FOR IMMEDIATE RELEASE | CONTACTS: Mike McMahon |
| Redwood Trust, Inc. | (415) 384-3805 |
| Wednesday, November 5, 2008 | |
| | Martin S. Hughes |
| | (415) 389-7373 |
REDWOOD TRUST REPORTS THIRD QUARTER 2008 RESULTS
MILL VALLEY, CA - November 5, 2008 - Redwood Trust, Inc. (NYSE: RWT) today reported a GAAP loss of $111 million for the third quarter of 2008, or a loss of $3.34 per share. This GAAP loss included $127 million, or $3.81 per share, of net negative mark-to-market (MTM) adjustments. This compares to a net loss of $1.40 per share for the second quarter of 2008, which reflected negative MTM adjustments of $1.84 per share, and to a net loss of $2.18 per share for the third quarter of 2007, which reflected negative MTM adjustments of $3.69 per share.
Taxable income for the third quarter was $2 million, or $0.07 per share. This taxable income reflected charges related to credit losses of $33 million, or $1.00 per share. This compares to taxable income of $4 million, or $0.11 per share, for the second quarter of 2008, and taxable income of $49 million, or $1.74 per share, for the third quarter of 2007.
During the quarter, Redwood’s investments generated $46 million of cash flow in excess of operating and interest costs and Redwood ended the quarter with $177 million in cash and $7 million of short-term debt.
“Our business remains challenging in light of the continuing deterioration in residential mortgage credit performance. The unrelenting decline in the market values of mortgage loans and related securities has continued to pressure our earnings and book value,” said Marty Hughes, Redwood’s Chief Financial Officer. “Since mid-June, we significantly reduced our acquisition activity while we assessed the impact of the publicly announced government loan modification programs and the recently announced Troubled Asset Relief Plan.” Mr. Hughes added, “In the upcoming months, we believe hedge fund redemptions, forced margin calls, and planned asset liquidations from troubled or seized financial institutions will provide extraordinary investment opportunities. Our strong cash position will allow us to take advantage of those opportunities. ”
The accounting concepts and disclosures relating to our financial statements are complex. Today, we also released our “Redwood Review” covering the third quarter of 2008. The Redwood Review contains a more detailed discussion of our business performance and outlook. The Redwood Review is available on our website at www.redwoodtrust.com.
Additional information on our GAAP results is available in our Quarterly Report on Form 10-Q for the three months ended September 30, 2008 which we filed today with the Securities and Exchange Commission. The Form 10-Q is available on our website at www.redwoodtrust.com. We strongly recommend reading the Redwood Review and 10-Q in conjunction with this press release.
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 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, 2007, and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, 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, including reports on Forms 10-K, 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.
Important factors, among others, that may affect our actual results include: changes in interest rates; changes in prepayment rates; general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; legislative and regulatory actions affecting the mortgage industry; the availability of high quality assets for purchase at attractive prices; declines in home 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, 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; and other factors not presently identified.
REDWOOD TRUST, INC. | | | | | | | | | | | |
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Consolidated Income Statement | | Third | | Second | | First | | Fourth | | Third | |
| ($ in millions, except share data) | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | |
| | | 2008 | | 2008 | | 2008 | | 2007 | | 2007 | |
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| Interest income | | $ | 131 | | $ | 137 | | $ | 176 | | $ | 207 | | $ | 220 | |
| Interest expense | | | (92 | ) | | (98 | ) | | (126 | ) | | (153 | ) | | (165 | ) |
| Net interest income | | | 39 | | | 39 | | | 50 | | | 54 | | | 55 | |
