T A B L E O F C O N T E N T S |
Introduction | |
Shareholder Letter | |
Quarterly Results | |
Ñ Fourth Quarter Highlights | |
Ñ New Segment Overview | |
Ñ Quarterly Earnings and Analysis | |
Ñ Book Value and Economic Return | |
Ñ Return Contribution Analysis | |
Ñ Segment Results | |
Quarterly Positions | |
Ñ Capital Allocations | |
Ñ Leverage | |
Ñ Credit | |
Financial Tables | |
Appendix | |
Ñ CoreVest Acquisition | |
Ñ Dividends and Taxable Income | |
Ñ Non-GAAP Measurements | |
Ñ Forward-Looking Statements | |
Endnotes |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
1 |
I N T R O D U C T I O N |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
2 |
S H A R E H O L D E R L E T T E R |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
3 |
S H A R E H O L D E R L E T T E R |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
4 |
S H A R E H O L D E R L E T T E R |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
5 |
S H A R E H O L D E R L E T T E R |
Christopher J. Abate | Dashiell I. Robinson | |
Chief Executive Officer | President |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
6 |
Q U A R T E R L Y R E S U L T S |
Key Financial Results and Metrics | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Earnings per Share | $ | 0.38 | $ | 0.31 | ||||
Core Earnings per Share (non-GAAP) | $ | 0.45 | $ | 0.37 | ||||
Return on Equity | 10.9 | % | 8.6 | % | ||||
Core Return on Equity (non-GAAP) | 13.6 | % | 10.9 | % | ||||
Book Value per Share | $ | 15.98 | $ | 15.92 | ||||
Dividend per Share | $ | 0.30 | $ | 0.30 | ||||
Economic Return on Book Value (1) | 2.3 | % | 1.3 | % | ||||
Recourse Leverage Ratio (2) | 3.1x | 2.7x | ||||||
Ñ | The acquisition of CoreVest in October 2019 contributed to strong overall results for the quarter, as its origination platform helped drive strong mortgage banking income, and capital deployed into business purpose loan ("BPL") investments drove higher net interest income. Our results were also bolstered by strong performance from our residential mortgage banking platform, which saw increased volume and margins during the quarter, as well as improved returns on our investments from portfolio optimization. |
Ñ | Our fourth quarter results contributed to an increase in book value of $0.06 per share and an economic return on book value of 2.3% for the quarter. Excluding acquisition-related items(3), which negatively impacted book value by $0.11 per share, our economic return on book value was 3.0%. |
Ñ | On February 27, 2020, we announced a 6.7% increase to our regular quarterly dividend to shareholders to $0.32 per share for the first quarter of 2020. |
Ñ | We deployed $634 million of capital during the fourth quarter, inclusive of the acquisition of CoreVest's operating platform and related financial assets. Total transaction consideration for CoreVest was $492 million, net of in-place financing (see the Appendix for additional details). |
Ñ | We purchased $1.8 billion and sold $2.2 billion of residential jumbo loans during the fourth quarter, both through whole loans sales and two securitizations. At December 31, 2019, our pipeline of jumbo residential loans identified for purchase was $1.8 billion. |
Ñ | We originated $750 million of business purpose loans across the CoreVest and 5 Arches platforms, including $435 million of single-family rental ("SFR") loans and $315 million of bridge loans. We sold $395 million of SFR loans through one securitization, Redwood's first SFR securitization since the acquisition of CoreVest, and CoreVest's 10th overall. |
Ñ | Leverage increased modestly during the fourth quarter, as we deployed capital into the CoreVest acquisition that we had accumulated through the prior quarter-end. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
7 |
Q U A R T E R L Y R E S U L T S |
Prior Segments | New Segments | |
Mortgage Banking | Residential Lending | |
Residential Mortgage Banking | Residential Mortgage Banking | |
Business Purpose Mortgage Banking | Residential Lending Investments | |
Investment Portfolio | Business Purpose Lending | |
Residential Lending Investments (Redwood Created) | Business Purpose Mortgage Banking | |
Business Purpose Lending Investments | Business Purpose Lending Investments | |
Multifamily Investments | ||
Third-Party Residential Investments | Multifamily Investments | |
Third-Party Residential Investments | ||
Ñ | Refer to the Capital Allocations section later in this document for additional details on the capital allocations and investments within each of our segments. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
8 |
Q U A R T E R L Y R E S U L T S |
GAAP Net Income and Non-GAAP Core Earnings | ||||||||||||||||
($ in millions, except per share data) | ||||||||||||||||
Three Months Ended | ||||||||||||||||
12/31/2019 | 9/30/2019 | 12/31/2019 | 9/30/2019 | |||||||||||||
GAAP | GAAP | Core | Core | |||||||||||||
Net interest income | ||||||||||||||||
From investments | $ | 38 | $ | 28 | $ | 28 | $ | 25 | ||||||||
From mortgage banking activities | 7 | 6 | 7 | 6 | ||||||||||||
Total net interest income | 45 | 34 | 35 | 31 | ||||||||||||
Non-interest income | ||||||||||||||||
Residential mortgage banking, net | 17 | 5 | 17 | 5 | ||||||||||||
Business purpose mortgage banking, net | 30 | 4 | 30 | 4 | ||||||||||||
Investment fair value changes, net | 1 | 11 | — | — | ||||||||||||
Other income, net | 5 | 4 | 5 | 4 | ||||||||||||
Realized gains, net | 6 | 5 | 23 | 25 | ||||||||||||
Total non-interest income, net | 58 | 30 | 74 | 38 | ||||||||||||
General and administrative expenses | (42 | ) | (27 | ) | (41 | ) | (25 | ) | ||||||||
Other expenses | (7 | ) | (3 | ) | — | — | ||||||||||
Provision for income taxes | (4 | ) | — | (7 | ) | — | ||||||||||
Earnings | $ | 49 | $ | 34 | $ | 61 | $ | 43 | ||||||||
Earnings per diluted common share | $ | 0.38 | $ | 0.31 | $ | 0.45 | $ | 0.37 | ||||||||
GAAP Net Income and Non-GAAP Core Earnings by Segment | ||||||||||||||||
($ in millions) | ||||||||||||||||
Three Months Ended | ||||||||||||||||
12/31/2019 | 9/30/2019 | 12/31/2019 | 9/30/2019 | |||||||||||||
GAAP | GAAP | Core | Core | |||||||||||||
Residential Lending | $ | 16 | $ | 9 | $ | 20 | $ | 14 | ||||||||
Business Purpose Lending | 19 | (1 | ) | 24 | 2 | |||||||||||
Multifamily Investments | 11 | 10 | 7 | 16 | ||||||||||||
Third-Party Residential Investments | 21 | 29 | 24 | 23 | ||||||||||||
Corporate | (18 | ) | (13 | ) | (15 | ) | (11 | ) | ||||||||
Earnings | $ | 49 | $ | 34 | $ | 61 | $ | 43 |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Ñ | Business purpose mortgage banking activities improved in the fourth quarter, as new originations from CoreVest increased volume meaningfully in addition to increased volume from 5 Arches. In addition, improvements in single-family rental securitization execution during the fourth quarter helped drive incremental profitability on the inventory of SFR loans we acquired from CoreVest, as well as our subsequent fourth quarter production. |
Ñ | Net interest income improved in the fourth quarter as we redeployed capital out of lower-yielding assets in our residential lending and other portfolios and deployed capital into additional business purpose lending investments, primarily through our CoreVest acquisition. |
Ñ | Residential mortgage banking activities also improved, as loan purchase commitments increased 42% from the third quarter, partly driven by elevated bulk deal activity in the fourth quarter. Gross margins were towards the higher end of our long-term expectations of 75-100 basis points, partly driven by improved securitization execution during the fourth quarter. |
Ñ | Realized gains remained elevated, as continued spread tightening created opportunities for us to sell $225 million of lower-yielding securities, freeing up $150 million of capital for redeployment. |
Ñ | General and administrative expenses increased in the fourth quarter due to the addition of $8 million of GAAP expenses from CoreVest, as well as higher overall variable compensation expense, which rose due to improved GAAP earnings in the fourth quarter. |
Ñ | Other expenses, primarily comprised of acquisition-related intangible amortization expense and contingent consideration expense, increased due to the addition of intangible assets from the acquisition of CoreVest. |
Ñ | Provision for income taxes increased in the fourth quarter due to higher mortgage banking income at our taxable subsidiary, as compared to the third quarter. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Changes in Book Value per Share | ||||||||
($ in per share) | ||||||||
Three Months Ended | ||||||||
12/31/19 | 9/30/2019 | |||||||
Beginning GAAP book value per share | $ | 15.92 | $ | 16.01 | ||||
