Exhibit 99.2

q22019outsidefrontcover001.jpg

 
  T A B L E O F C O N T E N T S


Introduction
 
 
Shareholder Letter
 
 
Quarterly Overview
 
 
Ñ Second Quarter Highlights
 
 
Ñ Quarterly Earnings and Analysis
 
 
Ñ Segment Results
 
 
Ñ Book Value
 
 
Ñ Capital Allocations
 
 
Ñ 2019 Updated Financial Outlook
 
 
Ñ Balance Sheet Analysis
 
 
Financial Tables
 
 
Appendix
 
 
Ñ Dividends
 
 
Ñ Non-GAAP Measurements
 
 
Ñ Forward-Looking Statements


 
THE REDWOOD REVIEW I 2ND QUARTER 2019
1
 
F O R W A R D - L O O K I N G S T A T E M E N T S

This Redwood Review 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, goals, 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 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 forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: statements we make regarding Redwood’s business strategy and strategic focus, statements related to our financial outlook and expectations for 2019, statements regarding our available capital and sourcing additional capital both internally and from the capital markets, and other statements regarding pending business activities and expectations and estimates relating to our business and financial results. Additional detail regarding the forward-looking statements in this Redwood Review and the important factors that may affect our actual results in 2019 are described in the Appendix of this Redwood Review under the heading “Forward-Looking Statements.”



 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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I N T R O D U C T I O N

Note to Readers:

We file annual reports (on Form 10-K) and quarterly reports (on Form 10-Q) with the Securities and Exchange Commission. These filings and our earnings press releases provide information about Redwood and our financial results in accordance with generally accepted accounting principles (GAAP). These documents, as well as information about our business and a glossary of terms we use in this and other publications, are available through our website, www.redwoodtrust.com. We encourage you to review these documents.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries. Note that because we round numbers in the tables to millions, except per share amounts, some numbers may not foot due to rounding. References to the “second quarter” refer to the quarter ended June 30, 2019, and references to the “first quarter” refer to the quarter ended March 31, 2019, unless otherwise specified.
We hope you find this Review helpful to your understanding of our business. We thank you for your input and suggestions, which have resulted in our changing the form and content of The Redwood Review over time.
 
Selected Financial Highlights
 
 
Quarter:Year
 
GAAP Income
(Loss) per Share
 
Non-GAAP Core Earnings per Share (1)
 
REIT Taxable
Income per
Share (2)
 
Annualized
GAAP Return
on Equity
 
GAAP Book
Value per
Share
 
Dividends
per Share
 
Economic Return on Book Value (3)
 
Q219
 
$0.30
 
$0.39
 
$0.25
 
8%
 
$16.01
 
$0.30
 
1.9%
 
Q119
 
$0.49
 
$0.36
 
$0.30
 
15%
 
$16.00
 
$0.30
 
2.6%
 
Q418
 
$(0.02)
 
$0.41
 
$0.32
 
—%
 
$15.89
 
$0.30
 
(1.4)%
 
Q318
 
$0.42
 
$0.39
 
$0.27
 
12%
 
$16.42
 
$0.30
 
3.0%
 
Q218
 
$0.38
 
$0.42
 
$0.35
 
11%
 
$16.23
 
$0.30
 
2.5%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Additional information on non-GAAP core earnings per share, including a definition and reconciliation to GAAP earnings per share, is included in the Non-GAAP Measurements section of the Appendix and Table 2 in the Financial Tables section.
(2)
REIT taxable income per share for 2018 and 2019 are estimates until we file our tax returns.
(3)
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.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
3
 
S H A R E H O L D E R L E T T E R

Dear Fellow Shareholders:
We hope that your summer is off to a great start and you found time for a break to spend with family and friends. The markets have meanwhile reminded us that volatility has an unpredictable vacation schedule, keeping us keenly focused on managing our interest rate exposure while executing against our broader initiatives. The steep decline in rates, coupled with a continuing demand for yield, had varying impacts on our second quarter results. Most notably, lower rates benefited our mortgage banking operations, but resulted in higher hedging costs for certain segments of our investment portfolio. These dynamics are a good reminder of the strength of our balanced business model and earnings power. Our second quarter GAAP book value remained stable at $16.01 per share as of June 30, 2019, with GAAP net income covering our dividend. Our non-GAAP core earnings of $0.39 per share was up 8% compared to the first quarter.
Strong mortgage banking results were a key driver of earnings for the second quarter. Our residential mortgage banking business benefited from the decline in interest rates resulting in close to a 60% increase in loan purchase volume over the first quarter. Gross margins in the second quarter exceeded our long-term target range for both securitization and whole loan sale executions, and overall returns for this business benefited from operational and capital efficiencies we have achieved thus far in 2019. The mix of Select and Choice loan lock volumes was consistent with the first quarter, and second quarter Choice loan lock volumes were the second highest since the program's inception in 2016.
While strong demand for yield and tighter spreads benefited our mortgage banking margins, they made portfolio capital deployment particularly challenging for yield-oriented investors like us. While our long-term goal is to deploy capital and build our investment portfolio, the second quarter represented one of the best quarters in recent memory to take profits and recycle capital. We deployed $136 million of capital into new investments during the second quarter, while generating $243 million of capital through financing structures that optimize our balance sheet, and sales of lower-yielding assets. Playing the long game allowed us to lock in $16 million of core realized gains, and we’ve already seen better opportunities to deploy capital in the third quarter, with over $100 million deployed in July alone. At June 30, 2019, we estimate that our available capital was approximately $200 million. We believe this capital, along with additional capital from continued portfolio optimization, should be sufficient to meet our near-term needs, and provide us with flexibility as we approach the November maturity of our $201 million of exchangeable debt.
From an underwriting and credit perspective, we remain highly pleased with the performance of our portfolio. Though housing price appreciation is slowing from the unsustainable levels of recent years, the labor market is at full employment, homebuilding continues to lag demand, and the excesses of the last cycle - including poorly underwritten mortgage credit - are not driving today’s market. Not coincidentally, the areas of recent underperformance in our portfolio have been investments most exposed to interest rates and prepayments rather than credit risk. This included jumbo residential loans that we finance at the FHLB, and the residential mortgage servicing rights (MSR) that we hold outright or in securitized form.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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S H A R E H O L D E R L E T T E R

Another key area of focus during the second quarter was the ongoing integration of the 5 Arches business. The second quarter marked our first full quarter of 5 Arches operating results, and we are pleased with our progress as we deepened our market footprint in the business purpose lending space and produced attractive loans for our portfolio. We are focused on originations that deliver superior risk-adjusted returns, including single-family rental loans and further development of small-balance multifamily and other bridge loans keyed around rental demand. This production mix reflects a market opportunity we continue to see as plentiful, driven by the overall fundamental supply/demand imbalance in housing, most notably at affordable price points for both renters and prospective owners. Importantly, we expect to continue ramping this valuable platform throughout 2019.
Turning to housing finance reform, over the last several months we have dedicated a considerable amount of time working with leadership in Washington to demonstrate the private sector's ability to partner with Fannie Mae and Freddie Mac (the “GSEs”) in providing solutions for a broad array of borrowers, including through non-qualified mortgage (non-QM) loans. In support of this work, in May we published an extensive presentation on our perspectives on private capital and the “QM Patch," the regulatory exemption currently enjoyed by the GSEs. In the presentation we advanced a robust, data-based argument that, if the rule were allowed to expire at a proper cadence, additional “crowding in” of private capital could occur in a safe and sound manner for all stakeholders, including borrowers and taxpayers alike.
Our presentation focused on potential solutions pertaining to the QM Patch, highlighting our view that Redwood is ideally positioned and uniquely qualified to participate with the public sector in establishing a framework for non-QM lending on a level playing field. Redwood has led the private sector resurgence in housing finance since issuing the first post-crisis securitization in 2010. The private sector has been financing an increasing share of certain market segments that have been long dominated by the GSEs and we believe the private sector can speak for more without a meaningful impact on rates available to borrowers. We presented this analysis to key policymakers in Washington and were encouraged by the feedback.
We were further encouraged just last week, when the CFPB released a notice of proposed rulemaking seeking information relating to the expiration of the QM Patch. In related remarks, the CFPB stated that it “currently plans to allow the GSE Patch to expire in January 2021 or after a short extension, if necessary, to facilitate a smooth and orderly transition away from the GSE Patch.” The CFPB Director’s reference to “a more transparent, level playing field that ultimately benefits consumers” speaks directly to the core of our May publication. Our presentation can be viewed on the Newsroom section of our website at: http://www.redwoodtrust.com/Presentations. 

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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S H A R E H O L D E R L E T T E R

More broadly, the Director of the Federal Housing Finance Agency (“FHFA”) has been regularly stating his determination to shift GSE market share to the private sector, a dramatic departure from the policies of his predecessor. The Director, as regulator and conservator of the GSEs, has a number of tools at his disposal to make that happen without Congressional action. These include altering GSE underwriting guidelines, discontinuing GSE eligibility for certain loan products (such as high balance loans and/or second home financings), requiring the GSEs to sell more first-loss risk as part of their risk-transfer programs, or even raising GSE guaranty fees to create a more level playing field with the private sector. In addition, the Director has suggested changes to the GSEs’ capital and regulatory regimes that would make holding risk more expensive, an incentive for additional credit risk transfer and a catalyst to further level the playing field with the private sector.
Taken together, these themes represent a clear direction of Federal housing finance policy that is fully aligned with Redwood’s business model and core strengths. As such, we maintain an active presence in Washington, meeting frequently with key policymakers to provide input and demonstrate that private capital is ready and able to take on a larger share of the mortgage market. We have noted many times that the range of potential housing reform outcomes for the market - and Redwood - is broad, but there remains opportunity for revolutionary change for our firm. This is still the case, but the quality of discourse over the past several months leaves room for more optimism than we have had in quite some time.
In closing, we continue to make good progress executing on our strategic initiatives and the current environment has provided us with an opportunity to demonstrate the strength and agility of our diversified business model. We are entering the second half of the year with a healthy balance sheet, disciplined cost management and a portfolio built on strong credit performance. We will continue to be responsive to market conditions while pursuing investments aimed at driving higher returns that can position us to support higher sustainable dividends and overall returns for our shareholders.
We appreciate your support.



q119ceosignaturea01.jpg
 
q119presidentsignaturea01.jpg
Christopher J. Abate
 
Dashiell I. Robinson
Chief Executive Officer
 
President

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Second Quarter Highlights
 
Key Financial Results and Metrics
($ in millions, except per share data)
 
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
GAAP Earnings per Share
$
0.30

 
$
0.49

 
Non-GAAP Core Earnings per Share (1)
$
0.39

 
$
0.36

 
 
 
 
 
 
Book Value per Share
$
16.01

 
$
16.00

 
Economic Return on Book Value (2)
1.9
%
 
2.6
%
 
Recourse Leverage (3)
3.1x

 
2.9x

 
 
 
 
 
 
Portfolio Capital Deployment
$
136

 
$
163

 
Residential Loan Purchase Commitments
$
1,695

 
$
1,199

 
 
 
 
 
 
Ñ
GAAP earnings per share declined in the second quarter, as we experienced a reduced benefit to investment fair value changes from spread tightening and lower realized gains from sales of available-for-sale securities.
Ñ
Core earnings per share increased in the second quarter, driven primarily by higher residential mortgage banking results, which benefited from a nearly 60% increase in loan purchase volume, and gross margins that exceeded our long-term target range as both securitization and whole loan sales represented attractive execution. Increased portfolio optimization activity in the second quarter resulted in increased core realized gains, but dampened economic net interest income due to a higher average balance of undeployed capital during the quarter. Economic net interest income was also impacted by the sharp decline in rates during the second quarter, which negatively impacted certain of segments of our portfolio more sensitive to interest rates and prepayments.
Ñ
Book value per share increased during the quarter, as GAAP earnings covered the dividend, and tighter spreads improved asset prices on available-for-sale securities in our investment portfolio.
Ñ
Recourse leverage increased modestly in the second quarter, primarily resulting from incremental financing on our investment securities, which increased available capital and improved risk-adjusted returns in our investment portfolio.
Ñ
We continued to make progress on operating efficiencies at our residential mortgage banking business during the quarter, meaningfully increasing our loan purchase volume, while maintaining strong margins and a flat capital allocation to this business, resulting in higher returns on capital.
_____________________
(1) For details on GAAP earnings and non-GAAP core earnings, see the Quarterly Earnings and Analysis section that follows on page 8 and the Non-GAAP Measurements section of the Appendix.
(2) 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.
(3)
See Table 7 in the Financial Tables section of this Redwood Review for details of how our recourse debt to equity leverage ratio is calculated.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Quarterly Earnings and Analysis
Below we present GAAP net income and non-GAAP core earnings for the second and first quarters of 2019.
 
