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Redwood Trust Reports Third Quarter 2009 Results

Wednesday, November 04, 2009

MILL VALLEY, Calif., Nov. 4/PRNewswire-FirstCall/ --Redwood Trust, Inc. (NYSE: RWT) today reported net income for the third quarter of 2009 of $27 million, or $0.35 per share. This compares to net income of $7 million, or $0.10 per share, for the second quarter of 2009, and a net loss of $111 million, or $3.34 per share, for the third quarter of 2008.

Redwood estimated that it incurred a taxable loss of $23 million, or $0.30 per share, during the third quarter of 2009. This compares to an estimated taxable loss of $12 million, or $0.16 per share, for the second quarter of 2009, and estimated taxable income of $2 million, or $0.07 per share, for the third quarter of 2008.

Key metrics for the third quarter are highlighted below:

    --  Investment cash flow increased to $78 million, up from $64 million in
        the second quarter of 2009, and business cash flow after operating and
        interest expenses increased to $68 million, compared to $55 million in
        the prior quarter;
    --  GAAP book value at the end of the third quarter was $11.68 per share, an
        increase of $1.33 or 13% from the end of the second quarter, and
        management's estimate of economic value increased to $12.28 per share,
        up $0.98 or 9% from the end of the prior quarter; and

    --  During the third quarter, we acquired $246 million of predominately
        senior securities, sold $74 million of securities, and ended the quarter
        with $217 million of cash.

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 September 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 third 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 "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 share    Third   Second    First   Fourth    Third
     data)                         Quarter  Quarter  Quarter  Quarter  Quarter
                                      2009     2009     2009     2008     2008
                                      ----     ----     ----     ----     ----

    Interest income                   $70      $74      $82     $123     $131
    Interest expense                  (25)     (39)     (47)     (99)     (92)
                                      ---      ---      ---      ---      ---
    Net interest income                45       35       35       24       39
    Provision for loan losses         (10)     (15)     (16)     (19)     (18)
    Market valuation
     adjustments, net                 (11)     (29)     (43)    (111)    (127)
                                      ---      ---      ---     ----     ----
    Net interest income (loss)
     after provision and
     market valuation adjustments      24       (9)     (24)    (106)    (106)
    Operating expenses                (15)     (11)     (11)     (14)     (17)
    Realized gains, net                18       26        -        6        -
    Benefit from (provision for)
     income taxes                       -        1        -       (4)      10
                                      ---        -      ---       --       --
    Net income (loss)                  27        7      (35)    (118)    (113)
      Less: Net (loss) income
       attributable to
       noncontrolling interest          -        -        -       (2)      (2)
                                      ---      ---      ---       --       --
    GAAP net income (loss)            $27       $7     $(35)   $(116)   $(111)
                                      ===       ==     ====    =====    =====


    Average diluted shares
     (thousands)                   78,223   66,446   53,632   33,366   33,334
    Diluted earnings (loss) per
     share                          $0.35    $0.10   $(0.65)  $(3.46)  $(3.34)
    Regular dividends declared
     per common share               $0.25    $0.25    $0.25    $0.75    $0.75



    REDWOOD TRUST, INC.



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

    Interest income                          $226    $444
    Interest expense                         (112)   (317)
                                             ----    ----
    Net interest income                       114     127
    Provision for loan losses                 (41)    (36)
    Market valuation adjustments, net         (83)   (382)
                                              ---    ----
    Net interest loss after provision and     (10)   (291)
     market valuation adjustments
    Operating expenses                        (36)    (48)
    Realized gains, net                        44       3
    Benefit from (provision for) income
     taxes                                      1       7
                                                -       -
    Net loss                                   (1)   (329)
      Less: Net (loss) income
       attributable to noncontrolling
       interest                                 -       -
                                              ---     ---
    GAAP net loss                             $(1)  $(329)
                                              ===   =====


    Average diluted shares (thousands)     65,363  32,907
    Diluted earnings (loss) per share      $(0.02) $(9.99)
    Regular dividends declared per common
     share                                  $0.75   $2.25



    REDWOOD TRUST, INC.


