1. Redwood sees a massive addressable market
Redwood spent a lot of time putting the overall size of the residential real estate market into context. The mREIT noted that the single-family housing market in the U.S. is currently worth $34 trillion. However, there's only $11 trillion of mortgage debt on homes, and that's linked to those with $9 trillion of equity. That leaves roughly $14 trillion of homes owned in cash and an average loan-to-value on current mortgages of 55%.
Redwood noted several opportunities. First, it has lots of room to expand in the massive residential mortgage market, even with its focus on the smaller jumbo mortgage segment. In addition, it wants a greater piece of the overall debt market tied to residential real estate. That includes expanding deeper into the business purpose loan (BPL) loan market. These are loans on residential properties for business purposes like single-family rentals (SFRs), student housing properties, and fix-and-flip projects. This also includes making more funding options available to investors who buy homes in cash.
Finally, Redwood wants to tap into the even greater potential of the home equity market. It noted that U.S. households have more than $20 trillion of equity trapped in their homes. It wants to help unlock this equity by providing new products, including home equity loans, home equity lines of credit (HELOC), and home equity investments.
2. Redwood Trust has bold goals
Given the massive market opportunity it sees ahead, Redwood unveiled equally lofty goals, which it aims to achieve by 2025:
- Double mortgage banking volumes.
- Double the size of its investment portfolio.
- Retain taxable REIT subsidiary earnings to support growth.
- Target 33% faster capital turn times (i.e., become more efficient).
- Reduce cost per loan by 50%.sin
These are bold goals and would transform Redwood into a much larger scale and more profitable company.
3. Redwood will continue to be very active on the strategic front
To achieve its strategic vision, Redwood intends on using M&A and other strategic partnerships. The company has a long history of doing deals that build out new platforms and expand its scale. For example, it acquired 5 Arches for $50 million in 2019 to accelerate its BPL platform’s growth. It supercharged that platform's expansion later that year by acquiring CoreVest for $490 million. Redwood expects to build on its M&A foundation and complete more deals to grow the scale of its existing platforms and expand into new areas.
4. The REIT structure might not support Redwood’s vision
Another thing Redwood noted at its investor day is that it won't let the REIT structure get in the way of its growth. While the company made it clear that the structure works right now, it might constrain its ambitions in the future since it needs to abide by IRS guidelines to maintain its tax advantages. However, if changing to another structure would create more value for shareholders, the company would make that move.
5. Redwood is making a big bet on disruptive technology
Redwood formed a strategic venture capital vehicle earlier this year, called RWT Horizons. It put $25 million of capital into the entity, which has already invested in 10 early-stage companies working on disruptive technologies in the real estate and lending spaces.
For example, it invested in Point, a fintech company that helps homeowners unlock the equity in their homes without taking on additional debt. Point allows homeowners to sell some of their home equity, giving them debt-free cash to use as they wish. It then packages that equity and sells it to investors. That aligns with Redwood’s strategy to tap into the home equity market.
Redwood expects to invest even more capital into Horizons to invest in innovative and disruptive technology, seeing the potential to grow it to $100 million by the end of next year. This business provides Redwood with lots of upside potential, making it unique in the mREIT space.
A unique mREIT with grand ambitions
The biggest takeaway from Redwood Trust's Investor Day is that it sees a bright future. The REIT sees a massive addressable market opportunity ahead that it wants to capture. It plans to complete more M&A, invest heavily in disruptive technology, and even pursue a structure change so that it can grab as much of that market as possible. It's a bold goal that could pay off big time if it's successful.