GAAP Net Income
($ in millions, except per share data)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
Net interest income
$
32

 
$
32

 
 
 
 
 
 
Non-interest income
 
 
 
 
Mortgage banking activities, net
19

 
12

 
Investment fair value changes, net
3

 
20

 
Other income, net
2

 
4

 
Realized gains, net
3

 
11

 
Total non-interest income, net
28

 
47

 
Operating expenses
(26
)
 
(23
)
 
Provision for income taxes
(2
)
 
(1
)
 
 
 
 
 
 
GAAP net income
$
31

 
$
54

 
 
 
 
 
 
GAAP diluted earnings per common share
$
0.30

 
$
0.49

 
 
 
 
 
 
 
Non-GAAP Core Earnings (1)
($ in millions, except per share data)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
GAAP net interest income
$
32

 
$
32

 
Change in basis and hedge interest
1

 
4

 
Non-GAAP economic net interest income (1)
34

 
36

 
 
 
 
 
 
Non-interest income
 
 
 
 
Mortgage banking activities, net
19

 
12

 
Core investment fair value changes, net (1)
—

 
—

 
Core other income, net (1)
4

 
2

 
Core realized gains, net (1)
16

 
12

 
Total non-interest income, net
40

 
26

 
Operating expenses
(26
)
 
(23
)
 
Core provision for income taxes (1)
(4
)
 
(1
)
 
 
 
 
 
 
Core earnings (1)
$
43

 
$
38

 
 
 
 
 
 
Core diluted earnings per common share (2)
$
0.39

 
$
0.36

 
(1)
Additional information on Redwood's non-GAAP measures, including: economic net interest income; core investment fair value changes, net; core other income, net; core realized gains, net; core provision for income taxes; and core earnings as well as reconciliations to associated GAAP measures, is included in the Non-GAAP Measurements section of the Appendix.
(2)
Additional information on the calculation of non-GAAP core diluted EPS can be found in Table 2 in the Financial Tables section of this Redwood Review.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Ñ
Net interest income was consistent quarter-over-quarter, as a benefit from continued capital deployment during the second quarter was offset by capital inflows that resulted from increased portfolio optimization activities, including opportunistic asset sales and the addition of incremental leverage within our investment portfolio.
Ñ
Non-GAAP economic net interest income declined from the first quarter of 2019, as faster prepayments during the second quarter increased the expense from the change in basis on fair value loans and securities held at a premium and interest rate volatility during the quarter resulted in higher hedging costs in certain segments of the portfolio.
Ñ
Mortgage banking activities increased primarily due to a combination of higher loan purchase volume from our residential mortgage banking operations, and a full quarter of activity from our business purpose mortgage banking operations.
Ñ
Investment fair value changes was positively impacted by tightening credit spreads in our securities portfolio during the second quarter, though to a lesser extent than experienced in the first quarter. Our non-GAAP core earnings excludes these market valuation adjustments.
Ñ
Other income declined in the second quarter, as the first quarter included income related to our purchase of 5 Arches, and the second quarter included a full period of amortization of intangible assets from the purchase. Non-GAAP core other income excludes these amounts.
Ñ
Realized gains in the second quarter resulted from the sale of $167 million of securities. After the repayment of associated debt, the security sales freed up $79 million of capital for reinvestment.
Ñ
Operating expenses increased primarily due to the second quarter including a full quarter of expenses from the 5 Arches platform.
Ñ
The increase in the tax provision was primarily due to higher mortgage banking income at our taxable subsidiary during the second quarter, as well as a tax benefit in the first quarter resulting from the purchase of 5 Arches. A reconciliation of GAAP and taxable income is set forth in Table 6 in the Financial Tables section of this Redwood Review.
Ñ
Additional details on our earnings are included in the Segment Results section that follows.

 
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Q U A R T E R L Y O V E R V I E W

Segment Results
Investment Portfolio
The following table presents segment contribution from our investment portfolio for the second and first quarters of 2019.
 
Investment Portfolio Segment Contribution
($ in millions)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
GAAP net interest income
$
38

 
$
38

 
Change in basis and hedge interest
1

 
4

 
Non-GAAP economic net interest income (1)
39

 
42

 
 
 
 
 
 
Non-GAAP other fair value changes, net (2)
2

 
16

 
Other income, net
3

 
1

 
Realized gains, net
3

 
11

 
Operating expenses
(2
)
 
(3
)
 
Provision for income taxes
(1
)
 
—

 
Segment contribution (3)
$
44

 
$
67

 
Core earnings adjustments (4)
 
 
 
 
Eliminate non-GAAP other fair value changes, net (2)
(2
)
 
(16
)
 
Include cumulative gain on long-term investments sold, net
13

 
1

 
Income taxes associated with core earnings adjustments
(1
)
 
1

 
Non-GAAP core segment contribution
$
54

 
$
54

 
(1)
Consistent with management's definition of non-GAAP economic net interest income set forth in the Non-GAAP Measurements section of the Appendix, this measure, as presented above, is calculated in the same manner, inclusive only of amounts allocable to this segment.
(2)
Non-GAAP other fair value changes, net, represents GAAP investment fair value changes adjusted to exclude the change in basis and hedge interest that is presented in the table above and included in non-GAAP economic net interest income.
(3)
Segment contribution totals above are presented in accordance with GAAP. Within the table, "Change in basis and hedge interest" has been reallocated between investment fair value changes and net interest income as described above.
(4)
Consistent with management's definition of core earnings set forth on page 38, non-GAAP core segment contribution reflects GAAP segment contribution adjusted to reflect the portion of core earnings adjustments allocable to this segment.
Ñ
Segment contribution from our investment portfolio declined during the second quarter, as we experienced a reduced benefit to investment fair value changes from spread tightening and lower realized gains from sales of available-for-sale securities.




 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Ñ
Core segment contribution declined during the second quarter, as economic net interest income was negatively impacted by interest rate volatility and accelerated prepayments, which increased hedging costs and change in basis expense from loans and securities with premiums.
Ñ
We deployed $136 million of capital in the second quarter, including $28 million into proprietary investments and $108 million into third-party investments. Proprietary investments included $25 million of business purpose loans originated by 5 Arches and $3 million into Sequoia RMBS. Third-party investments included $75 million of Agency multifamily securities, $17 million of Agency CRT securities, and $18 million of re-performing loan securities.
Ñ
During the second quarter, we sold $167 million of lower yielding securities, which freed up approximately $79 million of capital for redeployment. Additionally, we added new leverage to our portfolio of multifamily credit investments and incremental leverage to our business purpose loan investments, resulting from improved financing terms. On a combined basis, these incremental borrowings generated approximately $164 million of capital for redeployment and meaningfully improved return profiles on these investments.
Ñ
As of June 30, 2019, we had funded approximately $29 million of the $78 million commitment we previously made to a light-renovation multifamily loan fund, and we expect the remainder of the commitment to be funded over the next few quarters.
Ñ
Credit fundamentals in our investment portfolio remain strong, benefiting from continued stability in the general economy and in housing.




 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Mortgage Banking
 
Mortgage Banking Segment Contribution
($ in millions)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
Residential
 
Business Purpose
 
Total Mortgage Banking
 
Total Mortgage Banking
 
 
 
 
 
 
 
 
 
 
Net interest income
$
4

 
$
—

 
$
5

 
$
5

 
Mortgage banking activities, net
15

 
4

 
19

 
12

 
Mortgage banking income
20


4

 
24

 
17

 
 
 
 
 
 
 
 
 
 
Other income, net
—

 
—

 
—

 
—

 
Operating expenses
(6
)
 
(6
)
 
(12
)
 
(8
)
 
Provision for income taxes
(1
)
 
—

 
(1
)
 
(1
)
 
Segment contribution
$
13

 
$
(2
)
 
$
11

 
$
8

 
 
 
 
 
 
 
 
 
 
Core earnings adjustments (1)
—

 
2

 
2

 
—

 
Non-GAAP core segment contribution (2)
$
13

 
$
—

 
$
12


$
8

 
Jumbo loan purchase commitments
$
1,695

 
N/A

 
$
1,695

 
$
1,199

 
(1)
Includes amounts to eliminate purchase accounting adjustments and income tax adjustments of $0.4 million and $1 million for the second and first quarters of 2019, respectively.
(2)
Consistent with management's definition of core earnings set forth on page 38, non-GAAP core segment contribution reflects GAAP segment contribution adjusted to reflect the portion of core earnings adjustments allocable to this segment.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Residential Mortgage Banking
Ñ
Segment contribution from our residential mortgage banking operations increased to $13 million in the second quarter from $9 million in the first quarter, as higher loan purchase commitments and strong gross margins, supported by improved securitization and whole loan execution, benefited second quarter results. We define gross margins for this segment as mortgage banking income divided by loan purchase commitments.
Quarterly Jumbo Loan Purchase Volume
($ in billions)
q2purchvol.jpg
Ñ
The decline in mortgage rates helped drive an increase in loan purchase volumes and lock volumes during the second quarter. While Choice purchase volume increased modestly quarter-over-quarter, Choice lock volume increased close to 30%. At June 30, 2019, our pipeline of jumbo residential loans identified for purchase was $1.0 billion.
Ñ
During the second quarter, we completed one Select securitization of $0.4 billion and sold $0.8 billion of whole loans to third parties.

Business Purpose Mortgage Banking
Ñ
Segment contribution from our business purpose mortgage banking operations for the second quarter was a loss for GAAP purposes, as results included $2 million of expense related to the amortization of purchase intangibles. Non-GAAP core segment contribution excludes these amounts, and was just above break-even for the second quarter. Net interest income from bridge loans originated by this business and sold to our REIT is included in our portfolio segment results. We expect results for this business to improve in future quarters, as we complete our integration of 5 Arches and continue to ramp up business purpose loan origination volume.
Ñ
During the second quarter of 2019, we originated $175 million of loans and associated funding commitments, including $141 million of residential bridge loans and $34 million of single-family rental loans. Loan fundings during this period totaled $134 million, including $101 million of residential bridge loans and $33 million of single-family rental loans.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
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Q U A R T E R L Y O V E R V I E W

Book Value
Quarter-End Book Value Per Share (1) 
q2bvps.jpg

Ñ
Our GAAP book value increased $0.01 per share to $16.01 per share during the second quarter of 2019. This increase was primarily driven by GAAP net income covering our dividend and the net positive impact to valuations from spread tightening on certain available-for-sale securities in our investment portfolio, which increased comprehensive income (a component of equity). These increases were partially offset by a decrease in the value of derivatives hedging our long-term debt.
Ñ
The increase in book value per share in the second quarter of 2019, in combination with our $0.30 per share quarterly dividend, contributed to an economic return on book value(2) of 1.9% for the quarter.





_____________________
(1) A detailed rollforward of book value per share is included in Table 5 in the Financial Tables section of this Redwood Review.
(2)
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.

 
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Q U A R T E R L Y O V E R V I E W

Capital Allocations
We use a combination of equity and unsecured corporate debt (which we collectively refer to as “capital”) to fund our business.
Capital Allocation: By Source and By Business Use
(as of June 30, 2019)
q2capalloc2.jpg
Ñ
Our total capital of $2.3 billion at June 30, 2019 was comprised of $1.6 billion of equity capital and $0.8 billion of convertible notes and other long-term debt, including $201 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023, $200 million of convertible debt due in 2024, and $140 million of trust-preferred securities due in 2037, and has a weighted average cost of approximately 6.1%.
Ñ
We also utilize various forms of collateralized debt to finance certain investments and to warehouse our inventory of certain loans held-for-sale. We do not consider this collateralized debt as "capital" and, therefore, exclude it from our capital allocation analysis.
Ñ
The Balance Sheet Analysis portion of the Financial Insights section that follows describes our long-term and short-term borrowings in further detail.

 
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Q U A R T E R L Y O V E R V I E W

 
Capital Allocation Detail
By Investment Type
June 30, 2019
($ in millions)
 
GAAP Fair Value
 
Collateralized Debt
 
Allocated Capital
 
% of Total Capital
 
 
 
 
 
 
 
 
 
 
Residential loans (1)
$
2,486

 
$
(2,000
)
 
$
486

 
21%
 
 
 
 
 
 
 
 
 
 
Securities portfolio
 
 
 
 
 
 
 
 
Sequoia residential securities
476

 
(193
)
 
283

 
12%
 
Agency CRT securities
209

 
(26
)
 
182

 
8%
 
Multifamily securities
735

 
(575
)
 
160

 
7%
 
Re-performing residential loan securities (2)
407

 
(202
)
 
205

 
9%
 
Other third-party residential securities
319

 
(218
)
 
101

 
4%
 
Total securities portfolio (3)
2,145

 
(1,214
)
 
931

 
40%
 
 
 
 
 
 
 
 
 
 
Business purpose residential loans
159

 
(121
)
 
38

 
2%
 
Other investments
190

 
—

 
190

 
8%
 
Other assets/(liabilities)
(20
)
 
—

 
(20
)
 
(1)%
 
Cash and liquidity capital
 
 
 
 
517

 
N/A
 
 
 
 
 
 
 
 
 
 
Total Investments
$
4,961

 
$
(3,335
)
 
$
2,143

 
92%
 
 
 
 
 
 
 
 
 
 
Residential mortgage banking
 
 
 
 
130

 
6%
 
Business purpose mortgage banking
 
 
 
 
65

 
3%
 
 
 
 
 
 
 
 
 
 
Total Mortgage banking
 
 
 
 
$
195

 
8%
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
$
2,337

 
100%
 
(1)
Includes $43 million of FHLB stock, $49 million of cash and cash equivalents, and $7 million of restricted cash.
(2)
Re-performing residential loan securities represent third-party securities collateralized by seasoned re-performing residential loans.
(3)
In addition to our $1.5 billion of securities on our GAAP balance sheet, securities presented above also include $218 million, $243 million, and $207 million of securities retained from Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively. For GAAP purposes, we consolidate these securitizations.
Ñ
During the second quarter, our portfolio optimization activities resulted in a decrease in capital allocated to Agency CRT securities and other third-party residential securities from sales, as well as to multifamily securities resulting from incremental financing on these assets. Additionally, we increased capital allocations to re-performing residential loan securities.
Ñ
In the near-term, we expect to further increase capital allocated to multifamily securities, re-performing loan securities, and business purpose residential loans.
Ñ
As of June 30, 2019, our cash and liquidity capital included $200 million of available capital.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
16
 
Q U A R T E R L Y O V E R V I E W

2019 Updated Financial Outlook(1) 
Our overall financial performance in the first half of 2019 has exceeded the expectations we laid out in our fourth quarter 2018 Redwood Review and, incorporating our expectations for the second half of 2019, we currently anticipate our full year results will be towards the higher end, overall, of the original range we provided.
For the second half of 2019, we will continue to focus on key strategic initiatives to increase sustainable earnings - namely improving investment returns through portfolio optimization, implementing operational efficiencies to maintain strong returns on equity for our residential mortgage banking platform, and disciplined cost management to unlock operating leverage as we scale our business. The following are additional details on our expected activity in 2019:
For our investment portfolio
Ñ
Our investment portfolio returns through the end of the second quarter were near the high end of the 11-13% return on equity range previously provided, benefiting from higher gains associated with increased portfolio optimization activity. For the remainder of 2019, we expect gains to moderate, bringing expected returns for this portfolio for the full year within our original range of 11-13%. We expect to continue to allocate over 90% of our capital to portfolio investments through the remainder of 2019.
Ñ
Investment returns include an estimate of portfolio economic net interest income, interest expense on corporate debt capital, realized gains, direct operating expenses, and taxes.
For our residential mortgage banking platform
Ñ
Our residential mortgage banking platform had strong performance in the first half of 2019, generating a return on equity in excess of our previously disclosed range of mid to high teens. The outperformance was driven by gross margins above our long-term expectations of 75-100 basis points and strong volume growth in the second quarter. For the remainder of 2019, we expect gross margins to normalize and volume growth to stabilize, supporting full year results that we expect to be at the high-end or slightly above our previously disclosed return range. We are currently allocating 6% of our capital to this platform and continue to expect to allocate 5-6% of our capital to support this platform for the remainder of 2019.
Ñ
Mortgage banking returns include an estimate of loan purchase volume, gross margins, direct operating expenses, and taxes.
_____________________
(1)
As with all forward-looking statements, our forward-looking statements relating to our 2019 financial outlook are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K under the caption “Risk Factors” and other risks, uncertainties, and factors that could cause actual results to differ materially from those described above and under the heading "Forward-Looking Statements" in the Appendix to this Redwood Review, including those described in the “Forward-Looking Statements” at the beginning of this Redwood Review. Although we may update our 2019 financial outlook subsequently in 2019, as a general matter we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
17
 
Q U A R T E R L Y O V E R V I E W

For our business purpose mortgage banking platform
Ñ
During the first half of 2019 we focused our efforts on integrating 5 Arches into our business purpose lending platform and positioning it for future growth. For the remainder of 2019, we expect returns from this platform to improve, keeping our full-year returns in line with our original expectations. We expect to allocate around 3% of our capital to support this platform through the remainder of 2019. Additionally, we expect the platform to continue to provide new accretive investments for our investment portfolio, the anticipated returns on which are included in our investment portfolio outlook.
Ñ
Expected returns include an estimate of mortgage banking income (including origination points and fees), other income, direct operating expenses, and taxes. Return expectations exclude the same amounts excluded for core earnings related to the 5 Arches acquisition.
For our corporate overhead
Ñ
We continue to expect our baseline corporate operating expenses to be between $48 million and $50 million, with variable compensation commensurate with company performance.















