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Redwood Trust Reports First Quarter 2008 Results

Wednesday, May 07, 2008

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

Redwood Trust, Inc. (NYSE:RWT) today reported a GAAP net loss for the first quarter of 2008 of $172 million, or a loss of $5.28 per share. This GAAP loss included $194 million, or $5.96 per share, of net negative mark-to-market (MTM) adjustments. This compares to net income of $0.66 per share for the first quarter of 2007, which reflected negative MTM adjustments of $0.37 per share.

Taxable income for the first quarter was $26 million, or $0.79 per share. This taxable income included $14 million, or $0.41 per share, of charges related to credit losses. This compares to taxable income of $29 million, or $0.91 per share, for the fourth quarter of 2007 and taxable income of $40 million, or $1.48 per share, in the first quarter of 2007.

At March 31, 2008, Redwood had $257 million of cash and only $2 million of short-term debt. During the quarter, Redwood's investments generated $52 million of cash flow in excess of operating and interest costs.

"We are committed to being disciplined and patient investors," said Brett Nicholas, Redwood's Chief Investment Officer. "Despite a difficult operating environment, we are encouraged by the pace of investment activity. From the beginning of the fourth quarter of 2007 through May 5, 2008, we have deployed $272 million of capital. We believe these new investments will provide strong cash flows and future earnings."

The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our "Redwood Review" covering the first quarter of 2008. The Redwood Review contains a more detailed discussion of our business performance and outlook. The Redwood Review is available on our website at www.redwoodtrust.com.

Additional information on our GAAP results is available in our Quarterly Report on Form 10-Q for the three months ended March 31, 2008 which we filed today with the Securities and Exchange Commission. The Form 10-Q is available on our website at www.redwoodtrust.com. We strongly recommend reading the Redwood Review and 10-Q in conjunction with this press release.

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.

Consolidated Income
 Statement
-------------------------
($ in millions, except     First    Fourth   Third    Second   First
 share data)              Quarter  Quarter  Quarter  Quarter  Quarter
                            2008     2007     2007     2007     2007
                          -------- -------- -------- -------- --------

Interest income           $   170  $   202  $   219  $   220  $   215
Interest expense             (129)    (153)    (165)    (166)    (168)
                          --------  ------- -------- -------- --------
Net interest income
 before market valuation
 adjustments                   41       49       54       54       47

Market valuation
 adjustments, net            (194)  (1,119)    (103)     (30)     (10)
                          --------  ------- -------- -------- --------
Net interest income          (153)  (1,070)     (49)      24       37

Operating expenses            (17)     (15)     (12)     (13)     (16)
Severance expense            -          (1)    -        -          (2)
Realized gains on sales
 and calls, net              -           7        2        3        1
Credit (provision) for
 income taxes                  (2)       2       (2)      (3)      (2)
                          --------  ------- -------- -------- --------
GAAP net (loss) income    $  (172) $(1,077) $   (61) $    11  $    18
                          ========  ======= ======== ======== ========

Less: severance expense
 (1)                      $  -     $     1  $  -     $  -     $     2
Less: realized gains on
 sales and calls, net        -          (7)      (2)      (3)      (1)
Less: market valuation
 adjustments, net             194    1,119      103       30       10
                          --------  ------- -------- -------- --------
Core earnings (2) (3)     $    22  $    36  $    40  $    38  $    30

Average diluted shares
 (thousands)               32,511   29,531   27,892   28,165   27,684
GAAP earnings per share
 (diluted)                $ (5.28) $(36.49) $ (2.18) $  0.41  $  0.66
Core earnings per share
 (diluted) (2) (3)        $  0.68  $  1.21  $  1.43  $  1.35  $  1.08

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

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

(2) Core earnings is a profitability measure that highlights earnings
 we believe are more likely to be ongoing in nature. It is not a
 measure of earnings in accordance with GAAP. In computing core
 earnings, we start with GAAP income and then exclude realized gains
 and losses on calls and sales, unrealized market value adjustments,
 and one-time items that are not likely to be repeated. 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.

