MILL VALLEY, Calif.--(BUSINESS WIRE)--Nov. 10, 2004--Redwood
Trust, Inc. (NYSE:RWT) today reported GAAP earnings of $72 million, or
$3.18 per share, for the third quarter of 2004. GAAP earnings for the
first nine months of 2004 were $178 million, or $8.29 per share.
Redwood Trust is a financial institution that invests in,
credit-enhances, and securitizes residential and commercial real
estate loans and securities.
Core earnings for the third quarter of 2004 were $2.29 per share.
This is a 32% increase from the $1.74 core earnings per share Redwood
earned in the previous quarter and a 78% increase over the $1.29 core
earnings per share earned in the third quarter of 2003. Core earnings
for the first nine months of 2004 were $5.76 per share, a 75% increase
over the $3.29 core earnings per share earned in the first nine months
of 2003. Core earnings are ongoing earnings from operations, and thus
exclude gains and losses from asset sales, calls, and changes in
market values that are included in reported GAAP earnings.
Redwood's total taxable income (pre-tax income as calculated
according to tax rules) for the third quarter of 2004 was $2.53 per
share outstanding at quarter-end. Our REIT taxable income (which
excludes income earned in taxable non-REIT subsidiaries) was $2.10 per
share for the quarter. For the first nine months of 2004, total
taxable income was $8.45 per share and our REIT taxable income was
$7.05 per share. All taxable income results reported here are
estimates that are subject to change.
"Our business continues to develop and grow in a manner that we
believe should support attractive long-term results," said Doug
Hansen, Redwood's President. "The portfolio of assets we have built
over the last ten years is performing well. The new assets we are
acquiring for our permanent investment portfolio are high quality, and
are likely, we believe, to provide attractive returns for shareholders
in the years ahead."
Hansen continued, "Our portfolio of managed real estate credit
continues to grow. Our managed assets within the high-quality jumbo
residential real estate loan segment have grown from $84 billion to
$143 billion during the first nine months of 2004."
"Our real estate portfolios are designed to deliver attractive
returns on the upside if real estate credit performs well," Hansen
said. "There is also significant downside risk within our portfolio if
real estate credit performs poorly. For now, from our point of view,
real estate credit trends continue to be favorable."
"We continue to maintain a strong balance sheet," said Hansen. "We
do not leverage our permanent investment portfolio assets. We only use
debt to facilitate the accumulation of assets on a temporary basis
prior to securitization."
"We have made a number of cautionary statements during the last
year," continued Hansen. "We have said that we believe credit losses
and loan delinquencies are likely to increase from the insignificant
levels we are experiencing today, especially if housing prices level
off. Rising short-term interest rates could create stress for
homeowners, including some of our borrowers. We believe prepayment
patterns for residential real estate loans are unlikely to be as
favorable for us in the future as they have been in the last few
years."
Hansen also stated, "Competition is increasing. Asset prices have
risen and quality loans are harder to find. This makes underwriting
and investment discipline more important than ever. In response, we
continue to tighten our credit standards and increase our future
credit loss assumptions when evaluating new assets. This could mean
that growth in the future becomes more difficult."
"Furthermore," Hansen continued, "we have said that, irrespective
of the above trends, we expect core earnings per share may decline
over time (potentially creating some negative year-over-year core
earnings comparisons during 2005) due to calls of our residential
credit-enhancement securities. These calls are a favorable economic
event for Redwood (as we realize a large capital gain when the calls
occur), but they also tend to reduce our ongoing earnings as our
highest-yielding assets are typically the ones that get called away."
"Constant vigilance with respect to all these cautionary
statements continues to be warranted," reiterated Hansen.
"Nevertheless, the current environment for our business is still
reasonably favorable. We expect our core financial results going
forward will remain attractive, even if they do not match 2004's
record results. Our outlook for the future of our business continues
to be positive and optimistic."
Third Quarter Review
Redwood acquired $75 million of new assets for its permanent
investment portfolio during the third quarter of 2004. We acquired $55
million residential credit-enhancement securities (CES) -- including
$49 million from securitizations sponsored by others and $6 million
from the Sequoia residential loan securitization program we sponsor.
We acquired $1 million residential interest-only securities (IOS) from
securitizations sponsored by others. We also acquired as permanent
investments $6 million commercial real estate CES and $13 million
collateralized debt obligations (CDO) equity securities from the
Acacia CDO securitization program we sponsor. Our permanent investment
portfolio consists of assets we have acquired that earn an equity rate
of return and that we generally hold without leverage on our balance
sheet. The bulk of our earnings come from our permanent investment
portfolio.
Our securitization activities were successful and profitable in
the third quarter. Redwood acquired $2.9 billion residential real
estate loans. We sold $2.7 billion loans to Sequoia securitization
entities for securitization. Sequoia completed three securitizations
(Sequoia 2004-7, 2004-8, and 2004-9), creating and selling $2.7
billion asset-backed securities (ABS) to capital markets investors,
including $6 million to Redwood Trust for its permanent investment
portfolio. During the third quarter, Redwood acquired $188 million
real estate securities for future sale to Acacia CDO entities. Redwood
sold $300 million securities to Acacia CDO 5, which issued $300
million ABS securities to capital markets investors. Redwood bought
$13 million of these Acacia 5 securities for its permanent investment
portfolio.
Redwood utilizes both debt and equity to fund the accumulation of
assets prior to sale to securitization entities. Redwood's debt
averaged $405 million for the quarter and the maximum level of debt
reached during the quarter was $976 million. We expect Redwood's debt
levels to vary between $0 and $2 billion during the next year, varying
as a function of the timing of Redwood's purchase of assets under
accumulation for sale to securitization entities relative to the
timing of the closing of Redwood's sales transactions to these
entities. At the end of the third quarter of 2004, Redwood Trust had
debt of $246 million and shareholders' equity of $902 million, for
quarter-end debt-to-equity ratio of 0.27 to 1.0.
