Redwood Trust, Inc. (NYSE:RWT; "Redwood" or the "Company"), a
leader in expanding access to housing for homebuyers and renters,
today reported its financial results for the quarter ended
September 30, 2023.
Key Q3 2023 Financial Results and Metrics
- GAAP book value per common share was $8.77 at September 30,
2023, a 5.3% decrease from $9.26 per share at June 30, 2023
- Economic return on book value of (3.6)%(1)
- GAAP net loss related to common stockholders of $(33) million
or $(0.29) per diluted common share
- Non-GAAP Earnings Available for Distribution ("EAD") of $11
million or $0.09 per basic common share(2)
- Recourse leverage ratio of 2.3x at September 30, 2023, compared
to 2.2x at June 30, 2023(3)
- Declared and paid a regular quarterly dividend of $0.16 per
common share
Operational Business Highlights
Residential Mortgage Banking
- Locked $1.6 billion of jumbo loans(4), up from $567 million in
the second quarter 2023, and purchased $815 million of jumbo loans,
up from $184 million in the second quarter 2023
- 50% of purchase volume in the third quarter 2023 was from
depository institutions, up from 10% in the second quarter
2023
- Achieved gross margins of 80bps during the quarter, within our
historical 75bps to 100bps range
- Significantly grew jumbo loan seller network, including over 50
new or re-established relationships with depository
institutions
- Distributed $391 million of jumbo loans through securitization
($338 million) and whole loan sales ($54 million)
- Increased capital allocated to Residential Mortgage Banking
segment to $150 million at September 30, 2023, up from $80 million
at June 30, 2023
Business Purpose Mortgage
Banking
- Funded $411 million of business purpose lending ("BPL") loans
in the third quarter 2023 (74% bridge and 26% term), up from $406
million in the second quarter 2023
- Distributed $340 million of BPL loans through securitization
($278 million) and whole loan sales ($62 million)
- Began selling BPL bridge loans into joint venture ("JV") with
Oaktree Capital Management, L.P. ("Oaktree") and established new
dedicated financing line for the JV
Investment Portfolio
- Deployed approximately $70 million of capital into internally
sourced investments, while generating incremental capital from
sales of non-strategic third-party assets
- RPL and jumbo securities saw continued declines in 90 day+
delinquencies to 8.6% and 0.9%, respectively; 90 days+
delinquencies for our combined CAFL securities and bridge loan
portfolio declined to 4.0% from, aided in part by successful loss
mitigation resolutions completed during the quarter(5)
- Secured recourse leverage ratio of 1.0x at September 30,
2023(6)
Financing Highlights
- Unrestricted cash and cash equivalents of $204 million at
September 30, 2023
- Successfully renewed two maturing loan warehouse financing
facilities with key counterparties
- Maintained $2.2 billion of excess financing capacity across
warehouse facilities at September 30, 2023
Other Corporate Highlights
- Commenced origination efforts and officially launched in-house
home equity investment ("HEI") origination platform, Aspire
- Completed two RWT Horizons investments, including one follow-on
investment in an existing RWT Horizons portfolio company
- Published second annual environmental, social and governance
("ESG") report in accordance with Sustainability Accounting
Standards Board ("SASB"), demonstrating Redwood's continued
progress on ESG disclosure
Q4 2023 Highlights to Date(7)
- Closed SEMT 2023-4 securitization, backed by $369 million of
jumbo loans
- Priced securitization backed by Home Equity Investments
(“HEI”), with approximately $139 million of securities expected to
be issued through a co-sponsored deal(8)
- Sold $44 million of BPL term loans
- Repurchased approximately $5 million of convertible debt due in
July 2024(9)
"The mortgage market is in a state of significant transition on
the heels of an evolving bank regulatory backdrop," said
Christopher Abate, Chief Executive Officer of Redwood. "In the
third quarter, we saw continued progress in our Residential
Mortgage Banking business, where we've driven volume higher through
onboarding new sellers and deepening our overall wallet share.
Importantly, despite choppy markets, we were successful during the
quarter efficiently securitizing and selling our production across
both of our operating businesses. As we look ahead, we expect to
formalize other partnerships complementary to our traditional
distribution channels, driven by significant interest in our asset
creation and sourcing abilities."
_____________________
- Economic return on book value is based on the period change in
GAAP book value per common share plus dividends declared per common
share in the period.
- Earnings available for distribution is a non-GAAP measure. See
Non-GAAP Disclosures section that follows for additional
information on this measure.
