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Redwood Trust Reports Third Quarter 2008 Results

Wednesday, November 05, 2008

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

Redwood Trust, Inc. (NYSE:RWT) today reported a GAAP loss of $111 million for the third quarter of 2008, or a loss of $3.34 per share. This GAAP loss included $127 million, or $3.81 per share, of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $1.40 per share for the second quarter of 2008, which reflected negative MTM adjustments of $1.84 per share, and to a net loss of $2.18 per share for the third quarter of 2007, which reflected negative MTM adjustments of $3.69 per share.

Taxable income for the third quarter was $2 million, or $0.07 per share. This taxable income reflected charges related to credit losses of $33 million, or $1.00 per share. This compares to taxable income of $4 million, or $0.11 per share, for the second quarter of 2008, and taxable income of $49 million, or $1.74 per share, for the third quarter of 2007.

During the quarter, Redwood's investments generated $46 million of cash flow in excess of operating and interest costs and Redwood ended the quarter with $177 million in cash and $7 million of short-term debt.

"Our business remains challenging in light of the continuing deterioration in residential mortgage credit performance. The unrelenting decline in the market values of mortgage loans and related securities has continued to pressure our earnings and book value," said Marty Hughes, Redwood's Chief Financial Officer. "Since mid-June, we significantly reduced our acquisition activity while we assessed the impact of the publicly announced government loan modification programs and the recently announced Troubled Asset Relief Plan." Mr. Hughes added, "In the upcoming months, we believe hedge fund redemptions, forced margin calls, and planned asset liquidations from troubled or seized financial institutions will provide extraordinary investment opportunities. Our strong cash position will allow us to take advantage of those opportunities. "

The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our "Redwood Review" covering the third 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 September 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, and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, 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        Third   Second    First   Fourth    Third
 Statement                 Quarter  Quarter  Quarter  Quarter  Quarter
                            2008     2008     2008     2007     2007
------------------------- -------- -------- -------- -------- --------
($ in millions, except
 share data)

Interest income           $   131  $   137  $   176  $   207  $   220
Interest expense              (92)     (98)    (126)    (153)    (165)
                          -------- -------- -------- -------- --------
Net interest income            39       39       50       54       55
Provision for loan losses     (18)     (10)      (8)      (5)      (2)
Market valuation
 adjustments, net            (127)     (60)    (195)  (1,119)    (102)
                          -------- -------- -------- -------- --------
Net interest income after
 provision and               (106)     (31)    (153)  (1,070)     (49)
market valuation
 adjustments
Operating expenses            (17)     (15)     (16)     (16)     (12)
Realized gains on sales
 and calls, net                 -        3        -        7        2
Minority interest
 allocation                     2       (2)      (1)       -        -
Credit (provision) for
 income taxes                  10       (1)      (2)       2       (2)
                          -------- -------- -------- -------- --------
GAAP net (loss) income    $  (111) $   (46) $  (172) $(1,077) $   (61)
                          ======== ======== ======== ======== ========


Average diluted shares
 (thousands)               33,334   32,871   32,511   29,531   27,892
GAAP earnings per share
 (diluted)                $ (3.34) $ (1.40) $ (5.28) $(36.49) $ (2.18)

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  $  0.75  $  2.75  $  0.75
Consolidated Income Statement                        Nine Months Ended
                                                       September 30,
----------------------------------------------------
($ in millions, except share data)                    2008     2007
                                                     -------- --------

Interest income                                      $   444  $   661
Interest expense                                        (316)    (499)
                                                     -------- --------
Net interest income                                      128      162
Provision for loan losses                                (36)      (8)
Market valuation adjustments, net                       (382)    (142)
                                                     -------- --------
Net interest income after provision and                 (290)      12
market valuation adjustments
Operating expenses                                       (48)     (42)
Realized gains on sales and calls, net                     3        6
Minority interest allocation                              (1)       -
Credit (provision) for income taxes                        7       (7)
                                                     -------- --------
GAAP net (loss) income                               $  (329) $   (31)
                                                     ======== ========


