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Redwood Trust (RWT 0.75%)
Q4 2019 Earnings Call
Feb 27, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon and welcome to the Redwood Trust, Incorporated, fourth-quarter 2019 financial results conference call. [Operator instructions] Today's conference is being recorded. I'll 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 Hartman -- Senior Vice President, Head of Investor Relations

Thank you, Satchi. Hello, everyone, and thank you for participating in Redwood's fourth-quarter 2020 financial results call. Joining me on the call 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 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.

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A reconciliation between GAAP and non-GAAP financial measures is provided in both our fourth-quarter earnings press release and Redwood Review and also available on our website at redwoodtrust.com. Also, note that the content of this conference call contains time-sensitive information that is accurate only as of today. 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 and introduction.

Chris Abate -- Redwood's Chief Executive Officer

Thank you, Lisa. Good afternoon, everyone. The fourth quarter of 2019 marked a strong ending to a historic year at Redwood. We made significant progress toward our vision by executing on our strategic initiatives to expand our reach across all major throughways of housing finance.

We also scaled our platform to grow profitably and turbocharged our investing activity. Our hard work is beginning to pay off, as shown through our fourth-quarter financial results, where we delivered solid earnings and sustained momentum across our business lines. To recap, GAAP and non-GAAP core earnings were $0.38 and $0.45 per share, respectively, for the fourth quarter. We ended the full year with GAAP earnings of $1.46 per share and core earnings of $1.58 per share, resulting in a core ROE for 2019 of 11.6%.

Earnings benefited from a healthy balance of investment returns and income from mortgage banking operations, and we made $1.1 billion of investments that we believe will help us deliver increased returns to our shareholders in the coming quarters and years. Additionally, our earnings for the full year benefited from our strategic portfolio optimization activities, as we netted gains from sales of lower-yielding assets and freed up capital for new investments. In recognition of the longer-run strategic progress we have made, today we announced a 6.7% increase to our regular quarterly dividend for shareholders to $0.32 per share for the first quarter of 2020. Our ability to raise our dividend, despite the market volatility we have experienced over the past year, is significant in that it demonstrates the stability of our business model and the durability of our revenue streams.

Including today's dividend raise, we have increased our dividend 14% over the past two years. We remain committed to delivering earnings that can continue to support a growing dividend to our shareholders as we move forward. Reflecting on the brand we've built over a quarter-century now, Redwood has developed a track record of innovative housing investment programs that address underserved markets with vast long-term growth potential. Fueled in part by 2 acquisitions, 2019 not only enhanced our brand but also set a new foundation for profitable growth.

We are now a leading participant in several distinct areas of housing credit, and our consolidated portfolio has evolved to incorporate a diverse mix of residential, business-purpose and multifamily investments, areas of the housing market where we see the biggest opportunities for strong returns. We now operate out of four principal locations, and our earnings power is squarely driven by organically created investments and the associated platforms that produce them. We also boast two of the most highly regarded securitization issuance platforms in the entire PLS market. Putting this all together, we are better-positioned than ever to serve the public through our corporate mission, which is to help make quality housing accessible to all Americans, whether it's rented or owned.

As we work toward increasing our relevance to the broader housing market, we recently reorganized our business to facilitate continued growth through a more scalable infrastructure. This will allow us to better manage the ever-evolving opportunities of risks facing our business and to create better visibility into the earnings power of our operating platforms and the investments they create. We now manage our business with four distinct segments or verticals which align to our strategy and where we believe there is a compelling runway to grow and expand in the housing market. These verticals include residential lending, business-purpose lending, multifamily investments, and third-party residential investments.

Our new structure provides for centralized strategic decision-making that drives the activities of these verticals and in turn, our businesses can operate end-to-end in their respective sectors while benefiting from a corporate risk oversight and traditional shared services. Each of our verticals currently operates at a slightly different stage of maturity, creating what we view as a compelling mix of stable earnings generation and future upside. In sum, we believe the growth of this profile offers differentiated cash flows and return profiles that will contribute to our robust earnings for our shareholders. I'd like to now turn to the recent economic environment and what it means for our business.

First reflecting on 2019, few expected it to be a record year for residential mortgage refinance activity; that's essentially what we got. The federal reserve kept rates low after cutting it three times in 2019 amid global trade tensions and times of economic weakness. Inflation, meanwhile, remained low and the U.S. consumer balance sheet remained strong, partly driven by an increased propensity to save that put downward pressure on benchmark interest rates.

As we head deeper into 2020, the markets have once again become gripped with fear as growing concerns over COVID-19, also known as the coronavirus, and its potential impact on the global economy now dominate market sentiment. In just the past week, we've seen a steep drop in the equity markets along with the 10-year Treasury yield hitting all-time lows. On a global scale, we've got all the ingredients for an interruption in economic activity. Supply chains have already been materially impacted, especially those that rely on Chinese manufacturing.

Thus far at least, the impact on the U.S. economy has been negligible. The extent the coronavirus outbreak does extend to the U.S. in a material way, we would expect various debt markets to respond differently, at least initially.

For example, the corporate bond markets are likely to be directly impacted, followed by the CRE markets. And while COVID-19 does raise questions about the right risk premiums for residential credit, unlike some past downturns, we would not expect housing or even the consumer to lead the way. The ultimate impact to residential credit would likely depend on the severity and duration of any broad domestic outbreak if it were to occur. Regardless of where things head from here, we continue to run our business on the foundation of a strong risk culture, utilizing moderate leverage and disciplined underwriting, enabling us to generate attractive returns through various economic scenarios.

