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Redwood Trust Reports First Quarter 2007 Results

Wednesday, May 09, 2007

MILL VALLEY, Calif.--(BUSINESS WIRE)--

Redwood Trust, Inc. (NYSE:RWT) today reported GAAP earnings of $18 million ($0.66 per share) for the first quarter of 2007. In the first quarter of 2006, GAAP earnings were $28 million, ($1.09 per share).

Our core earnings for the first quarter were $30 million ($1.08 per share). Core earnings for each of the first and fourth quarters of 2006 were $30 million ($1.16 and $1.12 per share, respectively). Core earnings excludes gains from asset sales, calls, and market value changes that are included in earnings reported for GAAP purposes, and certain one-time income or expense items that are not likely to occur in the future. A reconciliation of core to GAAP earnings appears in the table below. We believe core earnings can be a meaningful measure of Redwood's financial performance in addition to reported GAAP results because core earnings highlights that portion of our reported earnings that is more likely to be ongoing in nature.

"Our results for the quarter were not bad," said Doug Hansen, Redwood's President. "Credit results were good. Net interest income and core income were strong, as were taxable income results. Declining market values of assets reduced our headline GAAP earnings number and our reported book value, but did not affect our prospective cash flows. Most importantly, although volatility in our reported results should be expected for some time, it appears that market turmoil, asset market value declines, and a new respect for risk are enhancing the value of our competitive advantages and thus our long-term opportunities for profitable growth."

The largest factor in the decline of net income from a year ago was a $7 million increase in negative unrealized mark-to-market asset valuation adjustments, reflecting the overall market decline in prices for real estate securities that occurred during the first quarter. Another factor that contributed to the decline in net income was a $5 million increase in operating expenses, of which $2 million related to severance charges as part of a re-alignment of our commercial operations, and $3 million related to increases in personnel and systems costs associated with diversification and growth of our business.

Our net interest income increased to $47 million during the quarter from $45 million in the same period last year. Higher net interest income from our securities portfolios more than offset the decline in net interest income from a reduced balance of adjustable-rate residential loans financed under our Sequoia program. In addition, net income for the period was positively affected by a lower tax provision and other items totaling $2 million.

Additional Information

Additional information on Redwood's GAAP results is available in its Quarterly Report on Form 10-Q for the three months ended March 31, 2007 which was filed today with the Securities and Exchange Commission. Today Redwood also released its "Redwood Review," covering the first quarter of 2007. The Review contains a discussion of first quarter activity, taxable income and other non-GAAP performance measures, and a review of Redwood's business and outlook. The company's 10-Q and the Redwood Review are available on its website: www.redwoodtrust.com.

CAUTIONARY STATEMENT: This press release contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including the words "anticipated," "estimated," "should," "expect," "believe," "intend," and similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our 2006 Annual Report on Form 10-K under Item 1A "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are detailed from time to time in reports filed by us with the Securities and Exchange Commission, including Forms 10-K, 10-Q, and 8-K. Important factors that may impact our actual results include changes in interest rates and market values; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the level of liquidity in the capital markets as it affects our ability to finance our real estate asset portfolio; and other factors not presently identified. In light of these risks, uncertainties, and assumptions, the forward-looking events mentioned in, discussed in, or incorporated by reference into this press release might not occur. Accordingly, our actual results may differ from our current expectations, estimates, and projections. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

REDWOOD TRUST, INC.
(All dollars in millions, except share data)

                           First    Fourth   Third    Second   First
CONSOLIDATED INCOME       Quarter  Quarter  Quarter  Quarter  Quarter
 STATEMENT                  2007     2006     2006     2006     2006
------------------------- -------- -------- -------- -------- --------
Interest income           $   215  $   218  $   224  $   218  $   226
Interest expense             (168)    (173)    (175)    (173)    (181)
------------------------- -------- -------- -------- -------- --------
Net interest income            47       45       49       45       45