GAAP earnings (per basic share) | 0.42 | 0.33 | ||||||
Add back intangible amortization expense (non-GAAP) | 0.03 | 0.01 | ||||||
Dividends | (0.30 | ) | (0.30 | ) | ||||
Non-cash equity award compensation | (0.04 | ) | 0.02 | |||||
Changes in unrealized gains on securities, net | (0.05 | ) | 0.02 | |||||
Change in long-term debt hedge | 0.09 | (0.11 | ) | |||||
Other, net | 0.02 | (0.05 | ) | |||||
Ending book value before acquisition-related items (non-GAAP) | 16.09 | 15.93 | ||||||
Intangible amortization expense | (0.03 | ) | (0.01 | ) | ||||
CoreVest acquisition equity consideration | (0.08 | ) | — | |||||
Ending GAAP book value per share | $ | 15.98 | $ | 15.92 |
Ñ | Our GAAP book value increased $0.06 per share during the fourth quarter of 2019, largely due to GAAP earnings exceeding our dividend. |
Ñ | Included in our change in GAAP book value was $(0.11) per share associated with acquisition related items. These included $(0.08) per share from the one-time impact of equity-based purchase consideration for CoreVest (treated as compensation for GAAP), and $(0.03) per share of expense related to intangible amortization associated with both the CoreVest and 5 Arches acquisitions. |
Ñ | Excluding these acquisition-related items(1), our non-GAAP book value increased $0.17 per share, and our economic return on book value was 3.0% during the fourth quarter. |
Ñ | Our intangible assets related to both acquisitions will be amortized through 2026, and we expect to incur $(0.03) per share of intangible amortization expense per quarter for the next several quarters. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Non-GAAP Core Return Contribution Summary | |||||||||||||||||||||||
($ in millions) | |||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||
12/31/2019 | 9/30/2019 | ||||||||||||||||||||||
Average Allocated Equity | Core Earnings | Core ROE | Average Allocated Equity | Core Earnings | Core ROE | ||||||||||||||||||
Residential Lending | |||||||||||||||||||||||
Mortgage Banking | $ | 130 | $ | 11 | 33.5 | % | $ | 130 | $ | 5 | 15.5 | % | |||||||||||
Investments | 336 | 9 | 11.0 | % | 426 | 9 | 8.1 | % | |||||||||||||||
Total | 466 | 20 | 17.3 | % | 556 | 14 | 9.9 | % | |||||||||||||||
Business Purpose Lending | |||||||||||||||||||||||
Mortgage Banking | 255 | 17 | 27.4 | % | 55 | — | (1.0 | )% | |||||||||||||||
Investments | 172 | 7 | 16.1 | % | 32 | 2 | 23.6 | % | |||||||||||||||
Total | 427 | 24 | 22.9 | % | 87 | 2 | 8.1 | % | |||||||||||||||
Multifamily Investments | 146 | 7 | 20.4 | % | 159 | 16 | 39.4 | % | |||||||||||||||
Third-Party Residential Investments | 294 | 24 | 32.8 | % | 308 | 23 | 29.7 | % | |||||||||||||||
Corporate | 468 | (15 | ) | N/A | 482 | (11 | ) | N/A | |||||||||||||||
Total | $ | 1,800 | $ | 61 | 13.6 | % | $ | 1,592 | $ | 43 | 10.9 | % |
Ñ | Residential Lending — Returns from mortgage banking increased during the fourth quarter, as both volume and margins improved from the third quarter. Returns from investments improved during the fourth quarter, as we sold lower-yielding assets, which resulted in gains and positioned the remaining portfolio with a higher average yield. |
Ñ | Business Purpose Lending — Overall returns improved in the fourth quarter, as we benefited from higher loan originations and higher income from investments resulting from our CoreVest acquisition, as well as increased originations from 5 Arches. |
Ñ | Multifamily Investments — Returns declined during the fourth quarter, as the pace of portfolio optimization in the portfolio slowed relative to the third quarter, resulting in fewer realized gains. |
Ñ | Third-Party Residential Investments — Returns on third-party investments remained elevated, as we recognized gains from sales of primarily CRT and mezzanine securities during the third and fourth quarters of 2019. |
Ñ | Corporate — Average allocated equity for corporate included $350 million of average capital available for investment during the fourth quarter, driven in part by the issuance in September 2019 of $201 million of convertible bonds, and subsequent repayment of $201 million of exchangeable bonds in mid-November. Corporate overhead expenses increased in the fourth quarter, as variable compensation was adjusted to reflect improved full-year financial results. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Non-GAAP Core Returns on Investments by Business Segment | ||||||||||||||||||||
($ in millions) | ||||||||||||||||||||
Three Months Ended December 31, 2019 | ||||||||||||||||||||
Residential Lending | Business Purpose Lending | Multifamily Investments | Third-Party Residential Investments | Total | ||||||||||||||||
Net interest income | $ | 5 | $ | 7 | $ | 4 | $ | 10 | $ | 27 | ||||||||||
Other income | 3 | — | 1 | — | 4 | |||||||||||||||
Investment income | 8 | 8 | 5 | 10 | 31 | |||||||||||||||
Realized gains | 3 | — | 3 | 17 | 23 | |||||||||||||||
General and administrative expenses | (2 | ) | (1 | ) | (1 | ) | (1 | ) | (4 | ) | ||||||||||
Provision for income taxes | — | — | — | (2 | ) | (2 | ) | |||||||||||||
Core earnings | $ | 9 | $ | 7 | $ | 7 | $ | 24 | $ | 48 | ||||||||||
Average equity | 336 | 172 | 146 | 294 | 948 | |||||||||||||||
Core investment income yield | 9.5 | % | 18.6 | % | 13.7 | % | 13.6 | % | 13.1 | % | ||||||||||
Core return on equity | 11.0 | % | 16.1 | % | 20.4 | % | 32.8 | % | 20.1 | % | ||||||||||
Ñ | As we deploy our capital available for investment and our pace of portfolio optimization slows, we expect an increasing portion of future quarterly earnings to come from investment income, and less from realized gains. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Residential Lending: Non-GAAP Core Earnings | |||||||||||||||||||||||||
($ in millions) | |||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
12/31/2019 | 9/30/2019 | ||||||||||||||||||||||||
Investments | Mortgage Banking | Total Residential Lending | Investments | Mortgage Banking | Total Residential Lending | ||||||||||||||||||||
Net interest income | $ | 5 | $ | 5 | $ | 10 | $ | 7 | $ | 5 | $ | 12 | |||||||||||||
Non-interest income | |||||||||||||||||||||||||
Mortgage banking activities, net | — | 17 | 17 | — | 5 | 5 | |||||||||||||||||||
Other income, net | 3 | — | 3 | 2 | — | 2 | |||||||||||||||||||
Realized gains, net | 3 | — | 3 | 1 | — | 1 | |||||||||||||||||||
Total non-interest income, net | 6 | 17 | 23 | 3 | 5 | 8 | |||||||||||||||||||
General and administrative expenses | (1 | ) | (9 | ) | (10 | ) | (1 | ) | (5 | ) | (6 | ) | |||||||||||||
Provision for income taxes | — | (2 | ) | (2 | ) | — | — | — | |||||||||||||||||
Core earnings | $ | 9 | $ | 11 | $ | 20 | $ | 9 | $ | 5 | $ | 14 | |||||||||||||
Key performance indicators | |||||||||||||||||||||||||
Average equity | $ | 336 | $ | 130 | $ | 466 | $ | 426 | $ | 130 | $ | 556 | |||||||||||||
Core return on equity | 11.0 | % | 33.5 | % | 17.3 | % | 8.1 | % | 15.5 | % | 9.9 | % | |||||||||||||
Core pre-tax margin (1) | 60 | % | 48 | % | |||||||||||||||||||||
Loan purchase commitments | $ | 2,419 | $ | 1,700 |
Ñ | Core net interest income from investments decreased in the fourth quarter, as average equity invested in this segment declined due to proceeds from portfolio optimization activities being redeployed into other asset classes. |
Ñ | Core mortgage banking results for our residential lending segment improved in the fourth quarter, as loan purchase commitments increased to $2.4 billion from $1.7 billion in the third quarter, and gross margins on securitization and whole loan sales improved from the third quarter. We define gross margins for this segment as the sum of mortgage banking net interest income and mortgage banking activities divided by loan purchase commitments. |
Ñ | Core general and administrative expenses increased in the fourth quarter, as variable compensation was adjusted to reflect improved full-year financial performance of this segment. |
Ñ | Core pre-tax margin improved in the fourth quarter, as revenue growth from higher volume and margins outpaced the increase in general and administrative expenses during the quarter. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Ñ | We deployed $6 million of capital into Sequoia RMBS retained from securitizations completed in the fourth quarter. |
Ñ | During the fourth quarter, we sold $26 million of lower-yielding securities in this segment, which freed up approximately $5 million of capital for redeployment. |
Ñ | The decline in average capital in this segment during the fourth quarter was primarily attributable to a reduction in the capital associated with our residential whole loans that are held for investment and financed with the FHLB, as paydowns of residential whole loans were replaced with single-family rental loans originated in our business purpose lending segment. |
