform to grow it.

There is lot we can do with our existing network within mortgage banking. They have more involved M&A that can help drive volume and that's really where we are going to be focused initially. Secondarily of course to making sure that this integration goes smoothly. .

Great. And then one last just a follow up on the dividend. It looks like in the review I think it said re-taxable income for the year is estimated to be $1.38.

So I guess you distributed around 85% of re-taxable income, kind of - I don't want to get too lost in the penny but from a bigger picture over the last I guess they have been on the floor 15 years.

You had a period where you paid large special dividends; there has been other tight period for you go forward the first three quarters of the next year's dividend.

It kind of still forward taxable earnings kind of, can you talk about -- I know first I think it was Chris commented high level on this but as far as dividend growing but can you talk about where you are as far as any kind of requirement of distribution so there is still NOLs that get you to 90%.

Are you spilling money over? Are you considering special dividends? Kind of how do you we think about the larger picture dividend policy of the company going forward?.

Hey, Stephen, it is a great question and we have previously announced our intention and board's intention on dividends and last year we didn't our intention we exceeded it. So we are happy to raise the dividend last year for the first time in a number of years.

It is a very important piece of our story for this management team to continue to try and get that dividend higher. As far as re-taxable income goes, certainly we are very focused on it, very focused on growing it. We are still over $30 million, $39 million NOL at the REIT that we can use.

But I would say overall it's not major factor in our long term thinking. And I think what we are trying to do is drive that dividend higher by growing net interest income and really focusing on the durability of our portfolio of cash flows. We are trying to grow the portfolio to grow the dividend and really scale the platform.

So I think on the ground level it does get back to the capital deployment activity of the company which we are happy to say is up and we did deploy a record amount of capital last year. I am afraid we will continue to that pace of deployment and continue to grow the book. We certainly think the math will pencil out to drive that dividend higher.

Whether it's in the form of higher regular dividends or special dividends, that's something we would -- we would need to take up with the Board. But I do think that re-taxable income unlike more recent year is becoming once again a very relevant metric for us and certainly to the management team.

So it's something, it's certainly something to follow in the coming quarters. .

Thanks for color there. And congratulations on expanding your business. And I am looking forward to hearing more about at the Investor Day in March. End of Q&A.

And there are no further questions in the queue. I will turn the call back over to Chris Abate for closing remarks..

Thank you, Didi. And to follow up on Steven's remark, we actually have lot to look forward to next year including celebrating Redwood's 25th anniversary as a public company. So we are excited about that. We are excited to be asked to ring the opening bell in New York Stock Exchange on Tuesday, March 12th. So we hope you all tune in to see that.

Additionally, that same week we will be hosting our second Annual Investor Day in New York City. The Investor Day will be on Thursday, March 14th. So please contact our investor relations department for information how to participate. And thank you again for joining us today. We look forward to seeing you guys in March. Thank you. .

And that concludes today's conference call. We thank you for joining..