Average diluted shares (thousands)                    32,907   27,388
GAAP earnings per share (diluted)                    $ (9.99) $ (1.14)

Regular dividends declared per common share          $  2.25  $  2.25
Special dividends declared per common share                -        -
                                                     -------- --------
Total dividends declared per common share            $  2.25  $  2.25
Consolidated Balance Sheet
----------------------------------
($ in millions, except share data)


                                        30-Sep     30-Jun     31-Mar
                                         2008       2008       2008
                                      ---------- ---------- ----------

Real estate loans                        $ 6,101    $ 6,377    $ 6,775
Real estate securities, at fair
 value:
Trading securities                           574        841        952
Available-for-sale securities                288        400        242
Other investments                             79         79         79
Cash and cash equivalents                    177        148        257
Other assets                                 155        201        241
                                      ---------- ---------- ----------
Total assets                             $ 7,374    $ 8,046    $ 8,546

Short-term debt - Redwood                $     7    $     9    $     2
Other liabilities                            167        166        211
Asset-backed securities issued -
 Sequoia                                   5,930      6,175      6,544
Asset-backed securities issued -
 Acacia(2)                                   673        935      1,046
Long-term debt - Redwood                     150        150        150
Minority interest                             35         47          8
Stockholders' equity (deficit)               412        564        585
                                      ---------- ---------- ----------
Total liabilities and stockholders'
 equity                                  $ 7,374    $ 8,046    $ 8,546

Shares outstanding at period end
 (thousands)                              33,238     33,184     32,710
GAAP book value per share                $ 12.40    $ 17.00    $ 17.89


                                     1-Jan (1)    31-Dec      30-Sep
                                        2008       2007        2007
                                     ---------- ----------- ----------

Real estate loans                    $    7,204    $  7,204    $ 7,656
Real estate securities, at fair
 value:
Trading securities                        1,805          12         25
Available-for-sale securities               317       2,110      2,926
Other investments                            79          79         80
Cash and cash equivalents                   290         290        310
Other assets                                223         244        286
                                     ---------- ----------- ----------
Total assets                         $    9,918    $  9,939    $11,283

Short-term debt - Redwood            $        8    $      8    $    39
Other liabilities                           170         170        142
Asset-backed securities issued -
 Sequoia                                  6,946       6,946      7,382
Asset-backed securities issued -
 Acacia(2)                                1,893       3,383      3,421
Long-term debt - Redwood                    150         150        150
Minority interest                             -           -          -
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

(1) We adopted the fair value option under FAS 159 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 September 30, 2008
($ in millions)

                                           Redwood Opportunity Sequoia
                                                       Fund
                                          -------- ----------- -------

Interest income                           $    17   $       2  $   71
Net discount (premium) amortization             6           2      (3)
                                           ------- ----------- -------
Total interest income                          23           4      68
Management fees                                 1           -       -
Interest expense                               (2)          -     (63)
                                           ------- ----------- -------
Net interest income                       $    22   $       4  $    5
Provision for loan losses                       -           -     (18)
Market valuation adjustments, net             (88)         (8)     (2)
                                           ------- ----------- -------
Net interest (loss) income after provision
 and market valuation adjustments             (66)         (4)    (15)
Operating expenses                            (17)          -       -
Realized gains on sales and calls, net          -           -       -
Loss from Opportunity Fund                     (2)          -       -
Loss from Sequoia                             (15)          -       -
Loss from Acacia                              (21)          -       -
Minority interest allocation                    -           2       -
Credit for income taxes                        10           -       -
                                           ------- ----------- -------
Net (Loss) Income                         $  (111)  $      (2) $  (15)
                                           ======= =========== =======

                                      Acacia Intercompany   Redwood
                                             Adjustments  Consolidated
                                      ------ ------------ ------------