Additionally, we would highlight the diversity of our revenue streams, which can help to offset some of the negative economic forces associated with the virus. For instance, the 30-year conforming mortgage rate continues to fall in step with benchmarks and is once again at three-year lows, not to mention within striking distance of all-time lows. This continues to provide ample fuel for refinance activity for our mortgage banking business and helps to lower consumers' debt service. Lower rates have also contributed to increased borrowing spending power, something that should otherwise lead home purchase demand among Millennials, who are now entering their prime home-buying years.

But in keeping with recent trends in housing, buying power is a moot point when there's nothing to buy. The low rate environment has extended the now decade-long run in housing but has also masked some more recent trends that continue to garner our close attention. Most notably, the supply of quality, affordable homes in the United States badly lags new household formation. While this imbalance has greatly supported rising home prices, it has made access to desirable housing more challenging for many, especially low to moderate-income families, many of whom are would-be first-time homebuyers.

An expedient solution making the rounds in Washington is to relax underwriting standards and make it easier to offer loans with lower down payments to borrowers with higher debt-to-income ratios. While we support expanding homeownership opportunities for all Americans who desire to own their own homes, lowering underwriting standards had disastrous consequences leading up to the 2008 financial crisis and beyond. Additionally, these solutions ignore the fundamental problem with housing, not enough homes. At Redwood, our approach to residential lending remains unchanged.

We emphasize purchasing safe, well-structured loans that borrowers can reliably afford. But more importantly, we are championing solutions in our business line that offer more high-quality and accessible housing for consumers. For instance, our business-purpose lending initiatives focus not only on stabilized rentals but also bridge lending for homes that are renovated, upgraded and brought up to current building codes before getting resold or rented to consumers. We're actively expanding the bridge business to include more robust construction/redevelopment opportunities, including market-leading financing programs for build-to-rent communities, urban infill development, and modular home development, to name a few.

These strategies all complement our consumer residential lending business and expand upon our mission. As we look toward the regulatory front, all eyes are now on the FHFA, where its new director is focused on taking the GSEs out of conservatorship, reducing their footprint across the housing sector and leveling the playing field for private capital to participate in a larger part of the market. We see this regulatory shift as a major opportunity for our residential lending business and a catalyst for us to invest in our platform to support higher levels of growth and profitability. We're now applying recent technological innovations to reimagine the entire non-agency loan production and distribution workstream.

At this time, technology to assist loan sellers in originating conventional loans that can be seamlessly sold exists only in the agency origination space. We want to make that a reality in the private sector. We see an equally compelling runway in our business-purpose lending segment, which is now nearly 30% of our equity allocation. We're now one of the largest originators of business-purpose residential loans, with a combined platform capable of building on the $2.4 billion of loans originated by CoreVest and 5 Arches in 2019.

As I mentioned earlier, we also have the largest and most highly regarded SFR securitization platform in the housing market, and this will help accelerate our strategy to grow profitably as we organically generate assets with attractive risk-adjusted returns. Our multifamily investing fits squarely within our corporate mission and has quickly emerged as a strategic and complementary facet of our overall housing finance strategy. Befittingly, we now designate multifamily investing as a core business of Redwood, with over $475 million of capital invested since 2017. We currently originate small-balance multifamily loans, both term and bridge, in our business-purpose lending segment.

However, capital deployment in traditional multifamily has been almost exclusively done through programs offered by Freddie Mac. Today we remain one of the few investors in newly issued Freddie Mac multifamily b-pieces that is not also a multifamily operator or direct lender. Given recent changes implemented by the FHFA, they are now exploring ways to expand how we provide liquidity to this rapidly growing market. While we anticipate most of our investing activities to be driven from our residential BPL and multifamily verticals going forward, we continue to dedicate meaningful resources to other third-party investment activities.

For over a quarter-century our role as an active investor and liquidity provider has been and will remain highly relevant to the mortgage capital markets. Before I hand it over to Dash, I'd like to close by saying we are proud of the progress we made over the past two years. We will continue to push our platforms ahead toward the next phase of growth. Our strategic priorities for 2020 will be focused on channeling regulatory changes and technological innovations to significantly advance our overall relevance to the housing market.

We plan to confront key issues facing housing finance and drive the industry forward with actionable initiatives. We recognize that the needs of consumers have changed and the allure of a home has as much to do with comfort, proximity to work and lifestyle as it does with pride of homeownership. As we move forward, we're committed to generating solid, risk-adjusted returns that can sustainably grow our dividend over time for our shareholders. And with that, I'll hand the call off to Dash.

Dash Robinson -- President

Thank you, Chris, and good afternoon, everyone. Our fourth-quarter results demonstrate the strength of our business model, the diversity of our revenue streams and our ability to react to shifts in the market to take advantage of opportunities to invest capital where we see the best risk-adjusted returns. As Chris discussed, over the past two years we have substantially expanded our role in housing finance. We now tout operating platforms deeply ingrained in both the consumer and business-purpose mortgage loan market.

Furthermore, we have meaningfully deepened our presence in the multifamily sector and, as Chris mentioned, are exploring additional ways to provide liquidity in this area. This progress has evolved our operating approach and capital allocations in a way we believe will drive shareholder returns for the long term. We now have 4 business segments with the operational and investing wherewithal to run in a coordinated but independent fashion and be measured as such. Before I get into our results for the quarter, I want to start by providing a deeper dive into these segments.

Our new verticals align with how we are running the company and provide better transparency into the value creation of our overall operations. We measure ourselves on the holistic results of these business lines, including earnings from both our operating activities and the financial assets these activities create. Our residential lending segment is comprised of our residential mortgage banking operations and investments created from these activities, including residential loans financed with the Federal Home Loan Bank and investments retained from our residential whole loan purchase and securitization activities. Our business-purpose lending segment includes our origination and investing activities across BPL, with a continued focus on single-family rental and single-family bridge loans, small-balance multifamily loans, and other related products.