Ñ | The continued lower interest rate environment, as well as an increase in bulk pool acquisitions, helped elevate loan purchase commitments and purchase volumes in the fourth quarter. |
Ñ | At December 31, 2019, our pipeline of jumbo residential loans identified for purchase was $1.8 billion. |
Ñ | During the fourth quarter, we sold $843 million of Select whole loans to third parties, completed two Select securitizations totaling $776 million, and sold $581 million of Choice whole loans to third parties. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Business Purpose Lending: Non-GAAP Core Earnings | |||||||||||||||||||||||||
($ in millions) | |||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
12/31/2019 | 9/30/2019 | ||||||||||||||||||||||||
Investments | Mortgage Banking | Total Business Purpose Lending | Investments | Mortgage Banking | Total Business Purpose Lending | ||||||||||||||||||||
Net interest income | $ | 7 | $ | 2 | $ | 9 | $ | 2 | $ | 1 | $ | 3 | |||||||||||||
Non-interest income | |||||||||||||||||||||||||
Mortgage banking activities, net | — | 30 | 30 | — | 4 | 4 | |||||||||||||||||||
Other income, net | — | 1 | 2 | — | 2 | 2 | |||||||||||||||||||
Realized gains, net | — | — | — | — | — | — | |||||||||||||||||||
Total non-interest income, net | — | 31 | 31 | — | 6 | 6 | |||||||||||||||||||
General and administrative expenses | (1 | ) | (14 | ) | (14 | ) | — | (7 | ) | (7 | ) | ||||||||||||||
Provision for income taxes | — | (2 | ) | (2 | ) | — | — | — | |||||||||||||||||
Core earnings | $ | 7 | $ | 17 | $ | 24 | $ | 2 | $ | — | $ | 2 | |||||||||||||
Key performance indicators | |||||||||||||||||||||||||
Average equity | $ | 172 | $ | 255 | $ | 427 | $ | 32 | $ | 55 | $ | 87 | |||||||||||||
Core return on equity | 16.1 | % | 27.4 | % | 22.9 | % | 23.6 | % | (1.0 | )% | 8.1 | % | |||||||||||||
Core pre-tax margin (1) | 59 | % | 4 | % | |||||||||||||||||||||
Loan originations | $ | 750 | $ | 162 |
Ñ | Core investment results improved, as we deployed $289 million of capital into investments, including $227 million into investments from the CoreVest acquisition, $41 million into additional bridge loan investments, and $21 million into SFR securities retained from our fourth quarter securitization. |
Ñ | Additionally, during the fourth quarter, we restructured our BPL warehouse facilities (including those assumed from CoreVest), improving borrowing terms. |
Ñ | During the fourth quarter, we funded $275 million of business purpose bridge loans and received repayments of $108 million. In addition, we transferred $219 million of single-family rental loans into our BPL investments portfolio to be financed with the FHLB. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Ñ | Core mortgage banking results for our business purpose lending segment improved, as origination volume from 5 Arches increased and we added significant volume from CoreVest. In addition, improved execution drove incremental profitability on the inventory of SFR loans acquired from CoreVest that we sold through our first CoreVest sponsored securitization completed in November. |
Ñ | BPL loan originations in the fourth quarter included $435 million of single-family rental loans and $315 million of bridge loans. |
Ñ | During the fourth quarter, we securitized $395 million of single-family rental loans, transferred $219 million of single-family rental loans to our FHLB borrowing facility, and sold $20 million of single-family rental loans to third parties. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Multifamily Investments: Non-GAAP Core Earnings | ||||||||
($ in millions) | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Net interest income | $ | 4 | $ | 5 | ||||
Non-interest income | ||||||||
Other income, net | 1 | 1 | ||||||
Realized gains, net | 3 | 10 | ||||||
Total non-interest income, net | 4 | 11 | ||||||
General and administrative expenses | (1 | ) | — | |||||
Provision for income taxes | — | — | ||||||
Core earnings | $ | 7 | $ | 16 | ||||
Average equity | 146 | 159 | ||||||
Core return on equity | 20.4 | % | 39.4 | % | ||||
Ñ | Core net interest income decreased slightly in the fourth quarter as higher yields on deployed equity were partially offset by lower average equity, as fourth quarter sales outpaced deployment. |
Ñ | During the fourth quarter, we deployed $21 million of capital towards multifamily investments, including $11 million of capital towards multifamily b-pieces and $10 million of capital towards multifamily mezzanine securities. |
Ñ | During the fourth quarter, we sold $88 million of lower-yielding multifamily mezzanine securities, freeing up $46 million of capital after the repayment of associated short-term debt. |
Ñ | Core realized gains declined in the fourth quarter, as we realized fewer gains from the sale of multifamily mezzanine securities relative to the third quarter. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y R E S U L T S |
Third-Party Residential Investments: Non-GAAP Core Earnings | ||||||||
($ in millions) | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Net interest income | $ | 10 | $ | 10 | ||||
Non-interest income | ||||||||
Other income, net | — | — | ||||||
Realized gains, net | 17 | 14 | ||||||
Total non-interest income, net | 17 | 13 | ||||||
General and administrative expenses | (1 | ) | (1 | ) | ||||
Provision for income taxes | (2 | ) | — | |||||
Core earnings | $ | 24 | $ | 23 | ||||
Average equity | $ | 294 | $ | 308 | ||||
Core return on equity | 32.8 | % | 29.7 | % | ||||
Ñ | Core net interest income was consistent quarter-over-quarter, as higher yields on invested equity was offset by slightly lower average equity invested in this portfolio, as fourth quarter sales outpaced deployment. |
Ñ | During the fourth quarter, we deployed $54 million of capital towards third-party investments, including $37 million of capital towards shared home appreciation options, and $17 million of capital towards other third-party residential credit securities. |
Ñ | Core realized gains increased from the third quarter as we sold $108 million of lower-yielding third-party securities, freeing up $97 million of capital after the repayment of associated short-term debt. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
19 |
Q U A R T E R L Y P O S I T I O N S |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Q U A R T E R L Y P O S I T I O N S |
Capital Allocation Detail | ||||||||||||||||||||||
By Investment Type | ||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||
Fair Value of Assets | Collateralized Short-Term Debt | Collateralized Long-Term Debt | Unsecured Corporate Debt | Allocated Equity(1) | % of Total Equity | |||||||||||||||||
Residential Lending | ||||||||||||||||||||||
Residential loans | $ | 2,210 | $ | — | $ | (1,776 | ) | $ | (176 | ) | $ | 257 | 14% | |||||||||
Sequoia securities | 483 | (135 | ) | (185 | ) | (70 | ) | 102 | 6% | |||||||||||||
MSRs/Other | 63 | — | — | (30 | ) | 43 | 2% | |||||||||||||||
Mortgage banking working capital | — | — | — | — | 130 | 7% | ||||||||||||||||
Total Residential Lending | 2,756 | (135 | ) | (1,961 | ) | (276 | ) | 533 | 29% | |||||||||||||
Business Purpose Lending | ||||||||||||||||||||||
SFR securities | 195 | (80 | ) | — | (47 | ) | 68 | 4% | ||||||||||||||
SFR loan investments | 242 | — | (185 | ) | (23 | ) | 34 | 2% | ||||||||||||||
Bridge investments | 764 | (567 | ) | — | (92 | ) | 133 | 7% | ||||||||||||||
Mortgage banking working capital | — | — | — | — | 100 | 5% | ||||||||||||||||
Platform premium | — | — | — | — | 161 | 9% | ||||||||||||||||
Total Business Purpose Lending | 1,201 | (647 | ) | (185 | ) | (162 | ) | 497 | 27% | |||||||||||||
Multifamily Investments | ||||||||||||||||||||||
Multifamily mezzanine | 423 | (334 | ) | — | (52 | ) | 76 | 4% | ||||||||||||||
Multifamily B-pieces | 234 | (171 | ) | — | (38 | ) | 56 | 3% | ||||||||||||||
Other investments | 61 | — | — | (25 | ) | 36 | 2% | |||||||||||||||
Total Multifamily Investments | 717 | (505 | ) | — | (115 | ) | 168 | 9% | ||||||||||||||
Third-Party Residential Investments | ||||||||||||||||||||||
RPL investments | 611 | (315 | ) | (39 | ) | (106 | ) | 154 | 8% | |||||||||||||
CRT & third-party securities | 306 | (142 | ) | — | (70 | ) | 102 | 6% | ||||||||||||||
Other investments | 102 | — | — | (41 | ) | 60 | 3% | |||||||||||||||
Total Third-Party Residential Investments | 1,019 | (457 | ) | (39 | ) | (217 | ) | 316 | 17% | |||||||||||||
Other assets, net | — | — | — | — | 314 | 17% | ||||||||||||||||
Totals | $ | 5,693 | $ | (1,744 | ) | $ | (2,185 | ) | $ | (770 | ) | $ | 1,827 | 100% |
