FOR IMMEDIATE RELEASE
CONTACTS:         Mike McMahon
Redwood Trust, Inc.
(415) 384-3805
Wednesday, November 4, 2009
  
 
Martin S. Hughes
 
(415) 389-7373

REDWOOD TRUST REPORTS THIRD QUARTER 2009 RESULTS
 
MILL VALLEY, CA – November 4, 2009 – Redwood Trust, Inc. (NYSE:RWT) today reported net income for the third quarter of 2009 of $27 million, or $0.35 per share. This compares to net income of $7 million, or $0.10 per share, for the second quarter of 2009, and a net loss of $111 million, or $3.34 per share, for the third quarter of 2008.
 
Redwood estimated that it incurred a taxable loss of $23 million, or $0.30 per share, during the third quarter of 2009.  This compares to an estimated taxable loss of $12 million, or $0.16 per share, for the second quarter of 2009, and estimated taxable income of $2 million, or $0.07 per share, for the third quarter of 2008.
 
Key metrics for the third quarter are highlighted below:
 
·    
Investment cash flow increased to $78 million, up from $64 million in the second quarter of 2009, and business cash flow after operating and interest expenses increased to $68 million, compared to $55 million in the prior quarter;
 
·    
GAAP book value at the end of the third quarter was $11.68 per share, an increase of $1.33 or 13% from the end of the second quarter, and management’s estimate of economic value increased to $12.28 per share, up $0.98 or 9% from the end of the prior quarter; and
 
·    
During the third quarter, we acquired $246 million of predominately senior securities, sold $74 million of securities, and ended the quarter with $217 million of cash.
 
Please see the tables that follow for reconciliations between GAAP and non-GAAP metrics.   Additional information on Redwood’s business and financial results and on non-GAAP metrics is available in its Quarterly Report on Form 10-Q for the three months ended September 30, 2009 which was filed today with the Securities and Exchange Commission.  The Form 10-Q is available on Redwood’s website at www.redwoodtrust.com.
 
The accounting concepts and disclosures relating to our financial statements are complex. Today, the company also released the Redwood Review covering the third quarter of 2009. The Redwood Review is an additional publication that provides information about the company. The Redwood Review is available on the company’s website at www.redwoodtrust.com.
 
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 beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, 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, 2008, and in our Quarterly Report on Form 10-Q for the three months ended June 30, 2009, in each case under the caption 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 (SEC), including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
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Important factors, among others, that may affect our actual results include: changes in interest rates; changes in mortgage prepayment rates; the timing of credit losses within our portfolio; our exposure to adjustable-rate and negative amortization mortgage loans; the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the concentration of the credit risks we are exposed to; the ability of counterparties to satisfy their obligations to us; legislative and regulatory actions affecting the mortgage industry or our business; the availability of high quality assets for purchase at attractive prices; declines in home prices and commercial real estate 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, inaccurate ratings of securities by rating agencies, 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; our ability to generate the amount of cash flow we expect from our investment portfolio; changes in our investment, financing, and hedging strategies and the new risks that those changes may expose us to; changes in the competitive landscape within our industry, including changes that may affect our ability to retain or attract personnel; our failure to manage various operational risks associated with our business; our failure to maintain appropriate internal controls over financial reporting; our failure to properly administer and manage our securitization entities; risks we may be exposed to if we expand our business activities, such as risks relating to significantly increasing our direct holdings of loans; limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940; our ability to successfully invest our cash available for investment and raise additional capital to fund our investing activity; and other factors not presently identified.
 

2
 
REDWOOD TRUST, INC.
 
 
Consolidated Income Statement
Third
    
Second
    
First
    
Fourth
    
Third
  
($ in millions, except share data)
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
 
2009
    
2009
    
2009
    
2008
    
2008
  
                               
Interest income
   $ 70     $ 74     $ 82     $ 123     $ 131  
Interest expense
     (25 )     (39 )     (47 )     (99 )     (92 )
Net interest income
     45       35       35       24       39  
Provision for loan losses
     (10 )     (15 )     (16 )     (19 )     (18 )
Market valuation adjustments, net
     (11 )     (29 )     (43 )     (111 )     (127 )
Net interest income (loss) after provision and
     24       (9 )     (24 )     (106 )     (106 )
market valuation adjustments
                                        
