View all news

Redwood Trust Reports 2007 Results and GAAP Book Value of Positive $23.18 per share after the Adoption of FAS 159 on January 1, 2008

Wednesday, March 05, 2008

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

Redwood Trust, Inc. (NYSE:RWT) today reported a GAAP net loss for the fourth quarter of 2007 of $1.1 billion ($36.49 per share). This loss included $1.1 billion ($37.90 per share) of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $2.18 per share for the third quarter of 2007 and net income of $1.32 per share for the fourth quarter of 2006. For 2007, our reported GAAP net loss was $1.1 billion ($39.70 per share). This loss included $1.3 billion ($45.17 per share) of net negative MTM adjustments. This compares to GAAP net income of $128 million ($4.85 per share) in 2006.

Taxable income for the fourth quarter was $29 million ($0.91 per share) compared to taxable income of $39 million ($1.45 per share) for the fourth quarter of 2006. Taxable income for 2007 was $164 million ($5.79 per share), compared to $175 million ($6.75 per share) in 2006.

Our excess capital position remained strong at $282 million at December 31, 2007, a slight decrease from the $298 million at the end of the third quarter. During the quarter, we raised $131 million of capital from stock issuance, $49 million of capital from portfolio cash flows in excess of our operating costs, and $7 million of capital from asset sales. We used $123 million of capital for new investments and $80 million of capital for dividend payments. We continue to have no liquidity issues or need to sell assets.

"After a painful year for our industry, we have emerged from 2007 as one of the companies best positioned to capitalize on the opportunities that lie ahead," said George Bull, Redwood's Chairman and CEO. "The strength of our balance sheet allowed us to weather the current liquidity crisis and build for the future. As a survivor and a leader, we will have an opportunity to define the new operating models in our space in the future."

Negative MTM adjustments were, by far, the most significant factor impacting earnings and book value for the fourth quarter and the year ended December 31, 2007. We believe the real economic impact of diminished market values is significantly less severe than the financial reporting impact reflected in our GAAP financial statements because the reported $1.0 billion loss attributed to the bankruptcy remote Acacia entities in 2007 substantially exceeds our $118 million net investment in these entities, and our economic loss cannot exceed our investment. The primary reason for the divergence between economics and GAAP is the accounting treatment required for our investments in the consolidated Acacia CDO entities. During 2007, we recorded cumulative fair value declines for Acacia's assets of $1.6 billion, but were not permitted to record $1.5 billion of fair value declines for Acacia's paired liabilities - the result was a reported net GAAP book value of negative $22.18 per share at December 31, 2007. On January 1, 2008, we adopted FAS 159, a new fair value accounting standard that permits us to mark-to-market both the assets and the liabilities of the consolidated Acacia CDO entities going forward. FAS 159 also provided for a one-time cumulative effect balance sheet adjustment reflecting the initial application of the standard. After giving effect to this adjustment, our GAAP book value was a positive $23.18 per share on January 1, 2008. We believe this new accounting standard significantly improves the substantial disparity that has existed between GAAP and economic values.

Our key operating results for the fourth quarter and year remained relatively strong despite the turmoil in the mortgage market. Net interest income for the fourth quarter of 2007 was $4 million higher than the fourth quarter of 2006. Operating expenses in the fourth quarter of 2007 were $2 million higher than the fourth quarter of last year. For 2007, net interest income increased to $204 million from $184 million in 2006. Operating expenses increased from $56 million in 2006 to $59 million in 2007 and provisions for income taxes decreased from $10 million in 2006 to $5 million in 2007.

The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our "Redwood Review" covering the fourth quarter of 2007. The Redwood Review contains a more detailed discussion of our business performance and outlook. We strongly recommend reading the Redwood Review in conjunction with this press release. The Redwood Review is available on our website at www.redwoodtrust.com.

Additional Information

Additional information on our GAAP results is available in our Annual Report on Form 10-K for the year ended December 31, 2007 which we filed today with the Securities and Exchange Commission. The Form 10-K is available on our website at www.redwoodtrust.com.

CAUTIONARY STATEMENT: This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2007 under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-K, 10-Q, and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Important factors, among others, that may affect our actual results include: changes in interest rates; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the availability of high quality assets for purchase at attractive prices; declines in home prices; increases in mortgage payment delinquencies; changes in the level of liquidity in the capital markets which may adversely affect our ability to finance our real estate asset portfolio; changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, rating agency downgrades of securities and increases in the supply of real estate securities available for sale, each of which may adversely affect the values of securities we own; the extent of changes in the values of securities we own and the impact of adjustments reflecting those changes on our income statement and balance sheet, including our stockholders' equity; our ability to maintain the positive stockholders' equity necessary to enable us to pay the dividends required to maintain our status as a real estate investment trust for tax purposes; and other factors not presently identified. This press release may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

REDWOOD TRUST, INC.

