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Redwood Trust Inc  (RWT 0.89%)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 5:00 p.m. ET


Prepared Remarks:


Good afternoon and welcome to the Redwood Trust Incorporated 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 a question-and-answer session. I will provide you with instructions to enter the Q&A queue after management's comments.

I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President and Head of Investor Relations for opening remarks and introductions. Please go ahead.

Lisa M. Hartman -- Senior Vice President, Head of Investor Relations

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 want 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 on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourages 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.

A 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.

Christopher J. Abate -- Chief Executive Officer and Director

Thank you, Lisa, and good afternoon everybody. The fourth quarter of 2018 kept a transformational year for Redwood Trust. We laid the groundwork with the strategic initiatives that we outlined at the beginning of the year and we began the early phases of executing on our vision.

The secular shifts we have 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 our 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 as a path to sustainable and profitable growth for our shareholders.

The end of 2018 brought heighten levels of market volatility, adversely impacting valuations 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 of spread widening was cushioned by our modest leverage and by the overall resiliency of our credit-focused portfolio, which remains well supported due to the 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 have recovered nearly half of last quarter's book value decline.

Our fourth quarter earnings were significantly impacted by mark-to-market adjustments. We are very pleased with the positive trend 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, on a capital base that 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%. Central 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 reperforming loans, our continued activity in subordinate Sequoia securities and business-purpose real estate loans, and our recent investment in legacy excess servicing that Dash will describe in more detail.

Our efforts in cultivating strategic relationships bore fruit in 2018, and we expect this to be a key differentiator for us moving forward. Our investment suite with Freddie Mac continues to grow, with momentum across both the single-family and multi-family sectors carrying over into 2019.

Exercising our option to acquire the remaining interest in 5 Arches further expands our excess to the business purpose real estate lending space, an area of housing that we believe offers accretable and scalable returns to our shareholders. This acquisition underscores our conviction in this space and our review of 5 Arches operational and cultural fit. We look forward to welcoming the 5 Arches' team into the fall of next month.

While facing similar market headwinds to what we have 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 adapting for several quarters now to the impact of higher rates and an 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 pace of change remains uncertain. Since the New Year, we have seen renewed focus from both the administration and Congress and how the mortgage market should be structured going forward.

An 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 and structuring, pricing and syndicating mortgage credit risk stands at a benefit in a market that welcomes more competition.

As we plan for the remainder of 2019, our focus remains in creating durable investment cash flows and at supporting our book value and dividend growth. Our integrated businesses are squarely focused in residential housing credit, an area where we have 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.

Dashiell I. Robinson -- President

Thank you, Chris, and good afternoon everyone. The fourth quarter was one of sustained momentum for Redwood across business lines despite the marketwide volatility we saw toward year-end. We took advantage of attractive prices adding several line items to the portfolio at compelling levels. But the main theme continue 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 toward 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 an additional multifamily B-Piece, $30 million to complete our investment in Freddie Mac-issued subordinate securities backed by reperforming 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 securitizations with up to $15 billion of total unpaid principal balance.

The average age of the underlying loans is approximately 13 years. Our partner in the joint venture is servicing the loans in the underlying trusts. Unlike newer vintage mortgage servicing rights where returns are more dependent upon voluntary prepayment speeds returns on this investment will likely be driven by the servicer's ability to efficiently work with delinquent borrowers an ongoing credit performance of the loans overall.

The joint venture is utilizing nonrecourse 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 the quarter.

Going forward we remain 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 our most recent multifamily B-Piece investment, earlier in the first quarter, we completed our participation in the fund set up to purchase short-term floating rate light renovation multifamily loans from Freddie Mac.

Over time there will be the opportunity to convert the fund investment into subordinate securities issued from our Freddie Mac-sponsored securitization. Our commitment $78 million in total was only 25% funded at close 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 lending 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 teams, 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 had 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 of which may become increasingly compelling as financing markets for these asset types continue to mature.

Most importantly, the acquisition provides us access to all of 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 in welcoming their team onto 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 freeing up approximately $58 million of capital for redeployment. Portfolio sales were focused in season Agency CRT securities and mezzanine RMBS.

Our mortgage banking platform continue to execute effectively in the fourth quarter managing headwinds that have continued into 2019. While 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 rates below those available today.

As Chris described, we will continue to manage the business in anticipation of increased overall competition for what may be 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 fourth quarter or 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 these partnerships 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 of our pipeline in the fourth quarter continue 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 to Collin.

Collin Lee Cochrane -- Chief Financial Officer

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 consistent with the third quarter. Our loss in the fourth quarter was primarily driven by negative market valuation adjustments 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 were partially 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 banking results and by record capital deployment in our investment portfolio which contributed to a 13% increase in economic net interest income in 2018, along with meaningful gains as we continue to optimize our portfolio.

