Redwood Trust Reports First Quarter 2019 Financial Results

_____________________

(1)

During the first quarter of 2019, we updated our definition of core earnings. 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 $5.9 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood.

REDWOOD TRUST, INC.

Financial Performance

Three Months Ended

($ in millions, except per share data)

3/31/2019

12/31/2018

3/31/2018

GAAP net income (loss)

$

54

$

(1)

$

47

GAAP net income (loss) per diluted common share

$

0.49

$

(0.02)

$

0.50

Non-GAAP core earnings

$

38

$

40

$

58

Non-GAAP core earnings per diluted common share

$

0.36

$

0.41

$

0.60

REIT taxable income (estimated)

$

29

$

27

$

33

REIT taxable income per share (estimated)

$

0.30

$

0.32

$

0.44

GAAP book value per share

$

16.00

$

15.89

$

16.12

Dividends per common share

$

0.30

$

0.30

$

0.28

Economic return on book value

2.6

%

(1.4)

%

3.6

%

Recourse debt-to-equity leverage ratio ⁽¹⁾

2.9

x

3.5

x

3.4

x

Capital deployment

$

163

$

235

$

108

Jumbo loans purchased

$

1,022

$

1,563

$

1,815

Jumbo loans securitized or sold

$

833

$

1,290

$

1,595

(1)

Recourse debt excludes $5.9 billion, $5.7 billion, and $1.5 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood at March 31, 2019, December 31, 2018, and March 31, 2018, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Three Months Ended

($ in millions, except share and per share data)

3/31/19

12/31/18

9/30/18

6/30/18

3/31/18

Interest income

$

131

$

120

$

99

$

83

$

77

Interest expense

(99)

(85)

(64)

(48)

(42)

Net interest income

32

35

35

35

35

Non-interest income

Mortgage banking activities, net

12

11

11

11

27

Investment fair value changes, net

20

(39)

10

1

2

Other income, net

4

4

3

3

2

Realized gains, net

11

6

7

5

9

Total non-interest income (loss), net

47

(18)

32

20

40

Operating expenses

(23)

(19)

(21)

(19)

(23)

(Provision for) benefit from income taxes

(1)

1

(5)

(3)

(5)

Net income (loss)

$

54

$

(1)

$

41

$

33

$

47

Weighted average diluted shares (thousands) ⁽²⁾

126,278

83,217

114,683

100,432

108,195

Diluted earnings (loss) per common share

$

0.49

$

(0.02)

$

0.42

$

0.38

$

0.50

Regular dividends declared per common share

$

0.30

$

0.30

$

0.30

$

0.30

$

0.28

(1)

Certain totals may not foot due to rounding.

(2)

In the periods presented above, excluding the fourth quarter of 2018, 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 March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018 were 96,866, 84,884, 82,930, 75,743, and 75,703, respectively.

REDWOOD TRUST, INC.

Reconciliation of GAAP Net Income to

Non-GAAP Core Earnings ^{(1) (2)}

Three Months Ended

($ in millions, except per share data)

3/31/19

12/31/18

3/31/18

GAAP net income (loss)

$

54

$

(1)

$

47

Adjustments:

Eliminate mark-to-market changes on long-term investments and associated derivatives ⁽³⁾

(16)

40

(7)

Include cumulative gain on long-term investments sold, net ⁽⁴⁾

1

4

18

Eliminate purchase accounting adjustments ⁽⁵⁾

(2)

—

—

Income taxes associated with core earnings adjustments ⁽⁶⁾

(1)

(2)

—

Total adjustments

(16)

41

11

Non-GAAP core earnings

$

38

$

40

$

58

GAAP net income per diluted common share

$

0.49

$

(0.02)

$

0.50

Non-GAAP core earnings per diluted common share ⁽⁷⁾

$

0.36

$

0.41

$

0.60

(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, (iii) exclude certain items related to Redwood's acquisition of 5 Arches (as described in footnote 5 below) and (iv) 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 first 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. Beginning with the first quarter of 2019, management has updated its calculation of this adjustment for certain investments accounted for under the fair value option that have significant differences between expected cash interest and expected yield-to-maturity. For consistency of presentation, core earnings for the first and fourth quarters of 2018 has been updated to reflect the impact of this change during those quarters. Details regarding the change in calculation of this adjustment and the components of investment fair value changes, net, are included in the Appendix of the first quarter 2019 Redwood Review.

(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)

Beginning with the first quarter of 2019, core earnings excludes several items related to the acquisition of 5 Arches. These items include the exclusion of a one-time gain associated with the re-measurement of our initial minority investment and purchase option in 5 Arches, as well as ongoing adjustments to exclude amortization of intangible assets and, in future quarters, changes in fair value of the contingent consideration liability related to the remaining purchase consideration for the platform. Additional information regarding this adjustment is included in the Appendix to the first quarter 2019 Redwood Review.

(6)

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.

(7)

Additional information on the calculation of non-GAAP core diluted 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⁾

($ in millions, except share and per share data)

3/31/19

12/31/18

9/30/18

6/30/18

3/31/18

Residential loans

$

7,274

$

7,255

$

5,922

$

5,491

$

5,146

Business purpose loans

161

141

116

—

—

Multifamily loans

2,176

2,145

942

—

—

Real estate securities

1,543

1,452

1,470

1,454

1,358

Other investments

414

439

114

117

66

Cash and cash equivalents

201

176

174

185

179

Other assets

424

330

402

266

251

Total assets

$

12,193

$

11,937

$

9,140

$

7,513

$

7,000

Short-term debt

$

2,163

$

2,400

$

1,424

$

1,426

$

1,504

Other liabilities

270

206

176

157

157

Asset-backed securities issued

5,638

5,410

3,407

1,930

1,542

Long-term debt, net

2,573

2,572

2,771

2,770

2,576

Total liabilities

10,643

10,589

7,778

6,284

5,780

Stockholders' equity

1,550

1,349

1,361

1,229

1,220

Total liabilities and equity

$

12,193

$

11,937

$

9,140

$

7,513

$

7,000

Shares outstanding at period end (thousands)

96,866

84,884

82,930

75,743

75,703

GAAP book value per share

$

16.00

$

15.89

$

16.42

$

16.23

$

16.12

(1)

Certain totals may not foot due to rounding.