 
THE REDWOOD REVIEW I 2ND QUARTER 2019
18
 
Q U A R T E R L Y O V E R V I E W

Balance Sheet Analysis
The following table presents our consolidated balance sheets at June 30, 2019 and March 31, 2019.
 
Consolidated Balance Sheets (1)
($ in millions)
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
Residential loans
$
7,283

 
$
7,274

 
Business purpose residential loans
251

 
161

 
Multifamily loans
3,750

 
2,176

 
Real estate securities
1,477

 
1,543

 
Other investments
372

 
414

 
Cash and cash equivalents
218

 
201

 
Other assets
500

 
424

 
 
 
 
 
 
Total assets
$
13,852

 
$
12,193

 
 
 
 
 
 
Short-term debt
 
 
 
 
Mortgage loan warehouse facilities
$
638

 
$
526

 
Business purpose mortgage loan warehouse facilities
174

 
106

 
Security repurchase facilities
1,214

 
1,081

 
Servicer advance financing
236

 
250

 
Convertible notes, net
200

 
200

 
Other liabilities
340

 
270

 
Asset-backed securities issued
 
 
 
 
Residential
3,370

 
3,590

 
Multifamily
3,543

 
2,047

 
Long-term debt, net
2,573

 
2,573

 
Total liabilities
12,288

 
10,643

 
 
 
 
 
 
Stockholders’ equity
1,564

 
1,550

 
 
 
 
 
 
Total liabilities and equity
$
13,852

 
$
12,193

 
(1)
Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to the primary beneficiary (Redwood Trust, Inc.). At June 30, 2019 and March 31, 2019, assets of consolidated VIEs totaled $7.9 billion and $6.6 billion, respectively, and liabilities of consolidated VIEs totaled $7.2 billion and $5.9 billion, respectively. See Table 10 in the Financial Tables section of this Redwood Review for additional detail on consolidated VIEs.
Ñ
Over the past several quarters, we have invested in several securitizations that we were required to consolidate under GAAP. See Table 9 in the Financial Tables section of this Redwood Review for additional information on these securitizations and other entities that we consolidate.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
19
 
Q U A R T E R L Y O V E R V I E W

Recourse Financing
We finance our business with a diversified mix of long-term and short-term recourse debt. The following charts present the composition of our recourse debt and its characteristics at the end of the second quarter:
q2recoursefina01.jpg
 
Borrowing Type
Average Cost of Funds
Average Remaining Term (yrs.)
 
 
 
FHLBC Borrowings
2.6%
6
Unsecured Corporate Debt
6.1%
6
Mortgage Warehouse
4.2%
<1
Securities Repurchase
3.6%
<1
 
 
 
Weighted Average Cost of Funds
3.7%
 
 
 
 

Ñ
Our unsecured corporate debt is comprised of $200 million of 5.625% convertible notes due in 2024, $245 million of 4.75% convertible notes due in 2023, $201 million of 5.625% exchangeable notes due in 2019, and $140 million of trust-preferred securities due in 2037 (that we hedge to yield approximately 6.9%).
Ñ
Our FHLBC borrowings and securities repurchase debt are used to finance our whole loan and securities investments, respectively, and we utilize mortgage warehouse facilities to finance our mortgage banking activities and investments in business purpose residential loans. These are discussed in further detail in the following sections.
Ñ
Our recourse debt to equity leverage ratio increased to 3.1x at the end of the second quarter from 2.9x at the end of the first quarter, primarily resulting from an increase in security repurchase debt, as we added financing on certain multifamily securities, and were also able to improve financing terms on our business purpose loan investments.
Ñ
In addition to our recourse financing, we have non-recourse ABS debt issued by securitization entities and other non-recourse short-term securitization debt that we consolidate.

_____________________
(1)
See Table 7 in the Financial Tables section of this Redwood Review for details of how our recourse debt to equity leverage ratio is calculated.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
20
 
Q U A R T E R L Y O V E R V I E W

Residential Loan Investments
Ñ
At June 30, 2019, we had $2.4 billion of residential loans held-for-investment. These loans are prime-quality, first lien jumbo loans, most of which were originated between 2013 and 2019. At June 30, 2019, 88% of these loans were fixed rate and the remainder were hybrid, and in aggregate, had a weighted average coupon of 4.16%.
Ñ
At June 30, 2019, the weighted average FICO score of borrowers backing these loans was 768 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 66% (at origination). At June 30, 2019, 0.05% of these loans (by unpaid principal balance) were more than 90 days delinquent.
Ñ
We finance our residential loan investments with $2.0 billion of variable-rate FHLB debt through our FHLB-member subsidiary. In connection with these borrowings, our FHLB-member subsidiary is required to hold $43 million of FHLB stock.
Ñ
We seek to minimize the interest rate risk in this portfolio by using a combination of swaps, TBAs, and other derivative instruments.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
21
 
Q U A R T E R L Y O V E R V I E W

Securities Portfolio
The following table presents the fair value of our real estate securities at June 30, 2019.
 
Securities Portfolio - By Source and Security Type
June 30, 2019
($ in millions)
 
Interest-Only Securities
 
Senior
 
Mezzanine
 
Subordinate
 
Total
 
% of Total Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sequoia (1)
$
62

 
$
—

 
$
232

 
$
182

 
$
476

 
22
%
 
Re-performing (2)
29

 
28

 
245

 
105

 
407

 
19
%
 
Agency CRT
—

 
—

 
—

 
209

 
209

 
10
%
 
Other third-party
—

 
121

 
111

 
86

 
318

 
15
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total residential securities
$
91

 
$
149

 
$
588

 
$
582

 
$
1,410

 
66
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily securities (3)
—

 
—

 
552

 
183

 
735

 
34
%
 
Total securities portfolio
$
91

 
$
149

 
$
1,140

 
$
765

 
$
2,145

 
100
%
 
(1)
Presents securities retained from our Sequoia securitizations that were issued from 2012 through 2019. These securities included $13 million of interest-only securities, $155 million of mezzanine securities, and $50 million of subordinate securities retained from our Sequoia Choice securitizations, which were consolidated for GAAP purposes.
(2)
Re-performing securities included $243 million of mezzanine and subordinate securities issued from an Agency residential securitization that is consolidated for GAAP purposes.
(3)
Multifamily securities included $24 million of mezzanine securities and $183 million of subordinate securities issued from Agency multifamily securitizations that are consolidated for GAAP purposes.
At June 30, 2019, our securities consisted of fixed-rate assets (87%), adjustable-rate assets (10%), hybrid assets that reset within the next year (2%), and hybrid assets that reset between 12 and 36 months (1%). For the portions of our securities portfolio that are sensitive to changes in interest rates, we seek to minimize this interest rate risk by using various derivative instruments.
We finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. At June 30, 2019, we had short-term debt incurred through repurchase facilities totaling $1.2 billion with 10 separate counterparties, which was secured by $1.5 billion of real estate securities. The remaining $643 million of securities were financed with capital.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
22
 
Q U A R T E R L Y O V E R V I E W

The following table presents the fair value of our real estate securities that are financed with repurchase debt, at June 30, 2019.
 
Real Estate Securities Financed with Repurchase Debt
June 30, 2019
($ in millions, except weighted average price)
 
Real Estate Securities (3)
 
Repurchase Debt
 
Allocated Capital
 
Weighted Average Price (1)
 
Financing Haircut (2)
 
 
 
 
 
 
 
 
 
 
 
 
Residential securities
 
 
 
 
 
 
 
 
 
 
Senior
$
149

 
$
(136
)
 
$
13

 
$
102

 
9
%
 
Mezzanine
569

 
(463
)
 
106

 
97

 
19
%
 
Subordinate
50

 
(41
)
 
9

 
97

 
18
%
 
Total residential securities
767

 
(640
)
 
128

 
 
 
 
 
Multifamily securities
735

 
(575
)
 
160

 
88

 
22
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,502

 
$
(1,214
)
 
$
288

 
$
93

 
19
%
 
(1)
GAAP fair value per $100 of principal.
(2)
Allocated capital divided by GAAP fair value.
(3)
Includes $148 million, $203 million, and $207 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively.     
Ñ
In addition to the allocated capital listed in the table above that directly supports our repurchase facilities (i.e., “the haircut”), we continue to hold a designated amount of supplemental risk capital available for potential margin calls or future obligations relating to these facilities.
Ñ
Additional information on the residential securities we own is set forth in Table 9 in the Financial Tables section of this Redwood Review.
Business Purpose Residential Loan Investments
Ñ
At June 30, 2019, our $159 million of business purpose residential loans held-for-investment were comprised of short-term, residential bridge loans, which were originated in 2018 and 2019.
Ñ
At June 30, 2019, the portfolio contained 274 loans with a weighted average coupon of 9.08% and a weighted average LTV ratio of 74% (at origination). At June 30, 2019, 11 of these loans with a cumulative unpaid principal balance and fair value of $12 million were more than 90 days delinquent. These delinquent loans had a weighted average LTV ratio of 85% (at origination), and we currently expect to recover the full carrying amount of these loans. Since June 30, 2019, two of these loans with a cumulative unpaid principal balance and fair value of $6 million were resolved with full repayment of principal, regular interest and expenses.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
23
 
Q U A R T E R L Y O V E R V I E W

Ñ
We finance our business purpose residential loan investments with warehouse debt that had a balance of $120 million at June 30, 2019.
Ñ
At June 30, 2019, our business purpose residential warehouse capacity for financing residential bridge loans totaled $330 million across four separate counterparties.
Other Investments
Ñ
At June 30, 2019, our other investments were primarily comprised of $259 million of servicer advance investments ($67 million of capital invested, net of non-recourse securitization debt collateralized by servicing-related assets), $47 million of MSRs retained from our Sequoia securitizations, $34 million of excess servicing investments, and a $29 million investment in a light-renovation multifamily loan fund.
Residential Loans Held-for-Sale
Ñ
At June 30, 2019, we had $1.1 billion of residential mortgages held-for-sale financed with $638 million of warehouse debt. These loans included $515 million of Select loans and $542 million of expanded-prime Choice loans.
Ñ
Our residential warehouse capacity at June 30, 2019 totaled $1.4 billion across four separate counterparties.
Ñ
At June 30, 2019, our pipeline of jumbo residential loans identified for purchase was $1.0 billion.
Ñ
We seek to minimize the exposure we have to interest rates on our loan pipeline (for loans both on balance sheet and identified for purchase) by using a combination of TBAs, interest rate swaps, and other derivative instruments.
Ñ
At June 30, 2019, we had 481 loan sellers, which included 186 jumbo sellers and 295 MPF Direct sellers from various FHLB districts.
Business Purpose Residential Loans Held-for-Sale
Ñ
At June 30, 2019, we had $92 million of business purpose residential loans held-for-sale that were financed with $54 million of short-term warehouse debt. All of these loans were collateralized by single-family rental properties.
Ñ
At June 30, 2019, the weighted average coupon on these loans was 5.54% and the LTV ratio was 66% (at origination).
Ñ
At June 30, 2019, our business purpose residential warehouse capacity for financing single-family rental loans totaled $400 million across two separate counterparties.
Ñ
We seek to minimize the exposure we have to interest rates on our business purpose loan pipeline by using interest rate swaps and other derivative instruments.