For GAAP balance sheet purposes, Redwood reports its own assets
and debt, plus all of the assets and ABS liabilities of the
securitization entities sponsored by Redwood. The four securitizations
sponsored by Redwood in the third quarter added $2.9 billion of assets
and liabilities to Redwood's consolidated GAAP balance sheet.
Redwood's net investment in and maximum loss exposure to these
securitizations totaled $19 million.
Residential real estate loan credit managed by Redwood rose to
$143 billion at the end of the third quarter. Redwood owns the
residential CES issued from the securitizations of these loans.
Redwood sponsored the securitization of $21 billion of these loans
through the Sequoia securitization program; other sponsors securitized
the remainder of these loans. The underlying loans were generally
originated to high-quality standards. The bulk of these loans were
jumbo loans at the time of origination (Fannie Mae and Freddie Mac
were not eligible to invest in, credit-enhance, or securitize these
loans due to the larger loan balances of these loans).
Seriously delinquent loans (over 90 days, in foreclosure, in
bankruptcy, or real estate owned (REO)) within Redwood's managed
residential loans increased during the quarter while remaining at low
levels. Serious delinquencies were $185 million (0.13% of loan
balances) at the end of the third quarter as compared to $137 million
(0.12% of loan balances) at the beginning of the quarter and $180
million (0.31% of loan balances) one year ago.
Credit losses for Redwood's managed residential loans were $0.7
million for the third quarter of 2004, $1.8 million for the previous
quarter, and $1.0 million for the third quarter of 2003. The credit
loss rate for these loans remained under one basis point (less than
0.01%) per annum.
Credit results for the rest of the residential and commercial
loans that underlie our permanent investment portfolio were also
strong during the third quarter of 2004.
Current residential loan prepayment rate patterns continue to be
favorable for Redwood's long-term results, although not as favorable
as they were in the past. In the third quarter, prepayment rates on
short-term ARMs (adjustable rate mortgages with coupon rates that
adjust each month or six months) securitized by Sequoia remained near
20% CPR (i.e., approximately 20% of the aggregate loan balance is
prepaying annually).
Short-term interest rates rose 20 to 50 basis points during the
quarter (0.20% to 0.50%). We continue to maintain a balance sheet that
is well balanced and matched from an interest rate perspective, so
these interest rate changes had little direct effect on our economic
results.
Third quarter GAAP and core income benefited from a reduction in
premium amortization expenses on residential loans from $13 million in
the prior quarter to a negative expense of $2 million in the third
quarter. Under our current GAAP methodologies, premium amortization
expenses tend to be significantly lower in a rising rate environment
than in a falling rate environment. Assuming we continue with this
methodology in future quarters, our GAAP and core results could be
volatile should the direction of change of interest rates fluctuate
from quarter to quarter.
Investors should note that our economic risk with respect to the
premium balances on these loans is less than the $195 million of
premium balance on our GAAP books (as of September 30, 2004) would
suggest. When we sponsor the securitization of these loans, our
purchase premium on these loans is effectively offset in some cases as
a result of the issuance of asset-backed securities (ABS) at premium
prices and from the issuance of ABS interest-only securities (all the
proceeds of which are issuance premium). The total ABS issuance
premium (net of unamortized ABS issuance expenses) on our GAAP books
for these loans at September 30, 2004 was $185 million. GAAP income
from the amortization of this ABS issuance premium (which reduces our
reported GAAP interest expense) partially offsets expenses from the
amortization of purchase premiums (which reduces our GAAP interest
income) from the same loans. Our net premium position on these loans
(including ABS premium) is $10 million, for an adjusted net amortized
basis of 100.05% of principal value of the loans. GAAP accounting
methods used for these offsetting premium balances on the same loans
are not parallel, however. Additionally, premium balances are not
equally offsetting on each pool of loans. Furthermore, as noted above,
premium amortization expenses on loans for GAAP can be volatile,
depending on the direction of interest rate changes. As a result of
these three factors, net premium amortization for GAAP for these
assets and ABS liabilities can be variable even though the aggregate
net premium economic risk is low.
Redwood's GAAP and taxable income exceeded core earnings due, in
part, to calls of residential CES. During the third quarter of 2004,
calls of $32 million principal value of CES generated $20 million of
GAAP income and $15 million of estimated taxable income. We do not
include gains or losses from calls, sales, or market value
fluctuations in our core earnings calculations.
The yield Redwood earns on its residential CES portfolio that it
has acquired from securitizations sponsored by others continued to
decline as the highest-yielding assets are called away. Redwood's
yield from this portfolio was 17% in the third quarter of 2004 versus
20% in the prior quarter and 28% in the third quarter of 2003.
Redwood raised $98 million new equity capital in the third
quarter, and has raised $198 million of new equity during the first
nine months of 2004. Permanent investment portfolio acquisitions for
the year have totaled $209 million. These purchases have been funded
with new equity capital, retained earnings, and cash flow from our
existing portfolio. Redwood ended the quarter with $302 million of net
liquidity (unrestricted cash balance assuming assets held short-term
for sale to securitization entities were sold and all Redwood Trust
debt was paid off using the sale proceeds). This should be sufficient
to provide continued on-going support for our securitization
activities, meet our dividend distribution requirements, and fund
permanent asset acquisitions for the fourth quarter of 2004.
Growth has contributed positively to Redwood in a number of ways.