Operating expenses
     (15 )     (11 )     (11 )     (14 )     (17 )
Realized gains, net
     18       26       -       6       -  
Benefit from (provision for) income taxes
     -       1       -       (4 )     10  
Net income (loss)
     27       7       (35 )     (118 )     (113 )
Less: Net (loss) income attributable to noncontrolling interest
     -       -       -       (2 )     (2 )
GAAP net income (loss)
   $ 27     $ 7     $ (35 )   $ (116 )   $ (111 )
                                         
                                         
Average diluted shares (thousands)
     78,223       66,446       53,632       33,366       33,334  
Diluted earnings (loss) per share
   $ 0.35     $ 0.10     $ (0.65 )   $ (3.46 )   $ (3.34 )
Regular dividends declared per common share
   $ 0.25     $ 0.25     $ 0.25     $ 0.75     $ 0.75  
 
 
 
 
3
 
REDWOOD TRUST, INC.
 
 
Consolidated Income Statement
Nine Months Ended
  
($ in millions, except share data)
September 30,
  
 
2009
    
2008
  
             
Interest income
   $ 226     $ 444  
Interest expense
     (112 )     (317 )
Net interest income
     114       127  
Provision for loan losses
     (41 )     (36 )
Market valuation adjustments, net
     (83 )     (382 )
Net interest loss after provision and
     (10 )     (291 )
market valuation adjustments
                
Operating expenses
     (36 )     (48 )
Realized gains, net
     44       3  
Benefit from (provision for) income taxes
     1       7  
Net loss
     (1 )     (329 )
Less: Net (loss) income attributable to noncontrolling interest
     -       -  
GAAP net loss
   $ (1 )   $ (329 )
                 
                 
Average diluted shares (thousands)
     65,363       32,907  
Diluted earnings (loss) per share
   $ (0.02 )   $ (9.99 )
Regular dividends declared per common share
   $ 0.75     $ 2.25  
 
 
 
 
 
4
 
REDWOOD TRUST, INC.
 
 
Consolidated Balance Sheet
30-Sep
    
30-Jun
    
31-Mar
    
31-Dec
    
30-Sep
  
($ in millions, except share data)
2009
    
2009
    
2009
    
2008
    
2008
  
                               
Real estate loans
   $ 3,831     $ 3,966     $ 4,541     $ 4,659     $ 6,101  
Real estate securities, at fair value:
                                        
Trading securities
     275       253       264       340       574  
Available-for-sale securities
     787       551       255       233       288  
Other investments
     29       47       62       78       79  
Cash and cash equivalents
     217       337       333       126       177  
Other assets
     146       131       126       146       155  
Total Assets
   $ 5,285     $ 5,285     $ 5,581     $ 5,582     $ 7,374  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ 7  
Other liabilities
     203       185       198       252       167  
Asset-backed securities issued - Sequoia
     3,728       3,843       4,418       4,508       5,930  
Asset-backed securities issued - Acacia
     288       287       291       347       673  
Long-term debt
     140       150       150       150       150  
Total liabilities
     4,359       4,465       5,057       5,257       6,927  
                                         
Stockholders’ equity
     907       802       506       302       412  
Noncontrolling interest
     19       18       18       23       35  
Total equity
     926       820       524       325       447  
                                              
Total Liabilities and Equity
   $ 5,285     $ 5,285     $ 5,581     $ 5,582     $ 7,374  
                                         
                                         
Shares outstanding at period end (thousands)
     77,669       77,503       60,228       33,471       33,238  
GAAP book value per share
   $ 11.68     $ 10.35     $ 8.40     $ 9.02     $ 12.40  
 
 
 
 
5
 
REDWOOD TRUST, INC.
 