- Recourse leverage ratio is defined as recourse debt at Redwood
divided by tangible stockholders' equity. Recourse debt excludes
$9.3 billion of consolidated securitization debt (ABS issued and
servicer advance financing) and other debt that is non-recourse to
Redwood, and tangible stockholders' equity excludes $55 million of
goodwill and intangible assets.
- Lock volume does not account for potential fallout from
pipeline that typically occurs through the lending process.
- Calculated as BPL loans in our consolidated CAFL
securitizations, bridge loans held for investment, and bridge and
term loans held-for-sale with a delinquent payment greater than 90
days divided by the total notional balance of consolidated CAFL
securitizations, bridge loans held for investment, and bridge and
term loans held for sale.
- Secured recourse leverage ratio for our Investment Portfolio is
defined as secured recourse debt financing our investment portfolio
assets divided by capital allocated to our investment
portfolio.
- Represents Q4'23 activity through October 27, 2023.
- This securitization priced on October 23, 2023 and is expected
to close on October 31, 2023.
- Represents repurchase activity that settled after September 30,
2023.
Third Quarter 2023 Redwood Review and Supplemental Tables
Available Online
A further discussion of Redwood's business and financial results
is included in the third quarter 2023 Shareholder Letter and
Redwood Review which are available under "Financial Info" within
the Investor Relations section of the Company’s website at
redwoodtrust.com/investor-relations. Additional supplemental
financial tables can also be found within this section of the
Company's website.
Conference Call and Webcast
Redwood will host an earnings call today, October 30, 2023, at
2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time to discuss its
third quarter 2023 financial results. The number to dial in order
to listen to the conference call is 1-877-423-9813 in the U.S. and
Canada. International callers must dial 1-201-689-8573. A replay of
the call will be available through midnight on Monday, November 13,
2023, and can be accessed by dialing 1-844-512-2921 in the U.S. and
Canada or 1-412-317-6671 internationally and entering access code
#13741257.
The conference call will be webcast live in listen-only mode
through the News & Events section of Redwood’s Investor
Relations website at
https://www.redwoodtrust.com/investor-relations/news-events/events.
To listen to the webcast, please go to Redwood's website at least
15 minutes before the call to register and to download and install
any needed audio software. An audio replay of the call will also be
available on Redwood's website following the call. Redwood plans to
file its Quarterly Report on Form 10-Q with the Securities and
Exchange Commission by Thursday, November 9, 2023, and also make it
available on Redwood’s website.
About Redwood
Redwood Trust, Inc. (NYSE: RWT) is a specialty finance company
focused on several distinct areas of housing credit. Our operating
platforms occupy a unique position in the housing finance value
chain, providing liquidity to growing segments of the U.S. housing
market not well served by government programs. We deliver
customized housing credit investments to a diverse mix of
investors, through our best-in-class securitization platforms;
whole-loan distribution activities; and our publicly traded shares.
Our aggregation, origination and investment activities have evolved
to incorporate a diverse mix of residential and business purpose
housing credit assets. Our goal is to provide attractive returns to
shareholders through a stable and growing stream of earnings and
dividends, capital appreciation, and a commitment to technological
innovation that facilitates risk-minded scale. We operate our
business in three segments: Residential Mortgage Banking, Business
Purpose Mortgage Banking and Investment Portfolio. Additionally,
through RWT Horizons, our venture investing initiative, we invest
in early-stage companies strategically aligned with our business
across the lending, real estate, and financial technology sectors
to drive innovations across our residential and business-purpose
lending platforms. Since going public in 1994, we have managed our
business through several cycles, built a track record of
innovation, and established a best-in-class reputation for service
and a common-sense approach to credit investing. Redwood Trust is
internally managed and structured as a real estate investment trust
("REIT") for tax purposes. For more information about Redwood,
please visit our website at www.redwoodtrust.com or connect with us
on LinkedIn.
Cautionary Statement; Forward-Looking Statements:
This press release and the related conference call contain
forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995,
including statements related to the amount of residential mortgage
loans that we identified for purchase during the third quarter of
2023, expected fallout and the corresponding volume of residential
mortgage loans expected to be available for purchase, and the
expected timing for the filing of Redwood's Quarterly Report on
Form 10-Q. Forward-looking statements involve numerous risks and
uncertainties. Redwood's actual results may differ from Redwood's
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,
opportunities, 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, 2022 under the caption “Risk Factors”. Other
risks, uncertainties, and factors that could cause actual results
to differ materially from those projected may be described from
time to time in reports we file with the Securities and Exchange
Commission, 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.
REDWOOD TRUST, INC.