Looking forward to 2019, we're 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 investments.

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 spreads 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 of seasoned reperforming loans. Those securitizations are now consolidated onto our balance sheet. Additional information on these investments and their impact to our financial statements is included in our 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 REIT 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 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 net 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 at the end of January we had approximately $190 million of capital available for investment. We expect the majority of this capital to be deployed toward investments in multifamily loans and securities, the securities issued offer a Sequoia shelf. Business purpose real estate loans and other mortgage credit assets.

Regarding leverage, our recourse debt-to-equity leverage ratio was 3.5 times at the end of the fourth quarter. While this 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 has come back down to around 3.1 times. We generally expect to continue to operate with a recourse to leverage ratio closer to 3.5 times 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 returns for shareholders. Building off new operational efficiencies and being responsive to market conditions, we expect to relocate capital from our mortgage banking business toward REIT-eligible investments in our portfolio.

More details on the specifics 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 a 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 a 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 this gives us to the growing originations pipeline. With this investment, we believe we can deploy $200 million to $300 million of capital and business-purpose loan investments that will generate returns in the low to mid-teens.

In terms of how this will impact our financial statements as a capital lead 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'll have more details on these amounts 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?

Questions and Answers:


Thank you. (Operator Instructions) We'll take our first question from Doug Harter with Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Collin just wanted a clarification on that kind of available capital number. Does that include -- that $190 million does that factor in the $40 million or so to pay for 5 Arches later this quarter?

Collin Lee Cochrane -- Chief Financial Officer

That does not include the 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 in that number. But not 5 Arches. It can only -- a portion as the 5 Arches (technical difficulty) is in cash Doug. So there is a portion that that will be funded in equity.

Doug Harter -- Credit Suisse -- Analyst

Okay. Got it. So I shouldn't think of the -- as a full $40 million reduction to that number?

Collin Lee Cochrane -- Chief Financial Officer

That's right.

Doug Harter -- Credit Suisse -- Analyst

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

Dashiell I. Robinson -- President

Sure. Hey, Doug its Dash I can take that. That's obviously, a dynamic process depending upon, where market prices are in general. I would say that, absent events like the volatility we saw on the fourth quarter, the investment 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 these positions season many get upgraded many of our subordinates Sequoia bonds get upgraded as they continue de-lever in season. You start to see yields compress. And so in many cases, the bonds that we sell yields mid-high single digits and we're redeploying that capital into low mid-double-digit returns.

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

Doug Harter -- Credit Suisse -- Analyst

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

Dashiell I. Robinson -- President

Yeah. 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're continuing to pursue those paths.

We're always going to look at it on a best execution analysis. We'll continue to do that. We've completed one Sequoia transactions this year. We anticipate doing others. We are about to have a deal on the market as well for Choice. But beyond that I think there continues to be really strong demand from whole loans -- from whole loan buyers, which we're going to continue to avail ourselves of.

Christopher J. Abate -- Chief Executive Officer and Director

Yeah. I would Doug that I think a year ago the securitization market relative to whole loan market was meaningfully stronger. We completed 12 Sequoias last year. This year they're 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're both profitable and having multiple forms of distribution will allow us to continue to optimize that execution.

Doug Harter -- Credit Suisse -- Analyst

Thank you.


(Operator Instructions) And we'll go next to Bose George with KBW.

Eric Hagen -- KBW -- Analyst

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

Dashiell I. Robinson -- President

Sure. Thanks, Eric. This is Dash. We are already actively deploying those proceeds that we raised few weeks ago. I touched on a few of those including the multi-family fund 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 to front-load that as much as possible obviously with the opportunities we have in front of us and 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-digits on capital are what we're seeing and what we project. In some cases, we are using leverage on those investments, and sometimes not there's sort of a variety there. So that's how we see things generally in terms of the deployment opportunities.

Eric Hagen -- KBW -- Analyst

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 investment string the last quarter?

Dashiell I. Robinson -- President

Yes, I would say the majority of the spread widening was away from Sequoia. Some of the mezzanine securities that we hold certainly did have spread widening those are generally long-duration securities and so they contributed to some of the book value movement we had in the quarter. Away from that largely it was some of the CRT investments that we have as well as some of the mezzanine securities we hold from Freddie Mac multifamily as well as within the FHLB book as well in terms of how mortgages overall performed during the quarter. Those are more of 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 it's Sequoia or third-party. But that's really where the majority of the book value movement came from.

Eric Hagen -- KBW -- Analyst

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

Christopher J. Abate -- Chief Executive Officer and Director

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

I think we expect it to be -- it continues to be something like a 70% purchase split between purchase and refi activity. The one thing I'd say on the mortgage banking business is we're 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 in that capital.