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

    Real estate loans                      $3,831 $3,966 $4,541 $4,659 $6,101
    Real estate securities, at fair value:
      Trading securities                      275    253    264    340    574
      Available-for-sale securities           787    551    255    233    288
    Other investments                          29     47     62     78     79
    Cash and cash equivalents                 217    337    333    126    177
    Other assets                              146    131    126    146    155
                                              ---    ---    ---    ---    ---
    Total Assets                           $5,285 $5,285 $5,581 $5,582 $7,374
                                           ====== ====== ====== ====== ======

    Short-term debt                            $-     $-     $-     $-     $7
    Other liabilities                         203    185    198    252    167
    Asset-backed securities issued -
     Sequoia                                3,728  3,843  4,418  4,508  5,930
    Asset-backed securities issued -
     Acacia                                   288    287    291    347    673
    Long-term debt                            140    150    150    150    150
                                              ---    ---    ---    ---    ---
    Total liabilities                       4,359  4,465  5,057  5,257  6,927

    Stockholders' equity                      907    802    506    302    412
    Noncontrolling interest                    19     18     18     23     35
                                               --     --     --     --     --
    Total equity                              926    820    524    325    447

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


    Shares outstanding at period end
     (thousands)                           77,669 77,503 60,228 33,471 33,238
    GAAP book value per share              $11.68 $10.35  $8.40  $9.02 $12.40



    REDWOOD TRUST, INC.


    Consolidating Income Statement
    ------------------------------
    Three Months Ended September 30, 2009
    ($ in millions)
                                                 Intercompany
                              The  Securitization  Adjust-      Redwood
                    Redwood   Fund     Entities     ments     Consolidated
                    -------  ------   ----------   --------     ---------

    Interest income   $21       $-         $43         $-           $64
    Net discount
     (premium)
     amortization       8        2          (4)         -             6
                      ---      ---          --        ---           ---
    Total interest
     income            29        2          39          -            70
    Management fees     1        -           -         (1)            -
    Interest expense   (1)       -         (24)         -           (25)
                       --      ---         ---        ---           ---
    Net interest
     income            29        2          15         (1)           45
    Provision for
     loan losses        -        -         (10)         -           (10)
    Market
     valuation
     adjustments,
     net               (8)      (1)         (2)         -           (11)
                       --       --          --        ---           ---
    Net interest
     income after
     provision         21        1           3         (1)           24
      and market
      valuation
      adjustments
    Operating
     expenses         (15)      (1)          -          1           (15)
    Realized gains,
     net               18        -           -          -            18
    Income from the
     Fund and
     Securitization
     Entities           3        -           -         (3)            -
    Noncontrolling
     interest           -        -           -          -             -
    Benefit from
     (provision for)
     income taxes       -        -           -          -             -
                      ---      ---         ---        ---           ---
    Net income        $27       $-          $3        $(3)          $27
                      ===      ===         ===        ===           ===



    Consolidating Income Statement
    ------------------------------
    Nine Months Ended September 30, 2009
    ($ in millions)


                                                 Intercompany
                              The  Securitization  Adjust-      Redwood
                    Redwood   Fund     Entities     ments     Consolidated
                    -------  ------   ----------   --------     ---------