Our multifamily investment segment includes multifamily securities and loans we have acquired, as well as other multifamily investments sourced through our various operating partners. And finally, our third-party residential investment segment includes residential investments sourced predominantly through partnerships and traditional purchases of residential securities issued by others, including reperforming loan securities, CRT securities, and other third-party RMBS. You can find more details about these new segments in the New Segment Overview and Capital Allocation Details sections at the Redwood Review. Turning to our results.

I'm going to start with our business-purpose lending segment, which had a fantastic quarter, highlighted by our acquisition of CoreVest and strong overall performance from CoreVest and 5 Arches. Nearly 30% of our equity capital is now allocated to our BPL business, and the segment contributed $24 million of core earnings during the fourth quarter, equating to a 23% core return on average equity. We saw a significant increase in volume and higher earnings contributions across both mortgage banking activities and our BPL portfolio. Overall, BPL originations in the fourth quarter totaled $750 million, including $457 million from CoreVest and $293 million from 5 Arches.

The mix of total BPL originations included $435 million from SFR loans and $315 million from bridge loans. Note that CoreVest origination numbers include only loans originated by the platform since we closed the acquisition in mid-October of last year. Going forward, we will be reporting one BPL origination number overall, in keeping with our progress in unifying the platforms into one cohesive operation. I'll provide more detail on these efforts in a moment.

On a stand-alone basis, CoreVest contributed $21 million of core earnings and slightly less than one full quarter of operations as part of Redwood. We estimate CoreVest as being $0.08 accretive in earnings per diluted share for the fourth quarter. The appendix of the Redwood Review contains more detailed information on CoreVest's fourth-quarter performance. In addition to robust origination volumes, strong execution in November on Redwood's first SFR securitization and CoreVest's tenth overall was an earnings driver for the segment.

At $395 million, the transaction was the largest securitization for the capital shelf in its five-year history and was met by strong investor demand. The securitization closed less than 30 days following the completion of the acquisition, representing an important early win. We have achieved other key milestones as well, notably, the recent restructuring of our BPL warehouse facilities, including those utilized by both CoreVest and 5 Arches, which should have a meaningful benefit to net interest income going forward. Furthermore, the first quarter of BPL is already off to a strong start.

In January, the segment originated $264 million of loans. We also made further progress on financing the business, recently closing a long-term secured debt transaction totaling $104 million in borrowings. The transaction generated $24 million of proceeds above amounts used to repay repo borrowings previously encumbering these assets. The new debt is collateralized by most of our retained subordinate and interest-only SFR securities and is similar to a transaction that we completed in the third quarter for a large portion of our Sequoia subordinated securities.

The debt is now mark-to-market with a fixed interest rate of 4.21% for the first three years. Continued product development remains a hallmark of our BPL strategy. In addition to our core SFR and bridge loan offerings, we continue to grow and develop other products that support related housing and investment activities, including build-to-rent financing and, as Chris mentioned, loans that support modular home development. We have begun the process of combining the 5 Arches and CoreVest platforms under a unified leadership structure, combining the substantial talent from both businesses to position for profitable future growth.

Once fully integrated, we believe no competing platform will possess the same breadth of financing products and depth of expertise to deliver all-inclusive and customized solutions to residential real estate investors. A unified platform will also allow us to apply our technology advantage to a full suite of products and in the process, remove redundant external costs in the day-to-day operation of the business. Moving on to our other operating segments. Residential lending delivered $20 million of core earnings in the fourth quarter by meaningfully higher lock volumes versus the third quarter and improved securitization execution.

During the fourth quarter, benchmark rates remained relatively low and were stable versus the third quarter, a boon to our production volumes and securitization execution. We had a record quarter of loan purchase commitment volumes of $2.4 billion, up 42% from the third quarter. Cumulatively for the quarter, purchases were comprised of 62% Select and 38% Choice. Volumes overall were supported by the purchase of a seasoned bulk pool of jumbo loans, which we subsequently securitized in our first Sequoia securitization in 2020.

In the spirit of celebrating milestones, it is worth noting that during the fourth quarter, our cumulative Choice purchases exceeded $6 billion since the inception of the program in early 2016. The diversity of our distribution channels between the whole loan and securitization continues to benefit our results. We are seeing increased demand from whole loan buyers for both Select and Choice production. During the quarter we sold $843 million of Select whole loans to third parties, completed two Select securitizations totaling $776 million and sold $581 million of Choice whole loans to third parties.

We saw improved securitization execution in the quarter, as elevated investor concerns over prepayment risks we saw in the third quarter subsided, resulting in fourth-quarter gross margins in line with our long-term target range. This momentum has continued into the first quarter of 2020, with year-to-date loan purchase commitment volumes totaling $1.8 billion. We have completed two Sequoia securitizations year to date at slightly better all-in execution versus our last transaction in 2019 and continue to sell more whole loan pools into a strengthening bid for mortgage credit. While the current path of interest rates is likely to produce a near-term lift to our purchase volumes, we remain focused on evolving our residential lending business to be operationally responsive to a larger and sustained opportunity to grow our footprint, whether through the expiration of the QM patch or other regulatory changes.

As Chris noted, this strategy centers around technological advancements designed to enable increased scale and efficiency of our platform, most importantly by reducing the time it takes to purchase loans from our origination partners. We plan to transform our correspondent loan acquisition platform to be more component-based, allowing us to implement the best technologies as they become available, rather than through the all-or-none systems that remain the standard in the industry today. Our multifamily strategy continues to evolve as well. As Chris previously mentioned, multifamily is emerging as an increasingly key facet of our housing finance strategy.

