Redwood Trust Inc (RWT) Q1 2021 Earnings Call Transcript

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Redwood Trust Inc (RWT 1.21%)
Q1 2021 Earnings Call
Apr 28, 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 First Quarter 2021 Financial Results Conference Call. During management's presentation. At the conclusion of prepared remarks there will be a question-and-answer session. I will provide you with instructions to join the question queue after management's comments.

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 of Investor Relations

Thank you. 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 first quarter Redwood review available on our website, 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 this afternoon. I'll 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 good afternoon, everyone. As you probably assumed, we are pleased with Redwood's trajectory thus far in 2021. Morale within our ranks is strong, especially as we start to see conditions for a return to normality with many employees eager to rub elbows again in the office and resume business travel. We're not quite there yet across the board, but it's nice to see the sun shining on our people and our businesses, especially when I think about where things stood a year ago. Driven by strong operating income and continued improvement in portfolio valuations, our GAAP earnings were $0.72 per diluted share for the first quarter as compared to $0.42 per diluted share in the fourth quarter. Our GAAP book value per share increased almost 9% to $10.76 at March 31st as compared to $9.91 at December 31st. GAAP earnings finished well in excess of our $0.16 per share first quarter dividend. While the first quarter introduced the latest chapter of our strategic evolution through the launch of RWT Horizons, the focus of our business hasn't changed. Our mission is to make quality housing accessible to all American households, whether rented or owned. We target borrowers whose needs are not well served by government loan programs, including borrowers are simply not eligible for them. To us, our role in housing finance has never been more important as the second half of 2020 ushered in a dramatic new uptick in home price appreciation and even greater affordability challenges.

Simply put, improving access to quality housing entails a combination of consumer loan and rental solutions. Through our leadership role in the private housing sector, we've turned much of our focus toward innovation to expedite the migration of more GSE eligible mortgages to our market. This doesn't just require low cost capital, which our industry seems to be a wash in these days, it requires the speed, automation and the ease of execution necessary to facilitate sustainably high volumes. These traits have not been commonplace in the less commoditized non-agency mortgage sector in part because it continues to be unsupported in Washington and even viewed as a threat to many established market participants who were unincented to change the status quo. Recent regulatory changes in Washington, however, highlight the need for a new way of thinking and present a big opportunity for the private sector. For example, the CFPB QM rules, which are still somewhat fluid, are likely to simplify many underwriting processes and meaningfully reduce the number of loans that require additional risk retention to securitize. Additionally, changes to the PSBA between the U.S. Department of Treasury and the GSEs now limits the acquisition of certain types of mortgages by Fannie and Freddie, including loans for non owner-occupied homes as well as loans with certain combinations of credit features, including higher LTVs and debt-to-income ratios and lower credit scores.

For the GSEs to effectively manage compliance with these new limitations, the practical amount of these loans that GSEs can acquire will be well below their prescribed caps. This presents an opportunity for those who can acclimate to the more automated underwriting regimes are eventually needed to facilitate more of these loans moving to the private sector. Our focus is squarely on addressing this need. And we're working toward this goal in a number of innovative ways, including investments in homegrown technology and strategic partnerships. For example, we achieved several milestones and demonstrated significant progress in our technology road map in the first quarter, including through our newly launched venture investment strategy, RWT Horizons. We've now completed three Horizons investments, which Dash will talk about in more detail. During the first phase of investing, we are focused on seeding early to mid-stage companies that leverage automation, digitization and blockchain to reimagine how alone is evaluated by an originator, financed by a lender or securitized by an issuer. In the business purpose lending market, we see opportunities to fund product development in the software space that can streamline property management workflows. This will reduce costs and increase visibility into revenue streams.

While these initial investments have not been material to our balance sheet, we believe we're embarking upon a path that can disrupt the mortgage finance landscape and significantly transform our business with innovative solutions that help all stakeholders most importantly, borrowers. With significant momentum on technology, an engaged and talented workforce, regulatory changes and strong competitive positioning, it's exciting to envision the role Redwood can play in the evolution of housing finance. We believe in the long-term durability of our earnings and our ability to deliver unique value to our shareholders. We also believe in the impact we have on our people and communities, such as our new housing Access benefits program that we just launched earlier today. I encourage all of you to check out the press release from this morning on our website and give us your feedback. As always, we balance the optimism against economic forces that affect our quarterly production volumes, including a recent dose of interest rate volatility in the past few months. We can't control many of the market forces that affect our business day-to-day, but we can equip our people with the tools necessary to lead Redwood toward its full potential. And with that, I'll now turn the call over to Dash Robinson, Redwood's President. Dash?

Dashiell I. Robinson -- President

Thank you, Chris. It was an active and successful quarter across our business lines, supported by continued tailwinds in housing and strengthening an overall housing credit. We believe the diversity in our business model remains responsive to the key trends in housing and supportive of the needs of owner occupants and investors alike. After a year of flexible work arrangements and at-home learning, the evolution in demand for housing continues, even as we gain momentum with vaccinations. The expectation, at least in the medium-term for hybrid work arrangements is keeping both prospective homebuyers and tenants looking for homes that combine added space, functionality and privacy. This is evident in the record velocity that we are seeing in both new and existing home sales and continued strength in single-family rents. Leading third-party data shows new single-family home sales in the first quarter were up approximately 37% year-over-year, with existing home sales up approximately 15% in the same period. The median home sales price rose 11% year-over-year and homes that require a nonconforming mortgage are showing similar trends, particularly in growing secondary metro areas. In a similar vein, demand for single-family homes for rent continues to deepen. Rising prices have further deferred the home buying decision for many consumers, while others still prefer to rent given the associated flexibility.