| Provision for loan losses | | | (18 | ) | | (10 | ) | | (8 | ) | | (5 | ) | | (2 | ) |
| Market valuation adjustments, net | | | (127 | ) | | (60 | ) | | (195 | ) | | (1,119 | ) | | (102 | ) |
| Net interest income after provision and | | | (106 | ) | | (31 | ) | | (153 | ) | | (1,070 | ) | | (49 | ) |
| market valuation adjustments | | | | | | | | | | | | | | | | |
| Operating expenses | | | (17 | ) | | (15 | ) | | (16 | ) | | (16 | ) | | (12 | ) |
| Realized gains on sales and calls, net | | | — | | | 3 | | | — | | | 7 | | | 2 | |
| Minority interest allocation | | | 2 | | | (2 | ) | | (1 | ) | | — | | | — | |
| Credit (provision) for income taxes | | | 10 | | | (1 | ) | | (2 | ) | | 2 | | | (2 | ) |
| GAAP net (loss) income | | $ | (111 | ) | $ | (46 | ) | $ | (172 | ) | $ | (1,077 | ) | $ | (61 | ) |
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| Average diluted shares (thousands) | | | 33,334 | | | 32,871 | | | 32,511 | | | 29,531 | | | 27,892 | |
| GAAP earnings per share (diluted) | | $ | (3.34 | ) | $ | (1.40 | ) | $ | (5.28 | ) | $ | (36.49 | ) | $ | (2.18 | ) |
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| Regular dividends declared per common share | | $ | 0.75 | | $ | 0.75 | | $ | 0.75 | | $ | 0.75 | | $ | 0.75 | |
| Special dividends declared per common share | | | — | | | — | | | — | | | 2.00 | | | — | |
| Total dividends declared per common share | | $ | 0.75 | | $ | 0.75 | | $ | 0.75 | | $ | 2.75 | | $ | 0.75 | |
REDWOOD TRUST, INC. | | | | | |
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Consolidated Income Statement | | Nine Months Ended | |
| ($ in millions, except share data) | | September 30, | |
| | | 2008 | | 2007 | |
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| Interest income | | $ | 444 | | $ | 661 | |
| Interest expense | | | (316 | ) | | (499 | ) |
| Net interest income | | | 128 | | | 162 | |
| Provision for loan losses | | | (36 | ) | | (8 | ) |
| Market valuation adjustments, net | | | (382 | ) | | (142 | ) |
| Net interest income after provision and | | | (290 | ) | | 12 | |
| market valuation adjustments | | | | | | | |
| Operating expenses | | | (48 | ) | | (42 | ) |
| Realized gains on sales and calls, net | | | 3 | | | 6 | |
| Minority interest allocation | | | (1 | ) | | — | |
| Credit (provision) for income taxes | | | 7 | | | (7 | ) |
| GAAP net (loss) income | | $ | (329 | ) | $ | (31 | ) |
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| Average diluted shares (thousands) | | | 32,907 | | | 27,388 | |
| GAAP earnings per share (diluted) | | $ | (9.99 | ) | $ | (1.14 | ) |
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| Regular dividends declared per common share | | $ | 2.25 | | $ | 2.25 | |
| Special dividends declared per common share | | | — | | | — | |
| Total dividends declared per common share | | $ | 2.25 | | $ | 2.25 | |
REDWOOD TRUST, INC. | | | | | | | | | | | | | |
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Consolidated Balance Sheet | | 30-Sep | | 30-Jun | | 31-Mar | | 1-Jan (1) | | 31-Dec | | 30-Sep | |
| ($ in millions, except share data) | | 2008 | | 2008 | | 2008 | | 2008 | | 2007 | | 2007 | |
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| Real estate loans | | $ | 6,101 | | $ | 6,377 | | $ | 6,775 | | $ | 7,204 | | $ | 7,204 | | $ | 7,656 | |
| Real estate securities, at fair value: | | | | | | | | | | | | | | | | | | | |
| Trading securities | | | 574 | | | 841 | | | 952 | | | 1,805 | | | 12 | | | 25 | |
| Available-for-sale securities | | | 288 | | | 400 | | | 242 | | | 317 | | | 2,110 | | | 2,926 | |
| Other investments | | | 79 | | | 79 | | | 79 | | | 79 | | | 79 | | | 80 | |
| Cash and cash equivalents | | | 177 | | | 148 | | | 257 | | | 290 | | | 290 | | | 310 | |
| Other assets | | | 155 | | | 201 | | | 241 | | | 223 | | | 244 | | | 286 | |
| Total assets | | $ | 7,374 | | $ | 8,046 | | $ | 8,546 | | $ | 9,918 | | $ | 9,939 | | $ | 11,283 | |
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| Short-term debt - Redwood | | $ | 7 | | $ | 9 | | $ | 2 | | $ | 8 | | $ | 8 | | $ | 39 | |
| Other liabilities | | | 167 | | | 166 | | | 211 | | | 170 | | | 170 | | | 142 | |
| Asset-backed securities issued - Sequoia | | | 5,930 | | | 6,175 | | | 6,544 | | | 6,946 | | | 6,946 | | | 7,382 | |
Asset-backed securities issued - Acacia(2) | | | 673 | | | 935 | | | 1,046 | | | 1,893 | | | 3,383 | | | 3,421 | |