Over the past year, we have strengthened our strategic partnerships and expanded our access to rental housing credit. These activities included new investments in multifamily b-pieces and joint venture participation in a whole loan fund that purchases short-term, floating-rate, light renovation multifamily loans from Freddie Mac. In the fourth quarter, we deployed $11 million into our first new issue, Freddie Mac multifamily DPs. And in January, the first $500 million of loans in our joint venture fund were securitized, creating $36 million of subordinated securities for our balance sheet.

Pricing on the securitization was tighter than our initially modeled expectations. While much of the sector remains efficiently financed through activities of the GSEs, we believe originators will increasingly value alternative outlets for loan products that fall slightly outside the GSE credit box. There may also be an opportunity should the GSEs focus change due to mandates/scoring changes from the FHFA and a potential exit from conservatorship. Under leadership resources already on our platform, we are hard at work on this initiative, which we view as a natural extension of our last several years of involvement in this market.

We look forward to keeping our stakeholders apprised of our progress. Capital allocation to third-party investments was reduced slightly from the third quarter, driven largely by the continued disposition of agency CRT bonds and other third-party securities as part of our portfolio optimization activities. Securities in this segment helped drive our increase in book value quarter on quarter, highlighted by the continued strong performance of the two reperforming loan investments we made with Freddie Mac. The more seasoned of these two investments, which we made in late 2018, continues to exceed modeled expectations as delinquencies have fallen 30% since closing.

Albeit with less track record to analyze, our more recent investment is trending slightly ahead of modeled expectations as well. Cumulatively, we have $154 million of capital deployed across reperforming loan securities, representing almost half of the capital currently allocated to this thing. With that, I will now turn the call over to Collin.

Collin Cochrane -- Chief Financial Officer

Thanks, Dash, and good afternoon, everyone. To summarize our financial results for the fourth quarter, our GAAP earnings were $0.38 per share, compared with $0.31 in the third quarter, and core earnings were $0.45 per share, compared with $0.37 in the third quarter. Acquisition of CoreVest in October contributed a strong overall result for the quarter, as its origination platform helped drive strong mortgage banking income, and capital deployed into business-purpose loan investments helped drive higher net interest income. Our results were also bolstered by a strong performance from our residential mortgage banking platform, which saw increased volume and strong margins during the quarter.

Our overall corporate investment portfolio saw improved returns from rotating out lower-yielding third-party CRT and multifamily vesting securities into higher-yielding assets in business-purpose lending. While the majority of our strategic optimization activities were completed during the first nine months of the year, strong demand for residential mortgage credit continued into the fourth quarter, presenting additional opportunities for us to make gains. In the quarter we netted $150 million of capital for deployment and captured $23 million of realized gains. These increases in revenues were accompanied by an increase in operating expenses, which beginning this quarter broke out into two line items: general and administrative expenses and other expenses.

Other expenses primarily consist of acquisition-related items, such as intangible amortization. The increase in overall expenses was from both the incremental operating expenses consolidated from the CoreVest platform and from higher variable compensation costs, which were reflective of our improved full-year results. For the full year, GAAP earnings were $1.46 per share and core earnings were $1.58 per share. Both our GAAP and core results benefited from higher investment returns in 2019 as we rotated capital into higher-yielding investments in multifamily, RPL and BPL assets, including through the CoreVest acquisition.

In addition to helping increase the investment income on our investment portfolio increased the pace of portfolio optimization during the year resulted in elevated core gains. Our 2019 results also benefited from increased income from business-purpose mortgage banking, as we ramped up our activity of 5 Arches and further boosted volume for the acquisition of CoreVest. And while residential mortgage banking income decreased overall in the lower margin, we ran that business with less capital during 2019, which contributed to better overall ROEs from those operations. Looking for a moment on the composition of our earnings, as I previously mentioned, 2019 was a big year for portfolio optimization.

As spreads tightened on many of our assets, we were opportunistic in making sales, locking in meaningful gains that drove strong total returns for our investment. The capital from these sales was deployed into higher-yielding assets, and we expect to see growth in our core net interest income in 2020 as a result of this process. Looking forward, we expect our pace of sales to normalize beginning in the first quarter, and given current conditions, to see gains decrease in 2020 as a proportion of overall earnings. Additionally, as we continue to deploy our available capital, we expect core investment income to comprise a more significant portion of the total return from our investments, contributing to greater sustainable earnings, which supports our dividend.

Our fourth-quarter results contributed to an increase in book value of $0.06 per share and an economic return of 2.3% for the quarter. Included in our change in GAAP book value was $0.11 per share associated with acquisition-related items. These included $0.08 per share from the onetime impact of the equity-based purchase consideration for CoreVest and $0.03 per share of expense related to intangible amortization associated with both the CoreVest and 5 Arches acquisitions. Excluding these acquisition-related items, our non-GAAP book value increased by $0.17 per share, and our economic return on book value was 3% during the fourth quarter.

Shifting to the tax side. Our total taxable income increased to $0.66 per share for the fourth quarter, driven by increases in taxable income at both our TRS and our REIT. Focusing specifically on REIT taxable income, for the full year of 2019 we generated $1.28 per share, which exceeded our dividend of $1.20 per share. As a result, we expect to utilize approximately $10 million of our REIT NOL for 2019, leaving us $28 million to carry forward.

Additionally, for the full-year 2019, we generated $0.27 per share of taxable income at our TRS, which we were able to retain for reinvestment in our business. Turning to the balance sheet and our capital position. During the fourth quarter, we deployed $634 million of capital, generated $150 million in capital from sales of low-yielding securities and ended the quarter with $260 million of capital available for investment. The bulk of our capital deployment during the quarter was driven by the CoreVest acquisition and, as a reminder, the total transaction consideration was $492 million net of in-place financing.

