Redwood Trust Inc. (NYSE: RWT), an investor in residential property loans and a credit source for them, is doubling down on its expectation that a big part of the future of home finance is for owners of rentals.
The Marin County-based real estate investment trust on Tuesday said it is acquiring the rest of 5 Arches LLC, a 6-year-old Southern California-based funder of fix-and-flip investments as well as long-term or bridge financing for single-family or under-100-unit properties. Redwood Trust invested $10 million in a 20 percent stake of 5 Arches last May, and now plans to acquire the remainder for $40 million in cash and stock, partly contingent on hitting loan-volume targets in the next two years.
The transaction is expected to close in the first quarter of this year.
“Completion of this transaction further accelerates our access into the business-purpose real estate lending space, an area of housing that we believe offers accretive and scalable returns to our shareholders,” said Christopher J. Abate, Redwood Trust CEO, in the announcement.
Since it started in 2012, 5 Arches (aka 5 Arch Funding Corp.) has originated over $1.8 billion in loans, according to Redwood Trust. Annual volume has grown from $150 million in 2015 to about $850 million last year.
Redwood Trust estimated in a presentation for its investors that the 5 Arches deal will increase the volume of business-purpose residential loans flowing to the Marin company to $900 million to $1 billion this year.
The Mill Valley-based firm pointed to a rate of household formation nationwide that has been outpacing construction of housing units over the past decade. CoreVest American Finance Lender told Bloomberg this week that the rise of retiring baby boomers, student-debt levels for millennials and mortgage interest rates is prompting production homebuilders to start tailoring single-family communities for the rental market.
The price of Redwood Trust stock was $15.99, up a quarter-percent, just before the Wednesday trading session closed.