Ñ | The equity allocated to each of our segments is determined by the fair value of its investment assets less the short-term and long-term collateralized debt used to finance its investments, less an allocation of our $770 million of long-term unsecured corporate debt. In addition, for investments financed with short-term repurchase debt, we allocate additional equity capital (our liquidity capital cushion) to manage liquidity in the event of an adverse change in market conditions. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
21 |
Q U A R T E R L Y P O S I T I O N S |
Borrowing Type | Average Cost of Funds | Average Remaining Term (yrs.) | |
FHLB Borrowings | 2.1% | 6 | |
Unsecured Corporate Debt | 6.1% | 7 | |
Long-Term Secured Financing | 4.2% | 3 | |
Mortgage Warehouse | 4.3% | <1 | |
Securities Repo | 2.9% | <1 | |
Weighted Average Cost of Funds | 3.4% | 3 | |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
22 |
Q U A R T E R L Y P O S I T I O N S |
Average remaining term | 3.9 years | <1 year | 3.5 years | |
Average borrowing cost | 3.42% | 4.3% | 3.41% | |
Recourse leverage ratio (1) | 4.2x | 2.0x | 3.1x |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
23 |
Q U A R T E R L Y P O S I T I O N S |
Residential Investments Credit Characteristics | ||||||||||||||||
($ in millions) | ||||||||||||||||
Sequoia Select Securities | Sequoia Choice Securities | Residential Whole Loans | Re-Performing Loan Securities | |||||||||||||
Market value | $ | 180 | $ | 241 | $ | 2,112 | $ | 610 | ||||||||
Avg. FICO (at origination) | 771 | 744 | 768 | 622 | ||||||||||||
HPI updated LTV(1) | 48 | 66 | 48 | 70 | ||||||||||||
Avg. loan size (in thousands) | $ | 653 | $ | 710 | $ | 698 | $ | 188 | ||||||||
Gross weighted average coupon | 4.1 | % | 5.0 | % | 4.2 | % | 4.5 | % | ||||||||
Current 3-month prepayment rate | 23 | % | 38 | % | 24 | % | 6 | % | ||||||||
Current 90+ days delinquency | 0.1 | % | 0.3 | % | 0.1 | % | 4.5 | % | ||||||||
Current investment thickness | 4 | % | 13 | % | N/A | 20 | % | |||||||||
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
24 |
Q U A R T E R L Y P O S I T I O N S |
Business Purpose and Multifamily Investments Credit Characteristics | ||||||||||||||||
($ in millions) | ||||||||||||||||
Multifamily B-Pieces | SFR Securities | SFR Loans | BPL Bridge Loans | |||||||||||||
Market value | $ | 234 | $ | 193 | $ | 238 | $ | 745 | ||||||||
Avg. current DSCR(1) | 1.7x | 1.3x | 1.4x | N/A | ||||||||||||
LTV (at origination)(2) | 69 | 68 | 68 | 70 | ||||||||||||
Avg. loan size (in thousands) | $ | 15,035 | $ | 2,650 | $ | 2,161 | $ | 280 | ||||||||
Gross weighted average coupon | 4.1 | % | 5.7 | % | 4.9 | % | 8.1 | % | ||||||||
Current 90+ days delinquency | 0.0 | % | 1.8 | % | 0.0 | % | 1.9 | % | ||||||||
Current investment thickness | 8 | % | 10 | % | N/A | N/A | ||||||||||
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
25 |
L E V E R A G E |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
26 |
Table 1: GAAP Earnings (in thousands, except per share data) | ||||||||||||||||||||||||||
2019 Q4 | 2019 Q3 | 2019 Q2 | 2019 Q1 | 2018 Q4 | Twelve Months 2019 | |||||||||||||||||||||
Net interest income | ||||||||||||||||||||||||||
From investments | $ | 37,639 | $ | 27,679 | $ | 27,565 | $ | 26,952 | $ | 29,749 | $ | 119,835 | ||||||||||||||
From mortgage banking activities | 7,234 | 5,834 | 4,757 | 4,813 | 5,015 | 22,638 | ||||||||||||||||||||
Net interest income | 44,873 | 33,513 | 32,322 | 31,765 | 34,764 | 142,473 | ||||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||||
Residential mortgage banking activities, net | 16,540 | 5,016 | 15,361 | 10,826 | 11,266 | 47,743 | ||||||||||||||||||||
Business purpose mortgage banking activities, net | 29,742 | 4,499 | 3,799 | 1,483 | (96 | ) | 39,523 | |||||||||||||||||||
Investment fair value changes, net | 759 | 11,444 | 3,138 | 20,159 | (38,519 | ) | 35,500 | |||||||||||||||||||
Realized gains, net | 5,594 | 4,714 | 2,827 | 10,686 | 5,689 | 23,821 | ||||||||||||||||||||
Other income | 5,417 | 4,356 | 4,859 | 4,625 | 4,106 | 19,257 | ||||||||||||||||||||
Total non-interest income (loss), net | 58,052 | 30,029 | 29,984 | 47,779 | (17,554 | ) | 165,844 | |||||||||||||||||||
Fixed compensation expense | (12,899 | ) | (9,391 | ) | (9,252 | ) | (8,205 | ) | (6,309 | ) | (39,747 | ) | ||||||||||||||
Variable compensation expense (excluding commissions) | (10,372 | ) | (3,489 | ) | (3,573 | ) | (4,402 | ) | (934 | ) | (21,836 | ) | ||||||||||||||
Equity compensation expense | (3,270 | ) | (3,155 | ) | (4,024 | ) | (2,953 | ) | (2,823 | ) | (13,402 | ) | ||||||||||||||
Acquisition-related equity compensation expense (1) | (1,010 | ) | — | — | — | — | (1,010 | ) | ||||||||||||||||||
Loan acquisition costs (including commissions) | (4,830 | ) | (1,993 | ) | (1,964 | ) | (1,477 | ) | (1,837 | ) | (10,264 | ) | ||||||||||||||
Other general and administrative expense | (10,062 | ) | (8,787 | ) | (7,442 | ) | (6,122 | ) | (7,350 | ) | (32,413 | ) | ||||||||||||||
Total general and administrative expenses | (42,443 | ) | (26,815 | ) | (26,255 | ) | (23,159 | ) | (19,253 | ) | (118,672 | ) | ||||||||||||||
Other expenses | (7,001 | ) | (2,531 | ) | (2,452 | ) | (1,038 | ) | (125 | ) | (13,022 | ) | ||||||||||||||
(Provision for) benefit from income taxes | (4,338 | ) | 114 | (2,333 | ) | (883 | ) | 1,255 | (7,440 | ) | ||||||||||||||||
Net income (loss) | $ | 49,143 | $ | 34,310 | $ | 31,266 | $ | 54,464 | $ | (913 | ) | $ | 169,183 | |||||||||||||
Diluted average shares (2) | 152,983 | 136,523 | 130,697 | 126,278 | 83,217 | 136,781 | ||||||||||||||||||||
Diluted earnings (loss) per common share | $ | 0.38 | $ | 0.31 | $ | 0.30 | $ | 0.49 | $ | (0.02 | ) | $ | 1.46 |
(1) | Acquisition-related equity compensation expense relates to shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest. |
(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 Report on Form 10-K. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 | See Appendix for details on non-GAAP measures. | Table 1: GAAP Earnings 27 |
Table 2: GAAP and Non-GAAP Core Basic and Diluted Earnings (1) per Common Share (in thousands, except per share data) | ||||||||||||||
2019 Q4 | 2019 Q3 | Twelve Months 2019 | ||||||||||||
GAAP Earnings per Common Share ("EPS"): | ||||||||||||||
Net income attributable to Redwood | $ | 49,143 | $ | 34,310 | $ | 169,183 | ||||||||
Less: Dividends and undistributed earnings allocated to participating securities | (1,546 | ) | (856 | ) | (4,797 | ) | ||||||||
Net income allocated to common shareholders for GAAP basic EPS | 47,597 | 33,454 | 164,386 | |||||||||||
Incremental adjustment to dividends and undistributed earnings allocated to participating securities | (113 | ) | (180 | ) | (476 | ) | ||||||||
Add back: Interest expense on convertible notes for the period, net of tax (2) | 9,941 | 8,887 | 36,212 | |||||||||||
Net income allocated to common shareholders for GAAP diluted EPS | $ | 57,425 | $ | 42,161 | $ | 200,122 | ||||||||
Basic weighted average common shares outstanding | 112,818 | 101,872 | 101,147 | |||||||||||
Net effect of dilutive equity awards | 221 | 363 | 251 | |||||||||||
Net effect of assumed convertible notes conversion to common shares (2) | 39,943 | 34,288 | 35,382 | |||||||||||
Diluted weighted average common shares outstanding | 152,982 | 136,522 | 136,780 | |||||||||||
GAAP Basic Earnings per Common Share | $ | 0.42 | $ | 0.33 | $ | 1.63 | ||||||||
GAAP Diluted Earnings per Common Share | $ | 0.38 | $ | 0.31 | $ | 1.46 | ||||||||
Non-GAAP Core Earnings per Common Share: | ||||||||||||||
Non-GAAP core earnings | $ | 61,233 | $ | 43,326 | $ | 185,867 | ||||||||
Less: Dividends and undistributed earnings allocated to participating securities | (1,908 | ) | (1,099 | ) | (5,270 | ) | ||||||||
Non-GAAP core earnings allocated to common shareholders for core basic EPS | 59,325 | 42,227 | 180,597 | |||||||||||
Incremental adjustment to dividends and undistributed earnings allocated to participating securities | (19 | ) | (121 | ) | (356 | ) | ||||||||
Add back: Interest expense on convertible notes for the period, net of tax (2) | 9,941 | 8,887 | 36,212 | |||||||||||
Non-GAAP core earnings allocated to common shareholders for core diluted EPS | $ | 69,247 | $ | 50,993 | $ | 216,453 | ||||||||
Basic weighted average common shares outstanding | 112,818 | 101,872 | 101,147 | |||||||||||
Net effect of dilutive equity awards | 221 | 363 | 251 | |||||||||||
Net effect of assumed convertible notes conversion to common shares (2) | 39,943 | 34,288 | 35,382 | |||||||||||
Diluted weighted average common shares outstanding | 152,982 | 136,523 | 136,780 | |||||||||||
Non-GAAP Core Basic Earnings per Common Share | $ | 0.53 | $ | 0.41 | $ | 1.79 | ||||||||
Non-GAAP Core Diluted Earnings per Common Share | $ | 0.45 | $ | 0.37 | $ | 1.58 | ||||||||
