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Redwood Trust Reports Second Quarter 2009 Results

Wednesday, August 05, 2009

MILL VALLEY, Calif., Aug. 5 /PRNewswire-FirstCall/ -- Redwood Trust, Inc. (NYSE: RWT) today reported net income for the second quarter of 2009 of $7 million, or $0.10 per share. This compares to a net loss of $35 million, or $0.65 per share, for the first quarter of 2009, and a net loss of $46 million, or $1.40 per share, for the second quarter of 2008.

Redwood estimated that it incurred a taxable loss of $12 million, or $0.16 per share, during the second quarter of 2009. This compares to an estimated taxable loss of $14 million, or $0.22 per share, for the first quarter of 2009, and estimated taxable income of $4 million, or $0.11 per share, for the second quarter of 2008.

Key metrics are highlighted below:

    --  Investment cash flow increased to $64 million, up from $57 million in
        the first quarter of 2009, and business cash flow after operating and
        interest expenses increased to $55 million, compared to $45 million in
        the prior quarter;
    --  GAAP book value per share at the end of the second quarter was $10.35
        per share, an increase of $1.95 or 23%, from the end of the first
        quarter, and economic book value per share increased to $11.30, up $1.29
        or 13%, from the end of the prior quarter; and

    --  $341 million was invested during the second quarter and an additional
        $158 million was invested in July, primarily in selected seasoned senior
        RMBS, bringing total capital invested thus far in 2009 to $597 million.

Please see the tables that follow for reconciliations between GAAP and non-GAAP metrics. Additional information on Redwood's business and financial results and on non-GAAP metrics is available in its Quarterly Report on Form 10-Q for the three months ended June 30, 2009 which was filed today with the Securities and Exchange Commission. The Form 10-Q is available on Redwood's website at www.redwoodtrust.com.

The accounting concepts and disclosures relating to our financial statements are complex. Today, the company also released the Redwood Review covering the second quarter of 2009. The Redwood Review is an additional publication that provides information about the company. The Redwood Review is available on the company's 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 beliefs, 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, 2008, and in our Quarterly Report on Form 10-Q for the three months ended June 30, 2009, in each case under the caption 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-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 mortgage prepayment rates; the timing of credit losses within our portfolio; our exposure to adjustable-rate and negative amortization mortgage loans; the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the concentration of the credit risks we are exposed to; the ability of counterparties to satisfy their obligations to us; legislative and regulatory actions affecting the mortgage industry or our business; the availability of high quality assets for purchase at attractive prices; declines in home prices and commercial real estate 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, inaccurate ratings of securities by rating agencies, 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; our ability to generate the amount of cash flow we expect from our investment portfolio; changes in our investment, financing, and hedging strategies and the new risks that those changes may expose us to; changes in the competitive landscape within our industry, including changes that may affect our ability to retain or attract personnel; our failure to manage various operational risks associated with our business; our failure to maintain appropriate internal controls over financial reporting; our failure to properly administer and manage our securitization entities; risks we may be exposed to if we expand our business activities, such as risks relating to significantly increasing our direct holdings of loans; limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940; our ability to successfully invest our cash available for investment and raise additional capital to fund our investing activity; and other factors not presently identified.

    REDWOOD TRUST, INC.

    Consolidated Income
     Statement
    -------------------
    ($ in millions, except    Second    First   Fourth    Third    Second
     share data)              Quarter  Quarter  Quarter  Quarter   Quarter
                                2009     2009     2008     2008     2008
                                ----     ----     ----     ----     ----

    Interest income              $74      $82     $123     $131     $137
    Interest expense             (39)     (48)     (99)     (92)     (98)
                                 ---      ---      ---      ---      ---
    Net interest income           35       34       24       39       39
    Provision for loan
     losses                      (15)     (16)     (19)     (18)     (10)
    Market valuation
     adjustments, net            (29)     (43)    (111)    (127)     (60)
                                 ---      ---     ----     ----      ---
    Net interest loss after
     provision and
     market valuation
     adjustments                  (9)     (25)    (106)    (106)     (31)
    Operating expenses           (11)     (11)     (14)     (17)     (15)
    Realized gains, net           26        -        6        -        3
    Benefit from (provision
     for) income taxes             1        -       (4)      10       (1)
                                 ---      ---      ---      ---      ---
    Net income (loss)              7      (36)    (118)    (113)     (44)
    Less: Net (loss) income
     attributable to
     noncontrolling interest       -       (1)      (2)      (2)       2
                                 ---      ---      ---      ---      ---
    GAAP net income (loss)        $7     $(35)   $(116)   $(111)    $(46)
                                 ===     ====    =====    =====     ====

