Redwood Trust Inc (RWT) Q4 2020 Earnings Call Transcript

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Redwood Trust Inc (RWT 2.63%)
Q4 2020 Earnings Call
Feb 10, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Redwood Trust Incorporated Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] At the conclusion of the prepared remarks, there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Lisa Hartman, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

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

Thank you, Andrea. Hello, everyone, and thank you for joining us. With me on today's call 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 may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is provided in our fourth quarter Redwood Review available on our website.

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 Abate, Redwood's Chief Executive Officer, for opening remarks.

Christopher J. Abate -- Chief Executive Officer

Well, thank you, Lisa, and thanks to all of you for joining the call today. As I reflected on the past year, it's hard to contextualize what our country has been through in the opening weeks of 2021, let alone all of 2020. With unprecedented turmoil in Washington, an economy still rocked by the coronavirus pandemic, now seemingly populist revolt under way on Wall Street, it's hard for any investor to navigate all the tumult and volatility. So we feel all the more fortunate to have emerged from such an unprecedented year in a renewed position of strength. It's motivated us to make 2021 the best year in our company's history.

We exited 2020 with momentum building across both of our platforms, including record lock volumes in residential lending and very strong originations and contribution from business purpose lending. GAAP earnings for the fourth quarter were $0.42 per share, well in excess of our $0.14 per share dividend, and our GAAP book value increased $0.50 per share from the third quarter to $9.91 in the fourth quarter. Based on the trajectory of our operating businesses and our expectations for sustainably higher net interest income throughout the year, we are confident that we can safely support a stable to growing dividend in 2021. We plan to announce our first quarter dividend in March.

Looking ahead, our strategic priorities for 2021 include allocating ample capital to our residential consumer and business purpose lending platforms, doubling down on our technology investments to scale our business and continuing to support and develop our team members. Strategically speaking, the COVID-19 pandemic has only further validated our core investment thesis, as demand for single-family detached housing has grown significantly. We expect much of that demand to be durable, as families choose to move away from dense urban areas, and more people are able to work remotely out of their homes regardless of proximity to the workplace. This has already caused ripple effects across both the residential and commercial property sectors, especially in major metropolitan areas.

That's why our primary focus for 2021 will remain on our operating platforms. The operating capital we allocate to these businesses is expected to generate returns on equity north of 20% post tax levels very difficult to come by when sourcing third-party investments in today's compressed yield environment. Most importantly, these businesses serve large and growing markets not covered by government lending programs, and as such are positioned to generate scalable and repeatable sources of future earnings, even in a less accommodative interest rate environment. Since they are earned within our taxable subsidiaries, the earnings generated can also be retained to provide a steady stream of internally sourced investment capital that can be deployed to further grow earnings and book value.

Turning to our investment portfolio, our portfolio remains a strategic element of our business model, so that supports our operating platforms and third-party investing activities. Overall credit performance of the book remained strong as delinquencies have continued to decrease since their peak in the summer and strong home price appreciation has kept the actual credit losses low. This means that, even if we retrace back to "preCOVID-19" valuations, we continue to expect significant further upside in these investments. Coupled with positive credit trends, high prepayment speeds have begun to unlock additional value on most of our credit investments held at a discount to par. And to channel the late Yogi Berra, I'll remind everybody that "loans that prepay, don't default.

On the technology front, speed and disruption are top of mind in 2021 across the Redwood enterprise. The goal is not simply to grow volume or issue more securitizations. We aim to fundamentally change how the non-Agency sector operates, from end-to-end. That entails more speed and automation, and keeping technology at the forefront of our planning process. In the past several months, we have launched several new technology initiatives through both organic and new venture investment strategies. And just today, we are announcing the recent launch of RWT Horizons, a new venture investing strategy focused on early stage technology companies with business plan squarely focused on innovations that can disrupt the mortgage finance landscape. The amount of capital deployed through this new platform will likely be smaller at first, however, the investments are designed to have an outsized impact on how our business operates.

Our strategy centers on creating new efficiencies across the mortgage value chain, thereby making us a more meaningful partner to the broad network of market constituents to whom we provide liquidity. We expect to have a steady stream of new technology releases across our platforms that we're excited to share with you, some of which Dash will cover in more detail on today's call.

Paramount to our success are our people and the core values by which we conduct our business. Caring for our employees has never been as important, as we continue to support our team members and their families through the impacts of COVID-19. Investments in our employee programs and stewardship of our culture remain strategic priorities, and we're proud of the work that we've done to engage, develop and retain our workforce over such a challenging year.

We stand behind our core values, including an earnest focus on diversity, equity and inclusion, and a commitment to strong corporate citizenship, both socially and environmentally. Our commitment to our larger communities through volunteerism and charitable giving have also remained in sharp focus for us, particularly as our shared humanity has been amplified by the COVID-19 pandemic. We believe our strategy will enable us to scale our business and take market share, grow durable and repeatable earnings and serve our mission to help make quality housing whether rented our owned, accessible to all Americans. With optimism on the horizon for 2021, we're looking forward to the positive impact that Redwood can make for our collective stakeholders, including our shareholders, our employees and our communities.

That concludes my prepared remarks. I'm now going to call -- turn the call over to Dash Robinson, who will walk through our operating results in more detail. Dash, go ahead.

Dashiell I. Robinson -- President

Thank you, Chris. With record performances from our operating businesses during the second half of 2020, we entered 2021 in a position of strength. Our fourth quarter results reflect continued improvement in the broader credit markets, the depth and breadth of our competitive advantages and opportunities for our business to further build market share and growing segments of housing finance.