Interest income                        $ 37    $      (1)    $    126
Net discount (premium) amortization       -            -            5
                                      ------ ------------ ------------
Total interest income                    37           (1)         131
Management fees                           -            -            1
Interest expense                        (29)           1          (93)
                                      ------ ------------ ------------
Net interest income                    $  8    $       -     $     39
Provision for loan losses                 -            -          (18)
Market valuation adjustments, net       (29)           -         (127)
                                      ------ ------------ ------------
Net interest (loss) income after
 provision and market valuation
 adjustments                            (21)           -         (106)
Operating expenses                        -            -          (17)
Realized gains on sales and calls,
 net                                      -            -            -
Loss from Opportunity Fund                -            2            -
Loss from Sequoia                         -           15            -
Loss from Acacia                          -           21            -
Minority interest allocation              -            -            2
Credit for income taxes                   -            -           10
                                      ------ ------------ ------------
Net (Loss) Income                      $(21)   $      38     $   (111)
                                      ====== ============ ============
Consolidating Income Statement
----------------------------------------------------------------------
Nine Months Ended September 30, 2008
($ in millions)

                                           Redwood Opportunity Sequoia
                                                       Fund
                                          -------- ----------- -------
Interest income                           $    60   $       4   $ 255
Net discount (premium) amortization            22           4     (20)
                                           ------- ----------- -------
Total interest income                          82           8     235
Management fees                                 4           -       -
Interest expense                               (7)          -    (212)
                                           ------- ----------- -------
Net interest income                       $    79   $       8   $  23
Provision for loan losses                       -           -     (36)
Market valuation adjustments, net            (287)         (8)     (3)
                                           ------- ----------- -------
Net interest (loss) income after
 provision and market valuation
 adjustments                                 (208)          -     (16)
Operating expenses                            (48)          -       -
Realized gains on sales and calls, net          1           2       -
Income from Opportunity Fund                    1           -       -
Loss from Sequoia                             (16)          -       -
Loss from Acacia                              (66)          -       -
Minority interest allocation                    -          (1)      -
Credit for income taxes                         7           -       -
                                           ------- ----------- -------
Net (Loss) Income                         $  (329)  $       1   $ (16)
                                           ======= =========== =======

                                     Acacia  Intercompany Redwood
                                             Adjustments  Consolidated
                                     ------  ------------ ------------
Interest income                      $ 124  $         (5)   $     438
Net discount (premium) amortization      -             -            6
                                     ------ ------------- ------------
Total interest income                  124            (5)         444
Management fees                          -             -            4
Interest expense                      (106)            5         (320)
                                     ------ ------------- ------------
Net interest income                  $  18  $          -    $     128
Provision for loan losses                -             -          (36)
Market valuation adjustments, net      (84)            -         (382)
                                     ------ ------------- ------------
Net interest (loss) income after
 provision and market valuation
 adjustments                           (66)            -         (290)
Operating expenses                       -             -          (48)
Realized gains on sales and calls,
 net                                     -             -            3
Income from Opportunity Fund             -            (1)           -
Loss from Sequoia                        -            16            -
Loss from Acacia                         -            66            -
Minority interest allocation             -             -           (1)
Credit for income taxes                  -             -            7
                                     ------ ------------- ------------
Net (Loss) Income                    $ (66) $         81    $    (329)
                                     ====== ============= ============
Consolidating Balance Sheet
----------------------------------------------------------------------
September 30, 2008
($ in millions)

                                         Redwood  Opportunity  Sequoia
                                                     Fund
                                        -------- ------------ --------

Real estate loans                           $  3   $        -   $6,084
Real estate securities, at fair value:                      -        -
Trading securities                             7            -        -
Available-for-sale securities                221           67        -
Other investments                              -            -        -
Cash and cash equivalents                    177            -        -
                                        -------- ------------ --------
Total earning assets                         408           67    6,084
Investment in Opportunity Fund                35            -        -
Investment in Sequoia                        111            -        -
Investment in Acacia                          19            -        -
Restricted cash                                -            6        -
Other assets                                  25            -       53
                                        -------- ------------ --------
Total Assets                                $598   $       73   $6,137
                                        ======== ============ ========

