FOR IMMEDIATE RELEASE
CONTACTS: Mike McMahon
Redwood Trust, Inc.
(415) 384-3805
Wednesday, November 5, 2008
  
 
Martin S. Hughes
 
(415) 389-7373

REDWOOD TRUST REPORTS THIRD QUARTER 2008 RESULTS
 
MILL VALLEY, CA - November 5, 2008 - Redwood Trust, Inc. (NYSE: RWT) today reported a GAAP loss of $111 million for the third quarter of 2008, or a loss of $3.34 per share. This GAAP loss included $127 million, or $3.81 per share, of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $1.40 per share for the second quarter of 2008, which reflected negative MTM adjustments of $1.84 per share, and to a net loss of $2.18 per share for the third quarter of 2007, which reflected negative MTM adjustments of $3.69 per share.
 
Taxable income for the third quarter was $2 million, or $0.07 per share. This taxable income reflected charges related to credit losses of $33 million, or $1.00 per share. This compares to taxable income of $4 million, or $0.11 per share, for the second quarter of 2008, and taxable income of $49 million, or $1.74 per share, for the third quarter of 2007.
 
During the quarter, Redwood’s investments generated $46 million of cash flow in excess of operating and interest costs and Redwood ended the quarter with $177 million in cash and $7 million of short-term debt. 
 
“Our business remains challenging in light of the continuing deterioration in residential mortgage credit performance. The unrelenting decline in the market values of mortgage loans and related securities has continued to pressure our earnings and book value,” said Marty Hughes, Redwood’s Chief Financial Officer. “Since mid-June, we significantly reduced our acquisition activity while we assessed the impact of the publicly announced government loan modification programs and the recently announced Troubled Asset Relief Plan.” Mr. Hughes added, “In the upcoming months, we believe hedge fund redemptions, forced margin calls, and planned asset liquidations from troubled or seized financial institutions will provide extraordinary investment opportunities. Our strong cash position will allow us to take advantage of those opportunities. ”
 
The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our “Redwood Review” covering the third quarter of 2008. The Redwood Review contains a more detailed discussion of our business performance and outlook. The Redwood Review is available on our website at www.redwoodtrust.com.
 
Additional information on our GAAP results is available in our Quarterly Report on Form 10-Q for the three months ended September 30, 2008 which we filed today with the Securities and Exchange Commission.  The Form 10-Q is available on our website at www.redwoodtrust.com. We strongly recommend reading the Redwood Review and 10-Q in conjunction with this press release.
 
CAUTIONARY STATEMENT: This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2007, and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, including reports on Forms 10-K, 10-Q, and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
Important factors, among others, that may affect our actual results include: changes in interest rates; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; legislative and regulatory actions affecting the mortgage industry; the availability of high quality assets for purchase at attractive prices; declines in home prices; increases in mortgage payment delinquencies; changes in the level of liquidity in the capital markets which may adversely affect our ability to finance our real estate asset portfolio; changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, rating agency downgrades of securities and increases in the supply of real estate securities available for sale, each of which may adversely affect the values of securities we own; the extent of changes in the values of securities we own and the impact of adjustments reflecting those changes on our income statement and balance sheet, including our stockholders’ equity; our ability to maintain the positive stockholders’ equity necessary to enable us to pay the dividends required to maintain our status as a real estate investment trust for tax purposes; and other factors not presently identified.
 
 
- 1 -
 

REDWOOD TRUST, INC.
                           
                            
                            
Consolidated Income Statement
  
Third
  
Second
  
First
  
Fourth
  
Third
  
($ in millions, except share data)
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
 
  
2008
  
2008
  
2008
  
2007
  
2007
  
                            
Interest income
  
$
131
 
$
137
 
$
176
 
$
207
 
$
220
  
Interest expense
    
(92
)
  
(98
)
  
(126
)
  
(153
)
  
(165
)
Net interest income
    
39
   
39
   
50
   
54
   
55
  
Provision for loan losses
    
(18
)
  
(10
)
  
(8
)
  
(5
)
  
(2
)
Market valuation adjustments, net
    
(127
)
  
(60
)
  
(195
)
  
(1,119
)
  
(102
)
Net interest income after provision and
    
(106
)
  
(31
)
  
(153
)
  
(1,070
)
  
(49
)
market valuation adjustments
                                
Operating expenses
    
(17
)
  
(15
)
  
(16
)
  
(16
)
  
(12
)
Realized gains on sales and calls, net
    
—
   
3
   
—
   
7
   
2
 
Minority interest allocation
    
2
   
(2
)
  
(1
)
  