Our crisp execution during the quarter was supported by progress on key technology initiatives and increased efficiency in turning our capital. Before getting into our results, I will further discuss some of the key housing industry trends we are observing. The theme as we saw in the third quarter have continued and tailwinds for our operating businesses remain strong. Secular trends driving single-family housing demand do not appear to be abating. Even with the promise of a vaccine, consumers are embracing the flexibility of the work-from-home model, detethering them from urban centers and creating a substantial pocket of fresh demand for housing.

The need for space and functionality to conduct business in private homes has driven higher home values at all price points, in turn fueling the potential for expansion in both the owner occupied and an investor-owned segments of the market. Home price appreciation continues at pace as demand for single-family homes as far outstripping supply.

Market observers estimate that US housing stock and a total of $2.5 trillion in value in 2020, including $2.2 trillion from appreciation and existing homes. Nationwide home prices were up over 10% year-on-year in December. And while the number of homes sold rose over 20%, inventory available for sale fell over 40%. Resale inventories at its tightest level ever in many top markets and on average stands at less than two months of supply. Once more mortgage rates have remained at or near record lows, even as 10-year treasury rates now stand more than 25 basis points higher than in late December.

And while the pandemic continues to impact certain segments of the labor market in different ways, the personal savings rate at year end was up 90% from the end of 2019. As such, a key outcome of Fed stimulus has been meaningful upward pressure on bank deposit levels, a phenomenon that among other things has important ramifications for bank appetite for assets. This data coupled with the demand trends we are seeing for our products and the performance of our portfolio makes us optimistic about our immediate and long-term opportunities for growth. In many ways, we will measure our success in 2021 by the velocity with which we enter 2022. We believe our competitive positioning, commitment to technology solutions and deep client base will allow our businesses to operate at a steadily increasing capacity as the year progresses.

Now I'll turn to some key metrics from the fourth quarter. Sparkling results from our residential and BPL platforms coupled with strong performance in our investment portfolio drove a 20% annualized return on equity for the quarter. In our residential business, we recorded a record $3.8 billion of locks with over 90 discrete sellers, up 81% from the third quarter. Loan purchase commitments, those adjusted for potential pipeline fallout during the quarter were $2.5 billion, more than double the amount in the third quarter. Momentum has continued into 2021, as January locks totaled $1.6 billion. The vast majority of our locks continue to be select loans, which are reflecting some of the strongest credit metrics we have seen since the great financial crisis. Including average FICOs in the high-700s and debt ratios of 30% or lower.

These record volumes were well balanced by our multi-channel distribution model. During the quarter, we achieved strong execution on two securitizations backed by $669 million of loans in aggregate, including a $345 million single-investor securitization placed with an insurance company. We also sold over $800 million of loans during the fourth quarter and entered into agreements to sell forward an additional $1 billion, expected to settle in the coming weeks.

We believe that in 2021, we will see a pronounced increase in consumer demand for jumbo loans, and that we are in the early stages of historically significant refinancing wave. With rates remaining low, we are seeing our seller network continue to hire additional loan officers to support pent-up demand in the jumbo pipeline and an increase in participation in our seller training sessions. In December, we officially launched a new seller initiative, Redwood Rapid Funding, demand has exceeded our expectations. And as of January 31st, we had funded nearly $120 million of loans through the program. We are in the process of onboarding several more sellers as we transition from the pilot phase into a more formal program for a broader set of our clients.

Additionally, we recently launched the pilot phase of Redwood Live, an app-based tool designed to give our sellers visibility into the underwriting process with live status updates for each of their loans. Also during the fourth quarter, we launched a new initiative to modernize our workflow on the Capital Markets' desk, which will include an end-to-end solution for accessing, reporting and analyzing standardized loan level data for our Sequoia securitizations. This platform will provide secure real-time data and transparency on the underlying loan performance within our existing securitizations and a portal for potential investors during the marketing period. In the coming months, we look forward to sharing more on these and other new programs, including the automation of certain portions of our underwriting process.

Turning to CoreVest, our investment thesis for entering the business purpose lending segment continues to be supported by origination growth and clean credit performance. CoreVest continues to post truly differentiated operating results, fueled by growing consumer demand for single-family homes for rent and institutional investor appetite for the asset class. We originated $448 million in BPL loans during the quarter, up 71% from the third quarter. Almost 80% of this production was in single-family rental loans, for which demand from the securitization markets remains a highlight. We completed two securitizations in the fourth quarter, including an innovative single-investor transaction placed with a leading insurance company.

Our broadly distributed deal was backed by $274 million of SFR loans and was particularly well received by the market. Certificates placed with third-party investors represented 91% of the capital structure with the weighted average yield of 1.48%. This was 20 basis point improvement upon the already strong execution of our previous issuance.

The single-investor securitization provides $200 million in financing for SFR loans, and includes a unique ramp up feature that enhances capital efficiency and reduces our reliance on traditional warehouse funding. During the fourth quarter, we distributed $60 million in SFR loans into the structure and expect to complete the ramp up later this month. We intend to pursue similar deals in 2021, which would accelerate our ability to grow the business with more efficient use of capital and reduced market risk. Additionally, in the fourth quarter, we called one of our previously issued SFR securitizations, which has $75 million of outstanding loans, the majority of these loans have either been refinanced or resecuritized, and the call allowed us to recycle our capital at a significantly improved cost of funds.

Our BPL borrowers are encouraged by the resilience of tenant performance this past year, and continue to raise additional capital to expand their portfolios. Importantly, we continue to believe that there is a deep group of potential borrowers, many of which are seasoned real estate investors that remains unserved by these types of lending products.