Operating expenses            (16)     (14)     (13)     (16)     (13)
Severance expense              (2)        -        -       0         -
Gains on sales and calls,
 net                            1        7        5        8        1
Valuation adjustments         (10)      (1)      (5)      (3)      (3)
Provision for income
 taxes                         (2)      (1)      (4)      (3)      (2)
------------------------- -------- -------- -------- -------- --------
GAAP earnings             $    18  $    36  $    32  $    31  $    28
                          ======== ======== ======== ======== ========

Less: severance
 expense(1)                     2         -        -        -        -
Less: gains on sales and
 calls, net                    (1)      (7)      (5)      (8)      (1)
Less: valuation
 adjustments                   10        1        5        3        3
------------------------- -------- -------- -------- -------- --------
Core earnings (2)         $    30  $    30  $    32  $    26  $    30
                          ======== ======== ======== ======== ========

Average diluted shares
 (thousands)               27,684   27,122   26,625   26,109   25,703
GAAP earnings per share
 (diluted)                $  0.66  $  1.32  $  1.22  $  1.20  $  1.09
Core earnings per share
 (diluted) (2)            $  1.08  $  1.12  $  1.20  $  0.97  $  1.16

Regular dividends per
 share                    $  0.75  $  0.70  $  0.70  $  0.70  $  0.70
Special dividends per
 share                           -    3.00         -        -        -
------------------------- -------- -------- -------- -------- --------
Total dividends per share $  0.75  $  3.70  $  0.70  $  0.70  $  0.70

(1) Cost associated with re-alignment of senior management in our
 commercial operations.

(2) Core earnings are not a measure of earnings in accordance with
 GAAP. We attempt to strip some of the elements out of GAAP earnings
 that are temporary, one-time, or non-economic in nature or that
 relate to the past rather than the future, so that the underlying on-
 going "core" trend of earnings is clearer, at least in certain
 respects. We exclude gains (and losses) on sales and calls. We sell
 assets from time to time as part of our on-going portfolio management
 activities. These occasional sales can produce material gains and
 losses that could obscure the underlying trend of our long-term
 portfolio earnings, so we exclude them from core earnings. Similarly,
 we exclude gains from calls of securities, as these are essentially
 sales of assets that produce a highly variable stream of income that
 may obscure some underlying income generation trends. GAAP earnings
 also include valuation adjustments for certain of our assets and
 interest rate agreements. These are unrealized market value
 fluctuations - we exclude them from core earnings. Management
 believes that core earnings provide relevant and useful information
 regarding 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 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.
 Core earnings may not foot from GAAP earnings due to rounding to
 millions of dollars.
REDWOOD TRUST, INC.
(All dollars in millions, except share data)

CONSOLIDATED BALANCE       31-Mar   31-Dec   30-Sep   30-Jun   31-Mar
 SHEET                      2007     2006     2006     2006     2006
------------------------- -------- -------- -------- -------- --------
Real estate loans         $ 8,706  $ 9,352  $ 9,875  $10,491  $12,045
Real estate securities      3,601    3,233    2,912    2,661    2,529
Other real estate
 investments                   50         -        -        -        -
Cash and cash equivalents      92      168      113      106       85
Other assets                  498      277      300      272      320
------------------------- -------- -------- -------- -------- --------
Total consolidated assets $12,947$13,030$13,200$13,530$14,979

Redwood debt              $ 1,880  $ 1,856  $   510  $   529  $      -
Consolidated asset-back
 securities issued          9,947    9,979   11,554   11,898   13,930
Other liabilities              96       92       93       99       82
Junior subordinated notes     100      100         -        -        -
Equity                        924    1,003    1,043    1,004      967
------------------------- -------- -------- -------- -------- --------
Total consolidated
 liabilities and equity   $12,947  $13,030  $13,200  $13,530  $14,979
                          ======== ======== ======== ======== ========

Shares outstanding at
 period end (thousands)    27,129   26,733   26,053   25,668   25,382
GAAP equity (GAAP book
 value) per share         $ 34.06  $ 37.51  $ 40.02  $ 39.13  $ 38.11

Source: Redwood Trust, Inc.

Contact: Redwood Trust, Inc. Martin S. Hughes, 415-380-3455

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