Either way, quality rental homes are an attractive alternative for many demographics who are in search of more space in established neighborhoods. And in many parts of the country, this type of housing stock is in short supply. Occupancy rates also continue to be at record highs with a weighted average of 93% in the top 20 metros. Importantly, sources of equity capital continue to recognize this imbalance as an opportunity to contribute to the creation of quality affordable rental housing, creating a new sleeve of borrowers and allowing our existing ones to keep growing. The macro data, while encouraging also underscores an important reality about housing affordability and accessibility, sharpened by the pandemic. Housing finance needs more creative solutions, driven by technology and a common sense approach to underwriting. That the private markets are equipped to provide. Their durability and diversification of our business model puts us in pole position to continue affecting beneficial change. Turning to our results. Our team's crisp execution resulted in a combined after-tax net operating contribution of $51 million for residential and BPL mortgage banking. This was driven by record residential loan purchase commitments, continued momentum in business purpose lending and execution of three securitizations exceeding $1 billion in issuance across Redwood Residential and CoreVest.

Turning to our residential business. Lock volumes in the first quarter rose 22% to $4.6 billion as mortgage rates rose during the quarter, but much less precipitously than benchmark interest rates. This led to a sustained uptick in refinance volumes, which represented 62% of our total locks for the quarter. Despite the interest rate volatility, margins well exceeded those in recent quarters. This was largely driven by strength in the securitization markets, particularly in the first half of the quarter, and the positioning of our pipeline as the curve steepen more than mortgage rates rose. The move-in rates during the quarter underscores a critical barrier to entry in the non-agency market, namely the importance of end-to-end coordination and efficiency across the operation. We were able to place one of our two securitizations during the quarter via reverse inquiry and settled $1.4 billion of whole loan sales. Key to this work is the speed with which we're able to buy loans from our sellers, which requires a well calibrated process internally and with our third-party vendors. Capacity constraints in the system have led to uneven outcomes across the industry and has been an area of outperformance for our team. As an example, the loans underlying our most recent securitization had an average age of approximately 45 days. Less than half of the loans brought to market by others during the same time period. We expect to engage with more reverse inquiry interest in our securitizations throughout the remainder of the year. Given the efficiency in connecting our bonds directly with where demand is most sizable and durable. The flexibility of our securitization program, coupled with whole loan distribution, facilitates added scale as collectively they allow us to be in the market consistently.

Overall, the productivity level of our securitization program has never been higher, and the second quarter is already off to a strong start with the recent closing of our third transaction of 2021. This went back by $361 million in jumbo loans. The ability to enhance our processes over time will ensure that we maintain our competitive advantage. To that end, leveraging technology remains a major organizational emphasis. During the first quarter, we achieved several milestones on our technology road map, including the onboarding of the majority of our Sequoia securitizations on to DVO 1, a third-party solution for accessing, reporting and analyzing standardized loan-level data for our Sequoia securitizations.

In keeping with our commitment to serve our sellers more quickly, we recently launched Rapid Funding Plus, which includes additional customized funding solutions. This was an important enhancement to our original Rapid funding program rolled out last year, which was successful in facilitating $274 million of purchases from an initial group of participating sellers. In addition, Redwood Live is now available for certain sellers through Apple's app store. Approved users can log in and access dashboards containing various metrics for the loan pipeline they have locked with Redwood. Rapid Funding and Redwood Live are cut from the same cloth, organic efforts to make doing business with Redwood even more efficient and user-friendly with real-time access to data that eases decision-making. As we roll these out further, we are excited about their potential to reduce customer acquisition costs and increase customer retention. To that end, elsewhere in our tech stack, we are exploring other applications with key partners to widen our competitive moat.

Earlier this month, through Redwood Horizons, we completed an investment in liquid mortgage, an earlier stage firm focused on providing life of loan infrastructure to digitize, track documentation, facilitate payments and record additional information on blockchain. While there is much to do for the industry to co last around how blockchain can evolve our ecosystem. Our initial work is focused on solutions in the post close environment that we believe could have tangible benefits in the near to medium term. Turning to CoreVest. Strategic progress continued to pace during the first quarter as we completed work on an innovative securitization structure and made key advancements in product development.

Overall, we originated $386 million of business purpose loans during the quarter, comprised of $253 million of single-family rental loans and $133 million of bridge loans. While SFR loan production was down from a seasonally strong fourth quarter, and bridge fundings rose 33%, driven by increased usage in lines of credit and initial fundings on several recently completed build-for-rent financings. Our origination mix for the first quarter reflected the strength of our multi-product strategy, which drives high rates of repeat borrowers, including those that utilize more than one of our loan products. In all, 71% of originations in the first quarter were from repeat customers. And the near to medium-term pipeline remains robust with a good mix of new loans and refinance opportunities.

During the first quarter, we completed the ramp-up of Capital 2020-P1, a privately placed SFR securitization funded with a leading insurance company. We are pleased with the efficiency of the execution and expect to pursue others of its type to complement traditional broadly marketed securitizations. On the follow, we recently priced our first broadly syndicated securitization of 2021, expected to close later this week. The transaction was very well received by the marketplace. And on a blended basis, we achieved all-time tights on credit spreads. As competition ramps up across the BPL market, product development remains a key priority.

Last week marked important progress on this front as we announced the strategic investment in Churchill Finance, a vertically integrated real estate finance company. Churchill focuses on the origination, aggregation and asset management of a variety of real estate credit products, including residential and multifamily loans. We expect the partnership to help grow and diversify CoreVest sourcing channels with a particular emphasis on smaller-balanced single-family rental and bridge loans. Partnerships like Churchill will deepen our market penetration and products we believe will remain in high demand by housing investors. Technology is central to CoreVest's competitive advantage, especially as we expand our product reach. There are several key initiatives well under way, including a revamped client portal, which will be rolled out later in 2021, enhancements to our data warehouse and additional automation with respect to capital markets processes to quicken our speed to market. CoreVest marketing position remains a core strength as we expand our leadership position with a combination of organic growth initiatives and strategic partnerships. We are uniquely positioned with a deep multiproduct offering, technology-driven processes and a best-in-class securitization platform and remain excited about the opportunities ahead. As Chris mentioned earlier, the first quarter also marked the formal arrival of Redwood Horizons, a venture investment strategy focused on early and mid-stage companies driving innovation in financial and real estate technology and digital infrastructure.