    Interest income   $65       $-        $155         $-          $220
    Net discount
     (premium)
     amortization       7        7          (8)         -             6
                      ---      ---          ---       ---           ---
    Total interest
     income            72        7         147          -           226
    Management fees     3        -           -         (3)            -
    Interest expense   (5)       -        (109)         2          (112)
                       --      ---        ----        ---          ----
    Net interest
     income            70        7          38         (1)          114
    Provision for
     loan losses        -        -         (41)         -           (41)
    Market
     valuation
     adjustments,
     net              (66)      (6)        (11)         -           (83)
                      ---      ---         ---        ---           ---
    Net interest
     (loss) income
     after provision    4        1         (14)        (1)          (10)
     and market
     valuation
     adjustments
    Operating
     expenses         (36)      (1)          -          1           (36)
    Realized gains,
     net               25        -          19          -            44
    Income from the
     Fund and
     Securitization
     Entities           5        -           -         (5)            -
    Noncontrolling
     interest           -        -           -          -             -
    Benefit from
     (provision for)
     income taxes       1        -           -          -             1
                      ---      ---         ---        ---           ---
    Net (loss)
     income           $(1)       -           5         (5)           (1)
                       ===     ===         ===        ===           ===



    Consolidating Balance Sheet
    ---------------------------
    September 30, 2009
    ($ in millions)
                                                            Inter-     Red-
                                                  Secur-   company     wood
                                          The   itization   Adjust-   Consol-
                                Redwood   Fund   Entities   ments     idated
                               --------- ------ ----------  --------  --------

    Real estate loans                 $3     $-     $3,828        $-    $3,831
    Real estate securities,
     at fair value:
      Trading securities               5      -        270         -       275
      Available-for-sale
       securities                    746     41          -         -       787
    Other investments                  -      -         29         -        29
    Cash and cash equivalents        217      -          -         -       217
    Investment in the Fund            24      -          -       (24)        -
    Investment in
     Securitization Entities          78      -          -       (78)        -
                                      --    ---        ---       ---       ---
        Total earning assets       1,073     41      4,127      (102)    5,139
    Other assets                      24      4        118         -       146
                                      --      -        ---       ---       ---
    Total Assets                  $1,097    $45     $4,245     $(102)   $5,285
                                   =====     ==      =====      ====     =====

    Short-term debt                   $-     $-         $-        $-        $-
    Other liabilities                 50      2        151         -       203
    Asset-backed securities
     issued                            -      -      4,016         -     4,016
    Long-term debt                   140      -          -         -       140
                                     ---    ---        ---       ---       ---
    Total liabilities                190      2      4,167         -     4,359

    Stockholders' equity             907     24         78      (102)      907
    Noncontrolling interest            -     19          -         -        19
                                     ---     --        ---       ---        --
    Total equity                     907     43         78      (102)      926

                                   -----     --      -----      ----     -----
    Total Liabilities and
     Equity                       $1,097    $45     $4,245     $(102)   $5,285
                                   =====     ==       =====      ====    =====



    REDWOOD TRUST, INC.


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

    GAAP net income (loss)          $27       $7     $(35)   $(116)   $(111)
    Difference in taxable (loss)
     income calculations
    --------------------
      Amortization and credit
       losses                       (48)     (23)     (22)      (5)      (7)
      Operating expenses             (2)       1        -       (1)       3
      Realized gains, net           (11)     (25)       -       (6)       -
      Market valuation
       adjustments, net              11       29       43      111      127
      Provision for income
       taxes                          -       (1)       -        4      (10)
                                    ---       --      ---        -      ---
    Total differences in GAAP
     and taxable (loss) income      (50)     (19)      21      103      113

                                   ----     ----     ----     ----      ---
    Taxable (loss) income          $(23)    $(12)    $(14)    $(13)      $2
                                   ====     ====     ====     ====      ===

    Taxable (loss) income per
     share                       $(0.30)  $(0.16)  $(0.22)  $(0.38)   $0.07



    REDWOOD TRUST, INC.


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

    GAAP net loss                                $(1) $(329)
    Difference in taxable (loss)
     income calculations
    --------------------
      Amortization and credit losses             (93)   (16)
      Operating expenses                           -      5
      Realized gains, net                        (37)    (3)
      Market valuation adjustments, net           83    382
      Provision for income taxes                  (1)    (7)
                                                  --     --
    Total differences in GAAP and taxable
     (loss) income                               (48)   361

                                                ----    ---
    Taxable (loss) income                       $(49)   $32
                                                ====    ===

    Taxable (loss) income per share           $(0.68) $0.97

    REDWOOD TRUST, INC.