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
24
 
  G L O S S A R Y

a2019financialtablesdivi2.jpg

 
THE REDWOOD REVIEW I 2ND QUARTER 2019
25


rwtq12019appendixlogoa02.jpg
Table 1: GAAP Earnings (in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
 
Six Months 2019
 
Six Months 2018
 
Interest income
$
146,483

 
$
129,111

 
$
116,858

 
$
96,074

 
$
79,128

 
$
72,559

 
$
67,370

 
$
58,106


$
54,419

 
 
$
275,594

 
$
151,687

 
Discount amortization on securities, net
2,059

 
1,930

 
2,867

 
3,323

 
3,848

 
4,060

 
4,098

 
4,631

 
4,805

 
 
3,989

 
7,908

 
Total interest income
148,542

 
131,041

 
119,725

 
99,397

 
82,976

 
76,619

 
71,468

 
62,737

 
59,224

 
 
279,583

 
159,595

 
Interest expense on short-term debt
(21,141
)
 
(19,090
)
 
(16,567
)
 
(14,146
)
 
(12,666
)
 
(10,424
)
 
(9,841
)
 
(7,158
)
 
(6,563
)
 
 
(40,231
)
 
(23,090
)
 
Interest expense on short-term convertible notes (1)
(3,134
)
 
(3,128
)
 
(1,594
)
 
—

 
(509
)
 
(3,011
)
 
(3,025
)
 
(3,024
)
 
(2,787
)
 
 
(6,262
)
 
(3,520
)
 
Interest expense on ABS issued from consolidated trusts
(70,113
)
 
(55,295
)
 
(44,258
)
 
(27,421
)
 
(16,349
)
 
(11,401
)
 
(7,917
)
 
(3,956
)
 
(3,705
)
 
 
(125,408
)
 
(27,750
)
 
Interest expense on long-term debt
(21,832
)
 
(21,763
)
 
(22,542
)
 
(22,784
)
 
(18,689
)
 
(16,678
)
 
(15,325
)
 
(13,305
)
 
(11,179
)
 
 
(43,595
)
 
(35,367
)
 
Total interest expense
(116,220
)
 
(99,276
)
 
(84,961
)
 
(64,351
)
 
(48,213
)
 
(41,514
)
 
(36,108
)
 
(27,443
)
 
(24,234
)
 
 
(215,496
)
 
(89,727
)
 
Net interest income
32,322

 
31,765

 
34,764

 
35,046

 
34,763

 
35,105

 
35,360

 
35,294

 
34,990

 
 
64,087


69,868

 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Mortgage banking activities, net
19,160

 
12,309

 
11,170

 
11,224

 
10,596

 
26,576

 
3,058

 
21,200

 
12,046

 
 
31,469

 
37,172

 
Investment fair value changes, net
3,138

 
20,159

 
(38,519
)
 
10,332

 
889

 
1,609

 
384

 
324

 
8,115

 
 
23,297

 
2,498

 
Realized gains, net
2,827

 
10,686

 
5,689

 
7,275

 
4,714

 
9,363

 
4,546

 
1,734

 
1,372

 
 
13,513

 
14,077

 
Other income, net
2,407

 
3,587

 
3,981

 
3,453

 
3,322

 
2,118

 
2,963

 
2,812

 
3,764

 
 
5,994

 
5,440

 
Total non-interest income (loss), net
27,532

 
46,741

 
(17,679
)
 
32,284

 
19,521

 
39,666

 
10,951

 
26,070


25,297

 
 
74,273

 
59,187

 
Fixed compensation expense
(9,252
)
 
(8,205
)
 
(6,309
)
 
(5,922
)
 
(5,775
)
 
(6,439
)
 
(5,555
)
 
(5,233
)
 
(5,321
)
 
 
(17,457
)
 
(12,214
)
 
Variable compensation expense
(4,021
)
 
(4,402
)
 
(934
)
 
(4,923
)
 
(1,825
)
 
(6,907
)
 
(5,861
)
 
(6,467
)
 
(4,313
)
 
 
(8,423
)
 
(8,732
)
 
Equity compensation expense
(4,024
)
 
(2,953
)
 
(2,823
)
 
(3,033
)
 
(3,835
)
 
(2,697
)
 
(2,507
)
 
(2,337
)
 
(3,121
)
 
 
(6,977
)
 
(6,532
)
 
Loan acquisition costs
(1,516
)
 
(1,477
)
 
(1,837
)
 
(1,887
)
 
(2,155
)
 
(1,818
)
 
(1,625
)
 
(1,187
)
 
(1,005
)
 
 
(2,993
)
 
(3,973
)
 
Other operating expense
(7,442
)
 
(6,122
)
 
(7,350
)
 
(5,725
)
 
(5,419
)
 
(5,169
)
 
(4,819
)
 
(4,698
)
 
(4,881
)
 
 
(13,564
)
 
(10,588
)
 
Total operating expenses
(26,255
)
 
(23,159
)
 
(19,253
)
 
(21,490
)
 
(19,009
)
 
(23,030
)
 
(20,367
)
 
(19,922
)

(18,641
)
 
 
(49,414
)
 
(42,039
)
 
(Provision for) benefit from income taxes
(2,333
)
 
(883
)
 
1,255

 
(4,919
)
 
(2,528
)
 
(4,896
)
 
4,989

 
(5,262
)
 
(5,322
)
 
 
(3,216
)
 
(7,424
)
 
Net income (loss)
$
31,266

 
$
54,464

 
$
(913
)
 
$
40,921

 
$
32,747

 
$
46,845

 
$
30,933

 
$
36,180


$
36,324

 
 
$
85,730

 
$
79,592

 
Diluted average shares (2)
130,697

 
126,278

 
83,217

 
114,683

 
100,432

 
108,195

 
109,621

 
102,703

 
97,494

 
 
128,499
 
104,291
 
Diluted earnings (loss) per common share
$
0.30

 
$
0.49

 
$
(0.02
)
 
$
0.42

 
$
0.38

 
$
0.50

 
$
0.35

 
$
0.41

 
$
0.43

 
 
$
0.78

 
$
0.88

 

(1)
Represents interest expense on $201 million of exchangeable notes and $250 million of convertible notes, respectively, that were reclassified from Long-term debt to Short-term debt as the maturity of the notes was less than one year as of the dates presented. Convertible notes of $250 million were repaid in April 2018 and exchangeable notes of $201 million are due in November 2019.
(2)
Diluted average shares includes shares from the assumed conversion of our convertible and/or exchangeable debt in certain periods, in accordance with GAAP diluted EPS provisions. See Table 2 that follows for details of this calculation for the current and prior quarter and our respective Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K for prior periods.

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
    Table 1: GAAP Earnings  26


rwtq12019appendixlogoa02.jpg
Table 2: GAAP and Non-GAAP Core Basic and Diluted Earnings (1) per Common Share (in thousands, except per share data)
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
GAAP Earnings per Common Share ("EPS"):
 
 
 
 
Net income attributable to Redwood
$
31,266

 
$
54,464

 
Less: Dividends and undistributed earnings allocated to participating securities
(877
)
 
(1,539
)
 
Net income allocated to common shareholders for GAAP basic EPS
30,389

 
52,925

 
Incremental adjustment to dividends and undistributed earnings allocated to participating securities
(176
)
 
—

 
Add back: Interest expense on convertible notes for the period, net of tax (2)
8,698

 
8,687

 
Net income allocated to common shareholders for GAAP diluted EPS
$
38,911

 
$
61,612

 
 
 
 
 
 
Basic weighted average common shares outstanding
96,984

 
92,685

 
Net effect of dilutive equity awards
271

 
150

 
Net effect of assumed convertible notes conversion to common shares (2)
33,443

 
33,443

 
Diluted weighted average common shares outstanding
130,697

 
126,278

 
 
 
 
 
 
GAAP Basic Earnings per Common Share
$
0.31

 
$
0.57

 
GAAP Diluted Earnings per Common Share
$
0.30

 
$
0.49

 
 
 
 
 
 
Non-GAAP Core Earnings per Common Share:
 
 
 
 
Non-GAAP core earnings
$
43,030

 
$
38,022

 
Less: Dividends and undistributed earnings allocated to participating securities
(1,211
)
 
(1,074
)
 
Non-GAAP core earnings allocated to common shareholders for core basic EPS
41,819

 
36,948

 
Incremental adjustment to dividends and undistributed earnings allocated to participating securities
(92
)
 
(121
)
 
Add back: Interest expense on convertible notes for the period, net of tax (2)
8,698

 
8,687

 
Non-GAAP core earnings allocated to common shareholders for core diluted EPS
$
50,425

 
$
45,514

 
 
 
 
 
 
Basic weighted average common shares outstanding
96,984

 
92,685

 
Net effect of dilutive equity awards
271

 
150

 
Net effect of assumed convertible notes conversion to common shares (2)
33,443

 
33,443

 
Diluted weighted average common shares outstanding
130,698

 
126,278

 
 
 
 
 
 
Non-GAAP Core Basic Earnings per Common Share
$
0.43

 
$
0.40

 
Non-GAAP Core Diluted Earnings per Common Share
$
0.39

 
$
0.36

 
 
 
 
 
 
(1)
A reconciliation of GAAP net income to non-GAAP core earnings and a definition of core earnings is included in the Non-GAAP Measurements section of the Appendix.
(2)
Certain convertible notes were determined to be dilutive in the periods presented and were included in the calculations of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
    Table 2: GAAP and Non-GAAP Core Earnings per Basic and Diluted Common Share 27


rwtq12019appendixlogoa02.jpg
 Table 3: Segment Results ($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
Six
Months 2019
 
Six
Months 2018
 
Investment Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At Redwood
$
11,115

 
$
11,022

 
$
11,659

 
$
12,478

 
$
13,842

 
$
15,842

 
$
16,032

 
$
16,916

 
$
18,461

 
$
22,137

 
$
29,684

 
At consolidated Sequoia Choice entities
3,694

 
3,549

 
3,608

 
2,880

 
2,002

 
1,386

 
836

 
22

 
—

 
7,243

 
3,388

 
At consolidated Freddie Mac SLST entity
3,038

 
3,047

 
1,297

 
—

 
—

 
—

 
—

 
—

 
—

 
6,085

 
—

 
Business purpose residential loans
1,740

 
1,521

 
1,861

 
974

 
—

 
—

 
—

 
—

 
—

 
3,261

 
—

 
Residential securities
14,304

 
14,291

 
17,700

 
19,412

 
19,700

 
19,778

 
20,287

 
19,342

 
18,163

 
28,595

 
39,478

 
Multifamily and commercial investments
4,063

 
3,964

 
3,296

 
2,209

 
1,860

 
1,888

 
1,749

 
1,298

 
1,978

 
8,027

 
3,748

 
Other investments
182

 
171

 
913

 
751

 
161

 
—

 
—

 
—

 
—

 
353

 
161

 
Total net interest income
38,136

 
37,565

 
40,334

 
38,704

 
37,565

 
38,894

 
38,904

 
37,578

 
38,602

 
75,701

 
76,459

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment fair value changes, net
3,297

 
20,556

 
(38,449
)
 
10,566

 
1,600

 
1,590

 
4,568

 
1,372

 
9,115

 
23,853

 
3,190

 
Other income, net
2,874

 
1,221

 
3,659

 
3,334

 
3,322

 
2,118

 
2,963

 
2,812

 
3,764

 
4,095

 
5,440

 
Realized gains
2,827

 
10,686

 
5,689

 
7,275

 
4,714

 
9,363

 
4,546

 
1,734

 
2,124

 
13,513

 
14,077

 
Total non-interest income, net
8,998

 
32,463

 
(29,101
)
 
21,175

 
9,636

 
13,071

 
12,077

 
5,918

 
15,003

 
41,461


22,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
(2,258
)
 
(2,661
)
 
(3,833
)
 
(2,659
)
 
(1,858
)
 
(2,007
)
 
(1,657
)
 
(1,324
)
 
(1,454
)
 
(4,919
)

(3,865
)
 
(Provision for) benefit from income taxes
(896
)
 
(342
)
 
1,117

 
(2,840
)
 
(1,130
)
 
(888
)
 
(838
)
 
(433
)
 
(2,320
)
 
(1,238
)

(2,018
)
 
Segment contribution
$
43,980

 
$
67,025

 
$
8,517

 
$
54,380

 
$
44,213

 
$
49,070

 
$
48,486

 
$
41,739

 
$
49,831

 
$
111,005


$
93,283

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
4,757

 
$
4,813

 
$
5,015

 
$
6,890

 
$
5,455

 
$
6,760

 
$
6,887

 
$
6,491

 
$
4,012

 
$
9,570


$
12,215

 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking activities
19,160

 
12,309

 
11,170

 
11,224

 
10,596

 
26,576

 
3,058

 
21,200

 
12,046

 
31,469

 
37,172

 
Other income (expense), net
(156
)
 
(167
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(323
)
 
—

 
Total non-interest income, net
19,004

 
12,142

 
11,170

 
11,224

 
10,596

 
26,576

 
3,058

 
21,200

 
12,046

 
31,146

 
37,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
(11,571
)
 
(8,104
)
 
(7,231
)
 
(6,570
)
 
(5,739
)
 
(8,632
)
 
(7,104
)
 
(6,107
)
 
(6,021
)
 
(19,675
)
 
(14,371
)
 
Benefit from (provision for) income taxes
(1,437
)
 
(541
)
 
138

 
(2,079
)
 
(1,398
)
 
(4,008
)
 
5,827

 
(4,829
)
 
(3,002
)
 
(1,978
)
 
(5,406
)
 
Segment contribution
$
10,753

 
$
8,310

 
$
9,092

 
$
9,465

 
$
8,914

 
$
20,696

 
$
8,668

 
$
16,755

 
$
7,035

 
$
19,063

 
$
29,610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate/other
(23,467
)
 
(20,871
)
 
(18,522
)
 
(22,924
)
 
(20,380
)
 
(22,921
)
 
(26,221
)
 
(22,314
)
 
(20,542
)
 
(44,338
)
 
(43,301
)
 
GAAP net income (loss)
$
31,266

 
$
54,464

 
$
(913
)
 
$
40,921

 
$
32,747

 
$
46,845

 
$
30,933

 
$
36,180

 
$
36,324

 
$
85,730

 
$
79,592

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
  Table 3: Segment Results  28

rwtq12019appendixlogoa02.jpg
Table 4: Segment Assets and Liabilities ($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
March 31, 2019
 
 
 
 
Investment Portfolio
 
Mortgage Banking
 
Corporate/ Other
 
Total
 
 
Investment Portfolio
 
Mortgage Banking
 
Corporate/ Other
 
Total
 
Residential loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At Redwood
 
$
2,395,314

 
$
1,047,856

 
$
—

 
$
3,443,170

 
 
$
2,427,018

 
$
797,073

 
$
—

 
$
3,224,091

 
At consolidated Sequoia entities
 
2,147,356

 
—

 
457,750

 
2,605,106

 
 
2,333,248

 
—

 
488,645

 
2,821,893

 
At consolidated Freddie Mac SLST entity
 
1,235,089

 
—

 
—

 
1,235,089

 
 