($ in millions, except per share data)
Three Months Ended
9/30/2023
6/30/2023
Financial
Performance
Net income (loss) per diluted common
share
$
(0.29
)
$
—
Net income (loss) per basic common
share
$
(0.29
)
$
—
EAD per basic common share (non-GAAP)
$
0.09
$
0.14
Return on Common Equity ("ROE")
(annualized)
(12.3
)%
0.4
%
EAD Return on Common Equity ("EAD ROE")
(annualized, non-GAAP)
4.3
%
6.2
%
Book Value per Common Share
$
8.77
$
9.26
Dividend per Common Share
$
0.16
$
0.16
Economic Return on Book Value (1)
(3.6
)%
0.2
%
Recourse Leverage Ratio (2)
2.3x
2.2x
Operating
Metrics
Business Purpose Loans
Term fundings
$
106
$
129
Bridge fundings
305
278
Term securitized
278
—
Term sold
27
180
Bridge sold
34
19
Residential Jumbo Loans
Locks
$
1,637
$
567
Purchases
815
184
Securitized
338
—
Sold
54
9
(1)
Economic return on book value is based on
the periodic change in GAAP book value per common share plus
dividends declared per common share during the period.
(2)
Recourse leverage ratio is defined as
recourse debt at Redwood divided by tangible stockholders' equity.
At September 30, 2023, and June 30, 2023, recourse debt excluded
$9.3 billion and $9.1 billion, respectively, of consolidated
securitization debt (ABS issued and servicer advance financing) and
other debt that is non-recourse to Redwood, and tangible
stockholders' equity excluded $55 million and $58 million,
respectively, of goodwill and intangible assets.
REDWOOD TRUST, INC.
Consolidated
Income Statements (1)
Three Months Ended
($ in millions, except share and per share
data)
9/30/23
6/30/23
3/31/23
12/31/22
9/30/22
Interest income
$
177
$
179
$
179
$
173
$
178
Interest expense
(157
)
(153
)
(152
)
(146
)
(143
)
Net interest income
20
26
26
27
35
Non-interest income (loss)
Residential mortgage banking activities,
net
9
7
3
(14
)
2
Business purpose mortgage banking
activities, net
10
9
13
(3
)
14
Investment fair value changes, net
(31
)
(5
)
—
(24
)
(58
)
Other income, net
2
4
5
4
4
Realized gains, net
—
1
—
3
—
Total non-interest income (loss), net
(10
)
17
21
(33
)
(37
)
General and administrative expenses
(30
)
(31
)
(36
)
(39
)
(38
)
Portfolio management costs
(4
)
(3
)
(4
)
(3
)
(2
)
Loan acquisition costs
(2
)
(1
)
(1
)
(1
)
(2
)
Other expenses
(5
)
(5
)
(4
)
(4
)
(4
)
(Provision for) benefit from income
taxes
(2
)
—
1
9
(1
)
Net income (loss)
$
(31
)
$
3
$
5
$
(44
)
$
(50
)
Dividends on preferred stock
(2
)
(2
)
(1
)
—
—
Net income (loss) available (related) to
common stockholders
$
(33
)
$
1
$
3
$
(44
)
$
(50
)
Weighted average basic common shares
(thousands)
115,466
114,051
113,679
113,363
116,088
Weighted average diluted common shares
(thousands) (2)
115,466
114,445
114,135
113,363
116,088
Earnings (loss) per basic common share
$
(0.29
)
$
—
$
0.02
$
(0.40
)
$
(0.44
)
Earnings (loss) per diluted common
share
$
(0.29
)
$
—
$
0.02
$
(0.40
)
$
(0.44
)
Regular dividends declared per common
share
$
0.16
$
0.16
$
0.23
$
0.23
$
0.23
(1)
Certain totals may not foot due to
rounding.
(2)
Actual shares outstanding (in thousands)
at September 30, 2023, June 30, 2023, March 31, 2023, December 31,
2022, and September 30, 2022, were 118,504, 114,178, 113,864,
113,485, and 113,343, respectively.
Analysis of Income Statement – Changes from Second Quarter
2023 to Third Quarter 2023
- Net interest income decreased from the second quarter primarily
due to lower interest income from our bridge loans, resulting from
a higher balance of non-accrual bridge loans that became 90 days+
delinquent in the third quarter. This decrease was partially offset
by higher net interest income from our Residential Mortgage Banking
operations resulting from higher volume and average balances in the
third quarter.
- Income from Residential Mortgage Banking activities increased
from the second quarter, as loan purchase commitments nearly
tripled to $1.3 billion during the quarter and margins of 80 basis
points were within our historical range of 75 to 100 basis
points.