We believe these technologies have the potential to significantly disrupt the mortgage industry in the near and medium term. We also believe the access to data provided by these platforms will help inform our strategy as we expand our leadership position in the market. The blockchain investment I mentioned earlier was preceded by two investments sourced through CoreVest borrower network, which we first announced in March. Rent room and rent butter are each focused on automating various processes from landlords, including tenant decisioning and rental collections. These investments reflect an opportunity to help grow these businesses through deepening their connection to landlords and for us to benefit in addition to the potential investment upside from their data access and growing network effect.

Our overall investment portfolio continued to perform well in the first quarter as credit performance strengthened, spreads tightened and total book value grew. In a low-yield environment, where deploying capital in the broader markets remains challenging, the competitive advantage of having two best-in-class operating platforms, producing high-quality assets is of particular importance. We deployed $73 million net of financing into new investments during the quarter, primarily new issue CoreVest SFR securities and newly originated Bridgeland. Delinquencies in our portfolio have fallen continuously since last summer, and new forbearance requests are de minimis.

Our asset management teams across the enterprise continue their sterling work. Combined 90-plus delinquencies across our Sequoia and CoreVest securitization platforms now stand below 2%, and 90-plus day bridge delinquencies are below 3.5%, significant outperformance versus the marketplace. Market value has also improved across the portfolio, most notably for certain reperforming loan and multifamily bonds as secondary market prices rose. Total portfolio returns rose slightly, driven by a combination of improved credit and faster prepayment speeds on securities, we hold at a discount to face value. Higher prepayment speeds led us to exercise our first series of Sequoia call options in several years. Since January, we have completed calls on three Sequoia transactions totaling $75 million in loans and plan to call several others throughout the remainder of the year.

Collin will elaborate further on this opportunity in his prepared remarks. While the first quarter's results exceeded expectations, our focus remains on sustainably growing and diversifying our business. Benchmark interest rates have moderately fallen since quarter end. But as the economy proceeds in finding its footing and the prospects for additional federal spending come into clearer focus, we are prepared for the markets to respond accordingly. And while increased competition has returned, we remain confident that our agility, commitment to technology and deep relationships will buttress our leading market position. 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 first quarter earnings and book value benefited from strong results across our operating businesses and investment portfolio. Contributing to GAAP earnings of $0.72 per share for the quarter and generating a 10% economic return on book value for the quarter. After the payment of our $0.16 dividend, which we increased by 14% in the first quarter, our book value increased 9% during the quarter to $10.76 per share. A significant amount of our earnings this quarter were generated from our mortgage banking operations, which are conducted within our taxable subsidiary, giving us the flexibility to retain a portion of that income to continue to reinvest in our business and organically grow book value while maintaining an attractive dividend for shareholders. Focusing in on some of the operating results within the business, as Dash mentioned, our residential mortgage banking team achieved exceptionally strong returns on another quarter of record lock volumes, combined with a meaningful increase in margins. While Dash describes some of the unique factors contributing to the expansion in margins during the quarter.

Moving forward, we generally expect margins to normalize back toward levels that still achieve a 20%-plus return on capital. At CoreVest, mortgage banking income normalized during the quarter while continuing to generate very strong operating returns on capital of nearly 30%, driven in part by marginal tightening on securitization execution. As a reminder, fourth quarter results benefited from significant spread tightening on a larger balance of loans held in inventory at the beginning of that quarter. In our investment portfolio, net interest income increased modestly in the quarter due to higher yield maintenance income associated with SFR securities and reduced leverage on our bridge loan portfolio. During the quarter, capital allocated to our investment portfolio increased as deployment into new investments and positive fair value changes were partially offset by sales and paydowns, which remained elevated. These higher prepay speeds, along with strengthening credit performance contributed to spread tightening across our portfolio, benefiting our subordinate securities that we hold at a discount and driving fair value increases. These same dynamics also created the opportunity for us to complete calls on three Sequoia transactions through the first four months of the year.

As a reminder, we control the call rights for many of the securities in our investment portfolio, including for Redwood sponsored Sequoia securitizations, CoreVest sponsored SFR securitizations and certain Freddie Mac sponsored RPL securitizations. Most of these call rights are exercisable at par once underlying portfolios pay down to a predetermined size. And in addition to the discount embedded in these securities, at current market conditions, underlying loans generally can be sold or resecuritized above their part value, creating further upside to valuation returns. In relation to the three Sequoia deals we've called through April, we acquired $75 million of jumbo loans on to our balance sheet. Related to these calls, we expect to record GAAP realized gains of $7 million associated with the underlying securities, the majority of which will not flow through book value, and a net book value benefit of approximately $2 million versus our December 31st fair values, which is inclusive of estimated loan premium. Inclusive of these recent calls, we estimate over $600 million in loans underlying our securities could be callable in 2021. Shifting to the tax side, we had REIT taxable income of $0.09 per share in the first quarter and $0.47 per share of taxable income at our TRS, again driven by income from our mortgage banking operations.

Turning to our balance sheet. We ended the first quarter with unrestricted cash of $426 million. After allocating additional working capital to our mortgage banking operations during the first quarter to support growing loan volumes, and net of other corporate and risk capital, we estimate we had approximately $225 million of capital available for investment at March 31st. During the quarter, our overall leverage increased as expected and was in line with increased inventory levels at our mortgage banking operations at the end of the first quarter. Our non-recourse leverage ratio increased to 1.9 times at March 31st from 1.3 times at the end of 2020, and total leverage in our investment portfolio remained consistent from the prior quarter at around 0.9 times. Looking forward, we expect to add a modest amount of incremental leverage to the investment portfolio as we refinance certain term facilities that have delevered and become repayable beginning in the second quarter and may also explore adding non-marginal leverage to some assets that are currently unencumbered, such as securities retained from recent CoreVest securitizations.

