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Redwood Trust Reports Second Quarter 2008 Results

Wednesday, August 06, 2008

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

Redwood Trust, Inc. (NYSE:RWT) today reported a GAAP net loss for the second quarter of 2008 of $46 million, or a loss of $1.40 per share. This GAAP loss included $60 million, or $1.84 per share, of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $5.28 per share for the first quarter of 2008, which reflected negative MTM adjustments of $5.96 per share and to net income of $0.41 per share for the second quarter of 2007, which reflected negative MTM of $1.04 per share.

Taxable income for the second quarter was $4 million, or $0.11 per share. This taxable income incorporated charges related to credit losses of $30 million, or $0.91 per share. This compares to taxable income of $26 million, or $0.79 per share, for the first quarter of 2008 and taxable income of $46 million, or $1.66 per share, for the second quarter of 2007.

During the quarter, Redwood's investments generated $52 million of cash flow in excess of operating and interest costs. Redwood invested $152 million in new assets in the second quarter, including $147 million of residential investment-grade securities.

"Given the current state of turmoil in the mortgage credit markets, our acquisition activity during the quarter was focused on attractive, yet safe, investments," said Brett Nicholas, Redwood's Chief Investment Officer. "These investments have significant credit-enhancement to protect against credit loss and to provide a greater certainty of the range of expected cash flows."

The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our "Redwood Review" covering the second 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 June 30, 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, 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; legislative and regulatory actions affecting the mortgage industry; 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.

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

Interest income           $   127  $   167  $   202  $   219  $   220
Interest expense              (98)    (127)    (153)    (165)    (166)
                          -------- -------- -------- -------- --------
Net interest income
 before                        29       40       49       54       54
    market valuation
     adjustments
Market valuation
 adjustments, net             (60)    (194)  (1,119)    (103)     (30)
                          -------- -------- -------- -------- --------
Net interest income           (31)    (154)  (1,070)     (49)      24

Operating expenses            (15)     (15)     (15)     (12)     (13)
Severance expense            -        -          (1)    -        -
Realized gains on sales
 and calls, net                 3     -           7        2        3
Minority interest
 allocation                    (2)      (1)    -        -        -
Credit (provision) for
 income taxes                  (1)      (2)       2       (2)      (3)
                          -------- -------- -------- -------- --------
GAAP net (loss) income    $   (46) $  (172) $(1,077) $   (61) $    11
                          ======== ======== ======== ======== ========


Average diluted shares
 (thousands)               32,871   32,511   29,531   27,892   28,165
GAAP earnings per share
 (diluted)                $ (1.40) $ (5.28) $(36.49) $ (2.18) $  0.41

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  $  0.75  $  2.75  $  0.75  $  0.75

Please note that we no longer highlight core earnings as recent accounting changes incorporating mark-to-market values have rendered current results under that calculation that are not consistent across our asset classes and are not comparable to prior core earnings results. Consequently, core earnings are no longer particularly useful in our view.

Consolidated Income Statement                     Six Months Ended
----------------------------------------------
($ in millions, except share data)                  June 30, 2008
                                                  2008        2007
                                               ----------- -----------

Interest income                                $      294  $      435
Interest expense                                     (225)       (334)
                                               ----------- -----------
Net interest income before                             69         101
    market valuation adjustments
Market valuation adjustments, net                    (254)        (40)
                                               ----------- -----------
Net interest income                                  (185)         61

Operating expenses                                    (30)        (28)
Severance expense                                   -              (2)
Realized gains on sales and calls, net                  3           4
Minority interest allocation                           (3)      -
Provision for income taxes                             (3)         (5)
                                               ----------- -----------
GAAP net (loss) income                         $     (218) $       30
                                               =========== ===========


Average diluted shares (thousands)                 32,691      27,918
GAAP earnings per share (diluted)              $    (6.65) $     1.06