 
Consolidating Income Statement
Three Months Ended September 30, 2009
($ in millions)
         
The
    
Securitization
    
Intercompany
     Redwood  
   
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 21     $ -     $ 43     $ -     $ 64  
Net discount (premium) amortization
     8       2       (4 )     -       6  
Total interest income
     29       2       39       -       70  
Management fees
     1       -       -       (1 )     -  
Interest expense
     (1 )     -       (24 )     -       (25 )
Net interest income
     29       2       15       (1 )     45  
Provision for loan losses
     -       -       (10 )     -       (10 )
Market valuation adjustments, net
     (8 )     (1 )     (2 )     -       (11 )
Net interest income after provision
     21       1       3       (1 )     24  
and market valuation adjustments
                                  
Operating expenses
     (15 )     (1 )     -       1       (15 )
Realized gains, net
     18       -       -       -       18  
Income from the Fund and Securitization Entities
     3       -       -       (3 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from (provision for) income taxes
     -       -       -       -       -  
Net income
   $ 27     $ -     $ 3     $ (3 )   $ 27  
 
 
Consolidating Income Statement
Nine Months Ended September 30, 2009
($ in millions)
         
The
     Securitization    
Intercompany
     Redwood  
   
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 65     $ -     $ 155     $ -     $ 220  
Net discount (premium) amortization
     7       7       (8 )     -       6  
Total interest income
     72       7       147       -       226  
Management fees
     3       -       -       (3 )     -  
Interest expense
     (5 )     -       (109 )     2       (112 )
Net interest income
     70       7       38       (1 )     114  
Provision for loan losses
     -       -       (41 )     -       (41 )
Market valuation adjustments, net
     (66 )     (6 )     (11 )     -       (83 )
Net interest (loss) income after provision
     4       1       (14 )     (1 )     (10 )
and market valuation adjustments
                                  
Operating expenses
     (36 )     (1 )     -       1       (36 )
Realized gains, net
     25       -       19       -       44  
Income from the Fund and Securitization Entities
     5       -       -       (5 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from (provision for) income taxes
     1       -       -       -       1  
Net (loss) income
   $ (1 )   $ -     $ 5     $ (5 )   $ (1 )
 
 
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REDWOOD TRUST, INC.
 
 
Consolidating Balance Sheet
September 30, 2009
($ in millions)
        The     Securitization    
Intercompany
     Redwood  
 
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Real estate loans
   $ 3     $ -     $ 3,828     $ -     $ 3,831  
Real estate securities, at fair value:
                                  
Trading securities
     5       -       270       -       275  
Available-for-sale securities
     746       41       -       -       787  
Other investments
     -       -       29       -       29  
Cash and cash equivalents
     217       -       -       -       217  
Investment in the Fund
     24       -       -       (24 )     -  
Investment in Securitization Entities
     78       -       -       (78 )     -  
Total earning assets
     1,073       41       4,127       (102 )     5,139  
Other assets
     24       4       118       -       146  
Total Assets
   $ 1,097     $ 45     $ 4,245     $ (102 )   $ 5,285  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ -  
Other liabilities
     50       2       151       -       203  
Asset-backed securities issued
     -       -       4,016       -       4,016  
Long-term debt
     140       -       -       -       140  
Total liabilities
     190       2       4,167       -       4,359  
                                         
Stockholders’ equity
     907       24       78       (102 )     907  
Noncontrolling interest
     -       19       -       -       19  
Total equity
     907       43       78       (102 )     926  
                                         
Total Liabilities and Equity
   $ 1,097     $ 45     $ 4,245     $ (102 )   $ 5,285  
 
 
 
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REDWOOD TRUST, INC.
 
 
GAAP and Taxable (Loss) Income Differences
Third
    
Second
    
First
    
Fourth
    
Third
  
($ in millions, except share data)
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
 
2009
    
2009
    
2009
    
2008
    
2008
  
                               
GAAP net income (loss)
   $ 27     $ 7     $ (35 )   $ (116 )   $ (111 )
Difference in taxable (loss) income calculations
                                  
Amortization and credit losses
     (48 )     (23 )     (22 )     (5 )     (7 )
Operating expenses
     (2 )     1       -       (1 )     3  
Realized gains, net
     (11 )     (25 )     -       (6 )     -  
Market valuation adjustments, net
     11       29       43       111       127  
Provision for income taxes
     -       (1 )     -       4       (10 )
Total differences in GAAP and taxable (loss) income
     (50 )     (19 )     21       103       113  
                                         
Taxable (loss) income
   $ (23 )   $ (12 )   $ (14 )   $ (13 )   $ 2  
                                         
Taxable (loss) income per share
   $ (0.30 )   $ (0.16 )   $ (0.22 )   $ (0.38 )   $ 0.07  
 
 
 
 
8
 
REDWOOD TRUST, INC.
 