We expect these refinancings to lower our borrowing costs given current market rates and new financings will generate incremental capital that can be redeployed into the business. Moving to our outlook. We remain broadly on track with the 2021 outlook we provided in our fourth quarter 2020 Redwood review. While returns from our operating businesses well exceeded 20% in the first quarter, we expect these returns to normalize during the remainder of the year, particularly for residential mortgage banking as our capital allocation now reflects a more steady state pipeline and levels of loan inventory on balance sheet. For our investment portfolio, returns for the quarter were in line with our outlook and strengthening credit across our portfolio generally provided for incremental improvements to our forward return expectations. Cash flow expectations generally improved across the portfolio, and inclusive of our previously reported 5% fair value increase in our securities portfolio during the quarter, we now estimate go forward returns relative to our March 31st GAAP basis to be between 10% and 11%, inclusive of potential upside from potential borrowing costs in the second half of the year.

Given the strong performance in the first quarter, we saw operating expenses, including variable compensation expense increased in line with the growth in net income. Looking forward, general and administrative expenses will continue to trend in sync with overall business returns, and we continue to expect long-term unsecured debt to risk costs over 2021 to remain consistent. For the remainder of 2021, we will continue to focus on growth, technological efficiency and profitability in our operating businesses. Income retained from these businesses should drive further growth in our book value, while increased production will continue to create new and attractive investments for our portfolio, driving higher net interest income over time, supporting a stable and attractive dividend. And with that, I'll conclude our prepared remarks. Operator, please open the call for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just wanted to follow-up on your comments, Collin, about the normalization of residential spreads. Can you talk about kind of what you've seen in April? Is that expectation of normalization something you've already seen? Or is that just kind of -- that's where it's been over time, and therefore, you expect it to get there?

Dashiell I. Robinson -- President

Hey, Doug, it's Dash. I can take that. Thanks for the question, and Chris can weigh in as well with some thoughts. Firstly, what I want to do is applaud the team for a great effort and great results in the quarter. The Q1 margins reflected, as I mentioned, both strong securitization execution, but also, as you know, some outperformance overall with mortgages versus what a benchmark rates did during the quarter. A lot of the normalization that we talked about, we have begun to see in April. Some of that is a function of just overall supply in the market. Obviously, as you know, benchmark rates have rallied since quarter-end. But we are seeing a heightened level of competing supply in the market, which obviously will ebb and flow as we go through. So a lot of what we're seeing on what Collin talked about, we're currently navigating and working through. We still feel very good about the earnings power of the business vis-a-vis the forecast that we laid out last quarter. And from a margin perspective, that normalization, just to put a slightly finer point on it, we see as margins more consistent with where they were in Q3 and Q4 of last year, sort of pricing out some of the things that drove significant outperformance in the first quarter.

Doug Harter -- Credit Suisse -- Analyst

Very helpful. And then just could you talk about the outlook for volumes in jumbo now that -- given the move-in rates that you referenced?

Christopher J. Abate -- Chief Executive Officer

Yes. Hey, Doug, it's -- in hindsight, the recovery in 2020, after COVID hit in the first quarter, it was pretty linear and there was good line of sight. The rates were a little bit less volatile. Things have backed up, and we certainly expect volumes in the short-term to normalize a bit versus where they were in the first quarter, which is at record levels for us. But there's a lot of moving parts with the economy, and rates had sold off quite a bit. Rates have since settled in here, at least with the 10-year. We've got a lot of moving forces with economic stimulus and recovery in jobs. And so when we look at the macros, we're very optimistic about the trajectory of volumes. It's hard on a quarter-to-quarter basis to handicap, which is why we like to kind of stick to a longer-term plan in talking about the outlook. But I will say one differentiator for us that's certainly been clear the last couple of quarters is the teams are operating at a different gear. We're just moving quicker. We're processing loans faster, both on the residential and BPL side. So we're optimistic that we're going to continue to be able to compete and take share through the course of the year. But I'd say, in the second quarter, coming off of that rate sell-off you referenced, we do expect volumes to normalize a bit.

Doug Harter -- Credit Suisse -- Analyst

Great, thank you.

Operator

Our next question comes from Bose George with KBW. Please go ahead.

Bose George -- KBW -- Analyst

Hello, good afternoon. So I wanted to ask first just about the increase in operating expenses. And is that tied to the increase in revenues that you saw? And how should we think about modeling that number going forward?

Christopher J. Abate -- Chief Executive Officer

Yes. I mean, I can kick it off. Somewhat of a recovery in expenses. Our variable compensation expenses were up quite a bit because earnings were quite a bit higher. Our noncompensation expenses were actually flat or even a little bit down. I think that sort of speaks to the scale and the efficiencies that we're operating in. I'll let Dash and Collin weigh in on the projection, but I think the way to think about it is somewhat vis-a-vis profit share, which is, as earnings go up, more profits go up, we expect that variable compensation line to be somewhat tethered to that. So I think we started at a low point in 2020, and we had a big surge in earnings, which had a lot to do with that accrual.

Bose George -- KBW -- Analyst

Okay. Great. No, that makes sense. And then switching over to sort of operating earnings. On Page 10, the table you have, so it looks like -- does that work out to around like $0.36 of operating earnings? And is that -- the main thing there is, are you guys just pulling out the mark-to-market investment gains?

Collin L. Cochrane -- Chief Financial Officer

Bose, on Page 10, that is the mortgage banking table. I just want to make sure I'm looking at the right one you're referring to. Because mark-to-markets are on the investment portfolio. On the mortgage banking, we're just backing out the -- this is the amortization of our purchase intangibles for the business purpose mortgage banking operations there.