(1) | A reconciliation of GAAP net income to non-GAAP core earnings and a definition of core earnings (which we updated during the third quarter of 2019) 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 4TH QUARTER 2019 | See Appendix for details on non-GAAP measures. | Table 2: GAAP and Non-GAAP Core Earnings per Basic and Diluted Common Share 28 |
Table 3: Taxable and GAAP Income (1) Differences and Dividends (In thousands, except for per share data) | |||||||||||||||||||||||||||||||||||||
Estimated Twelve Months 2019 (2) | Actual 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 | $ | 320,480 | $ | 622,281 | $ | (301,801 | ) | $ | 265,400 | $ | 378,717 | $ | (113,317 | ) | $ | 225,079 | $ | 248,057 | $ | (22,978 | ) | ||||||||||||||||
Interest expense | (183,550 | ) | (479,808 | ) | 296,258 | (139,147 | ) | (239,039 | ) | 99,892 | (89,662 | ) | (108,816 | ) | 19,154 | ||||||||||||||||||||||
Net interest income | 136,930 | 142,473 | (5,543 | ) | 126,253 | 139,678 | (13,425 | ) | 135,417 | 139,241 | (3,824 | ) | |||||||||||||||||||||||||
Realized credit losses | (534 | ) | — | (534 | ) | (1,738 | ) | — | (1,738 | ) | (3,442 | ) | — | (3,442 | ) | ||||||||||||||||||||||
Mortgage banking activities, net | 80,146 | 87,266 | (7,120 | ) | 57,212 | 59,566 | (2,354 | ) | 44,143 | 53,908 | (9,765 | ) | |||||||||||||||||||||||||
Investment fair value changes, net | 4,307 | 35,500 | (31,193 | ) | 4,927 | (25,689 | ) | 30,616 | (11,191 | ) | 10,374 | (21,565 | ) | ||||||||||||||||||||||||
General and administrative expenses | (109,737 | ) | (118,672 | ) | 8,935 | (78,022 | ) | (82,782 | ) | 4,760 | (73,203 | ) | (77,156 | ) | 3,953 | ||||||||||||||||||||||
Other income | 23,397 | 19,257 | 4,140 | 17,584 | 13,070 | 4,514 | 31,325 | 12,436 | 18,889 | ||||||||||||||||||||||||||||
Realized gains, net | 62,613 | 23,821 | 38,792 | 43,099 | 27,041 | 16,058 | (736 | ) | 13,355 | (14,091 | ) | ||||||||||||||||||||||||||
Other expenses | (3,351 | ) | (13,022 | ) | 9,671 | (65 | ) | (196 | ) | 131 | — | — | — | ||||||||||||||||||||||||
(Provision for) benefit from income taxes | (866 | ) | (7,440 | ) | 6,574 | (538 | ) | (11,088 | ) | 10,550 | (516 | ) | (11,752 | ) | 11,236 | ||||||||||||||||||||||
Income | $ | 192,905 | $ | 169,183 | $ | 23,722 | $ | 168,712 | $ | 119,600 | $ | 49,112 | $ | 121,797 | $ | 140,406 | $ | (18,609 | ) | ||||||||||||||||||
REIT taxable income | $ | 136,255 | $ | 110,161 | $ | 90,122 | |||||||||||||||||||||||||||||||
Taxable income at taxable subsidiaries | 56,650 | 58,551 | 31,675 | ||||||||||||||||||||||||||||||||||
Taxable income | $ | 192,905 | $ | 168,712 | $ | 121,797 | |||||||||||||||||||||||||||||||
Shares used for taxable EPS calculation | 114,353 | 84,884 | 76,600 | ||||||||||||||||||||||||||||||||||
REIT taxable income per share | $ | 1.28 | $ | 1.38 | $ | 1.17 | |||||||||||||||||||||||||||||||
Taxable income per share at taxable subsidiaries | $ | 0.54 | $ | 0.75 | $ | 0.42 | |||||||||||||||||||||||||||||||
Taxable income per share (3) | $ | 1.82 | $ | 2.13 | $ | 1.59 | |||||||||||||||||||||||||||||||
Dividends | |||||||||||||||||||||||||||||||||||||
Dividends declared | $ | 126,139 | $ | 94,134 | $ | 86,271 | |||||||||||||||||||||||||||||||
Dividends per share (4) | $ | 1.20 | $ | 1.18 | $ | 1.12 |
(1) | Taxable income for 2019 is an estimate until we file our tax returns for 2019. 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 2019 are expected to be characterized as 73% ordinary dividend income (or $92 million) and 27% long-term capital gain dividend income (or $34 million). Dividends in 2018 were 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 $25 million). |
THE REDWOOD REVIEW I 4TH QUARTER 2019 | See Appendix for details on non-GAAP measures. | Table 3: Taxable and GAAP Income Differences and Dividends 29 |
Table 4: Financial Ratios and Book Value ($ in thousands, except per share data) | |||||||||||||||||||||||||
2019 Q4 | 2019 Q3 | 2019 Q2 | 2019 Q1 | 2018 Q4 | Twelve Months 2019 | ||||||||||||||||||||
Financial performance ratios | |||||||||||||||||||||||||
Net interest income | $ | 44,873 | $ | 33,513 | $ | 32,322 | $ | 31,765 | $ | 34,764 | $ | 142,473 | |||||||||||||
Corporate general and administrative expenses | $ | (15,436 | ) | $ | (12,727 | ) | $ | (12,448 | ) | $ | (12,394 | ) | $ | (8,188 | ) | $ | (53,005 | ) | |||||||
Total general and administrative expenses | $ | (42,443 | ) | $ | (26,815 | ) | $ | (26,255 | ) | $ | (23,159 | ) | $ | (19,253 | ) | $ | (118,672 | ) | |||||||
GAAP net income (loss) | $ | 49,143 | $ | 34,310 | $ | 31,266 | $ | 54,464 | $ | (913 | ) | $ | 169,183 | ||||||||||||
Average total assets | $ | 17,551,586 | $ | 14,017,627 | $ | 13,596,337 | $ | 11,795,343 | $ | 10,163,283 | $ | 14,255,384 | |||||||||||||
Average total equity | $ | 1,800,390 | $ | 1,591,792 | $ | 1,556,850 | $ | 1,452,282 | $ | 1,342,967 | $ | 1,601,259 | |||||||||||||
Corporate general and administrative expenses / average total equity | 3.43 | % | 3.20 | % | 3.20 | % | 3.41 | % | 2.44 | % | 3.31 | % | |||||||||||||
Total general and administrative expenses / average total equity | 9.43 | % | 6.74 | % | 6.75 | % | 6.38 | % | 5.73 | % | 7.41 | % | |||||||||||||
GAAP net income / average equity (GAAP ROE) | 10.92 | % | 8.62 | % | 8.03 | % | 15.00 | % | (0.27 | )% | 10.57 | % | |||||||||||||
Leverage ratios and book value per share | |||||||||||||||||||||||||
Short-term debt | $ | 2,176,591 | $ | 1,789,827 | $ | 2,227,183 | $ | 1,914,514 | $ | 2,138,686 | |||||||||||||||
Long-term debt | 2,970,415 | 2,971,552 | 2,584,499 | 2,584,499 | 2,584,499 | ||||||||||||||||||||
Total debt at Redwood | $ | 5,147,006 | $ | 4,761,379 | $ | 4,811,682 | $ | 4,499,013 | $ | 4,723,185 | |||||||||||||||
At consolidated securitization entities | |||||||||||||||||||||||||
ABS issued | 10,515,475 | 8,346,051 | 6,913,129 | 5,637,644 | 5,410,073 | ||||||||||||||||||||
Non-recourse short-term debt | 153,696 | 191,556 | 237,363 | 251,875 | 265,637 | ||||||||||||||||||||
Total ABS and non-recourse short-term debt | $ | 10,669,171 | $ | 8,537,607 | $ | 7,150,492 | $ | 5,889,519 | $ | 5,675,710 | |||||||||||||||
Consolidated debt (1) | $ | 15,816,177 | $ | 13,298,986 | $ | 11,962,174 | $ | 10,388,532 | $ | 10,398,895 | |||||||||||||||
Tangible stockholders' equity (2) | $ | 1,665,767 | $ | 1,735,938 | $ | 1,513,033 | $ | 1,497,032 | $ | 1,348,794 | |||||||||||||||
Total stockholders' equity | $ | 1,827,231 | $ | 1,785,059 | $ | 1,564,032 | $ | 1,549,927 | $ | 1,348,794 | |||||||||||||||
Total capital (3) | $ | 2,596,984 | $ | 2,554,118 | $ | 2,337,442 | $ | 2,322,515 | $ | 2,120,572 | |||||||||||||||
Recourse leverage ratio (recourse debt at Redwood to tangible stockholders' equity)(4) | 3.1x | 2.7x | 3.2x | 3.0x | 3.5x | ||||||||||||||||||||
Consolidated debt to tangible stockholders' equity | 9.5x | 7.7x | 7.9x | 6.9x | 7.7x | ||||||||||||||||||||
Shares outstanding at period end (in thousands) | 114,353 | 112,102 | 97,715 | 96,866 | 84,884 | ||||||||||||||||||||
Book value per share | $ | 15.98 | $ | 15.92 | $ | 16.01 | $ | 16.00 | $ | 15.89 | |||||||||||||||
(1) | Amounts presented in Consolidated debt above do not include deferred issuance costs or debt discounts. |
(2) | At December 31, 2019, September 30, 2019, June 30, 2019, March 31, 2019, and December 31, 2018, tangible stockholders' equity excluded $161 million, $49 million, $51 million, $53 million and $0, respectively, of goodwill and intangible assets. |
(3) | Our total capital of $2.6 billion at December 31, 2019 included $1.8 billion of equity capital and $0.8 billion of unsecured corporate debt. |
(4) | Excludes ABS issued and non-recourse debt at consolidated entities. See Table 5 for additional detail on our ABS issued and short-term debt at consolidated entities. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 | See Appendix for details on non-GAAP measures. | Table 4: Financial Ratios and Book Value 30 |
Table 5: Consolidating Balance Sheet ($ in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated VIEs (1) | Consolidated VIEs (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At Redwood (1) | Sequoia Choice | Freddie Mac SLST | Freddie Mac K-Series | CAFL | Other (2) | Redwood Consolidated | At Redwood (1) | Sequoia Choice | Freddie Mac SLST | Freddie Mac K-Series | CAFL | Other (2) | Redwood Consolidated | ||||||||||||||||||||||||||||||||||||||||||||
Residential loans | $ | 2,648,282 | $ | 2,291,463 | $ | 2,367,215 | $ | — | $ | — | $ | 407,890 | $ | 7,714,850 | $ | 3,193,105 | $ | 2,618,316 | $ | 2,441,223 | $ | — | $ | — | $ | 429,159 | $ | 8,681,803 | |||||||||||||||||||||||||||||
Business purpose residential loans | 1,314,191 | — | — | — | 2,192,552 | — | 3,506,743 | 336,035 | — | — | — | — | — | 336,035 | |||||||||||||||||||||||||||||||||||||||||||