The tailwinds that fueled our residential and BPL businesses have also positively impacted our investment portfolio. During the quarter, the fair value of our securities book increased approximately 3%, supported by of our securities book increased approximately 3%, supported by continued improvement in credit spreads and strength in underlying credit performance. Overall, 90-plus day delinquencies in our securitized portfolios across both jumbo and SFR are now below 2%.

Additionally, elevated prepayment speeds are accelerating our ability to unlock the value of many of our subordinate bonds. The majority of which we have the right to call at specified dates or once the underlying pools pay down to a certain size. These call rights are generally at par reflecting a discount to our current estimate of the fair value of the underlying loans. In total, the net discount on our securities portfolio as of year-end was well in excess of $400 million. And while expected losses will to an extent influence its full realization, this discount reflects substantial potential upside to book value.

All in all, we remain very pleased with how our firm is positioned as we start the year. Against the favorable backdrop for our businesses, we are committed to the use of technology to facilitate scale, reduce customer acquisition costs and serve our growing client base more efficiently. These high-quality operating earnings are complemented by more proprietary deployment opportunities for our portfolio, which should help to drive net interest income higher through time.

And with that, I'll turn the call over to Collin Cochrane, Redwood's, CFO.

Collin L. Cochrane -- Chief Financial Officer

Thanks, Dash, and good afternoon, everyone. As Chris and Dash discussed, our fourth quarter earnings and book value benefited from strong results across our operating businesses and investment portfolio, contributing to GAAP earnings of $0.42 per share for the quarter and generating a 7% economic return on book value for the quarter.

After the payment of our $0.14 dividend, our book value increased to $9.91 per share, representing a 5% increase for the quarter. That was primarily driven by the strong earnings at our operating businesses. As Chris mentioned, these businesses are operated within our taxable subsidiary, giving us the optionality to retain and reinvest that income or distribute it through a dividend.

Focusing in on some of the operating results within the business, our residential mortgage banking team achieved record lock volumes while increasing gross margins relative to the prior quarter to generate $24 million of mortgage banking income. CoreVest also saw a large sequential volume growth and improved securitization execution during the quarter, which helped to generate $33 million of mortgage banking income. And a similar dynamic to the third quarter, though to a lesser extent, business purpose mortgage banking results included a benefit from spread tightening on the $286 million of SFR loan inventory it carried into the fourth quarter.

In our investment portfolio, net interest income remained relatively stable as capital deployment into CoreVest and Sequoia investments was outpaced by pay-downs, which have remain elevated due to higher prepayment fees. As dash mentioned, higher prepay speeds, along with tighter spreads continue to benefit our subordinate securities that we hold at discount, and we saw a positive fair value changes across our portfolio.

Shifting to the tax side, in the fourth quarter, we had REIT taxable income of $0.05 per share and $0.37 per share of taxable income at our TRS. Our fourth quarter REIT taxable income was negatively impacted by a year-end adjustments and we expect it will shift up in the first quarter of 2021, and continue growing as we deploy capital into our investment portfolio, which is generally held at 3. [Phonetic] Given our full-year net taxable loss at the REIT, we currently expect all of our dividends paid in 2020 to be characterized as a return of capital for tax purposes.

Turning to our balance sheet, we ended the fourth quarter with unrestricted cash of $461 million. After allocating incremental working capital to our mortgage banking operations during the fourth quarter and net of other corporate and risk capital, we estimate we had approximately $200 million of capital available for investment at December 31st.

Our financing structure remained stable in the fourth quarter, after significant changes in prior quarters. Overall, we saw non-recourse leverage decreased slightly to 1.3 times at the end of the year from 1.4 times at the end of the third quarter. This decrease was primarily due to some effective deleveraging within our investment portfolio from higher levels of paydowns and fair value increases during the quarter. Additionally, as we completed several securitizations near the end of the year, we held at relatively low balance of loans in inventory, which helped to keep overall leverage down.

As we discussed, we generally expect our overall leverage to increase as we continue to build inventory levels at our mortgage banking operations. We may also explore adding incremental non-marginable leverage to our investment portfolio, which currently has less than one times direct leverage excluding our long-term corporate unsecured debt. At our mortgage banking operations to support growing volumes, we increased our residential warehouse capacity from $600 million to $1.3 billion and maintain $1 billion of capacity for BPL operations, with nearly 70% of this total capacity being non-marginable.

I'll close with our outlook, which is also detailed in the new 2021 financial outlook section of our fourth quarter Redwood Review. We expect demand for single-family housing to remain robust throughout 2021, which should benefit both of our operating platforms. Though we may experience a rising rate environment, we expect most existing jumbo loans will remain in the money and refinanceable in 2021. Before 2021, we'll continue to focus on growth, technological efficiency and increased profitability in our operating businesses, which should allow us to retain more capital within our taxable subsidiary and grow book value. We also expect these activities to support incremental capital deployment into our investment portfolio, which should drive higher net interest income and support a stable to growing dividend.

Looking forward, we have arranged our outlook to focus on our operating businesses, which we run out of our taxable subsidiary and our investment portfolio, which we generally hold at our REIT. We think it's important to make this distinction as our operating businesses generate higher returns and have a steeper growth trajectory. And with the ability to retain earnings from these operations, over time, we expect a significant capital we have allocated to these platforms to be valued as a function of their forecasted earnings streams.

On that note, at December 31st, we had approximately $375 million of capital allocated to our operating businesses, including $215 million for residential mortgage banking and $160 million for BPL mortgage banking. And in 2021, we expect after-tax returns on this capital to 20%. We may allocate additional capital to each of these businesses to support growth in volumes throughout the year with similar return expectations.