    Average diluted shares
     (thousands)              66,446   53,632   33,366   33,334   32,871
    GAAP earnings (loss)
     per share (diluted)       $0.10   $(0.65)  $(3.46)  $(3.34)  $(1.40)
    Regular dividends
     declared per common
     share                     $0.25    $0.25    $0.75    $0.75    $0.75



    REDWOOD TRUST, INC.

    Consolidated Income Statement
    -----------------------------                      Six Months Ended
    ($ in millions, except share data)                     June 30,
                                                         2009    2008
                                                         ----    ----

    Interest income                                     $156    $313
    Interest expense                                     (87)   (225)
                                                         ---    ----
    Net interest income                                   69      88
    Provision for loan losses                            (31)    (18)
    Market valuation adjustments, net                    (72)   (254)
                                                         ---    ----
    Net interest loss after provision and
     market valuation adjustments                        (34)   (184)
    Operating expenses                                   (22)    (31)
    Realized gains, net                                   26       3
    Benefit from (provision for) income taxes              1      (3)
                                                         ---     ---
    Net loss                                             (29)   (215)
    Less: Net (loss) income attributable to
     noncontrolling interest                              (1)      2
                                                         ---     ---
    GAAP net loss                                       $(28)  $(217)
                                                        ====   =====

    Average diluted shares (thousands)                59,138  32,691
    GAAP earnings (loss) per share (diluted)          $(0.48) $(6.65)
    Regular dividends declared per common share        $0.50   $1.50



    REDWOOD TRUST, INC.

    Consolidated Balance Sheet
    --------------------------            30-Jun  31-Mar 31-Dec 30-Sep 30-Jun
    ($ in millions, except share data)      2009   2009   2008   2008   2008
                                            ----   ----   ----   ----   ----

    Real estate loans                      $3,966 $4,541 $4,659 $6,101 $6,377
    Real estate securities, at fair value:
      Trading securities                      253    264    340    574    841
      Available-for-sale securities           551    255    233    288    400
    Other investments                          47     62     78     79     79
    Cash and cash equivalents                 337    333    126    177    148
    Other assets                              131    126    146    155    201
                                              ---    ---    ---    ---    ---
    Total Assets                           $5,285 $5,581 $5,582 $7,374 $8,046

    Short-term debt                            $-     $-     $-     $7     $9
    Other liabilities                         185    198    252    167    166
    Asset-backed securities issued -
     Sequoia                                3,843  4,418  4,508  5,930  6,175
    Asset-backed securities issued -
     Acacia                                   287    291    347    673    935
    Long-term debt                            150    150    150    150    150
                                              ---    ---    ---    ---    ---
    Total liabilities                       4,465  5,057  5,257  6,927  7,435

    Stockholders' equity                      802    506    302    412    564
    Noncontrolling interest                    18     18     23     35     47
                                              ---    ---    ---    ---    ---
    Total equity                              820    524    325    447    611

                                           ------ ------ ------ ------ ------
    Total Liabilities and Equity           $5,285 $5,581 $5,582 $7,374 $8,046
                                           ====== ====== ====== ====== ======


    Shares outstanding at period end
     (thousands)                           77,503 60,228 33,471 33,238 33,184
    GAAP book value per share              $10.35  $8.40  $9.02 $12.40 $17.00



    REDWOOD TRUST, INC.