Our operating efficiency has improved with growth -- our efficiency
ratio (operating expenses before excise tax and variable stock option
expenses divided by net interest income) has improved from 25% to 12%
over the last year. In addition, the combination of accretive stock
issuance (as a result of growth) and retention of earnings has
increased the amount of permanent tangible capital per share we have
available to help us generate shareholder dividends. We believe the
best measure of long-term dividend-producing capital is "adjusted core
book value per share", which is GAAP book value per share, less
mark-to-market adjustments, less undistributed REIT taxable income (at
least 90% of which will be distributed in the near future as dividends
under the REIT rules). Adjusted core book value has increased by 30%
during the first nine months of 2004 (from $21.92 per share to $28.55
per share).
"The third quarter was a strong quarter for real economics, cash
flow, taxable income, REIT taxable income, book value gains, core
earnings, and GAAP earnings," said Hansen. "Total taxable income of
$59 million ($2.53 per share) was an outstanding result. Furthermore,
REIT taxable income of $49 million ($2.10 per share) for the third
quarter significantly increases the dividends per share we will be
distributing to shareholders over the next year."
Release of Form 10-Q
Our GAAP and core earnings for the third quarter of 2004 include
$4.8 million of net positive prior period adjustments. Of this amount,
$4.1 million increases our interest income through a reduction of
premium amortization expense and $0.7 million reduces our income tax
accruals. In management's opinion, these adjustments are immaterial
and we have therefore reported them as a component of income during
the third quarter of 2004. If these were material adjustments, we
would not have recorded these adjustments in this quarter, but rather
we would have restated earnings for quarters during the years 2001
through 2004, with an aggregate increase in GAAP and core earnings
during these quarters. At the time of this press release, our external
auditors have indicated that they have not yet completed their review
of this issue (and it is possible other issues could arise before
their overall review is completed). Since their review is required
before we file our Form 10-Q with the SEC, we have requested a
five-day extension for filing the Form 10-Q, and we currently
anticipate filing our Form 10-Q on or before Monday, November 15,
2004.
Dividends
"The outlook for continuing our regular dividend payments of $0.67
per share per quarter remains excellent," said Hansen.
"We estimate we ended the third quarter with $139 million ($5.95
per share currently outstanding) of undistributed REIT taxable
income," Hansen continued. "All of this undistributed REIT taxable
income was earned during 2004. Under the REIT rules, we will need to
distribute at least 90% of this amount (plus 90% of fourth quarter
REIT taxable earnings) to shareholders prior to September 2005. It is
likely we will make these required distributions through continued
regular dividends plus one or more special dividends to be authorized
in the future by our Board of Directors."
We generally release our press release, our Form 10-Q (including
our financial statements, footnotes, and management's discussion and
analysis), and our supplemental information package all on the same
day. For this quarter, our release of our Form 10-Q is delayed for
reasons discussed above. Once released and filed, you can access these
documents at our web site -- www.redwoodtrust.com.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995: Certain matters discussed in this news release may
constitute forward-looking statements within the meaning of the
federal securities laws that inherently include certain risks and
uncertainties. Actual results and the timing of certain events could
differ materially from those projected in or contemplated by the
forward-looking statements due to a number of factors, including,
among other things, changes in interest rates on our real estate loan
assets and borrowings, changes in prepayment rates on our real estate
loan assets, general economic conditions, particularly as they affect
the price of real estate loan and the credit status of borrowers, and
the level of liquidity in the capital markets, as it affects our
ability to finance our real estate loan portfolio, and other risk
factors outlined in the Company's 2003 Annual Report on Form 10-K and
September 2004 Prospectus Supplement (available on the Company's Web
site or by request to the Contacts listed above). Other factors not
presently identified may also cause actual results to differ. No one
should assume that results or trends projected in or contemplated by
the forward-looking statements included above will prove to be
accurate in the future. We will revise our outlook from time to time
and frequently will not disclose such revisions publicly.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
Consolidated Income Statement 2004 2004 2004 2003 2003
------------------------------ ------- ------- ------- ------- -------
Interest Income $180.1 $138.0 $124.8 $108.3 $90.2
Interest Expense (114.8) (90.4) (79.5) (68.6) (55.6)
------------------------------ ------- ------- ------- ------- -------
Net Interest Income $65.3 $47.6 $45.3 $39.7 $34.6
Operating Expenses (8.3) (9.1) (8.6) (8.0) (8.5)
Net Recognized Gains (Losses)
and Valuation Adjustments 20.5 12.3 17.4 42.1 0.6
Variable Stock Option (Expense)
Income (0.2) 0.6 (1.4) (2.7) (0.5)
Provision For Income Taxes (5.0) (1.5) (1.9) (1.2) (1.5)
One Time Deferred Tax Benefit 0.0 5.2 0.0 0.0 0.0
Preferred Dividends 0.0 0.0 0.0 0.0 0.0
------------------------------ ------- ------- ------- ------- -------
GAAP Earnings $72.3 $55.1 $50.8 $69.9 $24.7
Less: Net Recognized (Gains)
Losses and Valuation
Adjustments (20.5) (12.3) (17.4) (42.1) (0.6)
Less: Variable Stock Option
(Expense) Income 0.2 (0.6) 1.4 2.7 0.5
Less: One Time Deferred Tax
(Benefit) 0.0 (5.2) 0.0 0.0 0.0
------------------------------ ------- ------- ------- ------- -------
Core Earnings (1) $52.0 $37.0 $34.8 $30.5 $24.6
Average Diluted Shares
(thousands) 22,728 21,325 20,399 19,801 19,018
GAAP Earnings per Share
(Diluted) $3.18 $2.58 $2.49 $3.53 $1.30
Core Earnings per Share (1) $2.29 $1.74 $1.71 $1.54 $1.29
Estimated Total Taxable Income
Per Share Outstanding $2.53 $3.35 $2.57 $4.15 $1.97
Estimated REIT Taxable Income