Multifamily loans | — | — | — | 4,408,524 | — | — | 4,408,524 | — | — | — | 3,791,622 | — | — | 3,791,622 | |||||||||||||||||||||||||||||||||||||||||||
Real estate securities | 1,099,874 | — | — | — | — | — | 1,099,874 | 1,285,426 | — | — | — | — | — | 1,285,426 | |||||||||||||||||||||||||||||||||||||||||||
Other investments | 173,328 | — | — | — | 184,802 | 358,130 | 109,391 | — | — | — | 238,316 | 347,707 | |||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 187,951 | — | — | — | — | 9,015 | 196,966 | 373,388 | — | — | — | — | 21,240 | 394,628 | |||||||||||||||||||||||||||||||||||||||||||
Other assets (3) | 639,945 | 9,851 | 7,758 | 13,539 | 11,367 | 27,893 | 710,353 | 582,401 | 10,821 | 7,299 | 11,300 | — | 27,241 | 639,062 | |||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 6,063,571 | $ | 2,301,314 | $ | 2,374,973 | $ | 4,422,063 | $ | 2,203,919 | $ | 629,600 | $ | 17,995,440 | $ | 5,879,746 | $ | 2,629,137 | $ | 2,448,522 | $ | 3,802,922 | $ | — | $ | 715,956 | $ | 15,476,283 | |||||||||||||||||||||||||||||
Short-term debt | $ | 2,176,591 | $ | — | $ | — | $ | — | $ | — | $ | 152,554 | $ | 2,329,145 | $ | 1,789,614 | $ | — | $ | — | $ | — | $ | — | $ | 191,203 | $ | 1,980,817 | |||||||||||||||||||||||||||||
Other liabilities | 321,274 | 7,759 | 5,374 | 12,887 | 7,485 | 15,538 | 370,317 | 365,293 | 8,964 | 5,498 | 10,805 | — | 20,074 | 410,634 | |||||||||||||||||||||||||||||||||||||||||||
ABS issued | — | 2,037,198 | 1,918,322 | 4,156,239 | 2,001,251 | 402,465 | 10,515,475 | — | 2,361,111 | 1,987,473 | 3,577,577 | — | 419,890 | 8,346,051 | |||||||||||||||||||||||||||||||||||||||||||
Long-term debt, net | 2,953,272 | — | — | — | — | — | 2,953,272 | 2,953,722 | — | — | — | — | — | 2,953,722 | |||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 5,451,137 | 2,044,957 | 1,923,696 | 4,169,126 | 2,008,736 | 570,557 | 16,168,209 | 5,108,629 | 2,370,075 | 1,992,971 | 3,588,382 | — | 631,167 | 13,691,224 | |||||||||||||||||||||||||||||||||||||||||||
Equity | 612,434 | 256,357 | 451,277 | 252,937 | 195,183 | 59,043 | 1,827,231 | 771,117 | 259,062 | 455,551 | 214,540 | — | 84,789 | 1,785,059 | |||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 6,063,571 | $ | 2,301,314 | $ | 2,374,973 | $ | 4,422,063 | $ | 2,203,919 | $ | 629,600 | $ | 17,995,440 | $ | 5,879,746 | $ | 2,629,137 | $ | 2,448,522 | $ | 3,802,922 | $ | — | $ | 715,956 | $ | 15,476,283 | |||||||||||||||||||||||||||||
(1) | The format of this consolidating balance sheet is provided to more clearly delineate between the assets and liabilities belonging to securitization entities (Consolidated VIEs) that we are required to consolidate on our balance sheet in accordance with GAAP, and the assets that are legally ours and the liabilities of ours for which there is recourse to us. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained or acquired in these entities (generally subordinate securities), the fair value of which is represented by our equity in each entity, as presented in this table. |
(2) | Includes our consolidated Legacy Sequoia and Servicing Investment entities. At December 31, 2019, our equity in the Legacy Sequoia and Servicing Investment entities was $6 million and $53 million, respectively. At September 30, 2019, our equity in the Legacy Sequoia and Servicing Investment entities was $10 million and $75 million, respectively. |
(3) | At both December 31, 2019 and September 30, 2019, other assets at Redwood included a total of $33 million of assets held by third-party custodians and pledged as collateral to the GSEs in connection with credit risk-sharing arrangements. These pledged assets can only be used to settle obligations to the GSEs under these risk-sharing arrangements. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 | See Appendix for details on non-GAAP measures. | Table 5: Consolidating Balance Sheet 31 |
C O R E V E S T A C Q U I S I T I O N |
Net Assets Acquired from CoreVest | |||||
($ in thousands) | |||||
Single-family rental loans held-for-sale | $ | 406,550 | |||
Business purpose bridge loans held-for-investment | 374,691 | ||||
Real estate securities (retained from CAFL) | 173,226 | ||||
Cash and cash equivalents | 30,685 | ||||
Other assets | 67,420 | ||||
Goodwill | 59,928 | ||||
Intangible assets | 56,500 | ||||
Deferred tax asset | 2,577 | ||||
Total assets acquired | 1,171,577 | ||||
Short-term debt, net | 663,275 | ||||
Accrued expenses and other liabilities | 25,991 | ||||
Total liabilities assumed | 689,266 | ||||
Total net assets acquired | $ | 482,311 | |||
Ñ | We paid $452 million of cash on a net basis, after adjusting for the $31 million of cash and cash equivalents on balance sheet at acquisition. |
Ñ | In November 2019, we securitized the majority of the $407 million of single-family rental loans that were on balance sheet at acquisition. |
Ñ | Business purpose bridge loans and real estate securities were acquired with in-place financing. Subsequent to the acquisition, we restructured and improved the terms for these borrowing facilities. |
Ñ | The acquired intangible assets of $57 million have useful lives of up to 7 years for accounting purposes and we expect to record $0.02 per share of intangible amortization expense per quarter in 2021, related to these assets. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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C O R E V E S T A C Q U I S I T I O N |
CoreVest GAAP Net Income and Non-GAAP Core Earnings | |||||||||||||
($ in millions) | |||||||||||||
Three Months Ended December 31, 2019 | |||||||||||||
Investments | Mortgage Banking | Total | |||||||||||
Net interest income | $ | 9 | $ | 1 | $ | 11 | |||||||
Non-interest income | |||||||||||||
Mortgage banking activities, net | — | 23 | 23 | ||||||||||
Investment fair value changes, net | (4 | ) | — | (4 | ) | ||||||||
Realized gains, net | — | — | — | ||||||||||
Total non-interest income, net | (4 | ) | 24 | 19 | |||||||||
General and administrative expenses | — | (8 | ) | (8 | ) | ||||||||
Other expenses | — | (2 | ) | (2 | ) | ||||||||
Provision for income taxes | — | (1 | ) | (1 | ) | ||||||||
Net income | $ | 6 | $ | 14 | $ | 18 | |||||||
Core earnings adjustments | |||||||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | 1 | — | 1 | ||||||||||
Eliminate purchase accounting adjustments | — | 2 | 2 | ||||||||||
Eliminate corporate acquisition and related expenses | — | 1 | 1 | ||||||||||
Income tax adjustments associated with core earnings adjustments | — | (1 | ) | (1 | ) | ||||||||
Core earnings | $ | 7 | $ | 16 | $ | 21 | |||||||
Ñ | GAAP net interest income from investments includes cash interest earned from the acquisition date through December 31, 2019, and is comprised of $5 million from SFR securities and $4 million from bridge loans. |
Ñ | Investment fair value changes, net of negative $4 million, represents the change in value of our investments during the fourth quarter, of which $3 million (representing basis changes) is included in core net interest income, with the remainder excluded from core earnings. |
Ñ | Mortgage banking activities, net includes the change in fair value of loans originated post-acquisition as well as a benefit from incremental profitability on the inventory of SFR loans acquired from CoreVest that we sold through our first CoreVest sponsored securitization in November 2019. |
Ñ | GAAP general and administrative expenses include $1.4 million of commission expenses, which vary with loan origination volume and mix, as well as $1 million of acquisition-related compensation expense associated with the portion of the purchase consideration paid in Redwood stock (which is excluded for core earnings). |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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D I V I D E N D S A N D T A X A B L E I N C O M E |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
35 |
N O N - G A A P M E A S U R E M E N T S |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
36 |
N O N - G A A P M E A S U R E M E N T S |
• | 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 was 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. |
• | 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. |
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N O N - G A A P M E A S U R E M E N T S |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Reconciliation to Non-GAAP Core Earnings | ||||||||||||
($ in millions) | ||||||||||||
Three Months Ended December 31, 2019 | ||||||||||||
GAAP | Adjustments | Non-GAAP | ||||||||||
Net interest income | ||||||||||||
From portfolio investments | $ | 38 | $ | (10 | ) | $ | 28 | |||||
From mortgage banking activities | 7 | — | 7 | |||||||||
Non-interest income | ||||||||||||