Regular dividends declared per common share    $     1.50  $     1.50
Special dividends declared per common share         -           -
                                               ----------- -----------
Total dividends declared per common share      $     1.50  $     1.50
Consolidated Balance Sheet                   30-Jun  31-Mar  1-Jan (1)
--------------------------------------------
($ in millions, except share data)            2008    2008     2008
                                             ------- ------- ---------

Real estate loans                            $ 6,377 $ 6,775 $   7,204
Real estate securities, at fair value:
   Trading securities                            841     952     1,805
   Available-for-sale securities                 400     242       317
Other investments                                 79      79        79
Cash and cash equivalents                        148     257       290
Other assets                                     201     241       223
                                             ------- ------- ---------
Total consolidated assets                    $ 8,046 $ 8,546 $   9,918

Short-term debt - Redwood                    $     9 $     2 $       8
Asset-backed securities issued - Sequoia       6,175   6,544     6,946
Asset-backed securities issued - Acacia(2)       935   1,046     1,893
Other liabilities                                166     211       170
Long-term debt - Redwood                         150     150       150
Minority interest                                 47       8     -
Stockholders' equity (deficit)                   564     585       751
                                             ------- ------- ---------
Total liabilities and stockholders' equity   $ 8,046 $ 8,546 $   9,918

Shares outstanding at period end (thousands)  33,184  32,710    32,385
GAAP book value per share                    $ 17.00 $ 17.89 $   23.18

Consolidated Balance Sheet                    31-Dec  30-Sep   30-Jun
--------------------------------------------
($ in millions, except share data)             2007    2007     2007
                                             -------- ------- --------

Real estate loans                            $ 7,204  $ 7,656 $  8,377
Real estate securities, at fair value:
   Trading securities                             12       25       34
   Available-for-sale securities               2,110    2,926    3,726
Other investments                                 79       80       80
Cash and cash equivalents                        290      310       83
Other assets                                     244      286      381
                                             -------- ------- --------
Total consolidated assets                    $ 9,939  $11,283 $ 12,681

Short-term debt - Redwood                    $     8  $    39 $    849
Asset-backed securities issued - Sequoia       6,946    7,382    7,243
Asset-backed securities issued - Acacia(2)     3,383    3,421    3,432
Other liabilities                                170      142      131
Long-term debt - Redwood                         150      150      150
Minority interest                               -        -        -
Stockholders' equity (deficit)                  (718)     149      876
                                             -------- ------- --------
Total liabilities and stockholders' equity   $ 9,939  $11,283 $ 12,681

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




(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 Income Statement
----------------------------------------------------
Three Months Ended June 30, 2008

($ in millions)                                  Opportunity
                                        Redwood      Fund     Sequoia
                                       --------- ------------ --------

Interest income                        $     20  $         1  $    72
Net discount (premium) amortization           5            1      (10)
                                        -------- ------------ --------
Total interest income                        25            2       62
Management fees                               1            -        -
Interest expense                             (2)           -      (67)
                                        -------- ------------ --------
Net interest income before             $     24  $         2  $    (5)
    market valuation adjustments
Market valuation adjustments, net           (31)           -       (1)
                                        -------- ------------ --------
Net interest (loss) income                   (7)           2       (6)
Operating expenses                          (15)           -        -
Realized gains on sales and calls, net        1            2        -
Income from Opportunity Fund                  2            -        -
Loss from Sequoia                            (6)           -        -
Loss from Acacia                            (20)           -        -
Minority interest allocation                  -           (2)       -
Provision for income taxes                   (1)           -        -
                                        -------- ------------ --------
Net (Loss) Income                      $    (46) $         2  $    (6)
                                        ======== ============ ========