Per Share Outstanding $2.10 $2.81 $2.15 $4.00 $1.83
Dividends Per Common Share
(Regular) $0.67 $0.67 $0.67 $0.65 $0.65
Dividends Per Common Share
(Special) $0.00 $0.00 $0.50 $4.75 $0.00
------------------------------ ------- ------- ------- ------- -------
Total Dividends per Common
Share $0.67 $0.67 $1.17 $5.40 $0.65
Net Interest Income / Average
GAAP Equity 32.6% 28.7% 31.0% 28.4% 25.1%
Net Interest Income / Average
Core Equity (2) 37.5% 32.6% 35.7% 33.8% 30.2%
GAAP ROE: GAAP Earnings/ Avg
GAAP Common Equity 36.1% 33.2% 34.8% 50.0% 17.8%
Core ROE: Core Earnings / Avg
Common Core Equity 29.9% 25.4% 27.5% 26.0% 21.4%
(1) Core earnings is not a measure of earnings in accordance with
generally accepted accounting principles (GAAP). It is calculated
as GAAP earnings from ongoing operations less net recognized gains
(losses) and valuation adjustments (which include gains and losses
from sales and calls and valuation adjustments on certain assets
hedges) and other temporary or one-time adjustments. Management
believes that core earnings provides relevant and useful
information regarding its results from operations in addition to
GAAP measures of performance. This is, in part, because market
valuation adjustments on only a portion of the company's assets
and stock options and none of its liabilities are recognized
through the income statement under GAAP and thus GAAP valuation
adjustments may not be fully indicative of changes in market
values on the balance sheet as a whole or a reliable guide to
current operating performance. Furthermore, gains or losses
realized upon sales of assets vary based on portfolio management
decisions; a sale of an asset for a gain or a loss may or may not
affect on-going earnings from operations. Because all companies
and analysts do not calculate non-GAAP measures such as core
earnings in the same fashion, core earnings as calculated by the
company may not be comparable to similarly titled measures
reported by other companies.
(2) Core equity is calculated as GAAP equity less unrealized gains and
losses on certain assets and hedges. Management believes
measurements based on core equity provide relevant and useful
information regarding its results of operations in addition to
GAAP measures of performance. This is, in part, because market
valuation adjustments reflected in GAAP equity represent
unrealized gains and losses on a portion of the balance sheet only
and may not be reflective of the equity available to invest in
operations. Because all companies and analysts do not calculate
non-GAAP measures in the same fashion, core equity and ratios
using core equity as calculated by the company may not be
comparable to similarly titled measures reported by other
companies.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Nine Nine
Months Months
Consolidated Income Statement 2004 2003
------------------------------------------------------ ------- -------
Interest Income $442.9 $222.7
Interest Expense (284.7) (134.3)
------------------------------------------------------ ------- -------
Net Interest Income 158.2 88.4
Operating Expenses (26.0) (23.2)
Net Recognized Gains (Losses) and Valuation
Adjustments 50.2 4.6
Variable Stock Option (Expense) Income (1.0) (3.0)
Provision For Income Taxes (8.4) (4.3)
One Time Deferred Tax Benefit 5.2 0.0
------------------------------------------------------ ------- -------
GAAP Earnings (Diluted) $178.2 $62.5
Less: Dividends On And Earnings Allocated to Preferred 0.0 (1.2)
------------------------------------------------------ ------- -------
GAAP Earnings (1) 178.2 61.3
Less: Net Recognized Gains (Losses) and Valuation
Adjustments (50.2) (4.6)
Less: Variable Stock Option Expense (Income) 1.0 3.0
Less: One Time Deferred Tax Benefit (5.2) 0.0
------------------------------------------------------ ------- -------
Core Earnings (2) $123.8 $59.7
Average Diluted Shares 21,486 18,466
GAAP Earnings per Share (Diluted) (1) $8.29 $3.38
Core Earnings per Share (2) $5.76 $3.29
Estimated Total Taxable Income Per Share Outstanding $8.45 $5.48
Estimated REIT Taxable Income Per Share Outstanding $7.05 $5.21
Dividends Per Common Share (Regular) $2.01 $1.95
Dividends Per Common Share (Special) $0.50 $0.00
------------------------------------------------------ ------- -------
Total Dividends Per Common Share $2.51 $1.95
Net Interest Income / Average GAAP Equity 30.8% 22.9%
Net Interest Income / Average Core Equity (3) 35.4% 27.2%
GAAP Return on Equity: GAAP Earnings/ Average GAAP
Equity 34.8% 16.3%
Core Return on Equity: Core Earnings / Average Core
Equity 27.7% 19.0%
(1) The nine months 2003 GAAP earnings are lower than previously
reported due to the adoption of EITF 03-6 (Participating
Securities and the Two-Class Method under FASB Statement No. 128),
which allocates undistributed earnings between the common and
preferred stock based upon their respective contractual rights to
share in such earnings as if the earnings were distributed. EITF
03-6 had the effect of lowering GAAP earnings by $0.5 million for
the nine months 2003. EITF 03-6 also lowered GAAP earnings per
share (diluted) by $0.02 per share.
(2) Core earnings is not a measure of earnings in accordance with
generally accepted accounting principles (GAAP). It is calculated
as GAAP earnings from ongoing operations less net recognized gains
(losses) and valuation adjustments (which include gains and losses
from sales and calls and valuation adjustments on certain asset
hedges) and other temporary or one-time adjustments. Management
believes that core earnings provides relevant and useful
information regarding its results from operations in addition to
GAAP measures of performance. This is, in part, because market
valuation adjustments on only a portion of the company's assets
and stock options and none of its liabilities are recognized
through the income statement under GAAP and thus GAAP valuation
adjustments may not be fully indicative of changes in market
values on the balance sheet as a whole or a reliable guide to
current operating performance. Furthermore, gains or losses
realized upon sales of assets vary based on portfolio management
decisions; a sale of an asset for a gain or a loss may or may not
affect on-going earnings from operations. Because all companies
and analysts do not calculate non-GAAP measures such as core
earnings in the same fashion, core earnings as calculated by the
company may not be comparable to similarly titled measures
reported by other companies.