- Income from Business Purpose Mortgage Banking activities
increased from the second quarter, as spreads on term loans
tightened during the third quarter. Overall volume remained steady
with a rise in bridge fundings offset by a decline in term
production. With rates increasing materially in the third quarter
of 2023, borrowers preferred the short-term financing inherent in
our bridge offerings.
- Net negative fair value changes on our Investment Portfolio in
the third quarter primarily reflected the impact of rising rates to
valuations on our re-performing loan (“RPL”) securities, and
reductions of value on our bridge loan portfolio associated with
delinquent and modified loans. The negative fair value changes were
partially offset by fair value increases for HEI assets, as well as
servicing assets which benefited from an increase in rates.
- Other income declined from the second quarter primarily due to
market valuation changes for mortgage servicing rights, which
increased in the second quarter as a result of rising interest
rates and stabilized in the third quarter.
- General and administrative (G&A) expenses declined from the
second quarter, as we continued our firm-wide initiatives to
contain costs while supporting the recent growth in our Residential
Mortgage Banking volumes. Additionally, expenses associated with
performance-based long-term incentive compensation declined in the
third quarter of 2023.
- Portfolio management costs increased from the second quarter,
primarily due to higher workout costs on our bridge loan
portfolio.
- Loan acquisition costs increased in the third quarter as
Residential Mortgage Banking production volume increased
significantly from the second quarter.
- Other expenses were primarily comprised of acquisition-related
intangible amortization expenses.
- Our provision for income taxes in the third quarter reflected
net income earned at our taxable REIT subsidiary, driven primarily
by mortgage banking income and servicing investments.
REDWOOD TRUST, INC.
Consolidated
Income Statements (1)
Nine Months ended September
30,
($ in millions, except share and per share
data)
2023
2022
Interest income
$
535
$
535
Interest expense
(462
)
(406
)
Net interest income
73
129
Non-interest income (loss)
Residential mortgage banking activities,
net
19
(8
)
Business purpose mortgage banking
activities, net
33
11
Investment fair value changes, net
(36
)
(152
)
Other income
11
17
Realized gains, net
1
3
Total non-interest income (loss), net
29
(129
)
General and administrative expenses
(96
)
(102
)
Portfolio management costs
(10
)
(5
)
Loan acquisition costs
(5
)
(10
)
Other expenses
(13
)
(12
)
Benefit from income taxes
(1
)
10
Net income (loss)
$
(23
)
$
(119
)
Dividends on preferred stock
(5
)
—
Net income (loss) available (related) to
common stockholders
$
(28
)
$
(119
)
Weighted average basic common shares
(thousands)
114,382
118,530
Weighted average diluted common shares
(thousands)
114,382
118,530
Earnings (loss) per basic common share
$
(0.27
)
$
(1.04
)
Earnings (loss) per diluted common
share
$
(0.27
)
$
(1.04
)
Regular dividends declared per common
share
$
0.55
$
0.69
(1)
Certain totals may not foot due to
rounding.
REDWOOD TRUST, INC.
Consolidated
Balance Sheets (1)
($ in millions, except share and per share
data)
9/30/23
6/30/23
3/31/23
12/31/22
9/30/22
Residential loans
$
5,847
$
5,456
$
5,493
$
5,613
$
5,753
Business purpose loans
5,249
5,227
5,365
5,333
5,257
Consolidated Agency multifamily loans
421
420
427
425
427
Real estate securities
129
167
243
240
259
Home equity investments (HEI)
431
427
417
403
340
Other investments
340
356
382
391
413
Cash and cash equivalents
204
357
404
259
297
Other assets
399
387
391
367
399
Total assets
$
13,021
$
12,797
$
13,121
$
13,031
$
13,146
Short-term debt, net
$
1,477
$
1,457
$
1,616
$
2,030
$
2,110
Other liabilities
217
230
187
197
208
Asset-backed securities issued, net
8,392
8,183
8,447
7,987
8,139
Long-term debt, net
1,830
1,802
1,733
1,733
1,534
Total liabilities
11,915
11,673
11,984
11,947
11,992
Stockholders' equity
1,106
1,124
1,138
1,084
1,154
Total liabilities and equity
$
13,021
$
12,797
$
13,121
$
13,031
$
13,146
Common shares outstanding at period end
(thousands)
118,504
114,178
113,864
113,485
113,343
GAAP book value per common share
$
8.77
$
9.26
$
9.40
$
9.55
$
10.18
(1)
Certain totals may not foot due to
rounding.