Shifting to our investment portfolio, at December 31st, we had approximately $1.1 billion of capital deployed here, which we expect can generate returns on capital in 2021 between 10% to 12% relative to our year-end basis. We expect net interest income to trend higher throughout 2021 as we deploy incremental capital into largely proprietary portfolio investments at returns consistent with or higher than our in-place portfolio. Additionally, given current market conditions, we forecast the average cost of funds on our secured debt to continue improving throughout 2021.

To support our operating businesses and investment portfolio, we expect corporate operating expenses to be between $50 million and $55 million for 2021, with variable compensation commensurate with company performance. And we expect long-term unsecured debt service costs over 2021 to remain consistent with 2020, at approximately $40 million annually.

I'll note that while this outlook provides for a strong returns in 2021, we expect that to return potential of the businesses will grow throughout the year as we deploy additional capital and continue to expand our operating platforms, positioning the business to generate even higher overall returns in 2022.

And with that, I will conclude our prepared remarks. Operator, you can open the call for Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Doug Harter of Credit Suisse. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. So hoping we could just talk a little bit more about the 2021 outlook for the mortgage banking businesses. Obviously, saying in excess of 20% is kind of could be a wide range. But I guess if I look at the returns in the fourth quarter a little bit look like you generated $30 million, on that equity base would be kind of north of a 30% return on equity. So I guess, just kind of wanted to kind of drill down into the more excess of 20% a little bit more.

Christopher J. Abate -- Chief Executive Officer

Sure. Doug, I'll kick it off and then Dash can supplement. But you're right, the ROEs on the operating businesses have been meaningfully higher than 20%. It's a balance we need to strike with forward guidance, lot can happen over the course of the year as we saw last year. But what we've seen early on in Q1 gave us, obviously, plenty of confidence to go out with the north of 20% number. I think if this operating environment is maintained or enhanced, there is a very good opportunity and we could do quite a bit better than that. But we need to balance out a number of factors. Probably the most fundamental one is, is the rollout of the vaccine and ultimately a recovery in the economy. So right now, the operating environment remains strong. But we want to get a little bit more behind us in 2021 before we update that estimate.

Douglas Harter -- Credit Suisse -- Analyst

No, that -- I'm sorry, Dash.

Dashiell I. Robinson -- President

Doug it's Dash. I was just going to add that on to just to piggyback on Chris's point. Some of the -- so you're absolutely right. I mean, the returns on equity for that capital in the fourth quarter were in excess of 30%. Some of that does reflect some of the inventory balances we had carried into the fourth quarter, particularly around BPL, which will always do. But those continue to be a little higher than we expect them to be in 2021, as we continue to work out of the pipeline from the second half of the year.

And secondly, the fourth quarter also reflects what as you know, we're continuing improvement in credit spreads and so we were able to execute into that environment. And our forecast, we wanted to be careful not to assume, obviously, further execution tightening based on where we are today. So there are some things we hope will certainly recur, but we wanted the forecast to reflect a durable sense of margin and volume as opposed to some of the things that help contribute to the returns in the fourth quarter.

Douglas Harter -- Credit Suisse -- Analyst

That all makes sense. And then, I guess, just thinking about the ability to continue to deploy capital into the operating businesses even at the 20% return, obviously, quite attractive. I guess, how should we think about ability to kind of continue to grow and be able to deploy more capital into those businesses if -- at those types of returns?

Christopher J. Abate -- Chief Executive Officer

Well, right now, a big component of those returns is capital turnover. So we've allocated an amount of capital to each one, in total around $375 million. And in some sense to grow the ROEs, we want to preserve that amount and not necessarily increase it, unless we can do that accretively. But right now, we've been pretty successful for the past few quarters at those higher ROE run rates and we're confident at this point that we can preserve that. One thing that, in addition, we're able to do organically is create investments, as you know, through our PLS issuances. Most of that recently has been through CoreVest, through our capital executions and bridge originations. But as the residential Sequoia deals ramp up, hopefully we'll also be putting growing amount of capital to work there. So this had multiple benefits from that operating capital at the businesses. And then as we mentioned at the outset, the fact that it's tax and that 20% guidance was post-tax, all of those earnings we're able to redeploy if we so choose back into the businesses and always think of that as your lowest cost capital versus raising outside capital. So that's another accretive element to what we do.

Douglas Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

The next question comes from Stephen Laws of Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi, good afternoon and very nice quarter. Chris or Dash, I guess to start. Can you talk about the single-investor securitizations and maybe how the pricing and advance rate of those compares to the more traditional securitization? And maybe some comments on the ramp up feature for the SFR deal, how much capacity remains and is that something you can increase or expect to do continually on future deals?

Dashiell I. Robinson -- President

Sure, Stephen, thanks for the question. I would say in general, the advance rates and pricing are, are in-line. On the jumbo, the jumbo single-investor securitization, we -- that was a fully distributed deal for the P&I bonds. And that essentially price probably right on top of where we would have issued a irregular Sequoia transaction, of course, we have the benefit of pre-placing the whole structure upfront, which obviously has a meaningful benefit to market risk. So very comparable proceeds and effective cost of funds there versus the Sequoia deal.

The single-investor deal for BPL was a little bit different. The advance rate was comparable, pricing might have been a little bit wider than where we could do a capital securitization today, but when it was -- I think it was much more in line. But what it allows us to do is basically end around the traditional warehouse financing completely. So if you think about the typical process, we originate loans, put them on warehouse lines and then securitize them within a couple of months once we have critical mass. And while those loans carry pretty well on warehouse lines, they carry much more efficiently in a structure like this. And so what this allows us to do is basically ramp up a securitization from day one. And the execution that we get on any given loan that we pledged to that facility is pretty close to what the ultimate securitization outcome will be, which is obviously hugely attractive because we use less capital during the ramp-up period, we get a better return on that capital, because there is more free cash flow to our position. And most importantly, we mitigate the market risk associated with -- associated with carrying an inventory. So it's been -- it's almost full at this point. Like I said, we expect to complete it at the end of this month and we certainly will be looking to replicate that structure in some shape or form throughout the year.