—
   
—
 
Credit (provision) for income taxes
    
10
   
(1
)
  
(2
)
  
2
   
(2
)
GAAP net (loss) income
  
$
(111
)
$
(46
)
$
(172
)
$
(1,077
)
$
(61
)
                                 
                                 
Average diluted shares (thousands)
    
33,334
   
32,871
   
32,511
   
29,531
   
27,892
 
GAAP earnings per share (diluted)
  
$
(3.34
)
$
(1.40
)
$
(5.28
)
$
(36.49
)
$
(2.18
)
                                 
Regular dividends declared per common share
  
$
0.75
 
$
0.75
 
$
0.75
 
$
0.75
 
$
0.75
 
Special dividends declared per common share
    
—
   
—
   
—
   
2.00
   
—
 
Total dividends declared per common share
  
$
0.75
 
$
0.75
 
$
0.75
 
$
2.75
 
$
0.75
 
 
 
- 2 -
 

REDWOOD TRUST, INC.
            
             
             
Consolidated Income Statement
  
Nine Months Ended
  
($ in millions, except share data)
  
September 30,
  
 
  
2008
  
2007
  
             
Interest income
  
$
444
 
$
661
 
Interest expense
    
(316
)
  
(499
)
Net interest income
   
128
   
162
 
Provision for loan losses
    
(36
)
  
(8
)
Market valuation adjustments, net
    
(382
)
  
(142
)
Net interest income after provision and
    
(290
)
  
12
 
market valuation adjustments
              
Operating expenses
   
(48
)
  
(42
)
Realized gains on sales and calls, net
    
3
   
6
 
Minority interest allocation
    
(1
)
  
—
 
Credit (provision) for income taxes
    
7
   
(7
)
GAAP net (loss) income
  
$
(329
)
$
(31
)
               
               
Average diluted shares (thousands)
    
32,907
   
27,388
 
GAAP earnings per share (diluted)
  
$
(9.99
)
$
(1.14
)
               
Regular dividends declared per common share
  
$
2.25
 
$
2.25
 
Special dividends declared per common share
    
—
   
—
 
Total dividends declared per common share
  
$
2.25
 
$
2.25
 
 
 
- 3 -
 
 
REDWOOD TRUST, INC.
                                
                                 
                                 
Consolidated Balance Sheet
  
30-Sep
  
30-Jun
  
31-Mar
  
1-Jan (1)
  
31-Dec
  
30-Sep
  
($ in millions, except share data)
  
2008
  
2008
  
2008
  
2008
  
2007
  
2007
  
                                 
Real estate loans
  
$
6,101
 
$
6,377
 
$
6,775
 
$
7,204
 
$
7,204
 
$
7,656
 
Real estate securities, at fair value:
                                      
Trading securities
    
574
   
841
   
952
   
1,805
   
12
   
25
 
Available-for-sale securities
    
288
   
400
   
242
   
317
   
2,110
   
2,926
 
Other investments
    
79
   
79
   
79
   
79
   
79
   
80
 
Cash and cash equivalents
    
177
   
148
   
257
   
290
   
290
   
310
 
Other assets
    
155
   
201
   
241
   
223
   
244
   
286
 
Total assets
  
$
7,374
 
$
8,046
 
$
8,546
 
$
9,918
 
$
9,939
 
$
11,283
 
                                       
Short-term debt - Redwood
  
$
7
 
$
9
 
$
2
 
$
8
 
$
8
 
$
39
 
Other liabilities
    
167
   
166
   
211
   
170
   
170
   
142
 
Asset-backed securities issued - Sequoia
    
5,930
   
6,175
   
6,544
   
6,946
   
6,946
   
7,382
 
Asset-backed securities issued - Acacia(2)
    
673
   
935
   
1,046
   
1,893
   
3,383
   
3,421
 
Long-term debt - Redwood
    
150
   
150
   
150
   
150
   
150
   
150
 
Minority interest
   
35
   
47
   
8
   
—
   
—
   
—
 
Stockholders’ equity (deficit)
   
412
   
564
   
585
   
751
   
(718
)
  
149
 
Total liabilities and stockholders' equity
  
$
7,374
 
$
8,046
 
$
8,546
 
$
9,918
 
$
9,939
 
$
11,283
 
                                       
Shares outstanding at period end (thousands)
    
33,238
   
33,184
   
32,710
   
32,385
   
32,385
   
27,986
 
GAAP book value per share
  
$
12.40
 
$
17.00
 
$
17.89
 
$
23.18
 
$
(22.18
)
$
5.32
 
                                       
(1)
We adopted the fair value option under FAS 159 for assets and liabilities of Acacia and certain other assets effective January 1, 2008.
(2)
Prior to 2008, ABS issued by Acacia were accounted for at cost.
 
