Redwood Trust Reports Third Quarter 2008 Results
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.
Released November 5, 2008