Stephen Laws -- Raymond James -- Analyst

Appreciate that. Thinking about the call, the SFR securitization that was called. Can you talk, I think you have $600 million [Phonetic] of calls likely this year in the Review. But can you talk a little bit more about that and will we see -- will that drive the call gains and realized gains, I know you guys had an excess of $50 million [Phonetic] of those, I guess in 2003, 2004 and 2005 and again in 2012. Are we looking at something like that or is it simply more about getting optimal leverage back into a structure and the accretion that would come from that and then redeploying the excess capital. Can you maybe give us a little more color around what we should expect the impact to be from the securitization calls this year?

Dashiell I. Robinson -- President

Yeah, I think it's all the above, frankly. The reason we touched on just the net discount on the book overall reflects the fact that these calls come further into the money we would naturally expect, assuming credit performance and the market conditions remain consistent with where they are today. There is that accretion, which we would expect to accelerate in terms of just our -- what our current book value might reflect today.

And then secondly, there is the upside once we have access to those loans. The current value of those loans is north of par, in some cases well north of par. So when we think about calling a jumbo securitization being able to turn those loans into a fresh securitization at a premium execution. Number one, obviously, captures those gains, but to your point, those structures have inherently deleveraged significantly. And so our our effective borrowing rate would go down meaningfully or if we were able to resecuritize those loans and package them or frankly, just sell them outright to third parties and which would be obviously 100% financing.

What's particularly interesting about the business purpose loans as a direct lender, not only does the call allow us to do some of the financial work that I was just describing, but it also provides an opportunity to work directly with those borrowers who may be looking to refinance, which would obviously be a fresh set of originations for us on top of some of the financial improvement that we would have from being able to recapitalize those structures. So it really is all of the above and and we're excited about it. Obviously, it will depend upon prepayment speeds and the ongoing performance of the collateral. But it's an area we're very focused on this year and very excited about.

Stephen Laws -- Raymond James -- Analyst

Great. I remember the big gains and '03 through '05, well, so look forward to watching that the calls come through.

Christopher J. Abate -- Chief Executive Officer

Certainly.

Stephen Laws -- Raymond James -- Analyst

The capital redeployment, I'm sure, Chris.

Christopher J. Abate -- Chief Executive Officer

For us too.

Stephen Laws -- Raymond James -- Analyst

Yeah, Chris, one question, I got asked about the dividend, and I certainly understand the ability, which is unique among a few of you that have material TRS income to retain and grow book value and redeploy at attractive returns here. But can you give us any -- when you're with the Board, what is, is there a target on the dividend a certain yield or a multiple of maybe the S&P yield? Or how do you think about framing the dividend given the reinvestment opportunities you have with the capital you retain as I think about putting an estimate out for the coming quarters?

Christopher J. Abate -- Chief Executive Officer

Well, good question, Stephen, and that's why I answered it a little bit, just to clarify that this quarter, the actual the dividend will be declared later in March. Historically, we've done it closer to the 10-K filing. But I think going forward, it will be a little bit later. As far as the direction goes, it's obviously set by the board. But we're looking at from a trajectory perspective the direction of free cash flow and the business is generating a lot of cash flow, cash pays dividends, income doesn't pay dividends. And even though the operating subsidiaries are taxable, if we believe that that cash is best used to distribute, that's something that's a tool in our toolkit. And I think what I would expect is that it's going to continue to be some combination of retaxable income, which we expect to grow in 2021, as well as cash thrown off from these operating subsidiaries. So overall, we feel very confident where the dividend is today. And I think our goal is to see it continue to go up. But right now we're not at a point where we can give additional guidance.

Stephen Laws -- Raymond James -- Analyst

Great. Well, I appreciate the comments and look forward to staying in touch. Thanks.

Operator

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

Bose George -- KBW -- Analyst

Yeah, good afternoon. So firstly, in terms of thinking about an operating number for the quarter, it should be at $23 million of investment gains that we essentially pull that out. Is that kind of a way to work toward an operating number?

Christopher J. Abate -- Chief Executive Officer

Sorry, Bose, you're little staticky. Could you repeat that please?

Bose George -- KBW -- Analyst

Yeah, yeah. Just in terms of -- I was just trying to get to an operating number for the quarter. And I was wondering, you guys had that $23 million of investment gain. And if I remove that, is that a kind of a way to think about what the operating number would have been for the quarter?

Collin L. Cochrane -- Chief Financial Officer

Yeah, I think in the past, Bose, we have adjusted the GAAP earnings to back out investment fair value changes and also some of the amortization of the purchase intangibles. So those are kind of the two items that in the past we've put to the side when thinking about kind of the core earnings potential of the company. That's something we're continuing to look at in terms of how to express that. But those -- making those adjustments is what we have historically done.

Bose George -- KBW -- Analyst

Okay.

Collin L. Cochrane -- Chief Financial Officer

About $5 million on the purchase intangibles and you see the investment fair value changes on the face of income statement there about $23 million.

Bose George -- KBW -- Analyst

Okay. Great. Thanks. And then in terms of asset value recovery, that kind of remaining. Can you update us how much is left as if assets continue to recover?