 
- 4 -
 
REDWOOD TRUST, INC.
                           
                           
Consolidating Income Statement
                                
Three Months Ended September 30, 2008
                                
($ in millions)
       
Opportunity
            
Intercompany
  
Redwood
  
 
  
Redwood
 
Fund
  
Sequoia
  
Acacia
  
Adjustments
  
Consolidated
  
                                 
Interest income
  
$
17
 
$
2
 
$
71
 
$
37
 
$
(1
)
$
126
 
Net discount (premium) amortization
    
6
   
2
   
(3
)
  
—
   
—
   
5
 
Total interest income
    
23
   
4
   
68
   
37
   
(1
)
  
131
 
Management fees
    
1
   
—
   
—
   
—
   
—
   
1
 
Interest expense
    
(2
)
  
—
   
(63
)
  
(29
)
  
1
   
(93
)
Net interest income
 
$
22
 
$
4
 
$
5
 
$
8
 
$
—
 
$
39
 
Provision for loan losses
    
—
   
—
   
(18
)
  
—
   
—
   
(18
)
Market valuation adjustments, net
    
(88
)
  
(8
)
  
(2
)
  
(29
)
  
—
   
(127
)
Net interest (loss) income after provision
    
(66
)
  
(4
)
  
(15
)
  
(21
)
  
—
   
(106
)
and market valuation adjustments
                                      
Operating expenses
    
(17
)
  
—
   
—
   
—
   
—
   
(17
)
Realized gains on sales and calls, net
    
—
   
—
   
—
   
—
   
—
   
—
 
Loss from Opportunity Fund
    
(2
)
  
—
   
—
   
—
   
2
   
—
 
Loss from Sequoia
    
(15
)
  
—
   
—
   
—
   
15
   
—
 
Loss from Acacia
    
(21
)
  
—
   
—
   
—
   
21
   
—
 
Minority interest allocation
    
—
   
2
   
—
   
—
   
—
   
2
 
Credit for income taxes
    
10
   
—
   
—
   
—
   
—
   
10
 
Net (Loss) Income
 
$
(111
)
$
(2
)
$
(15
)
$
(21
)
$
38
 
$
(111
)
 
 
- 5 -
 
REDWOOD TRUST, INC.
                           
                           
Consolidating Income Statement
                                
Nine Months Ended September 30, 2008
                                
($ in millions)
       
Opportunity
            
Intercompany
  
Redwood
  
 
  
Redwood
  
Fund
  
Sequoia
  
Acacia
  
Adjustments
  
Consolidated
  
                           
Interest income
  
$
60
 
$
4
 
$
255
 
$
124
 
$
(5
)
$
438
 
Net discount (premium) amortization
    
22
   
4
   
(20
)
  
—
   
—
   
6
 
Total interest income
    
82
   
8
   
235
   
124
   
(5
)
  
444
 
Management fees
    
4
   
—
   
—
   
—
   
—
   
4
 
Interest expense
    
(7
)
  
—
   
(212
)
  
(106
)
  
5
   
(320
)
Net interest income
  
$
79
 
$
8
 
$
23
 
$
18
 
$
—
 
$
128
 
Provision for loan losses
    
—
   
—
   
(36
)
  
—
   
—
   
(36
)
Market valuation adjustments, net
    
(287
)
  
(8
)
  
(3
)
  
(84
)
  
—
   
(382
)
Net interest (loss) income after provision
    
(208
)
  
—
   
(16
)
  
(66
)
  
—
   
(290
)
and market valuation adjustments
                                      
Operating expenses
    
(48
)
  
—
 
  
—
   
—
   
—
   
(48
)
Realized gains on sales and calls, net
    
1
   
2
   
—
   
—
   
—
   
3
 
Income from Opportunity Fund
    
1
   
—
   
—
   
—
   
(1
)
  
—
 
Loss from Sequoia
    
(16
)
  
—
   
—
   
—
   
16
    
—
 
Loss from Acacia
    
(66
)
  
—
   
—
   
—
   
66
   
—
 
Minority interest allocation
    
—
   
(1
)
  
—
   
—
   
—
   
(1
)
Credit for income taxes
    
7
   
—
   
—
   
—
   
—
   
7
 
Net (Loss) Income
 
$
(329
)
$
1
 
$
(16
)
$
(66
)
$
81
  
$
(329
)
 
 
- 6 -
 
REDWOOD TRUST, INC.
                           