1,228,317

 
—

 
—

 
1,228,317

 
Business purpose residential loans
 
159,353

 
91,501

 
—

 
250,854

 
 
103,916

 
56,696

 
—

 
160,612

 
Multifamily loans at consolidated entities
 
3,749,657

 
—

 
—

 
3,749,657

 
 
2,175,899

 
—

 
—

 
2,175,899

 
Real estate securities
 
1,477,486

 
—

 
—

 
1,477,486

 
 
1,543,152

 
—

 
—

 
1,543,152

 
Other investments
 
369,900

 
2,230

 
—

 
372,130

 
 
411,853

 
2,345

 
—

 
414,198

 
Cash and cash equivalents
 
66,263

 
8,444

 
143,438

 
218,145

 
 
45,263

 
1,530

 
154,044

 
200,837

 
Other assets
 
190,001

 
75,086

 
234,862

 
499,949

 
 
175,613

 
84,952

 
163,795

 
424,360

 
Total assets
 
$
11,790,419

 
$
1,225,117


$
836,050

 
$
13,851,586

 
 
$
10,444,279

 
$
942,596


$
806,484

 
$
12,193,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan warehouse debt
 
$
—

 
$
638,055

 
$
—

 
$
638,055

 
 
$
—

 
$
526,341

 
$
—

 
$
526,341

 
Security repurchase facilities
 
1,213,920

 
—

 
—

 
1,213,920

 
 
1,081,079

 
—

 
—

 
1,081,079

 
Business purpose residential loan warehouse facilities
 
120,445

 
53,998

 
—

 
174,443

 
 
61,593

 
44,736

 
—

 
106,329

 
Servicer advance financing
 
236,231

 
—

 
—

 
236,231

 
 
249,557

 
—

 
—

 
249,557

 
Convertible notes, net
 
—

 
—

 
200,236

 
200,236

 
 
—

 
—

 
199,925

 
199,925

 
Other liabilities
 
182,390

 
29,897

 
126,080

 
338,367

 
 
127,221

 
30,626

 
112,049

 
269,896

 
ABS issued
 
6,464,267

 
—

 
448,862

 
6,913,129

 
 
5,157,645

 
—

 
479,999

 
5,637,644

 
Long-term debt, net
 
1,999,999

 
—

 
573,174

 
2,573,173

 
 
1,999,999

 
—

 
572,662

 
2,572,661

 
Total liabilities
 
$
10,217,252


$
721,950


$
1,348,352


$
12,287,554

 
 
$
8,677,094

 
$
601,703

 
$
1,364,635

 
$
10,643,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


THE REDWOOD REVIEW I 2ND QUARTER 2019
 
   Table 4: Segment Assets and Liabilities  29

rwtq12019appendixlogoa02.jpg
 Table 5: Changes in Book Value per Share ($ in per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
Six
Months 2019
 
Six
Months 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning book value per share
$
16.00

 
$
15.89

 
$
16.42

 
$
16.23

 
$
16.12

 
$
15.83

 
$
15.67

 
$
15.29

 
$
15.13

 
$
15.89

 
$
15.83

 
Earnings
0.30

 
0.49

 
(0.02
)
 
0.42

 
0.38

 
0.50

 
0.35

 
0.41

 
0.43

 
0.78

 
0.88

 
Changes in unrealized gains on securities, net, from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
Realized gains recognized in earnings
(0.02
)
 
(0.08
)
 
(0.07
)
 
(0.05
)
 
(0.05
)
 
(0.09
)
 
(0.03
)
 
(0.03
)
 
(0.02
)
 
(0.10
)
 
(0.14
)
 
Amortization income recognized in earnings
(0.02
)
 
(0.02
)
 
(0.03
)
 
(0.03
)
 
(0.04
)
 
(0.04
)
 
(0.04
)
 
(0.05
)
 
(0.05
)
 
(0.03
)
 
(0.08
)
 
Mark-to-market adjustments, net
0.11

 
0.10

 
0.06

 
0.01

 
0.01

 
—

 
0.12

 
0.27

 
0.09

 
0.21

 
0.01

 
Total change in unrealized gains on securities, net
0.07

 
—

 
(0.04
)
 
(0.07
)
 
(0.08
)
 
(0.13
)
 
0.05

 
0.19

 
0.02

 
0.08

 
(0.21
)
 
Dividends
(0.30
)
 
(0.30
)
 
(0.30
)
 
(0.30
)
 
(0.30
)
 
(0.28
)
 
(0.28
)
 
(0.28
)
 
(0.28
)
 
(0.60
)

(0.58
)
 
Issuance of common stock
—

 
(0.05
)
 
—

 
0.01

 
—

 
—

 
—

 
—

 
—

 
(0.05
)
 
—

 
Share repurchases
—

 
—

 
—

 
—

 
—

 
0.01

 
—

 
—

 
—

 
—

 
0.01

 
Equity compensation, net
0.02

 
(0.02
)
 
(0.07
)
 
0.03

 
0.03

 
0.03

 
(0.02
)
 
0.02

 
—

 
0.01

 
0.06

 
Changes in unrealized losses on derivatives hedging long-term debt
(0.10
)
 
(0.06
)
 
(0.09
)
 
0.06

 
0.05

 
0.11

 
0.02

 
—

 
(0.03
)
 
(0.17
)
 
0.16

 
Other, net
0.02

 
0.05

 
(0.01
)
 
0.04

 
0.03

 
0.05

 
0.04

 
0.04

 
0.02

 
0.07

 
0.08

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
Ending book value per share
$
16.01

 
$
16.00

 
$
15.89

 
$
16.42

 
$
16.23

 
$
16.12

 
$
15.83

 
$
15.67

 
$
15.29

 
$
16.01

 
$
16.23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Economic return on book value (1)
1.9
%
 
2.6
%
 
(1.4
)%
 
3.0
%
 
2.5
%
 
3.6
%
 
2.8
%
 
4.3
%
 
2.9
%
 
4.5
%
 
6.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.



THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 5: Changes in Book Value per Share  30


rwtq12019appendixlogoa02.jpg
Table 6: Taxable and GAAP Income (1) Differences and Dividends (In thousands, except for per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Six Months 2019 (2)
 
Estimated Twelve Months 2018 (2)
 
Actual Twelve Months 2017 (2)
 
 
 
Taxable
Income
 
GAAP
 Income
 
Differences
 
Taxable
Income
 
GAAP
Income
 
Differences
 
Taxable
Income
 
GAAP
 Income
 
Differences
 
Taxable and GAAP Income Differences
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
151,207

     
$
279,583

 
$
(128,376
)
 
$
265,753

     
$
378,717

 
$
(112,964
)
 
$
225,079

     
$
248,057

 
$
(22,978
)
 
Interest expense
(90,171
)
 
(215,496
)
 
125,325

 
(139,588
)
 
(239,039
)
 
99,451

 
(89,662
)
 
(108,816
)
 
19,154

 
Net interest income
61,036

 
64,087

 
(3,051
)
 
126,165

 
139,678

 
(13,513
)
 
135,417

 
139,241

 
(3,824
)
 
Realized credit losses
(580
)
 
—

 
(580
)
 
(1,738
)
 
—

 
(1,738
)
 
(3,442
)
 
—

 
(3,442
)
 
Mortgage banking activities, net
29,976

 
31,469

 
(1,493
)
 
57,297

 
59,566

 
(2,269
)
 
44,143

 
53,908

 
(9,765
)
 
Investment fair value changes, net
950

 
23,297

 
(22,347
)
 
4,995

 
(25,689
)
 
30,684

 
(11,191
)
 
10,374

 
(21,565
)
 
Operating expenses
(47,027
)
 
(49,414
)
 
2,387

 
(78,890
)
 
(82,782
)
 
3,892

 
(73,203
)
 
(77,156
)
 
3,953

 
Other income (expense), net
9,744

 
5,994

 
3,750

 
17,254

 
12,874

 
4,380

 
31,325

 
12,436

 
18,889

 
Realized gains, net
22,534

 
13,513

 
9,021

 
43,099

 
27,041

 
16,058

 
(736
)
 
13,355

 
(14,091
)
 
(Provision for) benefit from income taxes
(267
)
 
(3,216
)
 
2,949

 
(534
)
 
(11,088
)
 
10,554

 
(516
)
 
(11,752
)
 
11,236

 
Income
$
76,366

 
$
85,730

 
$
(9,364
)
 
$
167,648

 
$
119,600

 
$
48,048

 
$
121,797

 
$
140,406

 
$
(18,609
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REIT taxable income
$
53,322

 
 
 
 
 
$
110,092

 
 
 
 
 
$
90,122

 
 
 
 
 
Taxable income at taxable subsidiaries
23,044

 
 
 
 
 
57,556

 
 
 
 
 
31,675

 
 
 
 
 
Taxable income
$
76,366

 
 
 
 
 
$
167,648

 
 
 
 
 
$
121,797

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used for taxable EPS calculation
97,715

 
 
 
 
 
84,884

 
 
 
 
 
76,600

 
 
 
 
 
REIT taxable income per share
$
0.55

 
 
 
 
 
$
1.38

 
 
 
 
 
$
1.17

 
 
 
 
 
Taxable income (loss) per share at taxable subsidiaries
$
0.24

 
 
 
 
 
$
0.74

 
 
 
 
 
$
0.42

 
 
 
 
 
Taxable income per share (3)
$
0.79

 
 
 
 
 
$
2.12

 
 
 
 
 
$
1.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
$
58,304

 
 
 
 
 
$
94,134

 
 
 
 
 
$
86,271

 
 
 
 
 
Dividends per share (4)
$
0.60

 
 
 
 
 
$
1.18

 
 
 
 
 
$
1.12

 
 
 
 
 
(1)
Taxable income for 2018 and 2019 are estimates until we file our tax returns for these years. To the extent we expect to pay tax at the corporate level (generally as a result of activity at our taxable REIT subsidiaries), we are required to record a tax provision for GAAP reporting purposes. Any tax provision (or benefit) is not necessarily the actual amount of tax currently due (or receivable as a refund) as a portion of our provision (or benefit) is deferred in nature. It is our intention to retain any excess inclusion income generated in 2019 at our TRS and not pass it through to our shareholders.
(2)
Reconciliation of GAAP income to taxable income (loss) for prior quarters is provided in the respective Redwood Reviews for those quarters.
(3)
Taxable income (loss) per share is based on the number of shares outstanding at the end of each quarter. The annual taxable income (loss) per share is the sum of the quarterly per share estimates.
(4)
Dividends in 2018 are expected to be characterized as 69% ordinary dividend income (or $65 million) and 31% long-term capital gain dividend income (or $29 million). Dividends in 2017 were characterized as 71% ordinary dividend income (or $61 million) and 29% qualified dividend income (or $25 million).

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 6: Taxable and GAAP Income Differences and Dividends  31


rwtq12019appendixlogoa02.jpg
 Table 7: Financial Ratios and Book Value ($ in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
Six
Months 2019
 
Six
Months 2018
 
Financial performance ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
32,322

 
$
31,765

 
$
34,764

 
$
35,046

 
$
34,763

 
$
35,105

 
$
35,360

 
$
35,294

 
$
34,990

 
$
64,087

 
$
69,868

 
Operating expenses
$
(26,255
)
 
$
(23,159
)
 
$
(19,253
)
 
$
(21,490
)
 
$
(19,009
)
 
$
(23,030
)
 
$
(20,367
)
 
$
(19,922
)
 
$
(18,641
)
 
$
(49,414
)
 
$
(42,039
)
 
GAAP net income
$
31,266

 
$
54,464

 
$
(913
)
 
$
40,921

 
$
32,747

 
$
46,845

 
$
30,933

 
$
36,180

 
$
36,324

 
$
85,730

 
$
79,592

 
Average total assets
$
13,596,337

 
$
11,795,343

 
$
10,163,283

 
$
8,503,749

 
$
7,134,026

 
$
6,922,611

 
$
6,652,937

 
$
5,851,133

 
$
5,685,460

 
$
12,700,815

 
$
7,028,903

 
Average total equity
$
1,556,850

 
$
1,452,282

 
$
1,342,967

 
$
1,331,497

 
$
1,226,735

 
$
1,218,015

 
$
1,207,879

 
$
1,189,540

 
$
1,167,438

 
$
1,504,855

 
$
1,222,399

 
Operating expenses / total capital
4.49
%
 
3.99
%
 
3.63
 %
 
4.03
%
 
3.80
%
 
5.13
%
 
4.56
%
 
4.47
%
 
4.22
%
 
4.23
%
 
4.21
%
 
Operating expenses / average total equity
6.75
%
 
6.38
%
 
5.73
 %
 
6.46
%
 
6.20
%
 
7.56
%

6.74
%
 
6.70
%
 
6.39
%
 
6.57
%
 
6.88
%
 
GAAP net income / average equity (GAAP ROE)
8.03
%
 
15.00
%
 
(0.27
)%
 
12.29
%
 
10.68
%
 
15.38
%

10.24
%
 
12.17
%
 
12.45
%
 
11.39
%
 
13.02
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage ratios and book value per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
2,227,183

 
$
1,914,514

 
$
2,138,686

 
$
1,424,275

 
$
1,426,288

 
$
1,504,460

 
$
1,938,682

 
$
1,238,196

 
$
1,294,807

 
 
 
 
 
Long-term debt – Other
2,584,499

 
2,584,499

 
2,584,499

 
2,785,264

 
2,785,264

 
2,585,264

 
2,585,264

 
2,585,264

 
2,340,264

 
 
 
 
 
Total debt at Redwood 
$
4,811,682

 
$
4,499,013

 
$
4,723,185

 
$
4,209,539

 
$
4,211,552

 
$
4,089,724


$
4,523,946

 
$
3,823,460

 
$
3,635,071

 
 
 
 
 
At consolidated securitization entities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ABS issued
6,913,129

 
5,637,644

 
5,410,073

 
3,406,985

 
1,929,662

 
1,542,087

 
1,164,585

 
944,288

 
692,606

 
 
 
 
 
Non-recourse short-term debt
237,363

 
251,875

 
265,637

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
Total ABS and non-recourse short-term debt
$
7,150,492