Bose George -- KBW -- Analyst

Okay. Actually, I didn't look through the whole review, but do you guys give some sort of operating metric yet? Or is that something that is to be that something that you guys are going to look out in the future?

Collin L. Cochrane -- Chief Financial Officer

It's something we continue to consider. We don't have a consolidated operating metric. We do think that the GAAP metric is important, that it provides visibility into the value of the portfolio and book value, which is obviously important to investors. And then within each of the businesses, we have presented a non-GAAP measure. So in the review and the pages you referenced from both mortgage banking and the investment portfolio, we have provided more of an operating-adjusted type metric that does back out some income to try to get to more of a normalized core and adjusted-type earnings metric for those parts of the business.

Bose George -- KBW -- Analyst

Okay, good. Thanks. And then...

Christopher J. Abate -- Chief Executive Officer

I suppose -- just to add to that real quick, one thing we're focused on is trying to boost transparency around the relationship between the trajectory of the dividend and our operating results. Our mortgage banking platforms threw off over $50 million of what we internally see as free cash. And when you -- and that was in the first quarter. And when you translate that against a $19 million dividend, clearly -- when we think about the dividend and the direction of the dividend, it's no longer just a REIT-centric metric for us. So one thing we're trying to figure out is how to be more transparent around how the operating platforms factor into that calculation.

Bose George -- KBW -- Analyst

Okay. No, that makes sense. Thanks. And then, can you just repeat the numbers you gave for the earnings of the TRS versus REIT taxable income?

Collin L. Cochrane -- Chief Financial Officer

Well, on my prepared remarks, I talked about the REIT taxable income and the TRS taxable income, if you give me a minute, I'll find that here. It's $0.47 per share of REIT -- excuse me, taxable income at our TRS and $0.09 at the REIT.

Bose George -- KBW -- Analyst

Okay, great. Thanks a lot.

Operator

Next question comes from Steve Delaney with JMP Securities. Please go ahead.

Steve Delaney -- JMP Securities -- Analyst

Good afternoon, everybody. Congratulations on a really good start to 2021. The Sequoia calls, it's nice to see some of that realized. Is there anything unique on these, I assume, were some of the older transactions? But $75 million of loans, a $7 million gain, let's call it, 9%. Was this -- and would you expect that additional calls relative to the $600 million figure would. do you expect them in that ballpark? Or what type of a range could you share for us as to where they may be? And I understand that market conditions will have something to do with that.

Dashiell I. Robinson -- President

Sure. Thanks, Steve. It's Dash. Appreciate the question.

Steve Delaney -- JMP Securities -- Analyst

Hey, Dash. I think in terms of the impact to both earnings and book value, the number I would probably focus more on is the $2 million or so, call it, 2.5, 2.75 points on the $75 million of loans that we called. The $7 million is largely a function of the fact that those securities, for the most part, are in AFS. So there's a technical realized earnings outcome there, but obviously, you know it gets backed right back out of book value because it's already expressed basically. I see. Okay, that was already carried on a mark-to-market basis?

Dashiell I. Robinson -- President

Yes. So you're seeing...

Steve Delaney -- JMP Securities -- Analyst

Incremental cash. The $2.5 million were -- that was cash revenue to you?

Dashiell I. Robinson -- President

Yes. That's the alpha. That's kind of the alpha.

Steve Delaney -- JMP Securities -- Analyst

Okay, got it.

Dashiell I. Robinson -- President

There's a little bit of pull-to-par in there, and then there's the loan premium. And what I would say on -- in terms of uniqueness of the loans, I mean, obviously, there's going to be some distribution around this, but we would expect generally for some more of the season pools to get called or some of the more recent vintage, higher GWAC portfolios to get called. Speeds continue to be relatively high for both our select and choice programs. So we'll see how that shakes out. I think -- one thing I would emphasize is that the numbers that Collin was articulating, I think, to your point, pending market conditions, those will likely evolve as we call more of these transactions, because as you know, the ultimate execution could be a whole loan sale or it could be some sort of securitization, and we'll likely want to get to critical mass there before making that decision. So there's certainly some potential upside in the number as well looking forward as we gather more of these loans through additional calls. So I wouldn't say anything unique about these pools, in particular, other than they were more seasoned. And we're sort of stopping short of giving any guidance going forward because as the pieces come together, there will be more to see in terms of how these ultimately execute.

Steve Delaney -- JMP Securities -- Analyst

Great. Thank you for that. And switching over to the BPLs, just under $400 million. Obviously, the bulk of that in the single-family rental product versus the bridge. The -- should we assume for modeling purposes that the bridge loans you're going to sell on a whole-loan basis and the single-family rental properties that you're going to continue to securitize as opposed to you have sold some loans on the jumbo side as whole loans as well as doing the SMT securitizations? Should we just -- from a modeling or strategy standpoint, should we just assume that rental loans -- the rental loans come in and you're going to securitize those in the CoreVest deals and the bridge loans will likely be sold off on as -- for upfront gain on sale? Is it the best way to think about it?

Dashiell I. Robinson -- President

Well, on SFR loans, I would say both channels are open. We actually did sell a block of SFR loans last year, which would have securitized a little bit less efficiently than some of the core SFR loans that we're currently producing. So both channels are open. We certainly have been securitizing the preponderance of what we have been originating in SFR, but clearly, if executions move, there's very robust whole loan demand for these. But as you know, the ability to keep the subordinate pieces and deploy capital there is.

Steve Delaney -- JMP Securities -- Analyst

Long term. Long run.

Dashiell I. Robinson -- President

It's an economic benefit over the long term, exactly. But both channels are definitely open there. On bridge, we've been keeping them at the REIT. We have -- really, that many bridge loans. We're looking very carefully at some of the structured executions that are sort of reemerging here in the first half of the year for securitizing bridge loans and understanding what those structures could look like for some of the products that we originate, which are a little bit different than what a lot of other market participants are doing. So for now, they're all going to the REIT, but potentially more to come there when we look at structured executions, somewhat analogous to what we're doing with SFR.