But as far as the swings in refinance activity or mortgage rates goes we actually expect that to have a less meaningful impact on overall portfolio book of business which is good from our perspective because we tout the durability of cash flows and some of the stability we've been able to add over the past few quarters.

Despite the fact we took -- assuming if we can amount to 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 where we're gearing toward. And you will probably have better information on next quarter's call as the spring selling season takes hold and we see if people come out to buy homes.

Eric Hagen -- KBW -- Analyst

Got it. Thanks Chris. Maybe I can press you on your book value quarter-to-date?

Christopher J. Abate -- Chief Executive Officer and Director

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

Eric Hagen -- KBW -- Analyst

Super. Thanks guys. Appreciate it.

Christopher J. Abate -- Chief Executive Officer and Director

Thanks Eric.


And next we'll hear from Steve Delaney with JMP Securities.

Steve Delaney -- JMP Securities -- Analyst

Thank you and congratulations to the new team for a strong start in your first year. I guess I've heard comments about headwinds and refis. I'm 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 a wait-and-see situation? Thanks.

Christopher J. Abate -- Chief Executive Officer and Director

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

I think what we're most focused on is being really, really efficient. So some of the metrics we'll 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're absolutely committed to our mortgage banking initiatives for the long run. But we've seen this happen many times, it's a cyclical business and we just want to make sure we're positioned for the long run. And I think right now, if volumes are lower than last year, that's OK with us.

Steve Delaney -- JMP Securities -- Analyst

Yeah. And then definitely here in the point -- the theme of creating long-duration proprietary investments rather than maybe allocating 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 your 5 Arches handout, can't remember what that was, a month or so ago when you announced that, you did mention $900 million to $1 billion there in the BPLs. And I'm just curious, is there a sort of a 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?

Dashiell I. Robinson -- President

Thanks, Steve. This is Dash. Those are great questions. 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're currently financing those loans with two warehouse lines in the same way we refinanced our jumbo production before those go into Sequoia transactions.

I would say, 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, where we could effectively term out on a non-recourse basis our investments there. So we're assessing both of those and they both have efficiencies as we continue to ramp the portfolio.

The short-term bridge is a story that's evolving as well. We're currently financing those loans on multi-year warehouse lines. To answer your second question, we intend to begin stepping in and speaking for more of their production. They do currently sell some loans away and we're 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 coupons. So that's something we'll have eyes and keep our options open for.

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 and where other buyers are bidding this 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 have been a handful of -- to this point, unrated securitizations done in the bridge space, some of them revolving where the issuer is allowed to replenish repayments and some have been static. The metrics there appear very compelling versus where a traditional warehouse repo is available, and so we're assessing that.

It will probably a bit of time before we feel like we're ready to go and actually securitize these loans as you know there's a lot that goes into that preparation. But that's something that we'll certainly keep a close eye on and plan toward. So I think we're going to keep our options open. We would certainly love to speak for the majority if not all of their production. But we're going to do what's in our best economic interest. And again for what we feel is a relatively modest acquisition price we feel like we have a lot of attractive options with their platform and with the market in general.

Steve Delaney -- JMP Securities -- Analyst

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 point just to close out on, you got to read the shareholder letter, I've read that over the years with Redwood if 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 -- works out to about 7.5% yield on book value.

And I'm just curious if you guys have a goal or a target of where you think you'd 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 in the maybe the 9% to 10% range? Just curious if that seems realistic to you guys?

Christopher J. Abate -- Chief Executive Officer and Director

Steve, I mean I can tell you we are engineering toward 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're thinking about the portfolio in our capital allocation bolting on different asset classes within housing. And when you put it all together we're very, very conscious of the yield on the book and sustainable cash flows which drive sustainable dividends.

So it's a very much a goal of ours. We cited it. You cited it correctly in the shareholder letter. I think as we see economic net interest income go up which is something we're focused on through capital deployment. We'll have more and more durable cash flows and be in a position hopefully to do that. But it is very much a focus of ours to get the yield higher.

Steve Delaney -- JMP Securities -- Analyst

Great. Well thank you for the comments. Appreciate it.


(Operator Instructions) And our next question will come from Stephen Laws with Raymond James.

Stephen Laws -- Raymond James -- Analyst

Hi good afternoon. Thanks for taking my question. A lot have been hit on, but I want to follow up on two. I guess both just asked by Steve, but on the flip side of that I think covered the asset and the leverage capital for business-purpose loans. Can you talk about the 5 Arches acquisition, how that rolls into operating expenses? I think if I hit the right point in the review, I think you guided to like $48 million or $50 million of kind of operating expenses for this year.