As Dash noted, the appendix of our Redwood Review has a section on the CoreVest acquisition that provides additional detail on the purchase price allocation and CoreVest's stand-alone results for the quarter. In addition to the acquisition, we deployed an incremental $62 million toward DPL investments, including $41 million in bridge loan investment and $21 million in SFR securities from our CoreVest-sponsored securitization and also deployed $54 million toward third-party investment and $21 million toward multifamily investment in b-pieces and mezzanine securities. As presented in the capital allocation section of our Redwood Review, we manage our capital at a corporate level and don't include it in the equity allocated to our statement of totals deployed. Our average capital balance remained high during the fourth quarter, as we had a significant amount of available capital coming out of the third quarter in anticipation of the CoreVest acquisition, as well as the repayment of our $201 million of exchangeable notes that came due in November.

Looking at our capital structure holistically. Our recourse leverage ratio was 3.1 times at the end of the fourth quarter, increasing slightly from the third quarter as we deployed capital, including through the CoreVest acquisition. Looking forward, we expect our leverage to increase closer to the midpoint of our three times to four times the target range as we deploy our excess capital. As we've discussed before, our leverage will vary quarter to quarter, depending on the amount of loans we carry in inventory and our balance of available capital.

With the growth of our business-purpose lending operation, this will create some additional variability. And while this can create a bit of noise on this metric, we focus most closely on the leverage we employ on our long-term investments. And in that regard, our debt structure remains a significant differentiator between us and our peers. To help present this, our Redwood Review includes a new leverage section which details how over 60% of our long-term investments are financed with long-term debt with a weighted average remaining term of almost four years.

Additionally, a portion of our short-term debt is term financing we use to finance our business-purpose bridge loans, which are themselves short term in nature. Turning to our 2020 outlook. We plan to give a more detailed outlook at our Investor Day in a few weeks and will otherwise be providing commentary on our outlook through our earnings calls going forward. As such, we encourage you to attend our Investor Day or follow the webcast, which will be made available on our website.

As Chris discussed earlier, we're looking to build off our results in 2019 with continued delivering strong, risk-adjusted returns to our investors in 2020 and beyond. We believe the business is currently positioned to build on the 11.6% core ROE we delivered in 2019, with meaningful upside over the long term as we continue to develop and grow our business-purpose lending and multifamily businesses and as our residential lending business is positioned to capitalize on potential GSE reform. Directionally, we expect acquisition and origination volumes to grow at our residential and business-purpose lending segments, contributing to growth in our mortgage banking income. We believe this growth can occur while maintaining capital allocations to the mortgage banking platform relatively stable.

We will continue to deploy our available capital dynamically into investments at our business segments, depending on where we see the best risk-adjusted returns. As we become fully deployed, we expect our core net interest income to continue increasing and, as the pace of portfolio optimization slows, we expect lower core realized gain. With the addition of CoreVest and true-ups to our variable compensation for improved results in the fourth quarter, our general and administrative expenses have a bit of noise in them. Looking forward, we currently expect our quarterly run rate of total consolidated general and administrative expenses to be in a range of $36 million to $38 million.

With the growth in our mortgage banking businesses, we do expect to see some variability in our total operating expenses, as loan origination costs, including commissions, will move in tandem with our origination volumes. And with that, I will conclude our prepared remarks. Operator, please open the call for Q&A.

Questions & Answers:


[Operator instructions] The first question is from Stephen Laws of Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi. Good afternoon, and congratulations on a nice close to the year and a dividend increase to start 2020. Chris, I guess first, obvious with where rates have gone, can you talk about volumes and expectations this year or how you guys have moved loan pricing, given the 50-bp decline in long-term rates and how you view volumes in the jumbo business this year?

Chris Abate -- Redwood's Chief Executive Officer

Sure. What I would say is obvious, our volumes are up considerably. They were up in the fourth quarter. They're up again this far in the first quarter.

Rates have a lot to do with that. Another factor that has a lot to do with it is just sheer capacity constraints at the money center banks. I think we're seeing some competitors focus more on margins right now than volume, and as a result, it's really allowed us to step in and be very competitive. For the time being, I would expect that to continue because rates don't seem to be showing any sign of slowing down with respect to rallying.

So we feel pretty strongly about the trajectory of our residential business. All the same, we've got a lot of strategic work to do there this year. We're going to be investing in technology and positioning the firm to be able to look a lot more like an agency execution with respect to the private sector, so there's a lot to do there. But we see a lot of opportunity in that business going forward.

Stephen Laws -- Raymond James -- Analyst

Great. And staying on the jumbo and non-QM business, can you talk about the QM patch-GSE reform? Any updates or changes there from your comments three months ago on the same call? I believe I asked as well, but can you talk about the opportunity there and any insight you have into how you see that playing out as we get close to or past the January expiration date of the QM patch?

Chris Abate -- Redwood's Chief Executive Officer

Yes. Good question. We have had some developments there. I think the CFPB is committed or is hoping to get something out by May, some proposed rulemaking.

There was an indication by the Director that they're strongly looking at moving away from DTI as the de facto constraining metric to something in favor of a market-based metric. We were given assurances that no determination had been made, and I really do think they're very interested in what the market has to say. I think that when it comes to the change, whatever it is, we'll adapt very quickly. I think the important thing is the focus on leveling the playing field is still very much front and center for not only the CFPB but also the FHFA.

That's the most important piece for us. It sounds like there could be somewhat of a delay in 2021, but it was reiterated that this is going to happen, so we feel very good about that. Overall, as I mentioned in my comments, we'd still like to see a borrower credit metric that's really tethered to the specific underwriting. There are issues with market-based metrics.