    Consolidating Income Statement
    ------------------------------
    Three Months Ended June 30, 2009
                                                            Inter-
    ($ in millions)                                        company    Redwood
                                The                         Adjust-   Consoli-
                     Redwood    Fund    Sequoia   Acacia    ments      dated
                    ---------  ------  --------- --------  --------  ---------

    Interest income    $18       $1        $34      $22        $(1)       $74
    Net discount
     (premium)
     amortization        3       $1         (4)       -          -         $-
                       ---      ---        ---      ---        ---        ---
    Total interest
     income             21        2         30       22         (1)        74
    Management fees      1       $-          -        -         (1)         -
    Interest
     expense            (2)      $-        (23)     (16)         2        (39)
                       ---      ---        ---      ---        ---        ---
    Net interest
     income            $20       $2         $7       $6         $-        $35
    Provision for
     loan losses         -        -        (15)       -          -        (15)
    Market
     valuation
     adjustments,
     net               (32)      (1)        (1)       5          -        (29)
                       ---      ---        ---      ---        ---        ---
    Net interest
     (loss) income
     after provision
     and market
     valuation
     adjustments       (12)       1         (9)      11          -         (9)
    Operating
     expenses          (11)       -          -        -          -        (11)
    Realized
     gains, net          7        -         19        -          -         26
    Income from
     the Fund,
     Sequoia, and
     Acacia             22        -          -        -        (22)         -
    Noncontrolling
     interest            -        -          -        -          -          -
    Benefit from
     (provision
     for) income
     taxes               1        -          -        -          -          1
                       ---      ---        ---      ---        ---        ---
    Net income
     (loss)             $7       $1        $10      $11       $(22)        $7
                       ===      ===        ===      ===       ====        ===



    Consolidating Income Statement
    ------------------------------
    Six Months Ended June 30, 2009
                                                            Inter-
    ($ in millions)                                        company    Redwood
                                The                         Adjust-   Consoli-
                     Redwood    Fund    Sequoia   Acacia    ments      dated
                    ---------  ------  --------- --------  --------  ---------

    Interest income    $43       $4         68       45          -       $160
    Net discount
     (premium)
     amortization       (1)       1         (4)       -          -         (4)
                       ---      ---        ---      ---        ---        ---
    Total interest
     income             42        5         64       45          -        156
    Management fees      2       $-          -        -         (2)         -
    Interest
     expense            (3)      $-        (48)     (37)         1        (87)
                       ---      ---        ---      ---        ---        ---
    Net interest
     income            $41       $5        $16       $8        $(1)       $69
    Provision for
     loan losses         -        -        (31)       -          -        (31)
    Market
     valuation
     adjustments,
     net               (58)      (5)        (2)      (7)         -        (72)
                       ---      ---        ---      ---        ---        ---
    Net interest
     (loss) income
     after provision
     and market
     valuation
     adjustments       (17)       -        (17)       1         (1)       (34)
    Operating
     expenses          (22)       -          -        -          -        (22)
    Realized
     gains, net          7        -         19        -          -         26
    Income from
     the Fund,
     Sequoia, and
     Acacia              3        -          -        -         (3)         -
    Noncontrolling
     interest            -        1          -        -          -          1
    Benefit from
     (provision
     for) income
     taxes               1        -          -        -          -          1
                       ---      ---        ---      ---        ---        ---
    Net (loss)
     income           $(28)      $1         $2       $1        $(4)      $(28)
                      ====      ===        ===      ===        ===       ====



    REDWOOD TRUST, INC.

    Consolidating Balance Sheet
    ---------------------------
    June 30, 2009
                                                            Inter-
    ($ in millions)                                        company    Redwood
                                    The                     Adjust-   Consoli-
                           Redwood  Fund  Sequoia  Acacia   ments      dated
                          -------- ----- -------- -------  --------   --------

    Real estate
     loans                     $3    $-   $3,955      $8        $-      $3,966
    Real estate securities,
     at fair value:
      Trading securities        4     -        -     249         -         253
      Available-for-sale
       securities             513    38        -      55       (55)        551
    Other investments           -     -        -      47         -          47
    Cash and cash
     equivalents              337     -        -       -         -         337
    Investment in the
     Fund                      22     -        -       -       (22)          -
    Investment in Sequoia      82     -        -       -       (82)          -
    Investment in Acacia        4     -        -       -        (4)          -
                              ---   ---      ---     ---       ---         ---
        Total earning
         assets               965    38    3,955     359      (163)      5,154
    Other assets               22     4       27      78         -         131
                              ---   ---      ---     ---       ---         ---
    Total Assets             $987   $42   $3,982    $437     $(163)     $5,285
                             ====   ===   ======    ====     =====      ======