Consolidating Income Statement
--------------------------------------
Six Months Ended June 30, 2008
($ in millions)                                  Opportunity
                                        Redwood      Fund     Sequoia
                                       --------- ------------ --------
Interest income                        $     42  $         2  $   166
Net discount (premium) amortization          16            2      (17)
                                        -------- ------------ --------
Total interest income                        58            4      149
Management fees                               3            -        -
Interest expense                             (5)           -     (150)
                                        -------- ------------ --------
Net interest income before             $     56  $         4  $    (1)
    market valuation adjustments
Market valuation adjustments, net          (198)           -       (1)
                                        -------- ------------ --------
Net interest (loss) income                 (142)           4       (2)
Operating expenses                          (30)           -        -
Realized gains on sales and calls, net        1            2        -
Income from Opportunity Fund                  3            -        -
Loss from Sequoia                            (2)           -        -
Loss from Acacia                            (45)           -        -
Minority interest allocation                  -           (3)       -
Provision for income taxes                   (3)           -        -
                                        -------- ------------ --------
Net (Loss) Income                      $   (218) $         3  $    (2)
                                        ======== ============ ========

($ in millions)                             Intercompany    Redwood
                                    Acacia  Adjustments  Consolidated
                                    ------- ------------ -------------

Interest income                     $   40  $        (2) $        131
Net discount (premium) amortization      -            -            (4)
                                    ------- ------------ -------------
Total interest income                   40           (2)          127
Management fees                          -            -             1
Interest expense                       (32)           2           (99)
                                    ------- ------------ -------------
Net interest income before          $    8  $         -  $         29
    market valuation adjustments
Market valuation adjustments, net      (28)           -           (60)
                                    ------- ------------ -------------
Net interest (loss) income             (20)           -           (31)
Operating expenses                       -            -           (15)
Realized gains on sales and calls,
 net                                     -            -             3
Income from Opportunity Fund             -           (2)            -
Loss from Sequoia                        -            6             -
Loss from Acacia                         -           20             -
Minority interest allocation             -            -            (2)
Provision for income taxes               -            -            (1)
                                    ------- ------------ -------------
Net (Loss) Income                   $  (20) $        24  $        (46)
                                    ======= ============ =============


Consolidating Income Statement
-----------------------------------
Six Months Ended June 30, 2008
($ in millions)                             Intercompany    Redwood
                                    Acacia  Adjustments  Consolidated
                                    ------- ------------ -------------
Interest income                     $   87  $        (4) $        293
Net discount (premium) amortization      -            -             1
                                    ------- ------------ -------------
Total interest income                   87           (4)          294
Management fees                          -            -             3
Interest expense                       (77)           4          (228)
                                    ------- ------------ -------------
Net interest income before          $   10  $         -  $         69
    market valuation adjustments
Market valuation adjustments, net      (55)           -          (254)
                                    ------- ------------ -------------
Net interest (loss) income             (45)           -          (185)
Operating expenses                       -            -           (30)
Realized gains on sales and calls,
 net                                     -            -             3
Income from Opportunity Fund             -           (3)            -
Loss from Sequoia                        -            2             -
Loss from Acacia                         -           45             -
Minority interest allocation             -            -            (3)
Provision for income taxes               -            -            (3)
                                    ------- ------------ -------------
Net (Loss) Income                   $  (45) $        44  $       (218)
                                    ======= ============ =============
Consolidating Balance Sheet
----------------------------------------------------
June 30, 2008

($ in millions)                                   Opportunity
                                         Redwood     Fund      Sequoia
                                        -------- ------------ --------

Real estate loans                       $      4 $          - $  6,354
Real estate securities, at fair value:
  Trading securities                          19            -        -
  Available-for-sale securities              334           66        -
Other investments                              -            -        -
Cash and cash equivalents                    148            -        -
                                        -------- ------------ --------
    Total earning assets                     505           66    6,354
Investment in Opportunity Fund                47            -        -
Investment in Sequoia                        140            -        -
Investment in Acacia                          41            -        -
Restricted cash                                2           29        -
Other assets                                  24            -       60
                                        -------- ------------ --------
Total Assets                            $    759 $         95 $  6,414
                                        ======== ============ ========