I think they work well in coordination with other factors, and we'll have to wait and see how all of Appendix Q potentially changes. But in and of itself, we would prefer to see something that continues to link the QM designation to the borrower underwrite.

Stephen Laws -- Raymond James -- Analyst

Right. Thanks for those comments, Chris. Dash, I think you mentioned in your prepared remarks, $264 million of BPL volume in January. Please correct me if I'm wrong; I was writing a lot down.

And I think that's put pretty consistent with the $750 million of volume in 4Q. Is this a good run rate, $3 billion on the BPL volume, or how should we think about annual volume in that business line?

Dash Robinson -- President

Yes. I would say directionally, we would say we expect the business to continue to build on the $2.4 billion cumulatively that the two platforms did last year. The business over the past several years has displayed some positive seasonality effects in December as investors seek to get transactions done before year end, and so that certainly buoyed our December volumes, which obviously drove Q4 overall. And there was a little bit of benefit from that in January as well.

So in general, we remain very optimistic on continuing to build on the $2.4 billion cumulatively we did last year, largely because we feel like we can go deeper with the existing products but also, as Chris and I both alluded to, are continuing to see really some positive momentum in additional products that complement the core asset borrower and bridge production that we see. So that's what I would say there. From an interest rate perspective, the origination bonds in the space are certainly, at least we've seen, less sensitive to interest rates, much more driven by other motivations for investors and things of that nature. But for all the reasons we've said, we're very optimistic to continue to grow last year, but there are some seasonality effects, where quarter by quarter, we're not necessarily measuring.

We're measuring over the long term, measured in years.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks. And then lastly, at CoreVest, I think each of the last two quarters, you've deployed about $150 million of capital into new investments. I believe the Review said $260 million available at year end.

I would think some have been put to work. But can we talk about your capital needs? I know leverage is kind of under the midpoint of the target range. I know you've got a little bit of portfolio optimization, I guess, that could still be done. But can you talk about capital needs, how you think about that as we look at 2020?

Collin Cochrane -- Chief Financial Officer

Hey, Stephen. This is Collin. I can speak to that real quick. Right now I think we feel like we're in a pretty good position on capital.

We did talk about and we did see the opportunity to optimize some of our assets in the fourth quarter as we continued to see spreads tighten. So that did leave us with some capital heading here into the first quarter. So we feel like, for the time being, we're in a good place, and that gives us a little bit of runway to keep working forward on the initiatives we have here in the near term, and we'll see how things develop over the next months.

Chris Abate -- Redwood's Chief Executive Officer

Yes, Steve. I'd also add that we've said in the past, we try to be very disciplined with our capital raising and our needs. And that excess capital number, we had enough to run the business and deploy in the normal course. So obviously, there's been opportunities to raise money over the past few months, and that's a big reason why we haven't.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks a lot for the comment, and I appreciate the update and answer questions.


The next question is from Steve Delaney of JMP Securities. Please go ahead.

Steve Delaney -- JMP Securities -- Analyst

Hey. Thanks, everyone, and congrats on the strong start with CoreVest. This week, as you can imagine, the questions we're getting from investors all have to do with refis and increased expectations for refi volume. Just curious for your business, obviously, you're not an agency MBS investor, having to deal with the CPR increases.

But when you look at your business, how do you feel about, I assume there's pluses and minuses with refis. Right? You've got the origination business, but you're also an investor. Could you just comment briefly and broadly on how you see the pluses and the minuses on a high-refi environment working out for Redwood? Thanks.

Chris Abate -- Redwood's Chief Executive Officer

Sure. I think, overall -- we think it's a plus. Our residential lending group, looking at our volumes and our margins, both have been very strong. As I mentioned, there are some capacity constraints in the system, which has really helped to bolster our volumes recently, very opportunistic there.

We obviously, on the flip side, have some investments to manage. We have some ALS and IO-style securities. Not too much. We don't hold a lot of services.

But those become more difficult to manage. Our home loan bank portfolio becomes more difficult to manage. As you know, that's predominantly seasoned jumbo loans, and a lot of those have inherent price caps based on their complexity profiles. So effective hedging there is necessary but also challenging in these environments.

So I do think that there are some pluses and minuses. But the good news for us is we've got, I think, a fairly diverse revenue stream, and right now the pluses have been outweighing the minuses.

Steve Delaney -- JMP Securities -- Analyst

Great. That's helpful, Chris. Thanks. And just a quick follow-up, my last question.

You mentioned construction loans, construction/development, obviously with specific property types involved. I'm just curious if is that a new team at Redwood that you brought in? And logistically, kind of like with the resi bridge, how do you handle that logistically from just an inspection, disbursement and all of that?

Chris Abate -- Redwood's Chief Executive Officer

Yes, Steve. The reference to construction was really the effort that's already embedded in our combined BPL business.

Steve Delaney -- JMP Securities -- Analyst

OK. Got it.

Dash Robinson -- President

It's not ground-up, large multifamily like maybe you're referencing. It really is more development and things like that. The majority of what we do that's pure construction are these build-to-rent communities, which we're seeing more and more of. And CoreVest has been a market leader now for two or three years.

The discipline around managing those construction draws and that progress is really analogous to how we would manage any non-fully disbursed loan. We have third-party vendors and internal teams that verify expenditures and progress on the projects, and no additional money goes out the door until there are at least those two sets of eyes to validate expenditures and actual progress on the ground. And then additionally, particularly with the build to rent, one of the structural things that we like to use is really a phased approach. So if a sponsor has a larger project that they would like to complete, we tend to finance a certain portion of the construction, would like to see it stabilized and/or termed out before going on to other parts of the project, which is the helpful way to mitigate larger exposures to larger projects that are in play.

