Redwood Trust Reports Third Quarter 2018 Results

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Nov 07, 2018, 16:15 ET

MILL VALLEY, Calif., Nov. 7, 2018 /PRNewswire/ -- Redwood Trust, Inc. (NYSE:RWT) (the "Company" or "Redwood") today reported its financial results for the third quarter of 2018.

Quarterly Financial Highlights

GAAP net income was $41 million, or $0.42 per diluted common share
Non-GAAP core earnings⁽¹⁾ were $37 million, or $0.39 per diluted common share
Book value per common share increased to $16.42 from $16.23 at June 30, 2018 and $15.67 at September 30, 2017
Economic return on book value⁽²⁾ of 3.0% for the third quarter and 9.3% for the nine months ended September 30, 2018
Recourse debt-to-equity leverage ratio⁽³⁾ of 3.1x

Business Highlights

Deployed a record $281 million of capital into new investments in the third quarter of 2018, bringing year-to-date deployment to $575 million through the end of September 2018
Through partnership with 5 Arches, began acquiring single-family rental loans and made an initial investment in a portfolio of fix-and-flip loans
Closed three Sequoia securitizations, bringing the total to 11 for 2018 and over 50 post-crisis
Raised $117 million of equity capital in first follow-on offering of common stock since 2009

"With our recent capital raise and record capital deployment in the third quarter, we made tangible progress towards our strategic goals of scaling our platform and broadening our reach across the full housing finance spectrum. Most importantly, we continued to deliver strong returns for our shareholders during a period of rising interest rates and heightened market volatility," commented Chris Abate, Chief Executive Officer of Redwood Trust.

A further discussion of Redwood's business, financial results, core earnings and taxable income, as well as a discussion of management's 2018 outlook, is included in the third quarter Redwood Review, which is available on the Company's website at www.redwoodtrust.com.

(1)	A reconciliation of GAAP net income to non-GAAP core earnings and a reconciliation of GAAP earnings per diluted share to non-GAAP core earnings per diluted share, along with additional information about Redwood's core earnings measure, is included in the tables that follow.
(2)	Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.
(3)	Recourse debt excludes $3.4 billion of consolidated debt (ABS issued) that is non-recourse to Redwood.

REDWOOD TRUST, INC.

Financial Performance	Three Months Ended
($ in millions, except per share data)	September 30, 2018			June 30, 2018			September 30, 2017

GAAP net income	$	41		$	33		$	36
GAAP net income per diluted common share	$	0.42		$	0.38		$	0.41

Non-GAAP core earnings	$	37		$	36		$	30
Non-GAAP core earnings per diluted common share	$	0.39		$	0.41		$	0.35

REIT taxable income (estimated)	$	23		$	27		$	20
REIT taxable income per share (estimated)	$	0.27		$	0.35		$	0.26

GAAP book value per share	$	16.42		$	16.23		$	15.67
Dividend per common share	$	0.30		$	0.30		$	0.28
Economic return on book value	3.0		%	2.5		%	4.3		%
Recourse debt-to-equity leverage ratio	3.1x			3.4x			3.2x

Capital deployment	$	281		$	186		$	119
Jumbo loans purchased	$	1,804		$	1,952		$	1,462
Jumbo loans securitized or sold	$	1,929		$	1,938		$	1,393

Conference Call and Webcast

Redwood will host an earnings call today, November 7, 2018, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time to discuss its third quarter 2018 financial results. The number to dial in order to listen to the conference call is 1-866-548-4713 in the U.S. and Canada. International callers must dial 1-323-794-2093. Callers should reference call ID #3216233. A replay of the call will be available through midnight on November 21, 2018, and can be accessed by dialing 1-844-512-2921 in the U.S. and Canada or 1-412-317-6671 internationally and entering access code #3216233.

The live conference call will also be webcast in listen-only mode in the Newsroom section of Redwood's website under "Events." An audio replay of the call will also be available on Redwood's website following the call. Redwood plans to file its Quarterly Report on Form 10-Q with the Securities and Exchange Commission by Friday, November 9, 2018, and also make it available on Redwood's website.

Cautionary Statement: This press release and the related conference call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to estimates of 2018 REIT taxable income and the expected timing for the filing of Redwood's Quarterly Report on Form 10-Q. Forward-looking statements involve numerous risks and uncertainties. Redwood's actual results may differ from Redwood's 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 under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission, 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.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾	Third Quarter 2018		Second Quarter 2018		First Quarter 2018		Fourth Quarter 2017		Third Quarter 2017
($ in millions, except share and per share data)


Interest income	$	99	$	83	$	77	$	71	$	63
Interest expense	(64)		(48)		(42)		(36)		(27)
Net interest income	35		35		35		35		35
Non-interest income
Mortgage banking activities, net	11		11		27		3		21
Investment fair value changes, net	10		1		2		—		—
Other income, net	3		3		2		3		3
Realized gains, net	7		5		9		5		2
Total non-interest income, net	32		20		40		11		26
Operating expenses	(21)		(19)		(23)		(20)		(20)
(Provision for) benefit from income taxes	(5)		(3)		(5)		5		(5)
Net income	$	41	$	33	$	47	$	31	$	36

Weighted average diluted shares (thousands) ⁽²⁾	114,683		100,432		108,195		109,621		102,703
Diluted earnings per common share	$	0.42	$	0.38	$	0.50	$	0.35	$	0.41
Regular dividends declared per common share	$	0.30	$	0.30	$	0.28	$	0.28	$	0.28


(1)	Certain totals may not foot due to rounding.
(2)	In the periods presented above, weighted average diluted shares included shares from the assumed conversion of our convertible and/or exchangeable debt in accordance with GAAP diluted EPS provisions. Actual shares outstanding at September 30, 2018, June 30, 2018, March 31, 2018, December 31, 2017, and September 30, 2017 were 82,930, 75,743, 75,703, 76,600, and 77,123, respectively.


REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾	Nine Months Ended September 30,
($ in millions, except share and per share data)	2018		2017

Interest income	$	259	$	177
Interest expense	(154)		(73)
Net interest income	105		104
Non-interest income
Mortgage banking activities, net	48		51
Investment fair value changes, net	13		10
Other income, net	9		9
Realized gains, net	21		9
Total non-interest income	91		79
Operating expenses	(64)		(57)
Provision for income taxes	(12)		(17)
Net income	$	121	$	109

Weighted average diluted shares (thousands)	107,792		99,398
Diluted earnings per common share	$	1.30	$	1.26
Regular dividends declared per common share	$	0.88	$	0.84


(1)	Certain totals may not foot due to rounding.

REDWOOD TRUST, INC.


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings ^{(1) (2)}	Three Months Ended
($ in millions, except per share data)	September 30, 2018		June 30, 2018		September 30, 2017

GAAP net income	$	41	$	33	$	36
Adjustments:
Eliminate mark-to-market changes on long-term investments and associated derivatives ⁽³⁾	(12)		(3)		(6)
Include cumulative gain (loss) on long-term investments sold, net ⁽⁴⁾	8		7		1
Income taxes associated with core earnings adjustments ⁽⁵⁾	—		—		(1)
Total adjustments	(4)		4		(6)
Non-GAAP core earnings	$	37	$	36	$	30

GAAP net income per diluted common share	$	0.42	$	0.38	$	0.41
Non-GAAP core earnings per diluted common share ⁽⁶⁾	$	0.39	$	0.41	$	0.35


(1)	Certain totals may not foot due to rounding.

(2)	Core earnings is a non-GAAP measure of Redwood's earnings and results of operations. Specifically, management has defined core earnings as: GAAP net income adjusted to (i) eliminate the impact of quarterly mark-to-market changes on the fair value of long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads, (ii) include the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any gains or losses from derivatives associated with the investments sold, and (iii) include the hypothetical income taxes associated with core earnings adjustments. Management utilizes this core earnings measure internally as one way of analyzing Redwood's performance over multiple periods, as it believes it provides useful comparative results absent the impact of certain quarterly mark-to-market changes and other items that management believes are not reflective of core results. Core earnings should not be utilized in isolation, nor should it be considered as an alternative to GAAP net income or other measurements of results of operations computed in accordance with GAAP. A further discussion of core earnings is included in the third quarter Redwood Review.

(3)	Adjustments eliminate the mark-to-market changes on the fair value of loans held-for-investment, trading securities, other investments, and associated derivatives that are primarily related to changes in benchmark interest rates and credit spreads. Details on the components of investment fair value changes, net, are included in the Appendix of the Redwood Reviews for the respective quarters presented.

(4)	Adjustment includes the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any realized gains or losses from derivatives associated with the investments sold. Cumulative gains and losses are calculated by multiplying the difference between the sales price and original purchase price by the face value of the securities sold.

(5)	We apply estimated effective tax rates to core earnings adjustments occurring within Redwood's taxable REIT subsidiaries to estimate the hypothetical income tax expense or benefit associated with those adjustments.

(6)	Additional information on the calculation of non-GAAP core EPS can be found in Table 2 in the Financial Tables section of the Redwood Reviews for the respective quarters presented.

REDWOOD TRUST, INC.

Consolidated Balance Sheets ⁽¹⁾	30-Sep 2018		30-Jun 2018		31-Mar 2018		31-Dec 2017		30-Sep 2017
($ in millions, except share and per share data)	30-Sep 2018		30-Jun 2018		31-Mar 2018		31-Dec 2017		30-Sep 2017


Residential loans	$	5,922	$	5,491	$	5,146	$	5,115	$	4,185
Business purpose loans	116		—		—		—		—
Multifamily loans ⁽²⁾	942		—		—		—		—
Real estate securities	1,470		1,454		1,358		1,477		1,356
Cash and cash equivalents	174		185		179		145		258
Other assets	516		383		318		304		332
Total assets	$	9,140	$	7,513	$	7,000	$	7,040	$	6,131

Short-term debt	$	1,424	$	1,426	$	1,504	$	1,939	$	1,238
Other liabilities	176		157		157		149		166
Asset-backed securities issued	3,407		1,930		1,542		1,165		944
Long-term debt, net	2,771		2,770		2,576		2,575		2,574
Total liabilities	7,778		6,284		5,780		5,828		4,922

Stockholders' equity	1,361		1,229		1,220		1,212		1,209

Total liabilities and equity	$	9,140	$	7,513	$	7,000	$	7,040	$	6,131

Shares outstanding at period end (thousands)	82,930		75,743		75,703		76,600		77,123
GAAP book value per share	$	16.42	$	16.23	$	16.12	$	15.83	$	15.67


(1)	Certain totals may not foot due to rounding.
(2)	During the third quarter of 2018, we invested in subordinate bonds issued in Agency multifamily securitizations and were required to consolidate the securitizations under GAAP.