 
$
5,889,519

 
$
5,675,710

 
$
3,406,985

 
$
1,929,662

 
$
1,542,087


$
1,164,585

 
$
944,288

 
$
692,606

 
 
 
 
 
Consolidated debt (1)
$
11,962,174

 
$
10,388,532

 
$
10,398,895

 
$
7,616,524

 
$
6,141,214

 
$
5,631,811


$
5,688,531

 
$
4,767,748

 
$
4,327,677

 
 
 
 
 
Stockholders' equity
$
1,564,032

 
$
1,549,927

 
$
1,348,794

 
$
1,361,327

 
$
1,228,955

 
$
1,219,983

 
$
1,212,287

 
$
1,208,640

 
$
1,179,424

 
 
 
 
 
Total capital (2)
$
2,337,442

 
$
2,322,515

 
$
2,120,572

 
$
2,132,298

 
$
1,999,177

 
$
1,795,572

 
$
1,787,701

 
$
1,783,301

 
$
1,765,784

 
 
 
 
 
Recourse debt at Redwood to stockholders' equity (3)
3.1x

 
2.9x

 
3.5x

 
3.1x

 
3.4x

 
3.4x

 
3.7x

 
3.2x

 
3.1x

 
 
 
 
 
Consolidated debt to stockholders' equity
7.6x

 
6.7x

 
7.7x

 
5.6x

 
5.0x

 
4.6x

 
4.7x

 
3.9x

 
3.7x

 
 
 
 
 
Shares outstanding at period end (in thousands)
97,715

 
96,866

 
84,884

 
82,930

 
75,743

 
75,703

 
76,600

 
77,123

 
77,117

 
 
 
 
 
Book value per share
$
16.01

 
$
16.00

 
$
15.89

 
$
16.42

 
$
16.23

 
$
16.12

 
$
15.83

 
$
15.67

 
$
15.29

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Amounts presented in Consolidated debt above do not include deferred issuance costs or debt discounts.
(2)
Our total capital of $2.3 billion at June 30, 2019 included $1.6 billion of equity capital and $0.8 billion of unsecured corporate debt.
(3)
Excludes ABS issued and non-recourse debt at consolidated entities. See Table 10 for additional detail on our ABS issued and short-term debt at consolidated entities.

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 7: Financial Ratios and Book Value  32




rwtq12019appendixlogoa02.jpg
 Table 8: Loans and Securities Activity ($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
Six
Months
2019
 
Six
Months
2018
 
Residential Loans, Held-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning carrying value
$
819,221

 
$
1,048,801

 
$
866,444

 
$
1,104,660

 
$
1,130,185

 
$
1,427,945

 
$
925,681

 
$
837,371

 
$
376,607

 
$
1,048,801

 
$
1,427,945

 
Acquisitions
1,561,752

 
982,929

 
1,562,573

 
1,804,125

 
1,951,566

 
1,815,294

 
1,950,180

 
1,462,116

 
1,221,051

 
2,544,681

 
3,766,860

 
Sales
(1,252,416
)
 
(833,078
)
 
(1,290,337
)
 
(1,133,078
)
 
(1,408,358
)
 
(1,594,531
)
 
(834,977
)
 
(1,393,323
)
 
(694,875
)
 
(2,085,494
)
 
(3,002,889
)
 
Principal repayments
(32,401
)
 
(17,425
)
 
(14,862
)
 
(21,198
)
 
(14,612
)
 
(17,017
)
 
(14,771
)
 
(16,436
)
 
(9,273
)
 
(49,826
)
 
(31,629
)
 
Transfers between portfolios
(43,250
)
 
(366,672
)
 
(81,639
)
 
(896,129
)
 
(561,710
)
 
(507,616
)
 
(601,554
)
 
20,025

 
(61,922
)
 
(409,922
)
 
(1,069,326
)
 
Changes in fair value, net
3,381

 
4,666

 
6,622

 
8,064

 
7,589

 
6,110

 
3,386

 
15,928

 
5,783

 
8,047

 
13,699

 
Ending fair value
$
1,056,287

 
$
819,221

 
$
1,048,801

 
$
866,444

 
$
1,104,660

 
$
1,130,185

 
$
1,427,945

 
$
925,681

 
$
837,371

 
$
1,056,287

 
$
1,104,660

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Loans, HFI at Redwood  (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning carrying value
$
2,404,870

 
$
2,383,932

 
$
2,320,662

 
$
2,313,336

 
$
2,375,785

 
$
2,434,386

 
$
2,268,802

 
$
2,360,234

 
$
2,350,013

 
$
2,383,932

 
$
2,434,386

 
Acquisitions
—

 
39,269

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
39,269

 
—

 
Sales
(2,780
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,780
)
 
—

 
Principal repayments
(94,005
)
 
(63,583
)
 
(59,854
)
 
(76,144
)
 
(79,375
)
 
(74,954
)
 
(93,916
)
 
(74,530
)
 
(60,055
)
 
(157,588
)
 
(154,329
)
 
Transfers between portfolios
43,250

 
17,144

 
81,639

 
100,533

 
31,936

 
55,775

 
273,994

 
(20,045
)
 
61,922

 
60,394

 
87,711

 
Changes in fair value, net
35,548

 
28,108

 
41,485

 
(17,063
)
 
(15,010
)
 
(39,422
)
 
(14,494
)
 
3,143

 
8,354

 
63,656

 
(54,432
)
 
Ending fair value
$
2,386,883

 
$
2,404,870

 
$
2,383,932

 
$
2,320,662

 
$
2,313,336

 
$
2,375,785

 
$
2,434,386

 
$
2,268,802

 
$
2,360,234

 
$
2,386,883

 
$
2,313,336

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Purpose Residential Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning carrying value
$
160,612

 
$
141,258

 
$
115,620

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
141,258

 
$
—

 
Originations
134,133

 
35,968

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
170,101

 
—

 
Acquisitions
—

 
29,093

 
41,563

 
126,214

 
—

 
—

 
—

 
—

 
—

 
29,093

 
—

 
Sales
(22,811
)
 
(20,590
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(43,401
)
 
—

 
Principal repayments
(22,939
)
 
(20,992
)
 
(16,469
)
 
(10,912
)
 
—

 
—

 
—

 
—

 
—

 
(43,931
)
 
—

 
Transfers between portfolios
—

 
(4,996
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,996
)
 
—

 
Changes in fair value, net
1,859

 
871

 
544

 
318

 
—

 
—

 
—

 
—

 
—

 
2,730

 
—

 
Ending fair value
$
250,854

 
$
160,612

 
$
141,258

 
$
115,620

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
250,854

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning fair value
$
1,543,152

 
$
1,452,494

 
1,470,084

 
$
1,453,936

 
$
1,357,720

 
$
1,476,510

 
$
1,356,272

 
$
1,218,503

 
$
1,165,940

 
$
1,452,494

 
$
1,476,510

 
Acquisitions
91,960

 
157,472

 
132,457

 
161,534

 
223,022

 
144,465

 
204,733

 
188,138

 
116,860

 
249,432

 
367,487

 
Sales
(164,372
)
 
(67,358
)
 
(109,782
)
 
(106,972
)
 
(103,685
)
 
(234,509
)
 
(75,887
)
 
(47,076
)
 
(69,676
)
 
(231,730
)
 
(338,194
)
 
Effect of principal repayments
(13,953
)
 
(19,356
)
 
(22,562
)
 
(26,571
)
 
(17,022
)
 
(15,707
)
 
(21,503
)
 
(19,497
)
 
(15,854
)
 
(33,309
)
 
(32,729
)
 
Transfers between portfolios
(4,951
)
 
—

 
(6,090
)
 
(11,091
)
 
—

 
—

 
—

 
—

 
—

 
(4,951
)
 
—

 
Change in fair value, net
25,650

 
19,900

 
(11,613
)
 
(752
)
 
(6,099
)
 
(13,039
)
 
12,895

 
16,204

 
21,233

 
45,550

 
(19,138
)
 
Ending fair value
$
1,477,486

 
$
1,543,152

 
$
1,452,494

 
$
1,470,084

 
$
1,453,936

 
$
1,357,720

 
$
1,476,510

 
$
1,356,272

 
$
1,218,503

 
$
1,477,486

 
$
1,453,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Amounts presented include loans held-for-investment at Redwood that are financed at FHLB and exclude loans from consolidated securitization entities.

THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 8: Loans and Securities Activity  33


rwtq12019appendixlogoa02.jpg
 Table 9: Investment Portfolio Detailed Balances ($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
Q2
 
2019
Q1
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
Residential Loans Held-for-Investment at Redwood
$
2,386,883

 
$
2,404,870

 
$
2,383,932

 
$
2,320,662

 
$
2,313,336

 
$
2,375,785

 
$
2,434,386

 
$
2,268,802

 
$
2,360,234

 
Business Purpose (Residential Bridge) Loans Held-for-Investment
159,353

 
103,916

 
112,798

 
95,515

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities with Sub-Categories
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior - New Issue
76,923

 
79,389

 
48,553

 
48,076

 
49,099

 
—

 
—

 
—

 
—

 
Senior - Legacy
44,467

 
47,755

 
87,615

 
114,628

 
147,490

 
165,610

 
179,863

 
192,265

 
201,667

 
Senior - IO
49,019

 
57,542

 
62,601

 
64,673

 
64,018

 
53,957

 
38,990

 
40,671

 
35,529

 
Mezzanine - New issue
187,947

 
238,685

 
207,124

 
210,110

 
221,586

 
210,567

 
325,162

 
328,659

 
331,045

 
Subordinate - New issue
205,074

 
197,845

 
202,646

 
251,655

 
232,047

 
208,417

 
224,581

 
209,554

 
195,039

 
Subordinate - Agency CRT
208,603

 
274,112

 
276,894

 
235,720

 
239,767

 
245,654

 
300,713

 
286,780

 
229,510

 
Subordinate - Legacy
13,986

 
15,163

 
15,993

 
16,255

 
17,950

 
19,707

 
22,586

 
26,920

 
30,333

 
Re-performing
163,545

 
120,415

 
121,989

 
111,713

 
83,194

 
76,800

 
60,590

 
28,352

 
25,071

 
Multifamily (mezzanine)
527,922

 
512,246

 
429,079

 
417,254

 
398,785

 
377,008

 
324,025

 
243,071

 
170,309

 
Total Securities on Balance Sheet
1,477,486

 
1,543,152

 
1,452,494

 
1,470,084

 
1,453,936

 
1,357,720

 
1,476,510

 
1,356,272

 
1,218,503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sequoia Choice Securities (1)
217,912

 
215,892

 
194,372

 
194,739

 
133,718

 
87,381

 
77,922

 
30,975

 
—

 
Freddie Mac SLST Securities (1)
243,323

 
235,285

 
228,921

 
—

 
—

 
—

 
—

 
—

 
—

 
Freddie Mac K-Series Securities (1)
206,600

 
128,642

 
125,523

 
66,559

 
—

 
—

 
—

 
—

 
—

 
Adjusted Total Securities
2,145,321

 
2,122,971

 
2,001,310

 
1,731,382

 
1,587,654

 
1,445,101

 
1,554,432

 
1,387,247

 
1,218,503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer Advance Investments
259,222

 
303,920

 
300,468

 
—

 
—

 
—

 
—

 
—

 
—

 
Mortgage Servicing Rights
47,396

 
55,284

 
60,281

 
63,785

 
64,674

 
66,496

 
63,598

 
62,928

 
63,770

 
Excess MSRs
33,620

 
28,992

 
27,312

 
—

 
—

 
—

 
—

 
—

 
—

 
Investment in Multifamily Loan Fund
28,678

 
22,416

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
Other
3,214

 
3,586

 
50,457

 
49,991

 
52,631

 
—

 
—

 
—

 
—

 
Total earning assets
$
5,063,687

 
$
5,045,955

 
$
4,936,558

 
$
4,261,335

 
$
4,018,295

 
$
3,887,382

 
$
4,052,416

 
$
3,718,977

 
$
3,642,507

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents securities retained from our consolidated Sequoia Choice securitizations and securities owned in consolidated Freddie Mac SLST and Freddie Mac K-Series securitizations.


THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 9: Investment Portfolio Detailed Balances  34



rwtq12019appendixlogoa02.jpg
 Table 10: Consolidating Balance Sheet ($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
March 31, 2019
 
 
 
 
Consolidated VIEs (1)
 
 
 
 
 
Consolidated VIEs (1)
 
 
 
 
At
Redwood (1)
 
Legacy Sequoia
 
Sequoia Choice
 
Freddie Mac SLST
 
Freddie Mac
K-Series
 
Servicing Investment
 
Redwood
Consolidated
 
At
Redwood (1)
 
Legacy Sequoia
 
Sequoia Choice
 
Freddie Mac SLST
 
Freddie Mac
K-Series
 
Servicing Investment
 
Redwood
Consolidated
 
Residential loans
$
3,443,170

 
$
457,750

 
$
2,147,356

 
$
1,235,089

 
$
—

 
$
—

 
$
7,283,365

 
$
3,224,091

 
$
488,645

 
$
2,333,248

 
$
1,228,317

 
$
—

 
$
—

 
$
7,274,301

 
Business purpose residential loans
250,854

 
—

 
—

 
—

 
—

 
—

 
250,854

 
160,612

 
—

 
—

 
—

 
—

 
—

 
160,612

 
Multifamily loans
—

 
—

 
—

 
—

 
3,749,657

 
—

 
3,749,657

 
—

 
—

 
—

 
—

 
2,175,899

 
—

 
2,175,899

 
Real estate securities
1,477,486

 
—

 
—

 
—

 
—

 
—

 
1,477,486

 
1,543,152

 
—

 
—

 
—

 
—

 
—

 
1,543,152

 
Other investments
97,513

 
—

 
—

 
—

 
 
 
274,617

 
372,130

 
95,521

 
—

 
—

 
—

 
 
 
318,677

 
414,198

 
Cash and cash equivalents
198,752

 
—

 
—

 
—

 
—

 
19,393

 
218,145

 
189,462

 
—

 
—

 
—

 
—

 
11,375

 
200,837

 
Other assets (2)
446,126

 
2,363


8,960

 
3,786

 
11,317

 
27,397

 
499,949

 
394,640

 
3,202

 
9,630

 
3,861

 
6,587

 
6,440

 
424,360

 
Total assets
$
5,913,901

 
$
460,113

 
$
2,156,316

 
$
1,238,875

 
$
3,760,974

 
$
321,407

 
$
13,851,586

 
$
5,607,478

 
$
491,847

 
$
2,342,878

 
$
1,232,178

 
$
2,182,486

 
$
336,492

 
$
12,193,359

 
Short-term debt
$
2,226,654

 
$
—

 
$
—

 
$
—

 
$
—

 
$
236,231

 
$
2,462,885

 
$
1,913,674

 
$
—

 
$
—

 
$
—

 
$
—

 
$
249,557

 
$
2,163,231

 
Other liabilities
298,641

 
519


7,336

 
2,774

 
10,822

 
18,275

 
338,367

 
231,420

 
531

 
7,868

 
2,846

 
6,230

 
21,001

 
269,896

 
ABS issued
—

 
448,862

 
1,929,444

 
991,766

 
3,543,057

 
—

 
6,913,129

 
—

 
479,999

 
2,117,356

 
993,032

 
2,047,257

 
—

 
5,637,644

 
Long-term debt, net
2,573,173

 
—

 
—

 
—

 
—

 
—

 
2,573,173

 
2,572,661

 
—

 
—

 
—

 
—

 
—

 
2,572,661

 
Total liabilities
5,098,468

 
449,381

 
1,936,780

 
994,540

 
3,553,879

 
254,506

 
12,287,554

 
4,717,755

 
480,530

 
2,125,224

 
995,878

 
2,053,487

 
270,558

 
10,643,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
815,433

 
10,732


219,536

 
244,335

 
207,095

 
66,901

 
1,564,032

 
889,723

 
11,317

 
217,654

 
236,300

 
128,999

 
65,934

 
1,549,927

 
Total liabilities and equity
$
5,913,901

 
$
460,113


$
2,156,316

 
$
1,238,875

 
$
3,760,974

 
$
321,407

 
$
13,851,586

 
$
5,607,478

 
$
491,847

 
$
2,342,878

 
$
1,232,178

 
$
2,182,486

 
$
336,492

 
$
12,193,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The format of this consolidating balance sheet is provided to more clearly delineate between the assets belonging to consolidated securitization entities that we are required to consolidate on our balance sheet in accordance with GAAP, but which are not legally ours, and the liabilities of these consolidated entities, which are payable only from the cash flows generated by their assets and are, therefore, non-recourse to us, and the assets that are legally ours and the liabilities of ours for which there is recourse to us.
(2)
At both June 30, 2019 and March 31, 2019, other assets at Redwood included a total of $43 million of assets held by third-party custodians and pledged as collateral to the GSEs in connection with credit risk-sharing arrangements relating to conforming residential loans. These pledged assets can only be used to settle obligations to the GSEs under these risk-sharing arrangements.



THE REDWOOD REVIEW I 2ND QUARTER 2019
 
Table 10: Consolidating Balance Sheet  35


a2019appendixdividerpage2.jpg

 
  D I V I D E N D S


Dividends
Summary
As a REIT, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute.
Dividends Overview
In recent years, our Board of Directors has maintained a practice of paying regular quarterly dividends in excess of the amount required to comply with the provisions of the Internal Revenue Code applicable to REITs. In May 2019, the Board of Directors declared a regular dividend of $0.30 per share for the second quarter of 2019, which was paid on June 28, 2019 to shareholders of record on June 14, 2019.
Dividend Distribution Requirement
Our estimated REIT taxable income was $25 million, or $0.25 per share, for the second quarter of 2019 and $29 million, or $0.30 per share, for the first quarter of 2019. Under normal circumstances, our minimum REIT dividend requirement would be 90% of our annual REIT taxable income. However, we currently maintain a $39 million federal net operating loss carry forward (NOL) at the REIT that affords us the option of retaining REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered. It is possible our estimated REIT taxable income will exceed our dividend distributions in 2019; therefore, we may utilize a portion of our NOL in 2019 and any remaining amount will carry forward into 2020.
Income Tax Characterization of Dividend for Shareholders
We currently expect all or nearly all of the distributions to shareholders in 2019 will be taxable as dividend income and a smaller portion, if any, will be a return of capital, which is generally non-taxable. Additionally, a portion of our 2019 dividend distributions are expected to be characterized as long-term capital gains for federal income tax purposes.
Beginning in 2018, the Tax Cuts and Jobs Act provides that individual taxpayers may generally deduct 20% of their ordinary REIT dividends from taxable income. This results in a maximum federal effective tax rate of 29.6% on an individual taxpayer's ordinary REIT dividends, compared to the highest marginal rate of 37%. This deduction does not apply to REIT dividends classified as qualified dividend income or long-term capital gain dividends, as those dividends are taxed at a maximum rate of 20% for individuals.

 
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Information about our non-GAAP financial measures is provided in this Appendix, which supplements the descriptions and information about these non-GAAP financial measures that is set forth in previous sections of this Redwood Review. In addition, this Appendix provides reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures to the extent those reconciliations are not otherwise set forth in the previous sections of this Redwood Review or in the Financial Tables in the Appendix to this Redwood Review.
What is Core Earnings?
Core earnings is a non-GAAP measure of Redwood’s earnings and results of operations. Specifically, management has defined core earnings as: GAAP net income adjusted to (i) eliminate the impact of quarterly mark-to-market changes on the fair value of long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads, (ii) include the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any gains or losses from derivatives associated with the investments sold, and (iii) include the hypothetical income taxes associated with core earnings adjustments.
In addition, beginning with the first quarter of 2019, management has also excluded from core earnings several items related to our acquisition of 5 Arches. These items include: the exclusion of a one-time gain in the first quarter of 2019 associated with the re-measurement of our initial minority investment and purchase option in 5 Arches; ongoing adjustments to exclude amortization of intangible assets acquired in the 5 Arches transaction; and, beginning in the second quarter of 2019, changes in fair value of the contingent consideration liability related to the remaining purchase consideration for the 5 Arches platform.
What are the Core Earnings adjustments that relate to “eliminating the impact of quarterly mark-to-market changes on the fair value of long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads”?
Under GAAP there are quarterly mark-to-market changes in the value of our long-term investments in loans, trading securities, and other investments accounted for under the fair value option, as well as the associated derivatives, that result from changes in benchmark interest rates and credit spreads and which may not be reflective of the total return management would expect to earn from them over the longer-term. These mark-to-market changes, to the extent they do not reflect a change in basis or net interest paid or received on hedges, are eliminated from GAAP net income when management calculates Core Earnings.
Beginning with the first quarter of 2019, management updated its calculation of this adjustment for certain investments accounted for under the fair value option that have significant differences between expected cash interest and expected yield-to-maturity. For these assets management does not eliminate mark-to-market changes in value that are attributable to a change in basis from the expected receipt of future cash flows.

 
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•
Investments impacted by this change include certain multifamily mezzanine securities and B-pieces, residential securities relating to re-performing residential loans, our servicer advance investment and related excess spread investment, and beginning in the second quarter of 2019, we also included certain subordinate securities.
•
This change has been introduced because there is an increasing amount of these types of investments in Redwood’s portfolio and management believes this change represents a more precise method of eliminating mark-to-market changes in the value of these assets which may not be reflective of the total return management would expect to earn from them over the longer-term.
What are the Core Earnings adjustments that relate to “including the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any gains or losses from derivatives associated with the investments sold”?
The core earnings adjustments to include cumulative net gains or losses from the sale of trading securities is to ensure that core earnings presents consistently the impact of the sales of investments regardless of whether they are accounted for under GAAP as (i) trading securities or (ii) available-for-sale securities, as outlined below.
•
Under GAAP, available-for-sale securities are reported at their fair value with periodic changes in fair value recognized through the balance sheet in Shareholders’ equity. When an available-for-sale security is sold, the cumulative gain or loss since purchase is recognized through the income statement, in Realized gains, net, in the period the sale occurred. As a result, any such cumulative gains or losses are reflected in core earnings in the period the sale occurred.
•
Under GAAP, trading securities are reported at their fair value with periodic changes in fair value recognized through the income statement in Investment fair value changes, net. Certain of these periodic changes in fair value (as described above) are excluded from core earnings. Core earnings includes an adjustment to include the cumulative net gains or losses (from purchase through the sale of the investment) for sold trading securities in the period they are sold. The result is to consistently present within core earnings the cumulative gains or losses from the sale of long-term investments, regardless of how they are accounted for under GAAP.
What are the Core Earnings adjustments that relate to Redwood’s acquisition of 5 Arches?
The adjustments related to our acquisition of 5 Arches, which was completed during the first quarter 2019, include the elimination of the one-time gain associated with the re-measurement of our initial minority investment and purchase option in 5 Arches and an ongoing adjustment to exclude amortization of intangible assets. Additionally, beginning in the second quarter of 2019, we exclude from our calculation of core earnings changes in the fair value of the contingent consideration liability related to the remaining purchase consideration for the 5 Arches platform.

 
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What are the Core Earnings adjustments that relate to “including the hypothetical income taxes associated with core earnings adjustments”?
Core earnings also includes adjustments to show the hypothetical tax provision or benefit that would be associated with the core earnings adjustments made to net income. As a REIT, we are subject to income taxes on earnings generated at our taxable REIT subsidiaries (TRS) and generally not subject to income taxes on earnings generated at the REIT (to the extent we distribute our REIT taxable income as dividends). In order to present the hypothetical income taxes associated with core earnings adjustments made to net income, estimated effective tax rates are applied to the core earnings adjustments occurring within our TRS.
Why does management believe that Core Earnings provides useful information to investors in Redwood? How does management use Core Earnings to analyze Redwood’s performance?
Management utilizes this core earnings measure internally as one way of analyzing Redwood’s performance over multiple periods, as management believes it provides useful comparative results absent the impact of certain quarterly mark-to-market changes on investments held through the end of the period presented that may not be reflective of the total return management would expect to earn from them over the longer term, and inclusive of all realized gains and losses from securities sales, regardless of accounting designations.
In addition, management believes that it is useful for Core Earnings to be a measure of Redwood‘s performance that eliminates the impact of several items related to our acquisition of 5 Arches that management believes may not be reflective of the underlying performance of Redwood’s ongoing operations (and which, therefore, may not be reflective of their impact over the longer-term).
Has the definition of Core Earnings changed since Redwood previously published its Core Earnings? If so, has Redwood adjusted its presentation of past period Core Earnings to reflect the updated definition?
As noted above, beginning with the first quarter of 2019, management changed its definition of core earnings to exclude from core earnings several items related to our acquisition of 5 Arches. In addition, and as also noted above, beginning with the first quarter of 2019 management updated its calculation for eliminating the impact of quarterly mark-to-market changes on the fair value of long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads for certain types of investments, including certain investments accounted for under the fair value option that have significant differences between expected cash interest and expected yield-to-maturity.
For consistency of presentation, to the extent core earnings for any period prior to the first quarter of 2019 is republished or represented, management will adjust the prior presentation of core earnings for that prior period to reflect the updated calculation methodology. For example, core earnings for the final three quarters of 2018 are republished in this Redwood Review and, accordingly, have been updated to reflect the impact of this change during those quarters.

 
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The following table presents a reconciliation of GAAP net income to non-GAAP core earnings for the second and first quarters of 2019.
 
Reconciliation of Non-GAAP Core Earnings
($ in millions)
 
Three Months Ended June 30, 2019
 
 
GAAP
 
Adjustments
 
Non-GAAP
 
 
 
 
 
 
 
 
Net interest income
$
32

 
$
1

 
$
34

 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
Mortgage banking activities, net
19

 
—

 
19

 
Investment fair value changes, net (1)
3

 
(3
)
 
—

 
Other income, net (2)
2

 
2

 
4

 
Realized gains, net (3)
3

 
13

 
16

 
Total non-interest income, net
27

 
12

 
40

 
 
 
 
 
 
 
 
Operating expenses
(26
)
 
—

 
(26
)
 
Provision for income taxes (4)
(2
)
 
(2
)
 
(4
)
 
 
 
 
 
 
 
 
GAAP Net Income/Non-GAAP Core Earnings
$
31

 
$
12

 
$
43

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
GAAP
 
Adjustments
 
Non-GAAP
 
 
 
 
 
 
 
 
Net interest income
$
32

 
$
4

 
$
36

 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
Mortgage banking activities, net
12

 
—

 
12

 
Investment fair value changes, net (1)
20

 
(20
)
 
—

 
Other income, net (2)
4

 
(2
)
 
2

 
Realized gains, net (3)
11

 
1

 
12

 
Total non-interest income, net
47

 
(20
)
 
26

 
 
 
 
 
 
 
 
Operating expenses
(23
)
 
—

 
(23
)
 
Provision for income taxes (4)
(1
)
 
(1
)
 
(1
)
 
 
 
 
 
 
 
 
GAAP Net Income/Non-GAAP Core Earnings
$
54

 
$
(16
)
 
$
38

 
(1)
References in this Redwood Review to core investment fair value changes, net refer to GAAP investment fair value changes, net as adjusted by the amount described in the "Adjustments" column, as further described above under the heading "What is Core Earnings?"
(2)
References in this Redwood Review to core other income net, refer to GAAP other income, net as adjusted by the amount described in the "Adjustments" column, as further described above under the heading "What is Core Earnings?"
(3)
References in this Redwood Review to core realized gains, net refer to GAAP realized gains, net as adjusted by the amount described in the "Adjustments" column, as further described above under the heading "What is Core Earnings?"
(4)
References in this Redwood Review to core provision for income taxes refer to GAAP provision for income taxes as adjusted by the amount described in the "Adjustments" column, as further described above under the heading "What is Core Earnings?"