So to your point as a back-end logistical analysis that we always do, and then on the front end of the structure of the loan, there's a way to manage for the cumulative exposure over time based on the progress of a specific project. But it's much more driven by the single-family build to rent, where we've seen a lot of momentum over the past few quarters.

Steve Delaney -- JMP Securities -- Analyst

Thanks for that clarity, Dash. Appreciate it.


The next question is from Matt Howlett of Nomura. Please go ahead.

Matt Howlett -- Nomura Instinet -- Analyst

Hey, guys. Congrats. Thanks for taking my question. First, you mentioned in the Review that you're putting these business-purpose loans on the FHLB line.

You're rolling it out to your correspondent sellers. So just naturally, is this just going to -- it seems like an obvious question, but given the ROEs you're making, is this just going to continue to make a bigger portion of the total capital allocation at the company? Could you just go over that and what you're seeing so far with offering that to your sellers and how that's looking on the FHLB line?

Dash Robinson -- President

Sure. So a couple of clarifying things there, Matt. The single-family rental loans that we have been putting at the FHLB are more of the five to 10-year product that is consistent with what we've been securitizing. We're looking at other types of analogous products that could fit as well on the FHLB, but that is largely what we're doing there.

And, yes, you're correct. We have seen an evolution of the loan portfolio with the FHLB. And to Chris's point, now that we're as actively involved in BPL as we are, we have the opportunity to originate loans with better complexity profiles, particularly in this interest rate environment, than a lot of the jumbo loans that we have. And so the runoff in jumbo loans that we've seen at the FHLB has been essentially exclusively replaced, with a couple of smaller exceptions, with newly originated SFR loans like the type I was describing.

The effort through our Denver operations is a bit more linked to some of the smaller balance, what we call single-property SFR loans that CoreVest produces. So it's not the preponderance of their production, but we produce a little bit of it through CoreVest and have historically sold that whole loan. And the strategy there is to really use our resi lending operation to expand our distribution for that product. A lot of our sellers are already making those types of loans and selling them to our competitors, so we've been closely coordinated in trying to develop a program to complement our direct lending effort at CoreVest and essentially be able to accumulate more of those loans more efficiently, either for follow-on sale like we're doing today or potentially securitization.

Matt Howlett -- Nomura Instinet -- Analyst

Got it. Great. And on that note, the FHLB, there's been a request for a comment. I know you guys have this little longer access to it, but any thoughts on how it would impact you if they allow everyone to get back in? And obviously, you could renew your membership or possibly increase it?

Chris Abate -- Redwood's Chief Executive Officer

Yes. The FHFA, I think, on Monday put out the request for input. It was 15 pages with four pages of comments. So I think our first knee-jerk reaction is this is a big win.

If you recall, this was settled business under the Watt regime at the FHFA. But even by way of opening this issue up, it to me indicates that this isn't settled within the walls of the FHFA, and I think we obviously have been working fairly hard behind the scenes on this. And again, I think what we have is an example of an unlevel playing field. You've now got 50% of mortgages being originated through, or purchased by, non-depository institutions who do not have access at this point.

So I think Treasury started the process by advocating for the modernization of the membership. And I think what the big hurdles have been, have been around mission and safety and soundness. And I think some of the mission work could be relatively easily done. We should have a strong nexus to the mission of the banks, and we should be affiliated with residential lending somehow.

So if you're not, I think that's probably a reason for not having access to membership. On the safety and soundness side, it's a little bit more complicated, just based on how captives and insurance have worked versus banks. Banks have effectively an FDIC backstop, which can be utilized by the home loan bank system in the event of a default. That doesn't currently exist for captives.

We actually have a solution that, with others, has been developed that we think addresses the main thrusts of these safety and soundness concerns. So we do plan on submitting a response to the RFI and laying out the solution, and I think it's somewhat established now in Washington. And we're actually very hopeful at this point that something can be done. And again, at the end of the day, I think along with the QM patch, the spirit is can we do something safe and sound that levels the playing field with respect to this access to home loan bank liquidity? So we think that would be a very good thing for us and other investors in the residential housing market.

Matt Howlett -- Nomura Instinet -- Analyst

Well, it's nice to hear that from you guys, given you are a leading voice for the group and in Washington. And on that note of leveling the playing field, the securitization exit was strong in 4Q. You said it's been even a little bit better, if I heard you right, at the beginning of this year. When you look at a securitization exit versus agency exit, are you getting volume on your jumbo or your Choice because loan executions are superior to that of the GSEs? Is g-fees higher in certain products, we're hearing, or on investor loans? And I'm not sure where it is on a prime jumbo or Choice-type product.

But are you seeing better execution? Because that's why you're getting flow, or do the GSEs still have an unfair advantage on a lot of that product? It's something that I know the regulators have been looking at.

Chris Abate -- Redwood's Chief Executive Officer

Well, they still have an unfair advantage, if nothing else, by way of them not having to comply with the QM rules and demonstrating a borrower's ability to pay and also, for that matter, a QRM, which involves risk retention. So if Redwood is required to hold lifetime risk retention on a Choice deal, for instance, we need to price in that cost of capital into every mortgage that we buy. We need to price in the legal exposure to the extent they're non-QM loans. So those are definitely still clear advantages that the GSEs have today by way of the QM patch.

That said, we have been competitive in certain aspects of loans that are GSE eligible. You mentioned investor loans and certainly some higher DTI loans and some other products. That's been a pretty consistent theme over the past year or so. Some of that has to do with the way the GSEs price those products in relation to other products.