Dashiell I. Robinson -- President

Yeah. Bose, it's Dash. We -- if you look back to 12/31 of '19, it's about $1 a share at this point of potential recovery. If we were to retrace all of the remaining unrealized losses back to year end 2019. And I think the bigger point though is what I was articulating in the script, which is the -- even retracing back to the end of 2019 is far from the end of the movie in terms of unlocking value in the portfolio, like we talked about with the calls and just even the more accelerated deleveraging of our positions and what that means for valuations, and in conjunction with what's been continued strong credit performance. So it's about $1 a share to get back to year end '19, but we think there is a fair amount beyond that as well, per our prior comments.

Bose George -- KBW -- Analyst

Okay, that's helpful. And then just in terms of that potential recovery, is there kind of a way for us to think about what the discounts are in those securitizations and kind of think about scenarios have been about -- how big those recoveries could be?

Dashiell I. Robinson -- President

Yeah. The average discounts with our subordinate bonds range from from $0.50 to $0.60 on the $1 to $2 [Phonetic] up from there. So it is a bit of a range in terms of how to think about that. But if the $600 million of calls, potential calls for the year is one place to start. That's probably the more -- that's probably the area where we see the more immediate acceleration of the potential accretion and then some of the embedded discount it could come over the next year or two, as those structures themselves continue to delever and as our call options or our ability to do other things with the underlying collateral come further into the money. So there's a number of different scenarios, obviously, but just it's not something that we expect to be fully realized this year, but we expect this potentially be a busy year for doing so.

Bose George -- KBW -- Analyst

Okay. Okay, great. Thanks.

Christopher J. Abate -- Chief Executive Officer

Yeah. Bose, I'd add to that. The discount in the book overall is well north of $1 a share. So I think that's why Dash is emphasizing that. In this market environment, you've seen how quickly spreads and retraced, but as importantly, if the economy starts to recover, all signs are pointing toward a major secondary stimulus. But there's a lot there that would really I think turbocharge the performance of our overall book. And so we start thinking about it in terms of recovery and more in terms of the original investment thesis thinking about our RPL book is a good example. It's one of those, not our largest holdings. And that book in particular stands to do much, much better, with a big broad based economic recovery. So there is a lot to be optimistic about from our perspective in the book. But as we talked about, a lot can happen in the year and we're just taking it one quarter at a time.

Bose George -- KBW -- Analyst

Okay. That makes sense. Thanks a lot.

Operator

The next question comes from Eric Hagen of BTIG. Please go ahead.

Eric Hagen -- BTIG -- Analyst

Hi, guys. Hope all is well. A couple on the production side. Can you talk about your expectation for reramping Redwood Choice, a little bit more meaningfully and including talking through the industry's capacity in general to address the expanded prime market right now? And then another one on the production side, can you talk about expectations for pull through rates, getting loans to close and whether you think you might be able to turn your pipeline a little bit more quickly, if you see improvement on the pull through side? Thanks.

Dashiell I. Robinson -- President

Yeah, Eric, it's Dash. Thanks for the questions.

Christopher J. Abate -- Chief Executive Officer

I'm sure. Now I'll -- we're obviously separated, so we plan to keep away here. But I'll kick it off and Dash can supplement. Choice is something that we're very focused on. When you think about just the way the business runs and industry capacity, usually the easiest loans go to the front of the line and those are clearly selective borrowers who have the strongest credit profiles with the easiest underwrite, with the highest qualified. So that continues to be most of the story in the non-Agency space currently. But certainly from a purchase market perspective, the Choice business is a core strategic piece of what we do. And so we're very focused with our seller network and our partners on getting that business rebuilt, that business had been 25% to 40% last year in recent quarters of our overall production. So when we think about where our volumes could go, we haven't even really accounted for the addition of Choice. So that's definitely going to be a story in 2021.

As far as the turning over the portfolio and the pull-through, we -- our locks, I'd say two-thirds has been refis closer to 50% of the actual purchases have been -- purchase versus refi. So as far as what we're pulling through -- we're pulling through more of the purchase loans, because they need to close because somebody is buying a house. So that's been part of the story. And I think when the refis, it speaks to all of the automation efforts that are under way to get these through the value chain faster. I think a lot of it is -- some of it is near term wins, rapid funding is certainly one of those, some of it's more intermediate term through automating due diligence and some of the other pieces of the food chain. So I think there is going to be wins, more immediate wins and then there is going to be longer term innovations. And that's sort of speaks to some of the discussion we had about start-ups and some venture investing that we alluded to at the outset of the call.

Eric Hagen -- BTIG -- Analyst

Thanks for that color. You guys have typically hedged your long-term subordinated debt, but I think you took off that hedge last year. When you look at the forward curve, is there a desire to put that hedge back on?

Christopher J. Abate -- Chief Executive Officer

Not at the moment.

Dashiell I. Robinson -- President

We'll pick [Phonetic] it, Eric.

Christopher J. Abate -- Chief Executive Officer

No, we feel that it's overall -- at the moment, we feel fine, absolute yields are very manageable and frankly there's other aspects of our debt stack that we're more focused on refinancing. But it's something that's out there and we'll keep looking at it.

Eric Hagen -- BTIG -- Analyst

Great. Thank you guys, so much.

Operator

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

Steve Delaney -- JMP Securities -- Analyst

Thanks. Hi, everybody. So congrats on the progress ramping up your platforms. Just wondering, I guess, agency, 30-year agencies is about 2.80. [Phonetic] What's kind of the range, the tight range for your coupon on your select product as we sit here today?

Christopher J. Abate -- Chief Executive Officer

Hi, Steve, 2.75 [Phonetic] to 3, occasionally inside of that, but it's pretty similar.