 
GAAP and Taxable (Loss) Income Differences
Nine Months Ending
  
($ in millions, except share data)
September 30,
  
 
2009
  
2008
  
             
GAAP net loss
   $ (1 )   $ (329 )
Difference in taxable (loss) income calculations
        
Amortization and credit losses
     (93 )     (16 )
Operating expenses
     -       5  
Realized gains, net
     (37 )     (3 )
Market valuation adjustments, net
     83       382  
Provision for income taxes
     (1 )     (7 )
Total differences in GAAP and taxable (loss) income
     (48 )     361  
                   
Taxable (loss) income
   $ (49 )   $ 32  
                 
Taxable (loss) income per share
   $ (0.68 )   $ 0.97  
 
 
 
9
 
REDWOOD TRUST, INC.
 
Book Value Per Share and Non-GAAP Estimate of Economic Value Per Share
 
 
    September 30, 2009  
(In Millions, Except per Share Data)
  
GAAP Book Value
     Adjustments    
Management's Estimate of
Economic Value
  
Cash and cash equivalents
   $ 217     $       $ 217  
Real estate securities at Redwood
                        
Residential
     732               732  
Commercial
     17               17  
CDO
     2               2  
Subtotal real estate securities
     751               751  
Investments in the Fund
     24               24  
Investments in Sequoia
     76       (29 )(a)     47  
Investments in Acacia (b)
     2               2  
Total cash, securities and investments
     1,070               824  
Long-term debt
     (140 )     76 (c)     (64 )
Other assets/liabilities, net (d)
     (23 )             (23 )
Stockholders' Equity
   $ 907             $ 954  
              -          
Book Value Per Share
   $ 11.68             $ 12.28  

(a) Our Sequoia investments consist predominately of AAA-rated interest-only securities issued by Sequoia, and to a smaller extent, senior and subordinate securities. We calculated the $47 million estimate of economic value for these securities using the same valuation process that we follow to fair value our other real estate securities. In contrast, the $76 million of GAAP carrying value of these investments represents the difference between the assets and liabilities owned by the Sequoia entities.

(b) The fair value of our investments in Acacia was $2 million and the GAAP carrying value was $2 million. These investments consist of equity interests and securities in the Acacia CDO entities we sponsor, which have minimal value, as well as management fees. We valued the management fees at $2 million, which equals our projected management fees discounted at a 45% rate.

 (c) At September 30, 2009, we had $140 million of long-term debt outstanding at an interest rate of LIBOR plus 225 basis points due in 2037. We calculated the $64 million estimate of economic value of this debt using the same valuation process used to fair value our other financial assets and liabilities.

(d) Other assets/liabilities, net are comprised of $2 million of real estate loans, $7 million of accrued interest receivable, and $17 million of other assets, less dividends payable of $19 million and accrued interest and other liabilities of $30 million.
 

 
10
 
REDWOOD TRUST, INC.
 
Sources and Uses of Cash*
 
   
Three Months Ended
  
(In Millions)
  
September 30, 2009
  
Beginning Cash Balance at 6/30/09
   $ 337  
Business cash flows:
        
Cash flow from investments
     78  
Asset management fees
     1  
Operating expenses
     (10 )
Interest expense on long-term debt
     (1 )
Total Business Cash Flows
     68  
Other sources and uses:
        
Proceeds from asset sales
     74  
Proceeds from equity issuance
     -  
Changes in working capital
     6  
Acquisitions
     (246 )
Repurchase of long-term debt
     (3 )
Dividends paid
     (19 )
Total Other Uses
     (188 )
          
Net Uses of Cash
     (120 )
Ending Cash Balance at 9/30/09
   $ 217  
 
 
*The sources and uses of cash in the table below are derived from our GAAP Consolidated Statements of Cash Flows by aggregating and netting cash flows in a manner consistent with the way management analyzes them. This table excludes the gross cash flows generated by our Sequoia and Acacia securitization entities and the Fund (cash flows that are not available to Redwood), but does include the cash flows distributed to Redwood as a result of our investments in these entities. The beginning and ending cash balances presented in the table below are GAAP amounts.
 
 
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