(3) Core equity is calculated as GAAP equity less unrealized gains and
losses on certain assets and hedges. Management believes
measurements based on core equity provide relevant and useful
information regarding its results of operations in addition to
GAAP measures of performance. This is, in part, because market
valuation adjustments reflected in GAAP equity represent
unrealized gains and losses on a portion of the balance sheet only
and may not be reflective of the equity available to invest in
operations. Because all companies and analysts do not calculate
non-GAAP measures in the same fashion, core equity and ratios
using core equity as calculated by the company may not be
comparable to similarly titled measures reported by other
companies.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
30-Sept 30-Jun 31-Mar 31-Dec 30-Sep
Consolidated Balance Sheet 2004 2004 2004 2003 2003
------------------------- -------- -------- -------- -------- --------
Residential Real Estate
Loans $21,558 $19,916 $18,086 $16,239 $13,813
Residential Home Equity
Lines of Credit (HELOC) 317 327 -- -- --
Residential Loan Credit-
Enhancement Securities 497 442 375 379 373
Commercial Real Estate
Loans 33 34 22 22 24
Securities Portfolio 1,239 1,095 937 845 605
Cash and Cash Equivalents 76 38 58 59 32
Working Capital and Other
Assets 134 110 66 83 54
------------------------- -------- -------- -------- -------- --------
Total Consolidated Assets $23,854 $21,962 $19,544 $17,627 $14,901
Redwood Trust Debt $246 $270 $278 $236 $500
Consolidated Asset-Backed
Securities Issued 22,622 20,870 18,583 16,783 13,782
Working Capital and Other
Liabilities 84 64 75 55 53
Common Equity 902 758 608 553 566
------------------------- -------- -------- -------- -------- --------
Total Liabilities and
Equity $23,854 $21,962 $19,544 $17,627 $14,901
Total GAAP Equity $902 $758 $608 $553 $566
Less: Accumulated Other
Comprehensive Income (96) (111) (79) (82) (91)
------------------------- -------- -------- -------- -------- --------
Core Equity $806 $647 $529 $471 $475
Less: Undistributed REIT
Taxable Income (139) (110) (69) (53) (83)
------------------------- -------- -------- -------- -------- --------
Adjusted Core Equity $667 $537 $460 $418 $392
Common Shares Outstanding
at Period End
(thousands) 23,346 21,511 19,796 19,063 18,468
GAAP Equity (GAAP Book
Value) per Common Share $38.64 $35.24 $30.72 $29.03 $30.65
Core Equity (Core Book
Value) per Common Share $34.52 $30.06 $26.75 $24.72 $25.75
Adjusted Core Equity per
Share $28.55 $24.96 $23.25 $21.92 $21.24
Average Total
Consolidated Assets $22,877 $20,610 $18,386 $15,758 $12,132
Average Consolidated
Earning Assets $22,461 $20,283 $18,158 $15,504 $11,911
Average Debt and Asset
Backed Securities Issued $22,011 $19,890 $17,747 $15,120 $11,542
Average Total GAAP Equity $802 $664 $584 $559 $553
REDWOOD TRUST, INC.
(All dollars in millions)
30-Sep 30-Jun 31-Mar 31-Dec 30-Sep
Leverage Ratios (1) 2004 2004 2004 2003 2003
------------------------- -------- -------- -------- -------- --------
Total Reported
Consolidated Assets $23,854 $21,962 $19,544 $17,627 $14,901
Less: Assets Consolidated
from Securitization
Entities (22,706) (20,934) (18,658) (16,838) (13,835)
------------------------- -------- -------- -------- -------- --------
Redwood's Direct Assets $1,148 $1,028 $886 $789 $1,066
Total Redwood Debt and
Consolidated ABS Issued
Securities $22,868 $21,140 $18,861 $17,019 $14,282
Less: Consolidated ABS
Issued Securities (22,622) (20,870) (18,583) (16,783) (13,782)
------------------------- -------- -------- -------- -------- --------
Redwood's Debt $246 $270 $278 $236 $500
Redwood Debt $246 $270 $278 $236 $500
Redwood Equity 902 758 608 553 566
------------------------- -------- -------- -------- -------- --------
Redwood Capital $1,148 $1,028 $886 $789 $1,066
Redwood Debt to GAAP
Equity 0.3x 0.4x 0.5x 0.4x 0.9x
GAAP Equity / Redwood's
Direct Assets 79% 74% 69% 70% 53%
Redwood Debt to Capital
Ratio 21% 26% 31% 30% 47%
(1) The Asset-Backed Securities reported on our GAAP balance sheet as
liabilities consist of Asset-Backed securities issued by
bankruptcy-remote securitization entities. The owners of these
securities have no recourse to Redwood and must look only to the
assets of the securitization entities for repayment. Both the
assets and liabilities of these entities, however, are
consolidated on Redwood's balance sheet for GAAP reporting
purposes. Management believes that an analyst could achieve
insight into Redwood's business and balance sheet by
distinguishing between debt that must be repaid by Redwood and
Asset-Backed Securities that are consolidated onto Redwood's
balance sheet from other entities. This table shows leverage
ratios calculated for Redwood using measures that incorporate
Redwood's debt only.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
2004 2004 2004 2003 2003
-------- -------- -------- -------- --------
Consolidated Residential