Steve Delaney -- JMP Securities -- Analyst

Well, so obviously -- yeah, just obviously high-quality borrower. And it also tells me that leads me to the second question is, we always watch the primary, secondary spread on the agency side, just to try to get a sense, and that really affects more the originators in gain on sale margin. But it's an interesting thing, we're probably -- it's pretty attractive now, maybe 20 some basis points wider. I'm just curious, if you look at execution. So if you're there under 3%, how but on the other side, when you look at execution on your Sequoia stuff? How are you matching up in terms of your loan coupons versus the bulk of that RMBS debt stack versus it's kind of historical levels?

Christopher J. Abate -- Chief Executive Officer

AAA's -- yeah, I mean the AAA's have kind of come all the way back. We can't speak about any particular deal in the market currently, but certainly in the neighborhood of one back of the current coupon TBA is around where the AAA's have been executing in early 2021, kind of across the PLS space for super prime jumbo. That primary, secondary is still pretty attractive, but it's definitely the non-Agency space has attracted a lot of capital, probably from [Technical Issues] the side and definitely from other sectors just as people kind of roll down the risk curve a bit or roll up, I should say and look for yields, frankly. So it's still, we're definitely glad to be on the issuer side of equity, it's a very, very, strong issuer market.

Steve Delaney -- JMP Securities -- Analyst

That's where I was going.

Christopher J. Abate -- Chief Executive Officer

But -- yeah, yeah. So it's definitely, we feel like we're on the right side of that currently, but it also it has us focused on Choice and has us focused on kind of the next round of borrowers to serve.

Steve Delaney -- JMP Securities -- Analyst

Understood, pick the low hanging fruit for sure. And then so that kind of rolls me right into my question about the whole loan sales. I know before COVID, I mean, there was always a big bid there and the banks were buyers, etc. Kind of your thought process, you don't have unlimited capital obviously in terms of warehouse securitizations, but your gain on sale opportunity, whole loans today kind of relative to securitization and maybe kind of what the whole loan profit opportunity looks like to the sale channel, looks like today versus maybe late 2019 before COVID.

Dashiell I. Robinson -- President

Yes Steve, its Dash, it's a great question.

Steve Delaney -- JMP Securities -- Analyst

Hey, Dash.

Dashiell I. Robinson -- President

I would say the executions as recently as a few weeks ago were on par with each other and securitization is probably a little bit through whole loan sale at this point, but they're both quite strong. And I think from the depositories like I was mentioning in my prepared remarks, just the amount of deposits and the net interest margin pressure that depositories are feeling are really driving momentum in the conversations we're having with partners. And we're selling a lot of loans, we're selling a lot of loans to folks that we worked with a lot in the past, as well as some new faces as well, which is obviously very exciting, because we feel like there's a lot more to do there. When you combine the quality of the paper that we're able to produce, it was just the need to put that capital to work, yeah, there is a lot to do there. And when you combine that, of course, with deposit growth plus the fact that you know these -- the PM's and the CIO's at these places are also dealing with just substantial run off in all parts of the book. But just for context, Chris referenced the 2.75-ish current coupon on our select production. I mean, for context, if you look at the total universe of select loans that are outstanding right now, the GVAC [Phonetic] is around 4% and obviously those have been paying down pretty significantly. So when you combine the deposit growth with what we've seen in the past year, with just the natural run-off and accelerated run-off in the book, there is an incredible unlocking of demand there, which we've been able to take some advantage of.

Steve Delaney -- JMP Securities -- Analyst

Understood. Thank you both for the comments. I appreciate it.

Christopher J. Abate -- Chief Executive Officer

Thanks Steve.

Operator

The next question comes from Ryan Carr of Jeffries. Please go ahead.

Ryan Carr -- Jeffries -- Analyst

Hi, good afternoon, guys, and thanks for taking my questions. Congratulations on the great quarter. The first question for me, you highlighted throughout the call a lot of the secular trends that helped the broader mortgage market, but curious to hear your thoughts on which trends specifically are influencing jumbo. You locked record volumes in both the third and fourth quarter and the set up given where rates are and the amount of money or amount of mortgages in the money for refinance, it's pretty compelling for the first quarter. But curious to hear your thoughts on really how the market is different this time for jumbo.

Christopher J. Abate -- Chief Executive Officer

Sure, I can start and Dash can supplement. First of all, as I alluded, the way the business usually recovers is as you start with the easiest loans to refinance and that's always the conforming loans, the Fannie Mae loans and the take away. In jumbo, even though the credit profiles are stronger and stronger, because jumbo loans are almost by definition not conforming. Each one is a little bit different. It's a little harder to underwrite and therefore, these loans typically lag a bit from a refinancing perspective. There's limited industry capacity, there's a limited number of loan officers to process the refis.

So we -- last year in July, took some lessons learned from the last crisis and wanted to make sure we run a position to take advantage of that, when we saw the opening and we were fortunate enough to do that and be there and be ready to serve our sellers and be a strong partner. So that's what's going on in jumbo and the good news is the agency refinance cycle, you could call it middle innings, you might call it even a little later than that depending on what happens with the yield curve, it could have a long way to go, but jumbo is definitely in the early innings.

As Dash mentioned, most jumbo loans in existence today are well north of that 2.75 current coupon, which I think from that perspective we're focused on market share, we're focused on being the best partner we can to our loan sellers. They originate the loans. And I think that there's a lot to do in 2021. I also think that some of the -- some things that could prove to be secular, people transitioning from multi-family to single-family, part of that story is definitely more space, bigger homes, which tend to start to bleed into jumbo. When you look at home sales, some of the higher priced homes have shown the strongest price appreciation. And so demand for jumbo loans there has been increasing as well.