Steve Delaney -- JMP Securities -- Analyst

Great. And it sounds like the Churchill product is a unique, different product that you can offer out to all your correspondents or their network, so a little different animal, smaller, single investor type properties. That -- it strikes me that probably requires a different securitization structure. Or would you think you'd be able to mix those into the existing platform that CoreVest has?

Dashiell I. Robinson -- President

Your intuition is exactly right. I think we leverage the shelf and the brand. And obviously, that's a transaction we're usually excited about because they've got some really interesting adjacencies to CoreVest business. But you're right, those products may have different terms to them, different prepay protections as well. So our base case would be those -- if they could go whole loan sale or they would execute into a structure away from our traditional capital deals, that's right.

Steve Delaney -- JMP Securities -- Analyst

Yes. And that's out there with the little velocity shelf that's out there that has been pretty active, so -- well, listen, guys, thanks for the comments and the mission thing and what you're trying to do. I don't want to get too sappy here and sound like the old man. But we've all -- everybody on this call has been busy with a lot of agency originators in the last few months. You think about it in it's -- in terms of the business model and everything, they add a hell of a lot of capacity and technology and throughput. But basically, there's not a lot of creativity because the playbook is written by FHFA, the government and the GSEs. So the consumer in the housing market really doesn't get anything different from many of those lenders and with dozens. So I appreciate what you're doing, and I think you are on to something, and I think that investors will resonate with that. Thanks. Have a good night.

Christopher J. Abate -- Chief Executive Officer

Thanks, Steve. Appreciate that.

Collin L. Cochrane -- Chief Financial Officer

Thank you, Steve.

Operator

Our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi, good afternoon. The guys in front of me knocked out my number, questions around calls and volumes. So I appreciate the color there. Can you talk a little bit, Chris, about what you -- what are the two or three things you're watching most closely in D.C. of the many issues that they've got to look at? What impacts Redwood, do you think, the most? What maybe is something you're watching you don't think the market is watching closely enough that is an opportunity or concern as you go forward?

Christopher J. Abate -- Chief Executive Officer

Good question. Thanks, Stephen. We're watching a lot of the stuff that you probably read about. Obviously, there was an announcement that the QM rule, the formal implementation has been officially delayed until, I think, October 2022. There's a few things to peel back there, one of which is that doesn't really speak to the GSE's QM patch expiration. So the patch is set to expire, and if the rule reverts back to the old rule, the 2013 rule, that would be a very, very big deal for us because it would level that playing field and all participants would need to comply with the in-place Appendix Q. I'm not necessarily implying that, that would happen, but given the stakes, that's something that we're watching very closely. And there's a lot of agency protectionists out there that are fighting very hard to sort of move things along. We're sort of agnostic. We think that the rule change that was supposed to go in place could make a lot of sense. But we also don't -- we're not so doom and gloom on taking another look on -- at the old rule as well. So that's something we're focused on. I think we're definitely focused on the FHFA, Supreme Court issue and whether or not there could be a change in leadership there. We're focused on the investor caps. There's definitely been a lot of confusion in the market around how agency sellers can comply with those caps.

And as I mentioned at the beginning of the call, to manage to a 7% cap, I think you probably need to come in well under that because it's a trailing metric and very hard to keep tabs on, almost like a covenant. So I think that's something that we've seen an immediate effect on in the market that we're trying to be a solution provider for. I do think, though, that the initiatives we're focused on around automation and delivering a non-agency experience that looks and feels a lot more like the automated underwriting regime on the agency side, that's the holy grail to us. And that's what we're focused on. That's a big driver of Horizons and some of the strategic partnerships that we've been engaging in. And I'd remind everybody that both the residential business and the BPL business encompass non-agency. So that's really where -- we have the two different flags, but it's really meant to cover the entire non-agency space. And the business will continue to be focused on that segment because we believe in it, and we expect it to grow.

Stephen Laws -- Raymond James -- Analyst

Great. And thinking about kind of a bigger picture on the BPL, as you look at the bridge loan or new supply coming on, is there any hesitancy among people to start new projects, just giving input costs or supply chain, getting materials they need to do their products? Have you got any feedback like that? Or is it still pretty much full speed ahead given the demand for single-family rental housing?

Christopher J. Abate -- Chief Executive Officer

Yes, I'll kick it over to Dash. But at a high level, that market is absolutely growing. We -- our business continues to be very strong, and there's a lot of demand for bridge loans and perm loans. Some of the issues around cost, lumber costs and product, you've correctly noted, are really supply chain issues. You've seen a lot of price increases, but we do -- we question whether or not those are here for the long run or they're transitory because we've seen a lot of supply chain disruption via COVID. So as the economy starts to open up, hopefully, some of that gets addressed. But at a high level, we've seen great demand for our products. More and more focus is geared toward that sector, and it will continue to be a major focus area of ours.

Dashiell I. Robinson -- President

Yes. Chris said it well. The input cost is something we obviously look at very closely. Certain of our borrowers that have more -- a higher percentage of some of the processes internalized within their own businesses, and so some are more or less immune to some of the challenges that you're that you're talking about, Stephen. But I think the overriding theme is there's an addressable need in the market. It's not a spec strategy where you're sort of taking a view on demand at the back end. Like we know in these markets, particularly in the Southeast, the Southwest, parts of the Midwest that there's a discrete shortage in housing, particularly high-quality rental housing that's affordable. And that's what you're seeing these operators address, and that's why they're still able to raise equity capital incrementally to do these projects because they know there's good support, from a demand perspective, for what they're doing.

Christopher J. Abate -- Chief Executive Officer

Great. Thanks, Dash, for the comments this evening. Take care.

Dashiell I. Robinson -- President

Thank you.

Operator

The next question will come from Eric Hagen with BTIG. Please go ahead.

