Redwood Trust Reports Fourth Quarter 2019 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 leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $10.7 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood and tangible stockholders' equity excludes $161 million of goodwill and intangible assets.

REDWOOD TRUST, INC.

Financial Performance

Three Months Ended

Year Ended

($ in millions, except per share data)

12/31/2019

9/30/2019

12/31/2019

GAAP net income

$

49

$

34

$

169

GAAP net income per diluted common share

$

0.38

$

0.31

$

1.46

Non-GAAP core earnings

$

61

$

43

$

186

Non-GAAP core earnings per diluted common share

$

0.45

$

0.37

$

1.58

GAAP return on equity

10.9

%

8.6

%

10.6

%

Non-GAAP return on equity

13.6

%

10.9

%

11.6

%

REIT taxable income (estimated)

$

44

$

39

$

136

REIT taxable income per share (estimated)

$

0.39

$

0.34

$

1.28

GAAP book value per share

$

15.98

$

15.92

$

15.98

Dividends per common share

$

0.30

$

0.30

$

1.20

Economic return on book value

2.3

%

1.3

%

8.1

%

Recourse leverage ratio ⁽¹⁾

3.1x

2.7x

3.1x

Capital deployment

$

634

$

152

$

1,086

Jumbo loans purchased

$

1,835

$

1,483

$

5,902

Jumbo loans securitized or sold

$

2,200

$

1,574

$

5,132

(1)

Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $10.7 billion and $8.5 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood at December 31, 2019 and September 30, 2019, respectively. Tangible stockholder's equity excludes $161 million and $49 million of goodwill and intangible assets at December 31, 2019 and September 30, 2019, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Three Months Ended

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

12/31/19

9/30/19

6/30/19

3/31/19

12/31/18

Interest income

$

193

$

150

$

149

$

131

$

120

Interest expense

(148)

(117)

(116)

(99)

(85)

Net interest income

45

34

32

32

35

Non-interest income (loss)

Mortgage banking activities, net

46

10

19

12

11

Investment fair value changes, net

1

11

3

20

(39)

Other income

5

4

5

5

4

Realized gains, net

6

5

3

11

6

Total non-interest income (loss), net

58

30

30

48

(18)

General and administrative expenses

(42)

(27)

(26)

(23)

(19)

Other expenses

(7)

(3)

(2)

(1)

—

(Provision for) benefit from income taxes

(4)

—

(2)

(1)

1

Net income (loss)

$

49

$

34

$

31

$

54

$

(1)

Weighted average diluted shares (thousands) ⁽²⁾

152,983

136,523

130,697

126,278

83,217

Diluted earnings (loss) per common share

$

0.38

$

0.31

$

0.30

$

0.49

$

(0.02)

Regular dividends declared per common share

$

0.30

$

0.30

$

0.30

$

0.30

$

0.30

(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, 2019, September 30, 2019, June 30, 2019, March 31, 2019,  and December 31, 2018 were 114,353, 112,102, 97,715, 96,866, and 84,884, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Years Ended December 31,

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

2019

2018

Interest income

$

622

$

379

Interest expense

(480)

(239)

Net interest income

142

140

Non-interest income

Mortgage banking activities, net

87

60

Investment fair value changes, net

36

(26)

Other income

19

13

Realized gains, net

24

27

Total non-interest income

166

74

General and administrative expenses

(119)

(83)

Other expenses

(13)

—

Provision for income taxes

(7)

(11)

Net income

$

169

$

120

Weighted average diluted shares (thousands)

136,781

110,028

Diluted earnings per common share

$

1.46

$

1.34

Regular dividends declared per common share

$

1.20

$

1.18

(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

Year Ended

($ in millions, except per share data)

12/31/19

9/30/19

12/31/19

GAAP net income

$

49

$

34

169

Adjustments:

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

(11)

(14)

(42)

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

17

20

52

Eliminate purchase accounting adjustments ⁽⁵⁾

7

2

9

Eliminate corporate acquisition and related expenses ⁽⁵⁾

1

2

3

Income taxes associated with core earnings adjustments ⁽⁶⁾

(2)

(1)

(5)

Total adjustments

12

9

17

Non-GAAP core earnings

$

61

$

43

$

186

GAAP net income per diluted common share

$

0.38

$

0.31

$

1.46

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

$

0.45

$

0.37

$

1.58

(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 acquisitions of 5 Arches and CoreVest 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 fourth quarter 2019 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. During the third quarter of 2019, management updated its calculation of this adjustment. Additional information regarding this adjustment is included in the Appendix to the fourth 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)

Core earnings excludes several items related to the acquisitions of 5 Arches and CoreVest. 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 and ongoing adjustments to exclude amortization of intangible assets; changes in fair value of the contingent consideration liability related to the remaining purchase consideration for the 5 Arches platform; and exclusion of certain transaction expenses associated with our acquisition of CoreVest. Additional information regarding this adjustment is included in the Appendix to the fourth 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)

12/31/19

9/30/19

6/30/19

3/31/19

12/31/18

Residential loans

$

7,715

$

8,682

$

7,283

$

7,274

$

7,255

Business purpose residential loans

3,507

336

251

161

141

Multifamily loans

4,409

3,792

3,750

2,176

2,145

Real estate securities

1,100

1,285

1,477

1,543

1,452

Other investments

358

348

372

414

439

Cash and cash equivalents

197

395

218

201

176

Other assets

710

639

501

424

330

Total assets

$

17,995

$

15,476

$

13,852

$

12,193

$

11,937

Short-term debt

$

2,329

$

1,981

$

2,463

$

2,163

$

2,400

Other liabilities

370

411

338

270

206

Asset-backed securities issued

10,515

8,346

6,913

5,638

5,410

Long-term debt, net

2,953

2,954

2,573

2,573

2,572

Total liabilities

16,168

13,691

12,288

10,643

10,589

Stockholders' equity

1,827

1,785

1,564

1,550

1,349

Total liabilities and equity

$

17,995

$

15,476

$

13,852

$

12,193

$

11,937

Shares outstanding at period end (thousands)

114,353

112,102

97,715

96,866

84,884

GAAP book value per share

$

15.98

$

15.92

$

16.01

$

16.00

$

15.89

(1)

Certain totals may not foot due to rounding.