So it's hard to say what's sustainable at this point. But I still think that the main driver of what's really made us more competitive recently has just been the rate volatility and how consumers have responded to lower rates.

Matt Howlett -- Nomura Instinet -- Analyst

Right. Exactly. Well, congrats on excellent results. Thank you.


The next question is from George Bose of KBW. Please go ahead.

Bose George -- KBW -- Analyst

Hey, guys. Good afternoon. Actually, first just on CoreVest, the accretion there, obviously, was very attractive, the $0.08 that you noted. Earlier when you did the call at the time of the acquisition, you guys had mentioned that you thought they'd be $0.15 to $0.20 of accretion.

Obviously, the run rate seems to be a lot stronger here. So just any thoughts on should we think more in terms of what you guys did this quarter in terms of fee accretion from that deal?

Chris Abate -- Redwood's Chief Executive Officer

Yes. The thing I would say there, Bose, a little bit along the lines of, and responding to Steven earlier, there were probably -- it was a fantastic quarter for BPL overall, and we're thrilled with that. That said, there were a couple of items in there which are worth mentioning. I mentioned the December seasonality, which certainly drove volumes higher.

But because of how our acquisition was structured, we also garnered some P&L from the loans that we acquired as part of the acquisition, which we then securitized. But none of the loans that were originated by CoreVest since we acquired them went into that 2019 transaction, so we did have some incremental revenue from there as well. Q1 has started off very, very strong. But like I said earlier, we're trying to measure this over the long term.

But for some of those reasons, I would not draw a line through the $0.08 quarter to quarter. But we still are extremely optimistic about the accretive value of the acquisition over time.

Bose George -- KBW -- Analyst

OK. That makes sense. Thanks. And then actually, Collin had mentioned that the realized gains should be more normalized next year relative to the levels this year.

Obviously, it's a reasonably big number this year, so is there any way for us to think about what "normalized" means? Could it be like half the level of this year? Any color there?

Collin Cochrane -- Chief Financial Officer

Yes, Bose. I think gains are always a little bit hard to predict, just given the nature of how they occur and when we do have sales, those are optimistic -- sorry, opportunistic in nature, given where the market's at any point in time. But I think we can say directionally, we do expect them to be lower. How much lower, we didn't give a range, or I didn't give a range in my commentary.

But I do expect that they'd probably be meaningfully lower. We do expect that to be replaced to a large extent by an increase in income from the net interest income and from our investment as we've rotated into the higher-yielding investments. So overall when we think about the business, in my commentary I noted we're looking to build off the overall ROEs that we achieved this year. So we do think, even though with lower gains, that the rest of the business and how we're redeploying the capital is going to essentially make up for those lost gains and allow us to be able to build off the overall ROE.

Bose George -- KBW -- Analyst

And then, actually, I just wanted to follow up on Steve Delaney's earlier question just on rates and the pluses and minuses. Just in terms of the book value side of it, can you just update us on where you think book value is, quarter to date?

Dash Robinson -- President

It's probably down modestly maybe a few cents. We're just thinking about hedging costs. We retraced a lot of the spread movements since the beginning of the year, so I think probably the biggest effect on the book has been just movements in interest rates. So I would anticipate a small decline there, but not anything overly material at this point.

I'd also say as of today, we're in the most volatile moment that we've seen in probably a year from a market perspective. And so if there was ever a time where the rest of the quarter could be more impactful than the first part, it's probably the first quarter of this year. So I think we'll have to pay attention to what happens with the coronavirus and the macro outlook. And perhaps at our Investor Day, we may have a better, more, a better response that's more indicative of the full quarter.

Bose George -- KBW -- Analyst

Actually, let me just throw in one more. I just wanted to touch on the comments you made on the multifamily segment, potential ways you might increase your role there. And then I think you referred to changes made by the FHFA there. Can you just elaborate on that a little bit?

Dash Robinson -- President

Sure, Bose. It's Dash. Yes, recently last year, the caps within which Fannie and Freddie operate were restructured a bit, as you may know. Most importantly, they now include effectively all the products that the GSEs do, including affordable and sort of mission-rich products, which have to be at least 37.5% of total production.

So we have a very, very close relationship with the GSEs, particularly Freddie Mac in multifamily, and we are intending to deepen that relationship. And really, what we're saying is if there are opportunities in the market to provide liquidity and alternative liquidity source that complements how the GSEs may run their business going forward, given how large the multifamily market, this is a market that's approaching $400 billion in production per annum. There's a lot of opportunity there to be an adjacent player, frankly depending on how all that shakes out. So it's a little bit of early days.

Like I said in my remarks, we look forward to updating folks over time. But when you think about all the competencies we have across Redwood now, from a credit structuring and then overall operations perspective, this is something we feel is just a natural extension and can complement and embed very nicely with the businesses we're already running.

Bose George -- KBW -- Analyst

Yes. Makes sense. Thanks a lot, guys.


We have reached the end of the question-and-answer session. I will now turn the call over to Chris Abate for closing remarks.

Chris Abate -- Redwood's Chief Executive Officer

Thank you very much, and thank you to everyone who participated in our call today. We appreciate it. And lastly, once again, we'd like to remind you that our Investor Day, one of the great wonders of the world, is on March 24 in New York City. If you're interested in attending, please reach out to Lisa Hartman, our head of investor relations, via phone or our website.

Thank you.


[Operator signoff]

Duration: 67 minutes

Call participants:

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

Chris Abate -- Redwood's Chief Executive Officer

Dash Robinson -- President

Collin Cochrane -- Chief Financial Officer

Stephen Laws -- Raymond James -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Matt Howlett -- Nomura Instinet -- Analyst

Bose George -- KBW -- Analyst

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