Eric Hagen -- BTIG -- Analyst

Thanks. A lot of good questions here, but I wanted to follow-up on the healthy level of origination volume and earnings in CoreVest. I guess the question is what conditions need to be present, I guess, either at the loan level or in the capital markets to support more volume there? And as you guys have your eye on doing that, do you think you have the capital you need? Or does the current capital mix make sense to support that growth? And then the second one, I think you noted you had some debt, which becomes prepayable this summer. Can you give us some color around what that debt is and the terms that you think you could refi it at? Thanks.

Dashiell I. Robinson -- President

Sure, Eric. Thanks for the questions. I'll go in order. In terms of BPL volumes, we think conditions currently are very right for those volumes to continue to grow. We're doing a lot to continue to enhance our speed to market. We're already the market leader in speed of getting up and down on loans from the kickoff call to funding, and that's a competitive advantage that CoreVest has had for a number of years. And so I think the macro conditions are really here. You've got -- like I was describing earlier, you've got a really empirical supply/demand imbalance and a very natural and growing support level for demand for these homes. You're seeing more equity capital flow into the space that's the "top end of the market" in terms of larger global investors, earmarking more capital. But also globally, just more and more, more and more equity capital from sources of all types continues to flow in. I think equity cost of capital has probably adjusted here a little bit as it relates to where cap rates are on single-family homes for rent. And so the levels are still very constructive versus where one can purchase homes and rent them out and the associated cap rates.

And so I think the conditions are really here to continue to grow, and we expect to see that growth. From a capital allocation perspective, yes, I would say, consistent with what we've talked about in prior quarters, from a use of available capital perspective, flowing more capital over to our operating businesses, which we did in Q1 for residential to support more volumes is something we're very prepared to do. Obviously, the CoreVest business produces more long-term financial assets for the REIT, which we love to hold. And so we'd expect incremental deployment there. Organically, though, we do have the ability to generate capital above the $225 million that we had free at quarter end. We obviously have, as Collin described, the ability to retain earnings at the TRS, which we expect to continue to be powerful. And there's some other financings or refinancings in the portfolio that we think will allow us to organically raise capital here over the next few months. So we're keeping an eye on all the market opportunities, obviously, but that's how we see it right now. In terms of your question on cost of capital, there's a couple of financings on the bridge side, which we have the ability to restructure or repay here in the next few months. And we actually just stood up an additional bridge line at more accommodative terms here, which we expect to use along with others.

So that would be a cost of funds reduction, which we'll have more to say about when some of those restructurings are finished as well as the ability to unlock some capital because some of those structures have delevered, and there will be an opportunity to put a higher level of non-marginable debt against some of those portfolios.

Eric Hagen -- BTIG -- Analyst

Great. Thanks for the color. I appreciate it.

Operator

Our next question will come from Kevin Barker with Piper Sandler. Please go ahead.

Kevin Barker -- Piper Sandler -- Analyst

Thanks. I just want to follow-up on the operating expense comments you made. The $34.6 million in compensation expense, which you attributed mostly to variable expense. Is that directly related to residential mortgage banking during the quarter or is this a culmination of income that was generated over the previous quarters? So like how should we set a framework for that operating expense?

Christopher J. Abate -- Chief Executive Officer

Hey, Kevin, it essentially resets. So the accrual for the quarter and the first quarter of the year is the most inefficient accrual. The fourth is obviously the most efficient because we're trying to make assumptions around what that accrual is going to be over the course of the year, and we lean into it each quarter. So obviously, we had very strong results in the first quarter. And I think in a general sense, when that occurs, that accrual is going to look higher. Certainly, if our annual forecast changes over the course of the next few quarters. That will come up -- go up or down accordingly. But it's a 2021 results-based accrual.

Kevin Barker -- Piper Sandler -- Analyst

Yeah. Is it fair to say that it's somewhat forward-looking as well or just all the base of the first quarter?

Christopher J. Abate -- Chief Executive Officer

It takes into account our full-year projections. It's not attempting to cover the year in a quarter, but it's taking actual results from the first quarter and some of our expectations for the rest of the year. We did just file our proxy a few weeks ago, which gives some insight into how we look at compensation, but in a general sense, it's definitely aligned with shareholders. And as earnings per share improve, that line is somewhat tethered.

Kevin Barker -- Piper Sandler -- Analyst

Okay. And then going back to some of the normalization comments you made. I believe you indicated last quarter you can continue to generate 20% plus returns within BPO and within the jumbo securitizations. Could you -- you generated, I believe, over 60% returns on equity in the first quarter, specifically around the residential lending segment. When you refer to normalization, are you continuing to expect to generate those 20% plus returns?

Dashiell I. Robinson -- President

Yeah. Hey Kevin, it's Dash. Great question. Yes, so the margins that I was articulating on an earlier answer, to the extent margins normalize back to where they were in Q3 and Q4, sort of 78 to 100 basis points or so, call it, yes, that would be the driver of a 20-plus percent after-tax return for residential. So those numbers are consistent. And obviously, the 64% was outperformance this quarter for the reasons we talked about.

Kevin Barker -- Piper Sandler -- Analyst

Okay. And then a lot of the leverage that was -- that increased this quarter was driven by capital allocated to mortgage banking operations. Can you help us understand the move there and why that capital was allocated there versus maybe the investment portfolio or other places?

Dashiell I. Robinson -- President

It was largely responsive to volumes, Kevin. So we obviously allocated more working capital over to residential this quarter because of the volumes that we saw that working capital sits beneath and is credit enhancement for our warehouse facilities, which is really the moving business. Part of the enterprise where loans are coming on and off. And so those warehouse lines require haircuts and we have other risk capital on top of our explicit haircuts. When you add those together, those will still be higher leverage than the rest of the firm. And so when warehouse balances go up, you would see an uptick in and overall leverage for the balance sheet. But those numbers will obviously move around. Obviously, if volumes continue to go up, we would expect more incremental leverage in that part of the book. But again, those are on assets that we don't expect to be holding for very long, there either will be sold or securitized, but that's the essence of the lift in leverage in Q1.