 
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What are the following non-GAAP measures?
•
Core other income, net
•
Core realized gains, net
•
Core provision for income taxes
Where can I find more information about them?
All three of these non-GAAP measures correspond with line items in our income statement that are adjusted in connection with calculating core earnings as described above. Each of these three non-GAAP measures is included in the “Reconciliation of Non-GAAP Core Earnings” table above, along with a reconciliation to the most directly comparable GAAP financial measures.
What is Core Segment Contribution?
For our Investment Portfolio segment, we calculate non-GAAP core segment contribution in a manner consistent with management's definition of core earnings, as described above. Core segment contribution for our Investment Portfolio segment reflects GAAP segment contribution for our Investment Portfolio segment adjusted to reflect the portion of core earnings adjustments allocable to this segment and is shown and reconciled to GAAP segment contribution for our Investment Portfolio segment on page 10.
How are basic and diluted Core Earnings per share calculated? Where is a reconciliation of basic and diluted Core Earnings per share to basic and diluted earnings per share calculated in accordance with GAAP?
We use core earnings as described above to calculate basic and diluted core earnings per share. To calculate these measures, we follow the same methodology for calculating basic and diluted earnings per share for GAAP, but substitute core earnings for GAAP earnings in the calculation. A detailed presentation of these calculations is presented in Table 2 of the Financial Tables section of the Appendix to this Redwood Review.
What factors should be considered when comparing non-GAAP Core Earnings (and related non-GAAP measures) to GAAP financial measures?
We caution that core earnings, core other income, core realized gains, core provision for income taxes, core segment contribution, and core earnings per share should not be utilized in isolation, nor should they be considered as alternatives to GAAP net income, GAAP other income, GAAP realized gains, GAAP provision for income taxes, GAAP segment contribution, GAAP net income per share, or other measurements of results of operations computed in accordance with GAAP.

 
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What supplemental information about Core Earnings is helpful to understand?
The following table presents the components of investment fair value changes, net, of our Investment Portfolio segment that are included and excluded from core earnings, by investment type, for the second and first quarters of 2019.
 
Components of Investment Portfolio Fair Value Changes, Net
by Investment Type
($ in millions)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
Market valuation changes on:
 
 
 
 
Residential loans held-for-investment at fair value
 
 
 
 
Change in fair value from the reduction in basis (1)
$
(1
)
 
$
—

 
Other fair value changes (2)
37

 
29

 
Total change in fair value of residential loans held-for-investment
36

 
28

 
 
 
 
 
 
Real estate securities classified as trading
 
 
 
 
Change in fair value from the reduction in basis (1)
1

 
2

 
Other fair value changes (2)
31

 
33

 
Total change in fair value of real estate securities
32

 
35

 
 
 
 
 
 
Risk management derivatives
 
 
 
 
Interest component of hedges (3)
1

 
3

 
Other fair value changes (4)
(66
)
 
(45
)
 
Total change in fair value of risk management derivatives
(65
)
 
(42
)
 
 
 
 
 
 
Total investment portfolio fair value changes, net
$
3

 
$
21

 
(1)
Reflects the change in fair value due to principal changes, which is calculated as the change in principal on a given investment during the period, multiplied by the amount that the prior quarter ending price or acquisition price for that investment is above or below par in percentage terms or for certain securities, the change in fair value reflecting the expected receipt of cash flows.
(2)
Reflects changes in prepayment assumptions and credit spreads on our residential loans, trading securities and conforming risk-sharing investments primarily due to changes in benchmark interest rates. This item is excluded from management's definition of core earnings.
(3)
Reflects the net interest paid or received on hedges associated with fair value investments.
(4)
Reflects the change in fair value of our risk management derivatives that are associated with changes in benchmark interest rates during the period. This item is excluded from management's definition of core earnings.
What is Economic Net Interest Income?
Economic net interest income is a non-GAAP measure of Redwood’s net interest income. Management has defined economic net interest income as GAAP net interest income adjusted to (i) include the change in basis for fair value investments (including loans held-for-investment at fair value and real estate securities classified as trading, among others) and (ii) include net interest received or paid on hedges associated with fair value investments.

 
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What are the Economic Net Interest Income adjustments that relate to “including the change in basis for fair value investments (including loans held-for-investment at fair value and real estate securities classified as trading, among others)”?
For loans or securities that are carried at a fair value above or below their par value, any receipt of principal (or associated change in underlying notional principal) during the period results in a realization of the premium or discount to par (the “change in basis”) that affects yield. We also treat as a “change in basis” the periodic changes in net present value reflecting the expected receipt of cash flows on certain types of investments, including principal-only securities and investments that do not generally receive cash flows until maturity. We include these “change in basis” amounts in economic net interest income as we view them similarly to discount accretion or premium amortization on an available-for-sale security, which is incorporated into interest income when calculating an effective yield.
What are the Economic Net Interest Income adjustments that relate to “including net interest received or paid on hedges associated with fair value investments”?
Many of our investments pay a fixed rate of interest and are financed with floating rate debt. As interest rates rise, net interest income for these investments decreases. However, if these investments are hedged with swaps or other derivative instruments, there is an offsetting change in the net interest received or paid on the associated hedge. By including the net interest of associated hedges in economic net interest income, it allows us to better assess our hedge-adjusted returns for investments we hedge.
Why does management believe that Economic Net Interest Income provides useful information to investors in Redwood? How does management use Economic Net Interest Income to analyze Redwood’s performance?
Management utilizes economic net interest income internally as an additional metric to analyze the performance of its investments, as it believes it presents a more comprehensive view of an investment’s current return, by including the impact of hedges it uses to manage interest rate risk on an investment and also including the change in basis of an investment that factors into its economic yield.
Has the definition of Economic Net Interest Income changed since Redwood previously published its Economic Net Interest Income? If so, has Redwood adjusted it presentation of past period Economic Net Interest Income to reflect the updated definition?
Beginning with the first quarter of 2019, management updated its calculation of the change in basis to include the periodic changes in net present value reflecting the expected receipt of cash flows on certain types of investments, including investments accounted for under the fair value option that have significant differences between expected cash interest and expected yield-to-maturity. (This change is consistent with the updated calculation, described above, of our core earnings adjustment for mark-to-market changes on these types of investments.)


 
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•
Investments impacted by this change include certain multifamily mezzanine securities and B-pieces, residential securities relating to re-performing residential loans, our servicer advance investment and related excess spread investment, and beginning in the second quarter of 2019, we also included certain subordinate securities accounted for under the fair value option. As noted above, these investments are principal-only securities and investments that do not generally receive cash flows until maturity.
•
This change has been introduced because there is an increasing amount of these types of investments in Redwood’s portfolio and management believes this change represents a more precise method of determining the impact that this aspect of the change in basis for these fair value investments should have on economic net interest income.
As noted above with respect to core earnings, for consistency of presentation, to the extent economic net interest income for any period prior to the first quarter of 2019 is republished or represented, management will adjust the prior presentation of economic net interest income for that prior period to reflect the updated calculation methodology.
The following table presents a reconciliation of GAAP net interest income to non-GAAP economic net interest income for the second and first quarters of 2019.
 
Reconciliation to Non-GAAP Economic Net Interest Income
($ in millions)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
Net interest income
$
32

 
$
32

 
 
 
 
 
 
Adjustments
 
 
 
 
Change in basis of fair value investments
—

 
2

 
Interest component of hedges
1

 
3

 
 
 
 
 
 
Non-GAAP economic net interest income
$
34

 
$
36

 
Consistent with the methodology described above, we also calculate economic net interest income for our Investment Portfolio segment, which is shown and reconciled to GAAP net interest income for our Investment Portfolio segment on page 10.
What factors should be considered when comparing non-GAAP Economic Net Interest Income to GAAP net interest income?
We caution that economic net interest income should not be utilized in isolation, nor should it be considered as an alternative to GAAP net interest income.

 
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N O N - G A A P M E A S U R E M E N T S

What are non-GAAP Other Fair Value Changes, Net and Core Investment Fair Value Changes, Net? What are the adjustments made to GAAP Investment Fair Value Changes, Net to calculate these non-GAAP measures?
Other fair value changes, net and core investment fair value changes, net are non-GAAP measures of Redwood’s investment fair value changes, net.
•
Non-GAAP other fair value changes, net represents GAAP investment fair value changes, net, adjusted to exclude the amount of fair value changes that are included in non-GAAP economic net interest income, as described above. Effectively, this amount of fair value changes is excluded from investment fair value changes, net and included with net interest income to calculate economic net interest income.
•
Core investment fair value changes, net represents non-GAAP other fair value changes, net, adjusted to exclude the component of mark-to-market changes on long-term investments and associated derivatives that were not otherwise included in the adjustment to arrive at non-GAAP other fair value changes, net.
Why does management calculate non-GAAP Other Fair Value Changes, Net and Core Investment Fair Value Changes, Net? How are these two non-GAAP measures used by management?
Both of these measures are used in, and result from, the calculation of economic net interest income and our Investment Portfolio segment’s economic net interest income. As a result, they are calculated and used for the same reasons, as described above, that management calculates and uses economic net interest income.

 
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The following table presents a reconciliation of GAAP investment fair value changes, net to non-GAAP other fair value changes, net and non-GAAP core investment fair value changes, net, in each case for the second and first quarters of 2019.
 
Reconciliation to Non-GAAP Other Fair Value Changes, Net and
Non-GAAP Core Investment Fair Value Changes, Net
($ in millions)
 
Three Months Ended
 
 
6/30/2019
 
3/31/2019
 
 
 
 
 
 
Investment fair value changes, net
$
3

 
$
20

 
 
 
 
 
 
Adjustments
 
 
 
 
Change in basis of fair value investments
—

 
(2
)
 
Interest component of hedges
(1
)
 
(3
)
 
 
 
 
 
 
Non-GAAP Other Fair Value Changes, Net
$
2

 
$
16

 
Core adjustments
 
 
 
 
Eliminate mark-to-market changes on long-term investments and associated derivatives
(2
)
 
(16
)
 
Non-GAAP Core Investment Fair Value Changes, Net
$
—

 
$
—

 

What factors should be considered when comparing Non-GAAP Other Fair Value Changes, Net and Core Investment Fair Value Changes, Net to GAAP investment fair value changes, net?
We caution that neither non-GAAP other fair value changes, net nor core investment fair value changes, net should be utilized in isolation, nor should either of them be considered as an alternative to GAAP investment fair value changes, net.


 
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As noted above under the heading “Forward-Looking Statements,” this Redwood Review 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, goals, 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 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 forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood’s business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay higher sustainable dividends in the future, and the prospects for federal housing finance reform); (ii) statements related to our financial outlook and expectations for 2019, including with respect to: 2019 GAAP earnings, our investment portfolio (including target return on equity, expectations regarding realized gains associated with portfolio optimization, and target capital allocation), residential mortgage banking activities (including target return on equity, expectations regarding gross margins and volume growth, and target capital allocation), business purpose mortgage banking activities (including target return on equity, target capital allocation, and expectations regarding the creation of new accretive investments for our investment portfolio), and corporate operating expenses; (iii) statements related to our investment portfolio, including our long-term goals to deploy capital and build our investment portfolio, our expectations to increase capital allocated to multifamily securities, re-performing loan securities, and business purpose residential loans, and our expectations to fund the remainder of our commitment to a light-renovation multifamily loan fund over the next few quarters; (iv) statements related to our business purpose mortgage banking platform, including our focus on originations that reflect superior risk-adjusted returns, including single-family rental loans and further development of small-balance multifamily and other bridge loans keyed around rental demand, the market opportunity that we continue to see as plentiful, and our expectations to continue ramping this platform throughout 2019; (v) statements relating to the potential for regulatory reform, including the expiration of the “QM Patch” and shifting GSE market share to the private sector, and positioning Redwood to capitalize on resulting opportunities; (vi) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan

 
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to purchase, including the amount of such loans that we identified for purchase during the second quarter of 2019 and at June 30, 2019, and expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (vii) statements regarding business purpose loan originations, loans funded, and associated funding commitments, (viii) statements relating to our estimate of our available capital (including that we estimate our available capital at June 30, 2019 was approximately $200 million, and that we believe this capital, along with additional capital from continued portfolio optimization, should be sufficient to meet our near-term capital needs); (ix) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2019; and (x) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.
Important factors, among others, that may affect our actual results include:
•
the pace at which we redeploy our available capital into new investments and initiatives;    
•
our ability to scale our platform and systems, particularly with respect to our new initiatives;
•
interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
•
changes in the demand from investors for residential mortgages and investments, and our ability to distribute residential mortgages through our whole-loan distribution channel;    
•
our ability to finance our investments in securities and our acquisition of residential mortgages with short-term debt;
•
changes in the values of assets we own;
•
general economic trends, the performance of the housing, real estate, mortgage, credit, and broader financial markets, and their effects on the prices of earning assets and the credit status of borrowers;
•
federal and state legislative and regulatory developments, and the actions of governmental authorities, including the new U.S. presidential administration, and in particular those affecting the mortgage industry or our business (including, but not limited to, the Federal Housing Finance Agency’s rules relating to FHLB membership requirements and the implications for our captive insurance subsidiary’s membership in the FHLB);
•
strategic business and capital deployment decisions we make;
•
developments related to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;
•
our exposure to credit risk and the timing of credit losses within our portfolio;
•
the concentration of the credit risks we are exposed to, including due to the structure of assets we hold and the geographical concentration of real estate underlying assets we own;
•
our exposure to adjustable-rate mortgage loans;
•
the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;

 
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•
changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
•
changes in interest rates;
•
changes in mortgage prepayment rates;
•
changes in liquidity in the market for real estate securities and loans;
•
our ability to finance the acquisition of real estate-related assets with short-term debt;
•
the ability of counterparties to satisfy their obligations to us;
•
our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;
•
exposure to claims and litigation, including litigation arising from our involvement in securitization transactions;
•
ongoing litigation against various trustees of RMBS transactions;
•
whether we have sufficient liquid assets to meet short-term needs;
•
our ability to successfully compete and retain or attract key personnel;
•
our ability to adapt our business model and strategies to changing circumstances;
•
changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;
•
our exposure to a disruption or breach of the security of our technology infrastructure and systems;
•
exposure to environmental liabilities;
•
our failure to comply with applicable laws and regulations;
•
our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•
the impact on our reputation that could result from our actions or omissions or from those of others; changes in accounting principles and tax rules;
•
our ability to maintain our status as a REIT for tax purposes;
•
limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
•
decisions about raising, managing, and distributing capital; and
•
other factors not presently identified.




 
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