Redwood Trust (<a href="https://seekingalpha.com/symbol/RWT" alt="Redwood Trust, Inc." target="_blank">RWT</a>) just had a solid first quarter, with significant increases in key metrics like net interest income and GAAP earnings. But buried within the seemingly routine details of their April 30th earnings call lies a revelation that most analysts seem to have missed: <strong>Redwood Trust is quietly executing a strategic shift that could lead to explosive dividend growth, and the next few months will be critical to proving its success.</strong>

The story begins with Redwood's aggressive efforts to court banks, who are increasingly looking to offload their jumbo mortgage exposure in anticipation of stricter regulatory requirements. Redwood's "Switzerland" approach – they neither originate nor service mortgages, making them an ideal capital partner for banks – has been resonating. They ended 2023 with 70 bank partners, a remarkable achievement in a stagnant housing market.

But the real game-changer is the momentum they built in April, despite a significant backup in the 10-year treasury yield. Redwood's residential consumer locked volume in April was a staggering 25% higher than the average monthly run rate for Q1. This wasn't just a fluke; their April lock volumes were balanced across their seller base, including both bulk and flow transactions.

Here's why this April surge is so crucial: It demonstrates that Redwood's jumbo origination platform is becoming less dependent on interest rate movements and more on structural, long-term shifts in the housing finance market. Banks are feeling the pressure to comply with upcoming regulations, and they're actively looking for a reliable partner to help them manage their jumbo mortgage risk.

This is where Redwood's strategic pivot comes into play. They're shifting away from direct portfolio investing and toward joint venture partnerships with major institutions like Oaktree and, most recently, the Canada Pension Plan Investment Board (CPPIB). These partnerships serve a crucial dual purpose:

1. <strong>They provide a pre-established takeout for Redwood's origination, leading to greater predictability in revenue and profitability.</strong>

2. <strong>They allow Redwood to scale their platforms more aggressively, further solidifying their dominance in the jumbo market.</strong>

The $750 million partnership with CPPIB, announced just last month, is particularly noteworthy. It includes a $500 million joint venture designed to purchase up to $4 billion of residential investor loans – a signal of CPPIB's long-term commitment to the asset class. But equally important is the $250 million secured revolving credit facility extended to Redwood. They've already drawn $100 million from this facility, and it's specifically intended to fuel the growth of their residential consumer business.

Now, let's translate this strategic brilliance into cold, hard numbers. Redwood's management has stated that the CPPIB joint venture alone will generate $0.15 of annual accretion. Add to this the cost savings of $8 million annually from their recent expense reduction initiatives and the potential for further NII growth driven by the $175 million of currently deployable capital, and you have a recipe for substantial dividend growth.

Hypothetical Dividend Growth Projection

<strong>Here's a hypothesis:</strong> If Redwood can sustain their April origination run rate for the remainder of 2024, they could easily generate enough earnings to cover their current dividend level. Assuming a conservative 5% annual growth in origination volume thereafter, combined with the accretion from the CPPIB partnership and continued cost discipline, Redwood could be looking at a potential dividend increase of 50% or more over the next three years.

Risks and Opportunities

But there are risks, of course. The 10-year treasury yield remains volatile, and a sustained increase in rates could dampen origination volume. Additionally, the Basel end-game rules could be significantly watered down, potentially diminishing the urgency for banks to seek out Redwood's partnership.

However, the April data points paint a compelling picture. Redwood Trust is capitalizing on a once-in-a-generation opportunity to capture market share and establish themselves as the undisputed leader in jumbo mortgage finance. If they can execute on their strategic vision – and April suggests they can – the payoff for investors could be extraordinary.

Key Financial Data

Metric Value Market Cap $829,920,896 [Source] GAAP Earnings (Q1 2024) $29 million [Source] Net Interest Income Growth (Q1 2024 vs. Q4 2023) 20% [Source] Deployable Capital $175 million [Source] Annual Accretion from CPPIB JV $0.15 per share [Source]

"Redwood Trust: A History of Innovation Fun Fact: Redwood Trust was one of the pioneers of the non-agency mortgage-backed securities market in the 1990s, playing a crucial role in expanding access to mortgage credit for borrowers who didn't fit the traditional GSE mold. This history of innovation continues today as they adapt to the evolving landscape of housing finance."