Non-GAAP Disclosures
Reconciliation of
GAAP Net Income (Loss) Available (Related) to Common Stockholders
to non-GAAP Earnings Available for Distribution
(1)(2)
Three Months Ended
($ in millions, except share and per share
data)
9/30/23
6/30/23
GAAP Net income (loss) available (related)
to common stockholders
$
(33
)
$
1
Adjustments:
Investment fair value changes, net(3)
31
5
Change in economic basis of
investments(4)
9
8
Realized (gains)/losses, net(5)
—
(1
)
Acquisition related expenses(6)
3
3
Organizational restructuring
charges(7)
—
1
Tax effect of adjustments(8)
—
—
Earnings Available for Distribution
(non-GAAP)
$
11
$
16
Earnings (loss) per basic common share
$
(0.29
)
$
—
EAD per basic common share (non-GAAP)
$
0.09
$
0.14
GAAP Return on Common Equity
(annualized)
(12.3
)%
0.4
%
EAD Return on Common Equity (non-GAAP,
annualized)(9)
4.3
%
6.2
%
- Certain totals may not foot due to rounding.
- EAD and EAD ROE are non-GAAP measures derived from GAAP Net
income (loss) available (related) to common stockholders and GAAP
ROE, respectively. EAD is defined as: GAAP net income (loss)
available (related) to common stockholders adjusted to (i) exclude
investment fair value changes, net; (ii) adjust for change in
economic basis of investments; (iii) exclude realized gains and
losses; (iv) exclude acquisition related expenses; (v) exclude
organizational restructuring charges; and (vi) adjust for the
hypothetical income taxes associated with these adjustments. EAD
ROE is defined as EAD divided by average common equity. We believe
EAD and EAD ROE provide supplemental information to assist
management and investors in analyzing the Company’s results of
operations and help facilitate comparisons to industry peers.
Specifically, the adjustment for the change in economic basis of
investments helps to distinguish between the component of market
value changes of our investments associated with the passage of
time based on our estimated economic yield (i.e., “the change in
the economic basis”), from the component related to changes in
benchmark interest rates, credit spreads and other factors, which
can be volatile and may not be indicative of future economic
performance of our investments. Management also believes that EAD
and EAD ROE are metrics that can supplement its analysis of the
Company’s ability to pay dividends, by providing an indication of
the current income generating capacity of the Company's business
operations as of the quarter being presented – and when used for
this type of analysis, management focuses on EAD for its most
recently completed quarter and does not generally analyze quarterly
EAD results against the prior-year quarter or EAD results
accumulated across quarters. More generally, EAD and EAD ROE should
not be utilized in isolation, nor should they be considered as an
alternative to GAAP net income (loss) available (related) to common
stockholders, GAAP ROE or other measurements of results of
operations computed in accordance with GAAP or for federal income
tax purposes.
- Investment fair value changes, net includes all amounts within
that same line item on our consolidated statements of income, which
primarily represents both realized and unrealized gains and losses
on our investments and associated hedges.
- Change in economic basis of investments is an adjustment
representing the difference between GAAP interest income for those
investments and their current estimated economic income for the
quarter presented. We derive estimated economic income each quarter
by first calculating the internal rate of return (“IRR”) for an
investment, using the investment’s carrying value at the beginning
of the quarter (which for nearly all of our investments is fair
value) and our projected future cash flows for the investment (the
same cash flows we use to value the assets at the beginning of the
quarter, which include any expected losses). We apply this IRR (or
estimated economic yield) to the average carrying value of the
asset for the reported quarter to derive what we refer to as
“estimated economic income.” This adjustment is prospective in
nature and is recalculated each quarter without regard to an
investment's historical basis. As such, this measure should not be
utilized to assess results cumulatively over multiple quarters. It
is meant to provide an estimate of the yield we expect an
investment to generate as of the beginning of each quarter, if held
on a long-term basis.
- Realized (gains)/losses, net includes all amounts within that
line item on our consolidated statements of income.
- Acquisition related expenses include ongoing amortization of
intangible assets related to the Riverbend, CoreVest and 5Arches
acquisitions and any changes in the contingent consideration
liability related to the potential earnout consideration for the
acquisition of Riverbend.
- In response to business and market developments in 2022,
Redwood reduced its workforce – with effective dates for employee
departures spanning the third quarter of 2022 through the second
quarter of 2023. Organizational restructuring charges represent
employee severance and related transition expenses associated with
this reduction in force.
- Tax effect of adjustments represents the hypothetical income
taxes associated with all adjustments used to calculate EAD.
- EAD ROE is calculated by dividing EAD by average common equity
for each respective period.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231030221222/en/
Investor Relations Kaitlyn Mauritz SVP, Head of Investor
Relations Phone: 866-269-4976 Email:
investorrelations@redwoodtrust.com
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