CONSOLIDATED INCOME        Fourth   Third    Second   First    Fourth
 STATEMENT                Quarter  Quarter  Quarter  Quarter  Quarter
                            2007     2007     2007     2007     2006
------------------------- -------- -------- -------- -------- --------

(In Millions, Except
 Share Data)

Interest income           $   202  $   219  $   220  $   215  $   217
Interest expense             (153)    (165)    (166)    (168)    (172)
                          -------- -------- -------- -------- --------
Net interest income            49       54       54       47       45

Operating expenses            (15)     (12)     (13)     (16)     (14)
Severance expense              (1)       -        -       (2)       -
Realized gains on sales
 and calls, net                 7        2        3        1        7
Market valuation
 adjustments, net          (1,119)    (103)     (30)     (10)      (1)
Credit (provision) for
 income taxes                   2       (2)      (3)      (2)      (1)
                          -------- -------- -------- -------- --------
GAAP net (loss) income    $(1,077) $   (61) $    11  $    18  $    36
                          ======== ======== ======== ======== ========

Less: severance expense
 (1)                      $     1  $     -  $     -  $     2  $     -
Less: realized gains on
 sales and calls, net          (7)      (2)      (3)      (1)      (7)
Less: market valuation
 adjustments, net           1,119      103       30       10        1
                          -------- -------- -------- -------- --------
Core earnings (2)         $    36  $    40  $    38  $    30  $    30


Average diluted shares
 (thousands)               29,531   27,892   28,165   27,684   27,122

GAAP earnings per share
 (diluted)                $(36.49) $ (2.18) $  0.41  $  0.66  $  1.32

Core earnings per share
 (diluted) (2)            $  1.21  $  1.43  $  1.35  $  1.08  $  1.12

Regular dividends
 declared per common
 share                    $  0.75  $  0.75  $  0.75  $  0.75  $  0.70
Special dividends
 declared per common
 share                       2.00        -        -        -     3.00
                          -------- -------- -------- -------- --------
Total dividends declared
 per common share         $  2.75  $  0.75  $  0.75  $  0.75  $  3.70

(1) Cost associated with re-alignment of senior management in our commercial and residential 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. 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 not affect on-going earnings from operations. We also exclude gains from calls of securities, as these are essentially sales of assets that produce a highly variable stream of income that may obscure underlying income generation trends. GAAP earnings also include valuation adjustments for certain of our assets and interest rate agreements - 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 fair values on the balance sheet as a whole or a reliable guide to current operating performance. Because all companies and analysts do not calculate non-GAAP measures such as core earnings in the same fashion, our calculation of core earnings 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.


CONSOLIDATED INCOME STATEMENT              Year Ended December 31,
--------------------------------------  ------------------------------
(In Millions, Except Share Data)         2007     2006     2005
                                        -------- -------- --------

Interest income                         $   856  $   886  $   962
Interest expense                           (652)    (702)    (757)
                                        -------- -------- --------
Net interest income                         204      184      205

Operating expenses                          (56)     (56)     (48)
Severance expense                            (3)       -        -
Realized gains on sales and calls, net       13       23       66
Market valuation adjustments, net        (1,261)     (13)      (5)
Provision for income taxes                   (5)     (10)     (18)
                                        -------- -------- --------
GAAP net (loss) income                  $(1,108) $   128  $   200

Less: severance expense (1)             $     3  $     -  $     -
Less: realized gains on sales and
 calls, net                                 (13)     (23)     (66)
Less: market valuation adjustments,
 net                                      1,261       13        5
                                        -------- -------- --------
Core earnings (2)                       $   143  $   118  $   139


Average diluted shares (thousands)       27,928   26,314   25,121

GAAP earnings per share (diluted)       $(39.70) $  4.85  $  7.96

Core earnings per share (diluted) (2)   $  5.15  $  4.47  $  5.53

Regular dividends declared per common
 share                                  $  3.00  $  2.80  $  2.80
Special dividends declared per common
 share                                     2.00     3.00     3.00
                                        -------- -------- --------
Total dividends declared per common
 share                                  $  5.00  $  5.80  $  5.80

(1) Cost associated with re-alignment of senior management in our commercial and residential 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. 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 not affect on-going earnings from operations. We also exclude gains from calls of securities, as these are essentially sales of assets that produce a highly variable stream of income that may obscure underlying income generation trends. GAAP earnings also include valuation adjustments for certain of our assets and interest rate agreements - 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 fair values on the balance sheet as a whole or a reliable guide to current operating performance. Because all companies and analysts do not calculate non-GAAP measures such as core earnings in the same fashion, our calculation of core earnings 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.