    Short-term debt            $-    $-       $-      $-        $-          $-
    Other liabilities          35     2        2     146         -         185
    Asset-backed
     securities issued -
     Sequoia                    -     -    3,898       -       (55)      3,843
    Asset-backed
     securities issued -
     Acacia                     -     -        -     287         -         287
    Long-term debt            150     -        -       -         -         150
                              ---   ---      ---     ---       ---         ---
    Total liabilities         185     2    3,900     433       (55)      4,465

    Stockholders' equity      802    22       82       4      (108)        802
    Noncontrolling
     interest                   -    18        -       -         -          18
                              ---   ---      ---     ---       ---         ---
    Total equity              802    40       82       4      (108)        820

                             ----   ---   ------    ----     -----      ------
    Total Liabilities
     and Equity              $987   $42   $3,982    $437     $(163)     $5,285
                             ====   ===   ======    ====     =====      ======



    REDWOOD TRUST, INC.

    GAAP and Taxable (Loss)
     Income Differences
    -----------------------
    ($ in millions, except     Second    First   Fourth    Third   Second
     share data)               Quarter  Quarter  Quarter  Quarter  Quarter
                                 2009     2009     2008     2008     2008
                                 ----     ----     ----     ----     ----

    GAAP net income (loss)         $7     $(35)   $(116)   $(111)    $(46)
    Difference in taxable
     (loss) income calculations
    ---------------------------
      Amortization and credit
       losses                     (41)     (22)      (1)      (7)     (10)
      Operating expenses            1        -       (1)       3        1
      Realized gains, net           -        -       (5)       -       (3)
      Market valuation
       adjustments, net            22       43      111      127       61
      Provision for income
       taxes                       (1)       -        4      (10)       1
                                   --      ---      ---      ---      ---
    Total differences in
     GAAP and taxable (loss)
     income                       (19)      21      108      113       50

                                 ----     ----      ---      ---      ---
    Taxable (loss) income        $(12)    $(14)     $(8)      $2       $4
                                 ====     ====      ===      ===      ===

    Taxable (loss) income
     per share                 $(0.16)  $(0.22)  $(0.25)   $0.07    $0.11



    REDWOOD TRUST, INC.


    GAAP and Taxable (Loss) Income
     Differences
    ------------------------------            Six Months Ending
    ($ in millions, except share data)            June 30,
                                                 2009   2008
                                                 ----   ----

    GAAP net loss                               $(28) $(217)
    Difference in taxable
     (loss) income calculations
    ---------------------------
      Amortization and credit losses             (63)    (9)
      Operating expenses                           1      2
      Realized gains, net                          -     (3)
      Market valuation adjustments, net           65    254
      Provision for income taxes                  (1)     3
                                                 ---    ---
    Total differences in GAAP and taxable
     (loss) income                                 2    247
                                                ----    ---
    Taxable (loss) income                       $(26)   $30
                                                ====    ===

    Taxable (loss) income per share           $(0.38) $0.72

REDWOOD TRUST, INC.

Book Value Per Share

The following supplemental non-GAAP components of book value addresses our assets and liabilities at June 30, 2009, as reported under GAAP and as estimated by us using fair values for our investments. We show our investments in the Fund and the Sequoia and Acacia entities as separate line items to highlight our specific ownership interests, as the underlying assets and liabilities of these entities are legally not ours. Our estimated economic value is calculated using bid-side asset marks and offer-side marks for our financial liabilities, as required to determine fair value under GAAP. This method of calculating economic value more closely represents liquidation value and does not represent the higher amount we would have to pay at the offered-side to replace our existing assets. For additional information to consider when reviewing the following supplemental non-GAAP components of book value, please see "Factors Affecting Management's Estimate of Economic Value" in our Quarterly Report on Form 10-Q for the period ending June 30, 2009.