So I think when you factor that in, and then you actually factor in a vaccine and any broad-based economic recovery, we really like the market dynamics at the moment. There's clearly a lot of volatility out there and we're by no way, by no means through the woods -- out of the woods with respect to the virus, but we do think we're in the early innings of the refinanced portion of jumbo.

Ryan Carr -- Jeffries -- Analyst

Got it. Thanks, that was very helpful. And then last question for me, you've highlighted continuously over the past few quarters as well as on the call, some of the investments you've made in technology, specifically across CoreVest and Rapid Funding. And can you maybe highlight how that's different from your competitors across non-QM and BPL and the like, and really what you're focusing on technology wise into 2021?

Dashiell I. Robinson -- President

Sure. Ryan, its Dash. Thanks for the question. We view investment in technology as nationally a partnership between the efforts we want to take internally, more organic work, which Rapid Funding and Redwood Live are good examples of, and then partnerships with others, vendors or other companies, newer companies are more established ones that can help bring us to the forefront in terms of serving our customers more seamlessly.

I think our suite of businesses is unique, because we are a mix of -- our clients are a mix of originators as well as direct borrowers in our CoreVest business. But the underlying theme is how we can make the process less redundant, more seamless and more transparent to our clients. And Rapid Funding is a good example, where we can provide liquidity more quickly to the right group of sellers. The Redwood Live initiative, which I touched on is a great example of one where, we will be -- we are in pilot on an application that we can roll out to our sellers, to give them real-time insight into where their loan sits in the process.

One of the areas that we feel that we have really outperformed here the past few quarters is being able to process loans more quickly than our competitors and particularly if you're an originator, a non-bank originator in particular, the ability to reliably purchase those loans, when we say we will is huge. It's critical to liquidity management for them and just the transparency of where a loan sits in the queue is just so important for them to understand what kind of partner we are frankly and how reliably we can show up. And so ultimately it is, like I said, making sure that we can serve our clients more quickly and efficiently and take as much friction as possible out of the system. I think that is different, because when we think about the suite of clients we serve, like I said, between borrowers and originators, there's a real broad array of needs there in terms of what they are looking for. And so those are the areas of focus that we have, and I think it is unique in that regard because of where we're focused.

Ryan Carr -- Jeffries -- Analyst

Thank guys very much for answering my questions, and congrats again on a great quarter.

Christopher J. Abate -- Chief Executive Officer

Thank you.

Operator

The next question comes from Kevin Barker of Piper Sandler. Please go ahead.

Kevin Barker -- Piper Sandler -- Analyst

Hi, good afternoon. So your comments around the return on equity that you're seeing in the operating businesses, especially going into 2021, does that presume that you're going to see a little bit of a pick-up in leverage? And second, how much capital do you think could remix into the operating businesses, just given the strong returns that you're seeing there? I would assume that your leverage would remain low. It seems like you've been keeping recourse leverage relatively low and more conservative just given the economic uncertainty, but still love to hear your color on leverage and equity allocation.

Collin L. Cochrane -- Chief Financial Officer

Yeah, well, I can definitely touch on the leverage, Kevin.

Kevin Barker -- Piper Sandler -- Analyst

Thanks, Collin.

Collin L. Cochrane -- Chief Financial Officer

And then Chris can maybe follow-up. I did mention in my prepared remarks, we did see leverage remain pretty low this quarter and that was somewhat a function of the fact that we had cleared through a lot of inventory through some of the securitizations close to the end of the quarter, so that won't always be the case. We generally do expect that our inventory of loans for the operating businesses will trend higher over time and that -- those are typically held with higher amounts of leverage. So that will influence our overall leverage for the company. So that's something we've been talking about for a couple quarters now.

I think this quarter it just happened that. We did get some of these transactions done closer to the end of the quarter, which clear things out. And we do have a pretty large pipeline in front of us. So we do expect that to trend higher just in terms of the amount of inventory bounce around at any given quarter end, but generally trend higher. And I also mentioned the investment portfolio has a pretty low direct leverage on it and that has also been turning down a little bit as we've seen some deleveraging there. So I think there is some potential as we do some, look into refinancing some of our debt over 2021 that we could layer in a little bit more incremental leverage into that part of the business as well.

Kevin Barker -- Piper Sandler -- Analyst

Okay. Then, as far as the equity allocation, how that shifts and your expectations for it? I'm assuming that it's going to grow considerably in the operating business. You've seen quite a bit move up in the residential lending. Could you just provide a little bit color like how much more growth you could see as far as capital allocation within those respective operating the business?

Christopher J. Abate -- Chief Executive Officer

It's kind of like steering a ship, volumes are a big factor. How much loans we hold in inventory? How quickly we are turning the capital over? What we don't want to do, we are focused on accretive profitable growth and so we want to allocate more capital when we can deploy it as accreatively as we are able to currently. So right now, I think when we think about our volumes, we feel like the amount we have is a good risk adjusted capital balance for the foreseeable future. The extent that the operating environment continues to remain attractive and we are able to be more competitive and source more volume that would definitely necessitate a bigger capital allocation and that would be a good issue to have, because that capital is very accretive to us currently. But right now I think the amounts we disclosed or that you read about in the Review, are what we expect to fuel the business for the foreseeable future.

Kevin Barker -- Piper Sandler -- Analyst

Thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

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

Christopher J. Abate -- Chief Executive Officer

Dashiell I. Robinson -- President

Collin L. Cochrane -- Chief Financial Officer

Douglas Harter -- Credit Suisse -- Analyst

Stephen Laws -- Raymond James -- Analyst

Bose George -- KBW -- Analyst

Eric Hagen -- BTIG -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Ryan Carr -- Jeffries -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

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