                           
Consolidating Balance Sheet
                                
September 30, 2008
                                
($ in millions)
       
Opportunity
            
Intercompany
  
Redwood
  
 
  
Redwood
  
Fund
  
Sequoia
  
Acacia
  
Adjustments
  
Consolidated
  
                                 
Real estate loans
  
$
3
 
$
—
 
$
6,084
 
$
14
 
$
—
 
$
6,101
 
Real estate securities, at fair value:
          
—
   
—
   
—
   
—
   
—
 
Trading securities
    
7
   
—
   
—
   
567
   
—
   
574
 
Available-for-sale securities
    
221
   
67
   
—
   
82
   
(82
)
  
288
 
Other investments
    
—
   
—
   
—
   
79
   
—
   
79
 
Cash and cash equivalents
    
177
   
—
   
—
   
—
   
—
   
177
 
Total earning assets
    
408
   
67
   
6,084
   
742
   
(82
)
  
7,219
 
Investment in Opportunity Fund
    
35
   
—
   
—
   
—
   
(35
)
  
—
 
Investment in Sequoia
    
111
   
—
   
—
   
—
   
(111
)
  
—
 
Investment in Acacia
    
19
   
—
   
—
   
—
   
(19
)
  
—
 
Restricted cash
    
—
   
6
   
—
   
57
   
—
   
63
 
Other assets
    
25
   
—
   
53
   
14
   
—
   
92
 
Total Assets
  
$
598
 
$
73
 
$
6,137
 
$
813
 
$
(247
)
$
7,374
 
                                       
Short-term debt - Redwood
  
$
7
 
$
—
 
$
—
 
$
—
 
$
—
 
$
7
 
Other liabilities
    
29
   
3
   
14
   
121
   
—
   
167
 
Asset-backed securities issued - Sequoia
    
—
   
—
   
6,012
   
—
   
(82
)
  
5,930
 
Asset-backed securities issued - Acacia
    
—
   
—
   
—
   
673
   
—
   
673
 
Long-term debt - Redwood
    
150
   
—
   
—
   
—
   
—
   
150
 
Total liabilities
    
186
   
3
   
6,026
   
794
   
(82
)
  
6,927
 
Minority interest
    
—
   
35
   
—
   
—
   
—
   
35
 
Total stockholders’ equity
    
412
   
35
   
111
   
19
   
(165
)
  
412
 
Total Liabilities and Stockholders’ Equity
  
$
598
 
$
73
 
$
6,137
 
$
813
 
$
(247
)
$
7,374
 
 
 
- 7 -
 
REDWOOD TRUST, INC.
                           
                            
                            
Taxable Income & GAAP (Loss) Income Differences
  
Third
  
Second
  
First
  
Fourth
  
Third
  
($ in millions, except share data)
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
 
  
2008
  
2008
  
2008
  
2007
  
2007
  
                            
GAAP net (loss) income
  
$
(111
)
$
(46
)
$
(172
)
$
(1,077
)
$
(61
)
Difference in taxable income calculations
                                
Amortization and credit losses
    
4
   
(7
)
  
6
   
(15
)
  
10
 
Operating expenses
    
3
   
1
   
2
   
9
   
(2
)
Gross realized gains on calls and sales
    
(11
)
  
(6
)
  
(5
)
  
(5
)
  
(3
)
Market valuation adjustments, net
    
127
   
61
   
194
   
1,119
   
103
 
Provision for income taxes
    
(10
)
  
1
   
1
   
(2
)
  
2
 
Total differences in GAAP and taxable income
    
113
   
50
   
198
   
1,106
   
110
 
                                 
Taxable income
  
$
2
 
$
4
 
$
26
 
$
29
 
$
49
 
                                 
Total taxable income per share
 
$
0.07
 
$
0.11
 
$
0.79
 
$
0.91
 
$
1.74
 
 
 
- 8 -
 
REDWOOD TRUST, INC.
            
             
             
Taxable Income & GAAP (Loss) Income Differences
  
Nine Months Ended
  
($ in millions, except share data)
  
September 30, 2008
  
 
  
2008
  
2007
  
             
GAAP net (loss) income
  
$
(329
)
$
(31
)
Difference in taxable income calculations
              
Amortization and credit losses
    
3
   
31
 
Operating expenses
    
5
   
(6
)
Gross realized gains on calls and sales
    
(22
)
  
(6
)
Market valuation adjustments, net
    
382
   
142
 
Provision for income taxes
    
(7
)
  
5
 
Total differences in GAAP and taxable income
    
361
   
166
 
               
Taxable income
  
$
32
 
$
135
 
               
Total taxable income per share
 
$
0.97
 
$
4.88
 
 
 
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