                                            June 30, 2009
                                            -------------
                                                             Management's
                                     As                       Estimate of
    (In Millions, Except per       Reported                    Economic
     Share Data)                   (GAAP)     Adjustments        Value
                                   --------   -----------        -----
    Cash and cash equivalents        $337     $                  $337
    Real estate securities at Redwood
         Residential                  499                         499
         Commercial                    16                          16
         CDO                            2                           2
                                      ---                         ---
    Subtotal real estate securities   517                         517
    Investments in the Fund            22                          22
    Investments in Sequoia             82         (26) (a)         56
    Investments in Acacia               4           1  (b)          5
                                      ---                         ---
    Total securities and investments  625                         600
    Long-term debt                   (150)         99  (c)        (51)
    Other assets/liabilities, net (d) (10)                        (10)
                                      ---                         ---
    Stockholders' Equity             $802                        $876
                                     ====                        ====
    Book Value Per Share           $10.35                      $11.30
                                   ------                      ------

    (a) Our Sequoia investments consist of senior and subordinate securities
    and interest-only securities issued by Sequoia entities. We calculated the
    $56 million estimate of economic value for these securities using the same
    valuation process that we followed to fair value our other real estate
    securities. In contrast, the $82 million of GAAP carrying value of these
    investments represents the difference between residential real estate
    loans owned by the Sequoia entities and the asset-backed securities (ABS)
    issued by these entities to third-party investors. Under GAAP, we account
    for these loans and ABS issued at cost.
    (b) Our $5 million estimate of economic value represents the fair value
    of our investment in ABS issued by Acacia using the same valuation
    process we followed to value our other real estate securities, plus the
    net present value of projected cash flows from our Acacia management
    fees. In contrast, the $4 million of GAAP carrying value of these
    investments represents the difference between real estate securities
    owned by the Acacia entities and the ABS issued by these entities to
    third-party investors. Under GAAP, we account for these securities and
    ABS issued at fair value.
    (c) As of June 30, 2009, we had $150 million of 30-year long-term debt
    that matures in 2037 at an interest rate of LIBOR plus 225 basis
    points. Under GAAP, this debt is carried at cost. Economic value can be
    difficult to estimate due to a generally inactive trading market for this
    debt. In July 2009, we repurchased $10 million of this debt at a market
    price equal to 34% of face value and utilized this price to calculate our
    $51 million estimate of economic value.
    (d) Other assets/liabilities, net are comprised of $3 million of real
    estate loans, $2 million of deferred taxes, $7 million of accrued
    interest receivable, and $13 million of other assets, less dividends
    payable of $19 million and accrued interest and other liabilities of
    $16 million.

REDWOOD TRUST, INC.

Sources and Uses of Cash

Our quarterly sources and uses of our cash is one of the financial metrics on which we focus. Therefore, as a supplement to the Consolidated Statement of Cash Flows in our Quarterly Report on Form 10-Q for the period ending June 30, 2009, we show in the table below (i) the beginning cash balance at March 31, 2009 and the ending cash balance at June 30, 2009, which are GAAP amounts, and (ii) the components of sources and uses of cash organized in a manner consistent with the way management analyzes them. The presentation of our sources and uses of cash for the second quarter of 2009 is derived by aggregating and netting all items within our GAAP Consolidated Statement of Cash Flows that were attributable to the second quarter of 2009.

                                           Three Months Ended
                                                 June 30,
    (In Millions)                                  2009
    -------------                                  -----
    Beginning Cash Balance at 3/31/09               $333
    Business cash flows:
      Cash flow from investments                      64
      Asset management fees                            1
      Operating expenses                              (8)
      Interest expense on long-term debt              (2)
                                                      --
    Total Business Cash Flows                         55
    Other sources and uses:
      Proceeds from asset sales                       57
      Proceeds from equity issuance                  238
      Changes in working capital                       4
      Acquisitions                                  (334)
      Dividends paid                                 (16)
                                                     ---
    Total Other Uses                                 (51)

                                                     ---
    Net Sources of Cash                                4
                                                     ---
    Ending Cash Balance at 6/30/09                  $337
                                                    ====

SOURCE Redwood Trust, Inc.

Contact: Mike McMahon, +1-415-384-3805, or Martin S. Hughes, +1-415-389-7373, both of Redwood Trust, Inc.

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