      Book Value Per Share and Non-GAAP Estimate of Economic Value Per Share

                                                           Management's
                                      GAAP                 Estimate of
    (In Millions, Except              Book                   Economic
    per Share Data)                  Value    Adjustments      Value
    ---------------------            ------  -------------  ----------
    Cash and cash equivalents          $217      $                $217
    Real estate securities at Redwood
         Residential                    732                        732
         Commercial                      17                         17
         CDO                              2                          2
                                        ---                        ---
    Subtotal real estate securities     751                        751
    Investments in the Fund              24                         24
    Investments in Sequoia               76        (29)(a)          47
    Investments in Acacia (b)             2                          2
                                        ---                        ---
    Total cash, securities and
     investments                      1,070                        824
    Long-term debt                     (140)        76 (c)         (64)
    Other assets/liabilities, net (d)   (23)                       (23)
                                        ---                        ---
    Stockholders' Equity                907                        954
                                        ===                        ===

    Book Value Per Share              11.68                      12.28
                                      =====                      =====

    (a) Our Sequoia investments consist predominately of AAA-rated
        interest-only securities issued by Sequoia, and to a smaller extent,
        senior and subordinate securities. We calculated the $47 million
        estimate of economic value for these securities using the same
        valuation process that we follow to fair value our other real estate
        securities. In contrast, the $76 million of GAAP carrying value of
        these investments represents the difference between the assets and
        liabilities owned by the Sequoia entities.

    (b) The fair value of our investments in Acacia was $2 million and the
        GAAP carrying value was $2 million. These investments consist of
        equity interests and securities in the Acacia CDO entities we sponsor,
        which have minimal value, as well as management fees. We valued the
        management fees at $2 million, which equals our projected management
        fees discounted at a 45% rate.

    (c) At September 30, 2009, we had $140 million of long-term debt
        outstanding at an interest rate of LIBOR plus 225 basis points due
        in 2037. We calculated the $64 million estimate of economic value of
        this debt using the same valuation process used to fair value our
        other financial assets and liabilities.

    (d) Other assets/liabilities, net are comprised of $2 million of real
        estate loans, $7 million of accrued interest receivable, and $17
        million of other assets, less dividends payable of $19 million and
        accrued interest and other liabilities of $30 million.


    REDWOOD TRUST, INC.
    Sources and Uses of Cash*


                                                Three Months
                                                    Ended
    (In Millions)                             September 30, 2009
    -------------                             ------------------
    Beginning Cash Balance at 6/30/09                    $337
    Business cash flows:
      Cash flow from investments                           78
      Asset management fees                                 1
      Operating expenses                                  (10)
      Interest expense on long-term debt                   (1)
                                                           --
    Total Business Cash Flows                              68
    Other sources and uses:
      Proceeds from asset sales                            74
      Proceeds from equity issuance                         -
      Changes in working capital                            6
      Acquisitions                                       (246)
      Repurchase of long-term debt                         (3)
      Dividends paid                                      (19)
                                                          ---
    Total Other Uses                                     (188)

                                                         ----
    Net Uses of Cash                                     (120)
                                                         ----
    Ending Cash Balance at 9/30/09                       $217
                                                         ====

    * The sources and uses of cash in the table below are derived from our
      GAAP Consolidated Statements of Cash Flows by aggregating and netting
      cash flows in a manner consistent with the way management analyzes
      them. This table excludes the gross cash flows generated by our Sequoia
      and Acacia securitization entities and the Fund (cash flows that are not
      available to Redwood), but does include the cash flows distributed to
      Redwood as a result of our investments in these entities. The beginning
      and ending cash balances presented in the table below are GAAP amounts.

SOURCE Redwood Trust, Inc.

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

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