Kevin Barker -- Piper Sandler -- Analyst

Okay. Was your ending leverage similar to your average leverage? Or was that -- could you just help us understand that just given the temporary or transitory nature of the capital allocated there?

Dashiell I. Robinson -- President

Yes. It was a little higher at the end of the quarter than I would say the average, particularly in the second half of the quarter, as I was mentioning in my prepared remarks, getting these loans through the processes with the third-party review firms and getting them settled as a really big deal. And so we saw some increased momentum there in the second half of the quarter. And so on average, our warehouse utilization probably ticked up throughout the quarter for those reasons, and we'd expect that here to continue at least over the next a month or so. And then obviously, depending on where volumes go from here, we'll see that evolve.

Christopher J. Abate -- Chief Executive Officer

It's also always worth emphasizing that the nature of our debt has changed dramatically over the course of the last few quarters, and we're using a lot of non-recourse debt. And certainly a lot of non margin at will recourse debt. So when we look at our leverage, still well under 2 times on a recourse basis. We're in a very comfortable spot. Cash obviously continues to -- we're holding a significant amount of cash, well over $400 million, I think, at the end of the quarter. So that money is somewhat fungible. And if we want to leg into resi, we have the option to do that. We're not at a point with cash where the balances are so small that we need to make really tough choices on where we put it within the businesses. We've got some flexibility today that we're taking advantage of.

Kevin Barker -- Piper Sandler -- Analyst

Okay. Thank you for taking my question.

Christopher J. Abate -- Chief Executive Officer

Thanks.

Operator

[Operator Instructions] Our next question will come from Ryan Carr with Jefferies. Please go ahead.

Ryan Carr -- Jefferies -- Analyst

Hi, guys. Good afternoon. Congratulations on the great quarter. Thank you for taking my question. Most of them have been really asked and answered. I just have a few quick ones here. But curious to get your thoughts on the outlook for the jumbo market for the balance of the year. You continue to lock record volume seemingly every quarter over the past nine months. And just in the context of rising rates and significant HPA, curious to hear your thoughts on where it could go for the balance of the year and really how your recent investments position you to take advantage of that.

Christopher J. Abate -- Chief Executive Officer

Yeah, hey. I'll kick off, and these guys can add color or comments. We'll probably put out some material at some point in the second quarter, honing in on the size of the jumbo market and the macro trajectories. I think it's -- we always have to strike this delicate balance where we want to be cautious about near-term volumes. I said earlier, if the quarter ended today, we would expect Q2 volume not to exceed the first quarter. There's a lot of circumstantial reasons for that. But as far as the bigger picture goes, the jumbo market is still highly refinanceable. It is not as long in the tooth as the agency space is from a refinance perspective. And as home prices continue to go up -- home prices, as Dash mentioned, are at essentially record highs on an average basis. Everyday, more conforming loans are turning into high-balance conforming loans or turning into jumbo loans. And when you look at homebuilding in this country, a lot of the homebuilding is skewing toward larger homes that will require jumbo mortgages.

So there's just a lot about the non-agency space that we like. You couple that with what we're doing on the investor side and you come up with a really balanced strategy that really covers the entire country versus discretely jumbo, which is somewhat leveraged to high cost areas and the coasts. So we've really taken care to make sure that we're represented across the United States, and we're focused on access and affordability but really, really happy and excited about what we can do in jumbo this year. And I think as we get some more data behind us and get through the quarter, we'll probably update projections. But certainly, you're already starting to see some upward revisions in some of the trade groups. I think the -- there's a very acute sell-off in rates earlier in the first quarter, and people expected refinance activity to cool since it picked back up. And again, there's just a lot of stimulus that looks to be heading the way of the economy. So all of that -- I think when we think about the credit environment and where we're at in any cycle, there's still a lot to like about the market, and we're very optimistic about the year. We're optimistic about the next few years for all the reasons we've been talking about.

Ryan Carr -- Jefferies -- Analyst

Thanks very much. And then real quick on Horizons. You made a lot of very exciting strategic investments through the quarter that you announced over the past few weeks. But touching on Horizons, thinking about that over the long term, probably no near-term effect on the financials, but any thoughts or initial opinions on where -- when that could be material over -- as you continue to invest?

Christopher J. Abate -- Chief Executive Officer

That's a really good question. You're right. Horizons is not a material piece of our balance sheet today, and we wanted to emphasize that because we didn't want to imply that there are some missing piece to the models so to speak, as far as near-term earnings or forecast go. But when we think about transforming the company and disrupting the sector and really taking Redwood to the next level, Horizons is just an essential piece of that. And I think it's a higher beta strategy. I think we're going to be focused on a lot of different up-and-coming businesses, all with some nexus to housing and our work streams. But the energy it's brought to the firm and the relationships and the excitement, I think, is quite profound. Our technologists are very energized. It's been very refreshing to be working with some of these principles of real estate start-ups, real estate data-focused start-ups, especially. So I think it's been so far, very positive. We expect it to be a needle mover at some point. We don't expect that to happen in the next few quarters, but I do think if you're a long-term shareholder and you're thinking about how Redwood can shift the curve, so to speak, Horizons and doing more upstream is going to be a big part of that story.

Ryan Carr -- Jefferies -- Analyst

All right. Well, thanks guys very much, for answering my questions. And congrats again on the great quarter.

Christopher J. Abate -- Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Lisa Hartman -- Senior Vice President of Investor Relations

Christopher J. Abate -- Chief Executive Officer

Dashiell I. Robinson -- President

Collin L. Cochrane -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Bose George -- KBW -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

Eric Hagen -- BTIG -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Ryan Carr -- Jefferies -- Analyst

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