Does that include the 5 Arches for the pro forma expected of 10 months? Is that not included and if not how much should we think about adding to the operating expense to reflect that?

Collin Lee Cochrane -- Chief Financial Officer

Yes, Stephen this is Collin. The number 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 give 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're going to integrate into the segments 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 financial statements in the first quarter.

One of the points I made in my script was that when you step back at a high level when you look at the investment of 5 Arches, it's just under 2% of our total capital. So the overall net impact setting aside the gross revenue and gross expenses that 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 move into the portfolio. So, again we'll have some more detail on that in the first quarter, but the number you're seeing there is just the corporate overhead.

Dashiell I. Robinson -- President

Stephen, it's Dash. One thing I would just add on that quickly is 5 Arches was profitable in 2018 and the numbers that we have been quoting here and that we put in the little -- in the pack that we provided when we announced the intention to move forward and acquire the rest of the platform those are more of the raw asset returns that don't include the other additional economics that I mentioned in the prepared remarks that internalizing the economics of 5 Arches can bring to bear.

So as Collin articulated we'll have a lot more to say after the transaction closes when we talk about the first quarter. But a -- I just want to reinforce a couple of those points as well.

Stephen Laws -- Raymond James -- Analyst

No, great I appreciate that. And then looking at the opportunity is this what you need to fully be in the business-purpose loan space? Or you're out there looking for other partners or other acquisitions? Is this a platform that I think heard earlier maybe $900 million to $1 billion from the presentation a month ago in loans? Can you grow that to where you want to get to for an annual basis? Or do you need to continue to make acquisitions to add on to this business line?

Dashiell I. Robinson -- President

Yeah, I don't know. Obviously we'll always keep our options open. I would say for the next little bit everyone's plate is quite full of making sure that this integration goes properly and we onboard the platform onto ours in a prudent way. So that is, 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 these products out through our existing seller network there are other originators of these sorts of loans that we talk to and could potentially become correspondence of us via 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 the production is in-house they do have brokerage relationships. And there's a lot we can do with that existing platform to grow it. There's a lot we can do with our existing network within mortgage banking that won't involve M&A that can help drive volume and that's really where we're going to be focused initially. Secondarily of course to making sure that this integration goes smoothly.

Stephen Laws -- Raymond James -- Analyst

Great. And then one last just as a follow-up on the dividend. It looks like in the review I think it says REIT taxable income for the year is estimated to be $1.38. So, I guess you distributed around 85% of REIT taxable income. Kind of -- I don't want to get too lost in the pennies but from a bigger picture over the last I guess I've been around the story 15 years and you've had a period where you paid large special dividends there's been other time periods where you've roll forward the first three quarters of the next year's dividend and kind of the go forward of taxable earnings. Can you talk about -- and I know Chris -- I think it was Chris who 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 requirements of distributions are there still NOLs that get you to 90%? Are you spilling money over? Are you considering special dividends? Kind of how do we think about the larger picture dividend policy of the company going forward?

Christopher J. Abate -- Chief Executive Officer and Director

Hey, Stephen it's a great question. And we had previously announced our intention -- the Board's intention on dividends. And last year we didn't do our intention, we exceeded it. So, we were happy to raise the dividend last year for the first time in a number of years.

It's a very important piece of our story for this management team to continue to try and get that dividend higher. As far as REIT taxable income goes, certainly, we're very focused on it very focused on growing it. And we still have a $30 million -- $39 million NOL at the REIT that we can use. But I would say, overall, it's not a major factor in our long-term thinking.

I think what we're trying to do is drive that dividend higher by growing net interest income and really focusing on the durability of our portfolio cash flows. We're 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're happy to say is up. And we did deploy a record amount of capital last year.

If we're able to continue 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 need to take up with the Board.

But I do think that REIT taxable income unlike more recent years is becoming once again a very relevant metrics for us and certainly to the management team. So, it's something -- it's certainly something to follow in the coming quarters.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks for the color there and congratulations on expanding your business. I'm looking forward to hearing more about it at the Investor Day in March.

Christopher J. Abate -- Chief Executive Officer and Director



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

Christopher J. Abate -- Chief Executive Officer and Director

Thank you, Didi. And to follow-up on Stephen's remark, we actually have a lot to look forward to next year including celebrating Redwood's 25th anniversary as a public company, so we are excited about that.

We're excited to be asked to ring the opening bell at the 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 on 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.

Duration: 48 minutes

Call participants:

Lisa M. Hartman -- Senior Vice President, Head of Investor Relations

Christopher J. Abate -- Chief Executive Officer and Director

Dashiell I. Robinson -- President

Collin Lee Cochrane -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- KBW -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

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