(3) Core earnings for the first quarter of 2008 are not directly
 comparable to core earnings for prior quarters due to our adoption,
 on January 1, 2008, of SFAS No. 159, The Fair Value Option for
 Financial Assets and Financial Liabilities (FAS 159), issued by the
 Financial Accounting Standards Board, for certain assets and
 liabilities. Prior to the first quarter of 2008, core income included
 purchase discount amortization on those assets ($0.28 per share in
 the fourth quarter of 2007). We no longer calculate purchase discount
 amortization for those assets since it has become, in effect, one of
 the components of the FAS 159 adjustments. Consequently, that
 component of income is now excluded from core income for all periods
 ending after January 1, 2008.
Consolidating
 Income Statement
-------------------
Three Months Ended
 March 31, 2008
($ in millions)                             Intercompany    Redwood
                    Redwood  Sequoia Acacia  Adjustments  Consolidated
                    -------- ------- ------ ------------- ------------
Interest income     $    24    $ 94  $  48  $         (2) $       164
Net discount
 (premium)
 amortization            12      (7)     -             -            5
                    -------- ------- ------ ------------- ------------
Total interest
 income                  36      87     48            (2)         169
Management fees           -       -      1             -            1
Interest expense         (3)    (83)   (45)            2         (129)
                    -------- ------- ------ ------------- ------------
Net interest income
 before market
 valuation
 adjustments        $    33    $  4  $   4  $          -  $        41
Market valuation
 adjustments, net      (167)      -    (27)            -         (194)
                    -------- ------- ------ ------------- ------------
Net interest (loss)
 income                (134)      4    (23)            -         (153)
Operating expenses      (17)      -      -             -          (17)
Realized gains on
 sales and calls,
 net                      -       -      -             -            -
Income from Sequoia       4       -      -            (4)           -
Loss from Acacia        (23)      -      -            23            -
Provision for
 income taxes            (2)      -      -             -           (2)
                    -------- ------- ------ ------------- ------------
Net (Loss) Income   $  (172)   $  4  $ (23) $         19  $      (172)
                    ======== ======= ====== ============= ============
Consolidated Balance          1-Jan
 Sheet                31-Mar    (1)    31-Dec  30-Sep  30-Jun  31-Mar
---------------------
($ in millions,
 except share data)    2008    2008     2007    2007    2007    2007
                      ------- ------- -------- ------- ------- -------

Real estate loans     $ 6,775 $ 7,204 $ 7,204  $ 7,656 $ 8,377 $ 8,706
Real estate
 securities - AFS         242     317   2,110    2,926   3,726   3,601
Real estate
 securities - FVO         949   1,793    -        -       -       -
Other real estate
 investments                3      12      12       25      34      50
Non-real estate
 investments               79      79      79       80      80    -
Cash and cash
 equivalents              257     290     290      310      83      92
Other assets              241     223     244      286     381     498
                      ------- ------- -------- ------- ------- -------
Total consolidated
 assets               $ 8,546 $ 9,918 $ 9,939  $11,283 $12,681 $12,947

Redwood debt          $     2 $     8 $     8  $    39 $   849 $ 1,880
Asset-backed
 securities issued -
 Sequoia                6,544   6,946   6,946    7,382   7,243   7,209
Asset-backed
 securities issued -
 Acacia FVO (2)         1,046   1,893   3,383    3,421   3,432   2,738
Other liabilities         219     170     170      142     131      96
Subordinated notes        150     150     150      150     150     100
Stockholders' equity
 (deficit)                585     751    (718)     149     876     924
                      ------- ------- -------- ------- ------- -------
Total liabilities and
 stockholders' equity $ 8,546 $ 9,918 $ 9,939  $11,283 $12,681 $12,947

Shares outstanding at
 period end
 (thousands)           32,710  32,385  32,385   27,986  27,816  27,129
GAAP book value per
 share                $ 17.89 $ 23.18 $(22.18) $  5.32 $ 31.50 $ 34.06



(1) We adopted the fair value option under FAS 159 (FVO) for assets
 and liabilities of Acacia and certain other assets effective January
 1, 2008
(2) Prior to 2008, ABS issued by Acacia were accounted for at cost.
Consolidating
 Balance Sheet
--------------
March 31, 2008
($ in
 millions)                                Intercompany      Redwood
                Redwood  Sequoia  Acacia   Adjustments   Consolidated
               --------- -------- ------- -------------  -------------
Real estate
 loans         $       5 $  6,751 $    19 $           -  $       6,775
Real estate
 and other
 securities -
 FVO                  23        -     926             -            949
Real estate
 and other
 securities -
 AFS                 242        -      88           (88)           242
Other real
 estate
 investments           3        -       -             -              3
Non-real
 estate
 investments           -        -      79             -             79
Cash and cash
 equivalents         257        -       -             -            257
               --------- -------- ------- -------------- -------------
   Total
    earning
    assets           530    6,751   1,112           (88)         8,305
Investment in
 Sequoia             146        -       -          (146)             -
Investment in
 Acacia               68        -       -           (68)             -
Restricted
 cash                 11        -     138             -            149
Other assets          24       49      19             -             92
               --------- -------- ------- -------------- -------------
Total Assets   $     779 $  6,800 $ 1,269 $        (302) $       8,546
               ========= ======== ======= ============== =============

Redwood debt   $       2 $      - $     - $           -  $           2
Asset-backed
 securities
 issued -
 Sequoia               -    6,632       -           (88)         6,544
Asset-backed
 securities
 issued -
 Acacia FVO            -        -   1,046             -          1,046
Other
 liabilities          42       22     155             -            219
Subordinated
 notes               150        -       -             -            150
               --------- -------- ------- -------------- -------------
Total
 liabilities         194    6,654   1,201           (88)         7,961
Total
 stockholders'
 equity              585      146      68          (214)           585
               --------- -------- ------- -------------- -------------
Total
 Liabilities
 and
 Stockholders'
 Equity        $     779 $  6,800 $ 1,269 $        (302) $       8,546
               ========= ======== ======= ============== =============

Source: Redwood Trust, Inc.

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

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