Real Estate Loans (1)
-------------------------
Start of Period Balances $19,916 $18,086 $16,239 $13,813 $9,247
Acquisitions 2,898 2,703 2,322 2,897 4,997
Sales Proceeds (Not
Including Sales to
Consolidated Asset-
Backed Securities
Trusts) (113) 0 0 (1) 0
Principal Pay Downs (1,144) (858) (460) (458) (420)
Net Amortization Expense 2 (14) (12) (10) (9)
Net Charge Offs
(Recoveries) 0 0 0 0 0
Credit Provisions (1) (1) (3) (2) (2)
Net Recognized Gains
(Losses) 0 0 0 0 0
------------------------- -------- -------- -------- -------- --------
End of Period Balances $21,558 $19,916 $18,086 $16,239 $13,813
Average Amortized Cost
During Period, Net of
Credit Reserves $20,484 $18,754 $16,916 $14,381 $10,958
Interest Income $148 $110 $99 $83 $64
Yield 2.89% 2.34% 2.34% 2.30% 2.32%
Principal Value of Loans $21,382 $19,767 $17,951 $16,111 $13,704
Credit Reserve (21) (20) (19) (16) (14)
Net Premium to be
Amortized 197 169 154 144 123
------------------------- -------- -------- -------- -------- --------
Residential Real Estate
Loans $21,558 $19,916 $18,086 $16,239 $13,813
Credit Reserve, Start of
Period $20 $19 $16 $14 $12
Net Charge-Offs 0 0 0 0 0
Credit Provisions 1 1 3 2 2
------------------------- -------- -------- -------- -------- --------
Credit Reserve, End of
Period $21 $20 $19 $16 $14
Delinquencies (90 days +
FC + BK + REO) $11 $5 $3 $5 $2
Delinquencies as % of
Residential Loans 0.05% 0.03% 0.02% 0.03% 0.01%
Net Charge-offs as % of
Residential Loans
(Annualized) 0.00% 0.00% 0.00% 0.01% 0.00%
Reserve as % of
Residential Loans 0.10% 0.10% 0.10% 0.10% 0.10%
Reserve as % of
Delinquencies 198% 374% 548% 301% 852%
(1) Includes loans securitized by securitization entities sponsored by
Redwood that are consolidated on Redwood's GAAP balance sheet as
well as loans owned directly by Redwood on a temporary basis prior
to sale to a securitization entity.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
2004 2004 2004 2003 2003
------- ------- ------- ------- -------
Consolidated Residential Home
Equity Lines of Credit
(HELOC)
------------------------------
Start of Period Balances $327 $0 $0 $0 $0
Acquisitions 0 335 0 0 0
Sales Proceeds (Not Including
Sales to Consolidated Asset-
Backed Securities Trusts) 0 0 0 0 0
Principal Pay Downs (8) (8) 0 0 0
Net Amortization Expense (1) (0) 0 0 0
Net Charge Offs (Recoveries) 0 0 0 0 0
Credit Provisions (1) (0) 0 0 0
Net Recognized Gains (Losses)
& Valuation Adjustments 0 0 0 0 0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances $317 $327 $0 $0 $0
Average Amortized Cost During
Period, Net of Credit
Reserves $323 $124 $0 $0 $0
Interest Income $1 $1 $0 $0 $0
Yield 2.00% 1.73% 0.00% 0.00% 0.00%
Principal Value of Loans $309 $317 $0 $0 $0
Credit Reserve (1) (0) 0 0 0
Net Premium to be Amortized 9 10 0 0 0
------------------------------ ------- ------- ------- ------- -------
Residential Home Equity Lines
of Credit $317 $327 $0 $0 $0
Credit Reserve, Start of
Period $0 $0 $0 $0 $0
Net Charge-Offs 0 0 0 0 0
Credit Provisions 1 0 0 0 0
------------------------------ ------- ------- ------- ------- -------
Credit Reserve, End of Period $1 $0 $0 $0 $0
Delinquencies (90 days + FC +
BK + REO) $0 $0 $0 $0 $0
Delinquencies as % of HELOCs 0.00% 0.00% 0.00% 0.00% 0.00%
Net charge-offs as % of HELOCs
(Annualized) 0.00% 0.00% 0.00% 0.00% 0.00%
Reserve as % of HELOCs 0.17% 0.08% 0.00% 0.00% 0.00%
Reserve as % of Delinquencies 0.00% 0.00% 0.00% 0.00% 0.00%
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
2004 2004 2004 2003 2003
--------- -------- -------- -------- --------
Consolidated Residential
Loan Credit-Enhancement
Securities (1)
------------------------
Start of Period Balances $442 $375 $379 $373 $393
Acquisitions 83 75 38 78 23
Sales Proceeds (Not
Including Sales to
Consolidated Asset-
Backed Securities
Trusts) 0 0 (22) 0 0
Principal Pay Downs
(Including Calls) (45) (48) (35) (117) (37)
Net Amortization Income 9 9 9 10 11
Unrealized (Losses)
Gains Reported Through
Balance Sheet (12) 18 (12) (12) (21)
Realized Gains and
Market Valuation Losses
Reported in Income
Statement 20 13 18 47 4
------------------------ --------- -------- -------- -------- --------
End of Period Balances $497 $442 $375 $379 $373
Average Amortized Cost
During Period, Net of
Credit Reserves $369 $317 $287 $273 $271
Interest Income $16 $16 $16 $17 $19
Yield 17.36% 20.27% 21.64% 25.49% 28.09%
Principal Value of
Redwood's Credit-
Enhancement Securities $831 $713 $634 $624 $604
Internally Designated
Credit Protection on
Loans Credit-Enhanced (299) (236) (217) (201) (178)
Net Discount to be
Amortized (109) (122) (111) (123) (145)
------------------------ --------- -------- -------- -------- --------
Net Investment in
Credit-Enhancement
Securities $423 $355 $306 $300 $281
Net Unrealized Gains
(Losses) 74 87 69 79 92
------------------------ --------- -------- -------- -------- --------
Residential Loan Credit-
Enhancement Securities $497 $442 $375 $379 $373