Residential mortgage banking activities, net | 17 | — | 17 | |||||||||
BPL mortgage banking activities, net | 30 | — | 30 | |||||||||
Investment fair value changes, net (1) | 1 | (1 | ) | — | ||||||||
Other income, net (2) | 5 | — | 5 | |||||||||
Realized gains, net (3) | 6 | 17 | 23 | |||||||||
Total non-interest income, net | 58 | 16 | 74 | |||||||||
General and administrative expenses (4) | (42 | ) | 1 | (41 | ) | |||||||
Other expenses | (7 | ) | 7 | — | ||||||||
Provision for income taxes (5) | (4 | ) | (2 | ) | (7 | ) | ||||||
GAAP Net Income/Non-GAAP Core Earnings | $ | 49 | $ | 12 | $ | 61 | ||||||
Earnings per diluted common share | $ | 0.38 | $ | 0.45 | ||||||||
Three Months Ended September 30, 2019 | ||||||||||||
GAAP | Adjustments | Non-GAAP | ||||||||||
Net interest income | ||||||||||||
From portfolio investments | $ | 28 | $ | (3 | ) | $ | 25 | |||||
From mortgage banking activities | 6 | — | 6 | |||||||||
Non-interest income | ||||||||||||
Residential mortgage banking activities, net | 5 | — | 5 | |||||||||
BPL mortgage banking activities, net | 4 | — | 4 | |||||||||
Investment fair value changes, net (1) | 11 | (11 | ) | — | ||||||||
Other income, net (2) | 4 | — | 4 | |||||||||
Realized gains, net (3) | 5 | 20 | 25 | |||||||||
Total non-interest income, net | 30 | 9 | 38 | |||||||||
General and administrative expenses (4) | (27 | ) | 2 | (25 | ) | |||||||
Other expenses | (2 | ) | 2 | — | ||||||||
Provision for income taxes (5) | — | (1 | ) | — | ||||||||
GAAP Net Income/Non-GAAP Core Earnings | $ | 34 | $ | 9 | $ | 43 | ||||||
Earnings per diluted common share | $ | 0.31 | $ | 0.37 |
(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 general and administrative expenses refer to GAAP general and administrative expenses as adjusted by the amount described in the "Adjustments" column, as further described above under the heading "What is Core Earnings?" |
(5) | 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?" |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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• | Core other income, net |
• | Core realized gains, net |
• | Core general and administrative expenses |
• | Core provision for income taxes |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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N O N - G A A P M E A S U R E M E N T S |
Reconciliation to Non-GAAP Core Earnings by Business Segment | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Three Months Ended December 31, 2019 | ||||||||||||||||||||||||
Residential Lending | Business Purpose Lending | Multifamily Investments | Third-Party Residential Investments | Corporate | Total | |||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
From portfolio investments | $ | 14 | $ | 11 | $ | 2 | $ | 9 | $ | 1 | $ | 37 | ||||||||||||
From mortgage banking activities | 5 | 2 | — | — | — | 7 | ||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||
Mortgage banking activities, net | 17 | 30 | — | — | — | 46 | ||||||||||||||||||
Investment fair value changes, net | (11 | ) | (5 | ) | 8 | 9 | (1 | ) | — | |||||||||||||||
Other income, net | 3 | 2 | 1 | — | — | 5 | ||||||||||||||||||
Realized gains, net | 1 | — | — | 5 | — | 6 | ||||||||||||||||||
Total non-interest income, net | 9 | 26 | 9 | 14 | (1 | ) | 58 | |||||||||||||||||
General and administrative expenses | (10 | ) | (15 | ) | (1 | ) | (1 | ) | (15 | ) | (42 | ) | ||||||||||||
Other expenses | — | (4 | ) | — | — | (3 | ) | (7 | ) | |||||||||||||||
Provision for income taxes | (2 | ) | (1 | ) | — | (1 | ) | — | (4 | ) | ||||||||||||||
GAAP Net Income | $ | 16 | $ | 19 | $ | 11 | $ | 21 | $ | (18 | ) | $ | 49 | |||||||||||
Core earnings adjustments: | ||||||||||||||||||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | 1 | 1 | (6 | ) | (8 | ) | 1 | (11 | ) | |||||||||||||||
Include cumulative gain on long-term investments sold, net | 3 | — | 3 | 12 | — | 17 | ||||||||||||||||||
Eliminate purchase accounting adjustments | — | 4 | — | — | 3 | 7 | ||||||||||||||||||
Eliminate corporate acquisition and related expenses | — | 1 | — | — | — | 1 | ||||||||||||||||||
Income tax adjustments associated with core earnings adjustments | — | (1 | ) | — | (1 | ) | (1 | ) | (2 | ) | ||||||||||||||
Non-GAAP Core Earnings | $ | 20 | $ | 24 | $ | 7 | $ | 24 | $ | (15 | ) | $ | 61 | |||||||||||
Average allocated equity | $ | 466 | $ | 427 | $ | 146 | $ | 294 | $ | 468 | $ | 1,801 | ||||||||||||
GAAP ROE | 14 | % | 18 | % | 31 | % | 29 | % | N/A | 11 | % | |||||||||||||
Core ROE | 17 | % | 23 | % | 20 | % | 33 | % | N/A | 14 | % |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Reconciliation to Non-GAAP Core Earnings by Business Segment | ||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
Residential Lending | Business Purpose Lending | Multifamily Investments | Third-Party Residential Investments | Corporate | Total | |||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
From portfolio investments | $ | 14 | $ | 2 | $ | 3 | $ | 8 | $ | 1 | $ | 28 | ||||||||||||
From mortgage banking activities | 5 | 1 | — | — | — | 6 | ||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||
Mortgage banking activities, net | 5 | 4 | — | — | — | 10 | ||||||||||||||||||
Investment fair value changes, net | (11 | ) | (1 | ) | 7 | 17 | — | 11 | ||||||||||||||||
Other income, net | 2 | 2 | 1 | — | — | 4 | ||||||||||||||||||
Realized gains, net | — | — | — | 5 | — | 5 | ||||||||||||||||||
Total non-interest income, net | (4 | ) | 5 | 8 | 21 | — | 30 | |||||||||||||||||
General and administrative expenses | (6 | ) | (7 | ) | — | (1 | ) | (13 | ) | (27 | ) | |||||||||||||
Other expenses | — | (2 | ) | — | — | — | (2 | ) | ||||||||||||||||
Provision for income taxes | — | — | — | — | — | — | ||||||||||||||||||
GAAP Net Income | $ | 9 | $ | (1 | ) | $ | 10 | $ | 29 | $ | (13 | ) | $ | 34 | ||||||||||
Core earnings adjustments: | ||||||||||||||||||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | 4 | 1 | (4 | ) | (15 | ) | — | (14 | ) | |||||||||||||||
Include cumulative gain on long-term investments sold, net | 1 | — | 10 | 9 | — | 20 | ||||||||||||||||||
Eliminate purchase accounting adjustments | — | — | — | — | — | (1 | ) | |||||||||||||||||
Eliminate corporate acquisition and related expenses | — | 2 | — | — | — | 2 | ||||||||||||||||||
Income tax adjustments associated with core earnings adjustments | — | — | — | — | 2 | 2 | ||||||||||||||||||
Non-GAAP Core Earnings | $ | 14 | $ | 2 | $ | 16 | $ | 23 | $ | (11 | ) | $ | 43 | |||||||||||
Average allocated equity | $ | 556 | $ | 87 | $ | 159 | $ | 308 | $ | 482 | $ | 1,591 | ||||||||||||
GAAP ROE | 6 | % | (3 | )% | 25 | % | 38 | % | N/A | 9 | % | |||||||||||||
Core ROE | 10 | % | 8 | % | 39 | % | 30 | % | N/A | 11 | % |
THE REDWOOD REVIEW I 4TH QUARTER 2019 |
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Residential Lending: Reconciliation to Non-GAAP Core Earnings | |||||||||||||||||||||||||
($ in millions) | |||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
12/31/2019 | 9/30/2019 | ||||||||||||||||||||||||
Investments | Mortgage Banking | Total Residential Lending | Investments | Mortgage Banking | Total Residential Lending | ||||||||||||||||||||
Net interest income | $ | 14 | $ | 5 | $ | 20 | $ | 14 | $ | 5 | $ | 19 | |||||||||||||
Non-interest income | |||||||||||||||||||||||||
Mortgage banking activities, net | — | 17 | 17 | — | 5 | 5 | |||||||||||||||||||
Investment fair value changes, net | (11 | ) | — | (11 | ) | (11 | ) | — | (11 | ) | |||||||||||||||
Other income, net | 3 | — | 3 | 2 | — | 2 | |||||||||||||||||||
Realized gains, net | 1 | — | 1 | — | — | — | |||||||||||||||||||
Total non-interest income, net | (8 | ) | 17 | 9 | (9 | ) | 5 | (4 | ) | ||||||||||||||||
General and administrative expenses | (2 | ) | (9 | ) | (10 | ) | (1 | ) | (5 | ) | (6 | ) | |||||||||||||
Provision for income taxes | — | (2 | ) | (2 | ) | — | — | — | |||||||||||||||||
Net income | $ | 5 | $ | 11 | $ | 16 | $ | 4 | $ | 5 | $ | 9 | |||||||||||||
Core earnings adjustments: | |||||||||||||||||||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | 1 | — | — | 4 | — | — | |||||||||||||||||||
Include cumulative gain on long-term investments sold, net | 3 | — | — | 1 | — | 1 | |||||||||||||||||||
Eliminate purchase accounting adjustments | — | — | — | — | — | — | |||||||||||||||||||
Eliminate corporate acquisition and related expenses | — | — | — | — | — | — | |||||||||||||||||||
Income tax adjustments associated with core earnings adjustments | — | — | — | — | — | — | |||||||||||||||||||
Non-GAAP Core Earnings | $ | 9 | $ | 11 | $ | 20 | $ | 9 | $ | 5 | $ | 14 | |||||||||||||
Average equity | $ | 336 | $ | 130 | $ | 466 | $ | 426 | $ | 130 | $ | 556 | |||||||||||||
GAAP ROE | 6 | % | 33 | % | 14 | % | 3 | % | 16 | % | 6 | % | |||||||||||||
