CPP Investments Inks US$750 million Strategic Partnership With Redwood Trust

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Emilio Ghigini of Investing.com reports Redwood Trust and CPP Investments form $750M capital partnership:

Redwood Trust, Inc. (NYSE: NYSE:RWT), a company specializing in housing credit, and Canada Pension Plan Investment Board (CPP Investments), announced a strategic capital partnership valued at $750 million. The alliance includes a $500 million Asset Joint Venture and a $250 million corporate secured financing facility provided by CPP Investments to Redwood.

The Joint Venture will invest in Redwood's residential investor bridge and term loans, aiming for over $4 billion in acquisitions. Redwood and its subsidiaries will manage the assets for the Joint Venture. Equity contributions will be up to $500 million, with CPP Investments providing 80% and Redwood 20%. Redwood stands to earn administrative and potential performance fees.

The financing facility has a two-year term with a one-year extension option and is designed with revolving capacity to facilitate the growth of Redwood's mortgage banking platforms. Additionally, CPP Investments will receive warrants to acquire Redwood common stock, initially worth about $15 million, with the option for an additional $36 million upon meeting certain conditions.

Christopher Abate, CEO of Redwood, expressed enthusiasm for the partnership, highlighting its alignment with Redwood's growth strategy and potential to scale its mortgage banking business. David Colla of CPP Investments also remarked on the opportunity to invest in U.S. residential mortgage assets with Redwood.

Earlier today, CPP Investments issued a press release announcing a US$750 million strategic capital partnership with Redwood Trust:

MILL VALLEY, CA/Toronto, Canada (March 19, 2024) –– Redwood Trust, Inc. (NYSE: RWT; “Redwood” or the “Company”), a leader in expanding access to housing for homebuyers and renters, and Canada Pension Plan Investment Board (“CPP Investments”), through subsidiaries of CPPIB Credit Investments Inc., today announced a US$750 million strategic capital partnership.

The partnership consists of a newly formed US$500 million Asset Joint Venture and a US$250 million corporate secured financing facility that CPP Investments is providing to Redwood.

The Joint Venture will initially invest across the broad suite of Redwood’s residential investor bridge and term loans, targeting more than US$4 billion in total acquisitions. Redwood and its subsidiaries will administer the assets on behalf of the Joint Venture. Together, CPP Investments and Redwood will contribute up to US$500 million of equity to the Joint Venture, with an anticipated split of 80% from CPP Investments and 20% from Redwood. Redwood will earn ongoing fees to oversee the administration of the Joint Venture and is entitled to earn additional performance fees upon realization of specified return hurdles.

The secured corporate financing will have total capacity of up to US$250 million and carry a two-year term, with a one-year extension option. The facility is structured with revolving capacity to support the continued growth and scale of Redwood’s mortgage banking platforms.

To further promote long-term strategic alignment, CPP Investments will also receive warrants to acquire Redwood common stock in an initial amount of approximately US$15 million with the option to acquire up to an additional US$36 million if certain joint venture deployment targets are achieved1. The warrants are struck at a 25% premium to the trailing 30-day average stock price and have anti-dilution mechanics including a mandatory conversion feature.

“We are thrilled to announce this strategic partnership with CPP Investments, whose experienced team sees the power of Redwood’s franchise and the financial assets we procure,” said Christopher Abate, Chief Executive Officer of Redwood. “Last year, we unveiled a key initiative to evolve our investment approach, deploying capital side-by-side with strategic investing partners and driving organic scale within our operating platforms. Today’s announcement is a critical step forward in that evolution, one which we believe supports the unprecedented growth opportunities in front of us to scale our mortgage banking businesses and generates attractive earnings streams for our shareholders.”

“This investment partnership with Redwood provides an attractive opportunity to deploy capital at scale into residential mortgage assets alongside a well-established leader in the U.S. mortgage credit sector with a 30-year proven track record,” said David Colla, Managing Director, Head of Capital Solutions, CPP Investments. “We have confidence in Redwood’s long-term growth strategy and the strength of their origination franchise. This transaction expresses our positive thesis on U.S. housing and other asset-backed credit opportunities.”

For additional information on this announcement, please see the Current Report on Form 8-K filed by Redwood with the SEC concurrently with the publication of this press release.

About Redwood

Redwood Trust, Inc. (NYSE: RWT) is a specialty finance company focused on several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors, through our best-in-class securitization platforms; whole-loan distribution activities; and our publicly traded shares. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. Additionally, through RWT Horizons™, our venture investing initiative, we invest in early-stage companies strategically aligned with our business across the lending, real estate, and financial technology sectors to drive innovations across our residential and business-purpose lending platforms. Since going public in 1994, we have managed our business through several cycles, built a track record of innovation, and established a best-in-class reputation for service and a common-sense approach to credit investing. Redwood Trust is internally managed and structured as a real estate investment trust (“REIT”) for tax purposes. For more information about Redwood, please visit our website at www.redwoodtrust.com or connect with us on LinkedIn.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 22 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At December 31, 2023, the Fund totalled C$590.8 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.

1 Represents the aggregate exercise price of the warrants.

I think it's worth noting what David Colla, Managing Director, Head of Capital Solutions, CPP Investments states in the press release:

“This investment partnership with Redwood provides an attractive opportunity to deploy capital at scale into residential mortgage assets alongside a well-established leader in the U.S. mortgage credit sector with a 30-year proven track record. We have confidence in Redwood’s long-term growth strategy and the strength of their origination franchise. This transaction expresses our positive thesis on U.S. housing and other asset-backed credit opportunities.”