Securities Senior to
Redwood's Interests $120,685 $96,322 $70,684 $67,463 $43,024
Principal Value of
Redwood's Credit-
Enhancement Securities 831 713 634 624 604
Securities Junior to
Redwood's Interests 69 70 44 46 52
------------------------ --------- -------- -------- -------- --------
Underlying Residential
Real Estate Loan
Balances $121,585 $97,105 $71,362 $68,133 $43,680
Internally Designated
Credit Protection on
Loans Credit-Enhanced $299 $236 $217 $201 $178
External Credit-
Enhancement on Loans
Credit-Enhanced 69 70 44 46 52
------------------------ --------- -------- -------- -------- --------
Total Credit Protection
(2) $368 $306 $261 $247 $230
Delinquencies (90 days +
FC + BK + REO) $174 $131 $143 $133 $178
Redwood's Net Charge-
Offs $(1) $(2) $(0) $(1) $(1)
Losses to Securities
Junior to Redwood's
Interests (0) (0) (0) (1) (0)
------------------------ --------- -------- -------- -------- --------
Total Underlying Loan
Credit Losses $(1) $(2) $(0) $(2) $(1)
Delinquencies as % of
Underlying Loans 0.14% 0.14% 0.20% 0.19% 0.41%
Total Pool Credit
Losses/Underlying Loans
(Annualized) 0.01% 0.01% 0.01% 0.01% 0.01%
Total Credit Protection
as % of Underlying
Loans 0.30% 0.32% 0.37% 0.36% 0.53%
Total Credit Protection
as % of Delinquencies 211% 233% 183% 187% 129%
(1) Includes credit-enhancement securities acquired from
securitizations sponsored by third parties. Does not include
residential CES acquired from securitizations sponsored by us.
(2) Total credit protection represents the aggregate of the internally
designated credit reserve and the amount of any junior securities
with respect to each credit-enhanced security. The credit
protection amount for any credit-enhanced security is only
available to absorb losses on the pool of loans related to that
security. To the extent such losses exceed the credit protection
amount for that security, a charge-off of the net investment in
that security would result.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Total Managed Quarter Quarter Quarter Quarter Quarter
Residential Loans (1) 2004 2004 2004 2003 2003
----------------------- --------- --------- -------- -------- --------
Residential Real Estate
Loans Owned by Redwood $259 $161 $97 $43 $406
Residential Real Estate
Loans Securitized by
Redwood 21,299 19,755 17,989 16,196 13,407
Residential Real Estate
Loans Securitized by
Others 121,585 97,105 71,362 68,133 43,680
----------------------- --------- --------- -------- -------- --------
Total Residential Real
Estate Loans Managed $143,143 $117,021 $89,448 $84,372 $57,493
Credit Reserve on
Residential Loans
Securitized by Redwood $21 $20 $19 $16 $14
Internally Designated
Credit Reserve on
Loans Securitized by
Others 299 236 217 201 178
Redwood's Total
Residential Credit
Protection $320 $256 $236 $217 $192
External Credit
Enhancement on Loans
Securitized by Others 69 70 44 46 52
----------------------- --------- --------- -------- -------- --------
Total Credit Protection
(2) $389 $326 $280 $263 $244
Total Credit Protection
as % of Total
Residential Loans 0.27% 0.28% 0.31% 0.31% 0.42%
Delinquencies for
Residential Loans
owned by Redwood $0 $0 $0 $0 $0
Delinquencies for
Residential Loans
Securitized by Redwood 11 5 3 5 2
Delinquencies for
Residential Loans
Securitized by Others 174 131 143 133 178
----------------------- --------- --------- -------- -------- --------
Total Residential Loan
Serious Delinquencies $185 $136 $146 $138 $180
Delinquencies as % of
Total Residential
Loans 0.13% 0.12% 0.16% 0.16% 0.31%
Total Credit Protection
as % of Delinquencies 211% 239% 191% 191% 136%
Net Charge-Offs on
Residential Loans
Owned by Redwood $0 $0 $0 $0 $0
Net Charge-Offs on
Residential Loans
Securitized by Redwood $0 $0 $0 $0 $0
Net Charge-Offs on
Residential Loan
Securitized by Others (1) (2) 0 (1) (1)
----------------------- --------- --------- -------- -------- --------
Redwood's Shares of Net
Credit (Losses)
Recoveries ($1) ($2) $0 $(1) $(1)
Credit Losses to
External Credit
Enhancement 0 0 0 (1) 0
----------------------- --------- --------- -------- -------- --------
Total Residential
Credit Losses ($1) ($2) $0 $(2) $(1)
Total Credit Losses as
% of Total Residential
Loans (Annualized) 0.01% 0.01% 0.01% 0.01% 0.01%
(1) Includes loans securitized by Sequoia securitization entities
sponsored by Redwood from which Redwood has acquired the
residential CES plus loans securitized by third parties from which
Redwood has required the residential credit-enhanced securities,
plus loans held temporarily by Redwood prior to securitization.
(2) The credit reserve on residential real estate loans owned is only
available to absorb losses on the residential real estate loan
portfolio. The internally designated credit reserve on loans
credit-enhanced and the external credit enhancement on loans
credit-enhanced are only available to absorb losses on the pool of
loans related to each individual credit-enhancement security.