Core ROE | 11 | % | 33 | % | 17 | % | 8 | % | 16 | % | 10 | % | |||||||||||||
GAAP pre-tax margin | 60 | % | 48 | % | |||||||||||||||||||||
Core pre-tax margin | 60 | % | 48 | % |
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Business Purpose Lending: Reconciliation to Non-GAAP Core Earnings | |||||||||||||||||||||||||
($ in millions) | |||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||
12/31/2019 | 9/30/2019 | ||||||||||||||||||||||||
Investments | Mortgage Banking | Total Business Purpose Lending | Investments | Mortgage Banking | Total Business Purpose Lending | ||||||||||||||||||||
Net interest income | $ | 11 | $ | 2 | $ | 13 | $ | 2 | $ | 1 | $ | 3 | |||||||||||||
Non-interest income | |||||||||||||||||||||||||
Mortgage banking activities, net | — | 30 | 30 | — | 4 | 4 | |||||||||||||||||||
Investment fair value changes, net | (5 | ) | — | (5 | ) | (11 | ) | — | (1 | ) | |||||||||||||||
Other income, net | — | 1 | 2 | — | 2 | 2 | |||||||||||||||||||
Realized gains, net | — | — | — | — | — | — | |||||||||||||||||||
Total non-interest income, net | (5 | ) | 31 | 26 | (1 | ) | 6 | 5 | |||||||||||||||||
General and administrative expenses | (1 | ) | (15 | ) | (15 | ) | — | (7 | ) | (7 | ) | ||||||||||||||
Other expenses | — | (4 | ) | (4 | ) | — | (2 | ) | (2 | ) | |||||||||||||||
Provision for income taxes | — | (1 | ) | (1 | ) | — | — | — | |||||||||||||||||
Net income | $ | 6 | $ | 13 | $ | 19 | $ | 1 | $ | (2 | ) | $ | (1 | ) | |||||||||||
Core earnings adjustments: | |||||||||||||||||||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | 1 | — | 1 | 1 | — | 1 | |||||||||||||||||||
Include cumulative gain on long-term investments sold, net | — | — | — | — | — | — | |||||||||||||||||||
Eliminate purchase accounting adjustments | — | 4 | 4 | — | 2 | 2 | |||||||||||||||||||
Eliminate corporate acquisition and related expenses | — | 1 | 1 | — | — | — | |||||||||||||||||||
Income tax adjustments associated with core earnings adjustments | — | (1 | ) | (1 | ) | — | — | — | |||||||||||||||||
Non-GAAP Core Earnings | $ | 7 | $ | 17 | $ | 24 | $ | 2 | $ | — | $ | 2 | |||||||||||||
Average equity | $ | 172 | $ | 255 | $ | 427 | $ | 32 | $ | 55 | $ | 87 | |||||||||||||
GAAP ROE | 13 | % | 21 | % | 18 | % | 13 | % | (12 | )% | (3 | )% | |||||||||||||
Core ROE | 16 | % | 27 | % | 23 | % | 24 | % | (1 | )% | 8 | % | |||||||||||||
GAAP pre-tax margin | 43 | % | (24 | )% | |||||||||||||||||||||
Core pre-tax margin | 56 | % | 4 | % |
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Components of Investment Portfolio Fair Value Changes, Net by Investment Type | ||||||||
($ in millions) | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Market valuation changes on: | ||||||||
Residential loans held-for-investment at fair value | ||||||||
Change in fair value from the reduction in basis (1) | $ | (3 | ) | $ | (2 | ) | ||
Other fair value changes (2) | (10 | ) | 10 | |||||
Total change in fair value of residential loans held-for-investment | (13 | ) | 8 | |||||
Real estate securities classified as trading | ||||||||
Change in fair value from the reduction in basis (1) | (6 | ) | — | |||||
Other fair value changes (2) | 2 | 42 | ||||||
Total change in fair value of real estate securities | (4 | ) | 42 | |||||
Risk management derivatives | ||||||||
Interest component of hedges (3) | (2 | ) | — | |||||
Other fair value changes (4) | 19 | (37 | ) | |||||
Total change in fair value of risk management derivatives | 17 | (37 | ) | |||||
Total investment portfolio fair value changes, net | $ | 1 | $ | 12 |
(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 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. During the third quarter of 2019, we updated our calculation of the quarterly change in basis for certain investments accounted for under the fair value option. Prior period amounts presented above have been conformed. |
(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. |
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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 core net interest income. |
Reconciliation to Non-GAAP Core Net Interest Income | ||||||||
($ in millions) | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Net interest income | $ | 45 | $ | 34 | ||||
Adjustments | ||||||||
Change in basis of fair value investments | (8 | ) | (2 | ) | ||||
Interest component of hedges | (2 | ) | — | |||||
Non-GAAP core net interest income | $ | 35 | $ | 31 |
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Reconciliation to Non-GAAP Core Investment Fair Value Changes, Net | ||||||||
($ in millions) | ||||||||
Three Months Ended | ||||||||
12/31/2019 | 9/30/2019 | |||||||
Investment fair value changes, net | $ | 1 | $ | 11 | ||||
Core adjustments | ||||||||
Eliminate mark-to-market changes on long-term investments and associated derivatives | (1 | ) | (11 | ) | ||||
Non-GAAP Core Investment Fair Value Changes, Net | $ | — | $ | — |
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See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
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• | 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; |
• | 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; |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
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• | 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. |
See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review. |
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(1) | Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period. |
(2) | Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $10.7 billion and $8.5 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood at December 31, 2019 and September 30, 2019, respectively. Tangible stockholder's equity excludes $161 million and $49 million of goodwill and intangible assets at December 31, 2019 and September 30, 2019, respectively. |
(3) | Acquisition-related items included $4 million of purchased intangible amortization expense related to the CoreVest and 5 Arches acquisitions, as well as the dilutive impact of $10 million of stock-based purchase consideration for CoreVest that was treated as compensation expense for GAAP purposes. |
(1) | Acquisition-related items included $4 million of purchased intangible amortization expense related to the CoreVest and 5 Arches acquisitions, as well as the dilutive impact of $10 million of stock-based purchase consideration for CoreVest that was treated as compensation expense for GAAP purposes. |
(1) | Core pre-tax margin is a measure of profitability that indicates how much of each dollar of revenue is left over after expenses, other than taxes. It is calculated on a non-GAAP core basis as the sum of mortgage banking net interest income and mortgage banking activities less general and administrative expenses, divided by the sum of mortgage banking net interest income and mortgage banking activities. |
(1) | Core pre-tax margin is a measure of profitability that indicates how much of each dollar of revenue is left over after expenses, other than taxes. It is calculated on a non-GAAP core basis as the sum of mortgage banking net interest income and mortgage banking activities less general and administrative expenses, divided by the sum of mortgage banking net interest income and mortgage banking activities. |
(1) | Equity attributable to financial instruments financed with short-term debt includes internal liquidity capital cushion that is not presented within table. Corporate long-term debt is not allocated to mortgage banking working capital or platform premiums. |
(1) | Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $10.7 billion and $8.5 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood at December 31, 2019 and September 30, 2019, respectively. Tangible stockholder's equity excludes $161 million and $49 million of goodwill and intangible assets at December 31, 2019 and September 30, 2019, respectively. |
(1) | Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $10.7 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood and tangible stockholders' equity excludes $161 million of goodwill and intangible assets. |
(1) | HPI updated LTV is calculated based on the current loan balance and an updated property value amount that is formulaically adjusted from value at origination based on the FHFA home price index (HPI). |
(1) | Debt service coverage ratio (or DSCR) is the ratio by which net operating income of a property exceeds it fixed debt costs. |
(2) | LTV (at origination) is calculated based on the original loan amount and the property value at the time the loan was originated. |
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