CONSOLIDATED BALANCE SHEET                   1-Jan    31-Dec  30-Sep
                                               (1)     2007    2007
                                              2008
-------------------------------------------- ------- -------- -------
(In Millions, Except Share Data)

Real estate loans                            $ 7,204 $  7,204 $ 7,656
Real estate securities                         2,110    2,110   2,926
Other real estate investments                     12       12      25
Non-real estate investments                       79       79      80
Cash and cash equivalents                        290      290     310
Other assets                                     223      244     286
                                             ------- -------- -------
Total consolidated assets                    $ 9,918 $  9,939 $11,283

Redwood debt                                 $     8 $      8 $    39
Asset-backed securities issued                 8,839   10,329  10,803
Other liabilities                                170      170     142
Subordinated notes                               150      150     150
Stockholders' equity (deficit)                   751    (718)     149
                                             ------- -------- -------
Total liabilities and stockholders' equity   $ 9,918 $  9,939 $11,283

Shares outstanding at period end (thousands)  32,385   32,385  27,986
GAAP book value per share                    $ 23.18 $(22.18) $  5.32



CONSOLIDATED BALANCE SHEET                     30-Jun  31-Mar  31-Dec
                                                2007    2007    2006
------------------------------------------------------ ------- -------
(In Millions, Except Share Data)

Real estate loans                              $ 8,377 $ 8,706 $ 9,352
Real estate securities                           3,726   3,601   3,233
Other real estate investments                       34      50       -
Non-real estate investments                         80       -       -
Cash and cash equivalents                           83      92     168
Other assets                                       381     498     277
                                               ------- ------- -------
Total consolidated assets                      $12,681 $12,947 $13,030

Redwood debt                                   $   849 $ 1,880 $ 1,856
Asset-backed securities issued                  10,675   9,947   9,979
Other liabilities                                  131      96      92
Subordinated notes                                 150     100     100
Stockholders' equity (deficit)                     876     924   1,003
                                               ------- ------- -------
Total liabilities and stockholders' equity     $12,681 $12,947 $13,030

Shares outstanding at period end (thousands)    27,816  27,129  26,733
GAAP book value per share                      $ 31.49 $ 34.06 $ 37.51

(1) After giving effect to the adoption of FAS 159.

Consolidating Balance Sheets

December 31, 2007
(In Millions)   Redwood
                Parent                       Intercompany   Redwood
                  Only    Sequoia   Acacia   Adjustments  Consolidated
                -------- --------  -------- ------------- ------------
Real estate
 loans          $     4    $7,174  $    26       $    -       $ 7,204
Real estate and
 other
 securities         359         -    1,935          (93)        2,201
Cash and cash
 equivalents        290         -        -            -           290
                -------- --------  -------- ------------  ------------
Total earning
 assets             653     7,174    1,961          (93)        9,695
Investment in
 Sequoia            146         -        -         (146)            -
Investment in
 Acacia          (1,385)        -        -        1,385             -
Restricted cash       5         -      113            -           118
Other assets         62        31       38           (5)          126
                -------- --------  -------- ------------  ------------
Total Assets    $  (519)   $7,205  $ 2,112       $1,141       $ 9,939
                ======== ========  ======== ============  ============
Redwood debt    $     8    $    -  $     -       $    -       $     8
Asset-backed
 securities
 issued               -     7,039    3,383          (93)       10,329
Other
 liabilities         41        20      114           (5)          170
Subordinated
 notes              150         -        -            -           150
                -------- --------  --------       ------  ------------
Total
 liabilities        199     7,059    3,497          (98)       10,657
Total
 stockholders'
 equity            (718)      146   (1,385)       1,239          (718)
                -------- --------  -------- ------------  ------------
Total
 Liabilities
 and
 Stockholders'
 Equity         $  (519)   $7,205  $ 2,112       $1,141       $ 9,939
                ======== ========  ======== ============  ============
Consolidating Balance Sheets

January 1, 2008 after giving effect
 to the adoption of FAS 159


(In Millions)      Redwood
                   Parent                    Intercompany    Redwood
                    Only    Sequoia  Acacia  Adjustments  Consolidated
                  -------- -------- ------- ------------- ------------
Real estate loans    $  4    $7,174  $   26       $   -         $7,204
Real estate and
 other securities     359         -   1,935         (93)         2,201
Cash and cash
 equivalents          290         -       -           -            290
                  -------  -------- ------- ------------  ------------
Total earning
 assets               653     7,174   1,961         (93)         9,695
Investment in
 Sequoia              146         -       -        (146)             -
Investment in
 Acacia                84         -       -         (84)             -
Restricted cash         5         -     113           -            118
Other assets           62        31      17          (5)           105
                  -------  -------- ------- ------------  ------------
Total Assets         $950    $7,205  $2,091       $(328)        $9,918
                  =======  ======== ======= ============  ============
Redwood debt         $  8    $    -  $    -       $   -         $    8
Asset-backed
 securities issued      -     7,039   1,893         (93)         8,839
Other liabilities      41        20     114          (5)           170
Subordinated notes    150         -       -           -            150
                  -------  -------- -------        -----  ------------
Total liabilities     199     7,059   2,007         (98)         9,167
Total
 stockholders'
 equity               751       146      84        (230)           751
                  -------  -------- ------- ------------  ------------
Total Liabilities
 and Stockholders'
 Equity              $950    $7,205  $2,091       $(328)        $9,918
                  =======  ======== ======= ============  ============

Source: Redwood Trust, Inc.

Contact: Redwood Trust, Inc. Lauren K. Morgensen, 415-384-3558 Martin S. Hughes, 415-389-7373

Multimedia Files:

View all news