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
Commercial Real Estate Loans 2004 2004 2004 2003 2003
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances $34 $22 $22 $24 $35
Acquisitions 0 17 0 0 1
Sales Proceeds (Not Including
Sales to Consolidated Asset-
Backed Securities Trusts) 0 (2) 0 0 (1)
Principal Pay Downs 0 (3) 0 0 (11)
Net Amortization Income (1) 0 0 0 0
Credit Provisions 0 0 0 (1) 0
Net Loss Adjustments through
I/S 0 0 0 (1) 0
------------------------------ ------- ------- ------- ------- -------
End of Period Balances $33 $34 $22 $22 $24
Average Amortized Cost During
Period, Net of Credit
Reserves $33 $26 $22 $23 $30
Interest Income $1.0 $0.9 $0.7 $0.2 $0.9
Yield 12.40% 13.29% 12.56% 4.16% 12.33%
Principal Value of Loans $43 $43 $31 $31 $31
Credit Reserve and Credit
Protection (9) (8) (8) (8) (7)
Net Discount to be Amortized (1) (1) (1) (1) (0)
------------------------------ ------- ------- ------- ------- -------
Commercial Mortgage Loans $33 $34 $22 $22 $24
Commercial Real Estate Loan
Delinquencies $0 $0 $0 $0 $0
Commercial Real Estate Loan
Net Charge-Offs $0 $0 $0 $0 $0
Commercial Real Estate Loan
Credit Provisions $0 $0 $0 $1 $0
Commercial Real Estate Loan
Credit Reserves and Credit
Protection $8 $8 $8 $8 $7
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
Securities Portfolio 2004 2004 2004 2003 2003
------------------------------ ------- ------- ------- ------- -------
Start of Period Balances $1,095 $937 $845 $605 $596
Acquisitions 151 193 86 257 28
Sales Proceeds (Not Including
Sales to Consolidated Asset-
Backed Securities Trusts) 0 (9) 0 0 0
Principal Pay Downs (18) (10) (10) (17) (13)
Net Amortization Income
(Expense) 0 (1) 0 (1) 0
Net Unrealized Gains (Losses) 11 0 16 4 (3)
Net Recognized Gains (Losses)
& Valuation Adjustments 0 (15) 0 (3) (3)
------------------------------ ------- ------- ------- ------- -------
End of Period Balances $1,239 $1,095 $937 $845 $605
Average Amortized Cost During
Period $1,149 $980 $862 $710 $603
Interest Income $13 $11 $10 $8 $6
Yield 4.62% 4.30% 4.46% 4.40% 4.30%
Principal Value of Securities 1,243 $1,097 $921 $833 $599
Net (Discount) Premium to be
Amortized (20) (7) (4) 8 7
Net Unrealized Gains (losses) 16 5 20 4 (1)
------------------------------ ------- ------- ------- ------- -------
Securities Portfolio $1,239 $1,095 $937 $845 $605
REDWOOD TRUST, INC.
(All dollars in millions, except per share data)
Differences Between GAAP Net Income and Estimated Total Taxable and
REIT Taxable Income
Estimated Estimated Actual
For the Three For the Nine For the
Months Ended Months Ended Year Ended
Sept. 30, Sept. 30, Dec. 31,
2004 2004 2003
------------- ------------- -----------
GAAP Net Income $72.3 $178.2 $131.7
Interest Income and Expense
Differences (23.5) (19.5) 22.3
Provision for Credit Losses -
GAAP 1.5 5.5 8.7
Tax Deductions for Realized
Credit Losses (0.1) (0.6) (0.8)
Long-Term Compensation
Differences 2.0 6.7 1.8
Stock Option Exercise
Deductions Differences (2.4) (13.9) 3.2
Depreciation of Fixed Asset
Differences (0.6) (0.5) (0.7)
Other Operating Expense
Differences (0.0) (0.0) 0.9
Sales of Assets to Third
Parties Differences (0.5) (1.7) (0.0)
Call Income from Residential
CES Differences (4.0) (8.0) (8.4)
Tax Gain on Securitizations 11.2 21.5 --
Tax Gain on Intercompany Sales
and Transfers 0.0 7.5 2.8
GAAP Market Valuation Write
Downs (EITF 99-20) 0.4 4.8 7.6
Interest Rate Agreements
Differences (0.3) 0.3 (0.2)
Provision for Excise Tax - GAAP 0.3 0.8 1.2
Provision for Income Tax
Differences 2.8 1.0 5.5
Preferred Dividend - GAAP 0.0 0.0 0.7
------------- ------------- -----------
Total Taxable Income (Pre-Tax) $59.1 $182.1 $176.3
(Earnings) Losses From Taxable
Subsidiaries (10.1) (30.2) (7.9)
REIT Taxable Income (Pre-Tax) 49.0 151.9 168.4
GAAP Income per Share Based on
Average Diluted Shares During
Period (2) $3.18 $8.29 $7.04
Total Taxable Income per Share
Based on Shares Outstanding at
Period End $2.53 $8.45 $9.64
REIT Taxable Income per Share
Based on Shares Outstanding at
Period End $2.10 $7.05 $9.21
(1) Estimated total taxable income and estimated REIT taxable income
are not GAAP performance measures but are important measures as
they are the basis of our dividend distributions to shareholders.
(2) Historic periods may be lower than previously reported earnings
per share numbers as a result of the application of EITF 03-6
(Participating Securities and the Two-Class Method under FASB
Statement No. 128) requirement that prior period basic and diluted
earnings per share be restated for participating securities. Under
the provision of EITF 03-6 our convertible preferred stock that
was converted in the second quarter of 2003 is a participating
security and thus our reported earnings per share for periods 2003
and earlier are revised downwards by up to 2% per period.
CONTACT: Redwood Trust, Inc.
Harold Zagunis, 415-389-7373
SOURCE: Redwood Trust, Inc.