Short-term debt - Redwood                   $  7   $        -   $    -
Other liabilities                             29            3       14
Asset-backed securities
issued - Sequoia                               -            -    6,012
Asset-backed securities
issued - Acacia                                -            -        -
Long-term debt - Redwood                     150            -        -
                                        -------- ------------ --------
Total liabilities                            186            3    6,026
Minority interest                              -           35        -
Total stockholders' equity                   412           35      111
                                        -------- ------------ --------
Total Liabilities and Stockholders'
 Equity                                     $598   $       73   $6,137
                                        ======== ============ ========

                                    Acacia  Intercompany   Redwood
                                            Adjustments   Consolidated
                                   ------- ---------------------------

Real estate loans                     $ 14   $        -    $     6,101
Real estate securities, at fair
 value:                                  -            -              -
Trading securities                     567            -            574
Available-for-sale securities           82         (82)            288
Other investments                       79            -             79
Cash and cash equivalents                -            -            177
                                   ------- ------------ --------------
Total earning assets                   742         (82)          7,219
Investment in Opportunity Fund           -         (35)              -
Investment in Sequoia                    -        (111)              -
Investment in Acacia                     -         (19)              -
Restricted cash                         57            -             63
Other assets                            14            -             92
                                   ------- ------------ --------------
Total Assets                          $813   $    (247)    $     7,374
                                   ======= ============ ==============

Short-term debt - Redwood             $  -   $        -    $         7
Other liabilities                      121            -            167
Asset-backed securities
issued - Sequoia                         -         (82)          5,930
Asset-backed securities
issued - Acacia                        673            -            673
Long-term debt - Redwood                 -            -            150
                                   ------- ------------ --------------
Total liabilities                      794         (82)          6,927
Minority interest                        -            -             35
Total stockholders' equity              19        (165)            412
                                   ------- ------------ --------------
Total Liabilities and
 Stockholders' Equity                 $813   $    (247)    $     7,374
                                   ======= ============ ==============
Taxable Income & GAAP
 (Loss) Income
 Differences
-------------------------
($ in millions, except     Third   Second    First   Fourth    Third
 share data)               Quarter  Quarter  Quarter  Quarter  Quarter
                            2008     2008     2008     2007     2007
                          -------- -------- -------- -------- --------

GAAP net (loss) income      $(111)   $ (46)   $(172) $(1,077)   $ (61)
Difference in taxable
 income calculations
-------------------------
  Amortization and credit
   losses                       4       (7)       6      (15)      10
  Operating expenses            3        1        2        9       (2)
  Gross realized gains on
   calls and sales            (11)      (6)      (5)      (5)      (3)
  Market valuation
   adjustments, net           127       61      194    1,119      103
  Provision for income
   taxes                      (10)       1        1       (2)       2
                          -------- -------- -------- -------- --------
Total differences in GAAP
 and taxable income           113       50      198    1,106      110

                          -------- -------- -------- -------- --------
Taxable income              $   2    $   4    $  26  $    29    $  49
                          ======== ======== ======== ======== ========

Total taxable income per
 share                      $0.07    $0.11    $0.79  $  0.91    $1.74
Taxable Income & GAAP (Loss) Income Differences     Nine Months Ended
---------------------------------------------------
($ in millions, except share data)                  September 30, 2008
                                                       2008     2007
                                                    ----------- ------

GAAP net (loss) income                               $    (329) $ (31)
Difference in taxable income calculations
---------------------------------------------------
  Amortization and credit losses                             3     31
  Operating expenses                                         5     (6)
  Gross realized gains on calls and sales                  (22)    (6)
  Market valuation adjustments, net                        382    142
      Provision for income taxes                            (7)     5
                                                    ----------- ------
Total differences in GAAP and taxable income               361    166

                                                    ----------- ------
Taxable income                                       $      32  $ 135
                                                    =========== ======

Total taxable income per share                       $    0.97  $4.88

Source: Redwood Trust, Inc.

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

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