Redwood Trust Reports Fourth Quarter 2018 Financial Results

(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 $5.7 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

Years Ended

($ in millions, except per share data)

12/31/2018

9/30/2018

12/31/2017

12/31/2018

12/31/2017

GAAP net income (loss)

$

(1)

$

41

$

31

$

120

$

140

GAAP net income (loss) per diluted common share

$

(0.02)

$

0.42

$

0.35

$

1.34

$

1.60

Non-GAAP core earnings

$

38

$

37

$

30

$

168

$

119

Non-GAAP core earnings per diluted common share

$

0.39

$

0.39

$

0.35

$

1.78

$

1.40

REIT taxable income (2018 estimated)

$

27

$

23

$

34

$

110

$

90

REIT taxable income per share (2018 estimated)

$

0.32

$

0.27

$

0.44

$

1.38

$

1.17

GAAP book value per share

$

15.89

$

16.42

$

15.83

$

15.89

$

15.83

Dividends per common share

$

0.30

$

0.30

$

0.28

$

1.18

$

1.12

Economic return on book value

(1.4)

%

3.0

%

2.8

%

7.8

%

13.3

%

Recourse debt-to-equity leverage ratio ⁽¹⁾

3.5x

3.1x

3.7x

3.5x

3.7x

Capital deployment

$

235

$

281

$

118

$

810

$

511

Jumbo loans purchased

$

1,563

$

1,804

$

1,950

$

7,134

$

5,742

Jumbo loans securitized or sold

$

1,290

$

1,929

$

1,163

$

7,204

$

4,628

(1)

Recourse debt excludes $5.7 billion, $3.4 billion, and $1.2 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood at December 31, 2018, September 30, 2018, and December 31, 2017, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Three Months Ended

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

12/31/18

9/30/18

6/30/18

3/31/18

12/31/17

Interest income

$

120

$

99

$

83

$

77

$

71

Interest expense

(85)

(64)

(48)

(42)

(36)

Net interest income

35

35

35

35

35

Non-interest income

Mortgage banking activities, net

11

11

11

27

3

Investment fair value changes, net

(39)

10

1

2

—

Other income, net

4

3

3

2

3

Realized gains, net

6

7

5

9

5

Total non-interest (loss) income, net

(18)

32

20

40

11

Operating expenses

(19)

(21)

(19)

(23)

(20)

Benefit from (provision for) income taxes

1

(5)

(3)

(5)

5

Net (loss) income

$

(1)

$

41

$

33

$

47

$

31

Weighted average diluted shares (thousands) ⁽²⁾

83,217

114,683

100,432

108,195

109,621

Diluted (loss) earnings per common share

$

(0.02)

$

0.42

$

0.38

$

0.50

$

0.35

Regular dividends declared per common share

$

0.30

$

0.30

$

0.30

$

0.28

$

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 December 31, 2018, September 30, 2018, June 30, 2018, March 31, 2018, and December 31, 2017 were 84,884, 82,930, 75,743, 75,703, and 76,600, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Years Ended December 31,

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

2018

2017

Interest income

$

379

$

248

Interest expense

(239)

(109)

Net interest income

140

139

Non-interest income

Mortgage banking activities, net

60

54

Investment fair value changes, net

(26)

10

Other income, net

13

12

Realized gains, net

27

13

Total non-interest income

74

90

Operating expenses

(83)

(77)

Provision for income taxes

(11)

(12)

Net income

$

120

$

140

Weighted average diluted shares (thousands)

110,028

101,975

Diluted earnings per common share

$

1.34

$

1.60

Regular dividends declared per common share

$

1.18

$

1.12

(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

Years Ended

($ in millions, except per share data)

12/31/18

9/30/18

12/31/17

12/31/18

12/31/17

GAAP net (loss) income

$

(1)

$

41

$

31

$

120

140

Adjustments:

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

37

(12)

(7)

14

(36)

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

4

8

5

37

10

Income taxes associated with core earnings adjustments ⁽⁵⁾

(2)

—

2

(2)

5

Total adjustments

39

(4)

—

49

Non-GAAP core earnings

$

38

$

37

$

30

$

168

$

119

GAAP net income per diluted common share

$

(0.02)

$

0.42

$

0.35

$

1.34

$

1.60

Non-GAAP core earnings per diluted common share ⁽⁶⁾

$

0.39

$

0.39

$

0.35

$

1.78

$

1.40

(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 fourth 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 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)

12/31/18

9/30/18

6/30/18

3/31/18

12/31/17

Residential loans

$

7,255

$

5,922

$

5,491

$

5,146

$

5,115

Business purpose loans

141

116

—

—

—

Multifamily loans

2,145

942

—

—

—

Real estate securities

1,452

1,470

1,454

1,358

1,477

Other investments

439

114

117

66

64

Cash and cash equivalents

176

174

185

179

145

Other assets

330

402

266

251

240

Total assets

$

11,937

$

9,140

$

7,513

$

7,000

$

7,040

Short-term debt

$

2,400

$

1,424

$

1,426

$

1,504

$

1,939

Other liabilities

206

176

157

157

149

Asset-backed securities issued

5,410

3,407

1,930

1,542

1,165

Long-term debt, net

2,572

2,771

2,770

2,576

2,575

Total liabilities

10,589

7,778

6,284

5,780

5,828

Stockholders' equity

1,349

1,361

1,229

1,220

1,212

Total liabilities and equity

$

11,937

$

9,140

$

7,513

$

7,000

$

7,040

Shares outstanding at period end (thousands)

84,884

82,930

75,743

75,703

76,600

GAAP book value per share

$

15.89

$

16.42

$

16.23

$

16.12

$

15.83

(1)

Certain totals may not foot due to rounding.