Short-term debt - Redwood               $      9 $          - $      -
Asset-backed securities issued -
 Sequoia                                       -            -    6,259
Asset-backed securities issued - Acacia        -            -        -
Other liabilities                             36            1       15
Long-term debt - Redwood                     150            -        -
                                        -------- ------------ --------
Total liabilities                            195            1    6,274
Minority interest                              -           47        -
Total stockholders' equity                   564           47      140
                                        -------- ------------ --------
Total Liabilities and Stockholders'
 Equity                                 $    759 $         95 $  6,414
                                        ======== ============ ========

($ in millions)                             Intercompany    Redwood
                                     Acacia Adjustments   Consolidated
                                    ------- ------------ -------------

Real estate loans                   $    19 $         -  $       6,377
Real estate securities, at fair
 value:
  Trading securities                    822           -            841
  Available-for-sale securities          84         (84)           400
Other investments                        79           -             79
Cash and cash equivalents                 -           -            148
                                    ------- ------------ -------------
    Total earning assets              1,004         (84)         7,845
Investment in Opportunity Fund            -         (47)             -
Investment in Sequoia                     -        (140)             -
Investment in Acacia                      -         (41)             -
Restricted cash                          72           -            103
Other assets                             14           -             98
                                    ------- ------------ -------------
Total Assets                        $ 1,090 $      (312) $       8,046
                                    ======= ============ =============

Short-term debt - Redwood           $     - $         -  $           9
Asset-backed securities issued -
 Sequoia                                  -         (84)         6,175
Asset-backed securities issued -
 Acacia                                 935           -            935
Other liabilities                       114           -            166
Long-term debt - Redwood                  -           -            150
                                    ------- ------------ -------------
Total liabilities                     1,049         (84)         7,435
Minority interest                         -           -             47
Total stockholders' equity               41        (228)           564
                                    ------- ------------ -------------
Total Liabilities and Stockholders'
 Equity                             $ 1,090 $      (312) $       8,046
                                    ======= ============ =============
Taxable Income &
 GAAP (Loss)
 Income
 Differences        Second     First     Fourth      Third    Second
------------------
($ in millions,     Quarter   Quarter    Quarter    Quarter   Quarter
 except share
 data)
                     2008      2008       2007       2007      2007
                   --------- --------- ----------- --------- ---------

GAAP net (loss)
 income            $    (46) $   (172) $   (1,077) $    (61) $     11
Difference in
 taxable income
 calculations
------------------
  Amortization and
   credit losses         (7)        6         (15)       10        10
  Operating
   expenses               1         2           9        (2)       (3)
  Gross realized
   gains on calls
   and sales             (6)       (5)         (5)       (3)       (3)
  Market valuation
   adjustments,
   net                   61       194       1,119       103        29
Provision (credit)
 for income taxes         1         1          (2)        2         2
                   --------- --------- ----------- --------- ---------
Total differences
 in GAAP and
 taxable income          50       198       1,106       110        35

                   --------- --------- ----------- --------- ---------
Taxable income     $      4  $     26  $       29  $     49  $     46
                   ========= ========= =========== ========= =========

Total taxable
 income per share  $   0.11  $   0.79  $     0.91  $   1.74  $   1.66
Taxable Income & GAAP (Loss) Income Differences    Six Months Ended
-----------------------------------------------
($ in millions, except share data)                  June 30, 2008
                                                   2008        2007
                                                ----------- ----------

GAAP net (loss) income                          $     (218) $      30
Difference in taxable income calculations
-----------------------------------------------
  Amortization and credit losses                        (1)        21
  Operating expenses                                     2         (5)
  Gross realized gains on calls and sales              (11)        (3)
  Market valuation adjustments, net                    254         40
Provision for income taxes                               3          3
                                                ----------- ----------
Total differences in GAAP and taxable income           247         56

                                                ----------- ----------
Taxable income                                  $       29  $      86
                                                =========== ==========

Total taxable income per share                  $     0.90  $    3.14

Source: Redwood Trust, Inc.

Contact: Redwood Trust, Inc. Mike McMahon, 415-384-3805 Martin S. Hughes, 415-389-7373

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