Last I checked, the affordability crisis continues to ravage the US housing market and people are staying put because they cannot afford to move and lose the low mortgage rate they locked in during the pandemic:

But this will not last forever and when rates start falling, residential mortgage market will start seeing increased activity as long as the US economy doesn't fall into a deep and prolonged recession.

And even if it does, at one point, residential mortgages will take off again and by entering this strategic capital partnership with Redwood Trust, CPP Investments will benefit from this deal.

Note the way it was structured through CPP Investments' credit group and with warrants to acquire shares in Redwood if certain venture deployment targets are achieved, was all thought out carefully as a way to get the best risk-adjusted returns and promote long-term strategic alignment.

As far as Redwood Trust, note the following:

 Redwood Trust is a leading participant in several distinct areas of housing credit. Our consolidated portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our risk-minded culture and our values — which emphasize passion, integrity, change, growth, relationships, and results — underlie our methodical pursuit of becoming the nation’s most innovative participant in housing credit.

Also worth noting Redwood Trust has been around for 30 years and is a publicly listed REIT that offers a decent dividend:

Notice the big dip in shares during the onset of the pandemic and then activity came roaring back as rates plunged to historic lows. I bring this up to your attention because I see a similar situation playing out if the US falls into a recession.

However, if we get a stagflationary episode where rates rise and stay elevated, the mortgage market will stay quiet relative to historical activity (it can't go on forever like this, at one point, things need to move). That's why I like the way this deal was structured to ensure the best risk-adjusted returns.

In other news today, CPP Investments committed C$297 million to a follow-on investment in India's National Highways Infra Trust:

Mumbai, INDIA (March 19, 2024) – Canada Pension Plan Investment Board (CPP Investments) today announced a follow-on investment of INR 18.2 billion (C$297 million) in the units of National Highways Infra Trust (NHIT, also known as NHAI InvIT), an infrastructure investment trust (InvIT) sponsored by the National Highways Authority of India (NHAI).

The investment is part of NHIT’s capital raise by way of an institutional placement. The proceeds will be used to acquire seven brownfield toll roads, currently owned by NHAI, as part of Government of India’s National Monetisation Pipeline.

Following this investment, CPP Investments will continue to hold 25% of the units in NHIT. CPP Investments’ total investment in NHIT will increase to INR 36.8 billion (C$614 million).

“India remains a key market for CPP Investments and infrastructure is vital to the country’s economic growth. Our follow-on investment in NHIT deepens our commitment to this highly scalable platform, which has an important role to play in the continued expansion of the Indian road network,” said James Bryce, Managing Director, Head of Infrastructure, CPP Investments. “We are confident that this investment will continue to deliver high-quality infrastructure across India while generating strong risk-adjusted returns for the CPP Fund.”

The newly acquired toll roads will increase the size of NHIT’s portfolio from eight to 15 toll roads – all of which have been acquired from NHAI, a statutory authority set up in 1988 by an act of the Indian Parliament and responsible for developing, maintaining and managing national highways in India. Following the completion of this transaction, NHIT’s total portfolio will span over 1,500 kilometers across nine Indian states: Assam, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh, Telangana and West Bengal.

James Bryce, Managing Director, Head of Infrastructure, CPP Investments explains the rationale behind this follow-on investment:

“India remains a key market for CPP Investments and infrastructure is vital to the country’s economic growth. Our follow-on investment in NHIT deepens our commitment to this highly scalable platform, which has an important role to play in the continued expansion of the Indian road network. We are confident that this investment will continue to deliver high-quality infrastructure across India while generating strong risk-adjusted returns for the CPP Fund.”

James is in Berlin this week with other major infrastructure investors to participate at a big conference that takes place there. His former colleague Michael Hill who now runs OMERS Infrastructure also attended this conference.

Lastly, some more good news for CPP Investments and its contributors and beneficiaries.

Earlier today, I learned AstraZeneca will acquire Fusion Pharmaceuticals (FUSN) for $2 billion upfront and the biotech stock doubled:

Among the major institutional holders, Federated Hermes, Deerfield, Fidelity, Perceptive Advisors, Orbimed and CPP Investments which owns 4.3% of the shares.

Being an avid biotech trader who literally tracks 30-50 biotechs every day, I just had to throw that in there (sadly I didn't have this in my portfolio today even though I was looking at it yesterday).

So, the next time someone tells you pension funds shouldn't invest in biotech shares, just remember this post and tell them I say "rubbish".

Below, US housing market is long overdue to catch a break as experts believe peaking mortgage rates have come just in time alongside Fed forecasts planning for interest rate cuts in 2024. Redfin Chief Economist Daryl Fairweather tells Yahoo Finance this could be a set up for a slow recovery for homebuyers. 

"It's going to be more of a slow trickle of people deciding that 'you know, I can't wait any longer and I want to move,'" Fairweather comments, "but a strong economy does mean that more people are moving for job opportunities — they feel more confident, they feel like even though rates are high, they can make it work for their budget." Fairweather also comments on the rise in "nepo-homebuyers" as more Americans receive assistance from family in order to purchase a home.

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