| Long-term debt - Redwood | | | 150 | | | 150 | | | 150 | | | 150 | | | 150 | | | 150 | |
| Minority interest | | | 35 | | | 47 | | | 8 | | | — | | | — | | | — | |
| Stockholders’ equity (deficit) | | | 412 | | | 564 | | | 585 | | | 751 | | | (718 | ) | | 149 | |
| Total liabilities and stockholders' equity | | $ | 7,374 | | $ | 8,046 | | $ | 8,546 | | $ | 9,918 | | $ | 9,939 | | $ | 11,283 | |
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| Shares outstanding at period end (thousands) | | | 33,238 | | | 33,184 | | | 32,710 | | | 32,385 | | | 32,385 | | | 27,986 | |
| GAAP book value per share | | $ | 12.40 | | $ | 17.00 | | $ | 17.89 | | $ | 23.18 | | $ | (22.18 | ) | $ | 5.32 | |
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| (1) | We adopted the fair value option under FAS 159 for assets and liabilities of Acacia and certain other assets effective January 1, 2008. |
| (2) | Prior to 2008, ABS issued by Acacia were accounted for at cost. |
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Consolidating Income Statement | | | | | | | | | | | | | |
| Three Months Ended September 30, 2008 | | | | | | | | | | | | | |
| ($ in millions) | | | | Opportunity | | | | | | Intercompany | | Redwood | |
| | | Redwood | | Fund | | Sequoia | | Acacia | | Adjustments | | Consolidated | |
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| Interest income | | $ | 17 | | $ | 2 | | $ | 71 | | $ | 37 | | $ | (1 | ) | $ | 126 | |
| Net discount (premium) amortization | | | 6 | | | 2 | | | (3 | ) | | — | | | — | | | 5 | |
| Total interest income | | | 23 | | | 4 | | | 68 | | | 37 | | | (1 | ) | | 131 | |
| Management fees | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Interest expense | | | (2 | ) | | — | | | (63 | ) | | (29 | ) | | 1 | | | (93 | ) |
| Net interest income | | $ | 22 | | $ | 4 | | $ | 5 | | $ | 8 | | $ | — | | $ | 39 | |
| Provision for loan losses | | | — | | | — | | | (18 | ) | | — | | | — | | | (18 | ) |
| Market valuation adjustments, net | | | (88 | ) | | (8 | ) | | (2 | ) | | (29 | ) | | — | | | (127 | ) |
| Net interest (loss) income after provision | | | (66 | ) | | (4 | ) | | (15 | ) | | (21 | ) | | — | | | (106 | ) |
| and market valuation adjustments | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | (17 | ) | | — | | | — | | | — | | | — | | | (17 | ) |
| Realized gains on sales and calls, net | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss from Opportunity Fund | | | (2 | ) | | — | | | — | | | — | | | 2 | | | — | |
| Loss from Sequoia | | | (15 | ) | | — | | | — | | | — | | | 15 | | | — | |
| Loss from Acacia | | | (21 | ) | | — | | | — | | | — | | | 21 | | | — | |
| Minority interest allocation | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Credit for income taxes | | | 10 | | | — | | | — | | | — | | | — | | | 10 | |
| Net (Loss) Income | | $ | (111 | ) | $ | (2 | ) | $ | (15 | ) | $ | (21 | ) | $ | 38 | | $ | (111 | ) |
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Consolidating Income Statement | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2008 | | | | | | | | | | | | | |
| ($ in millions) | | | | Opportunity | | | | | | Intercompany | | Redwood | |
| | | Redwood | | Fund | | Sequoia | | Acacia | | Adjustments | | Consolidated | |
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| Interest income | | $ | 60 | | $ | 4 | | $ | 255 | | $ | 124 | | $ | (5 | ) | $ | 438 | |
| Net discount (premium) amortization | | | 22 | | | 4 | | | (20 | ) | | — | | | — | | | 6 | |
| Total interest income | | | 82 | | | 8 | | | 235 | | | 124 | | | (5 | ) | | 444 | |
| Management fees | | | 4 | | | — | | | — | | | — | | | — | | | 4 | |
| Interest expense | | | (7 | ) | | — | | | (212 | ) | | (106 | ) | | 5 | | | (320 | ) |
| Net interest income | | $ | 79 | | $ | 8 | | $ | 23 | | $ | 18 | | $ | — | | $ | 128 | |
| Provision for loan losses | | | — | | | — | | | (36 | ) | | — | | | — | | | (36 | ) |
| Market valuation adjustments, net | | | (287 | ) | | (8 | ) | | (3 | ) | | (84 | ) | | — | | | (382 | ) |
| Net interest (loss) income after provision | | | (208 | ) | | — | | | (16 | ) | | (66 | ) | | — | | | (290 | ) |
| and market valuation adjustments | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | (48 | ) | | — | | | — | | | — | | | — | | | (48 | ) |
| Realized gains on sales and calls, net | | | 1 | | | 2 | | | — | | | — | | | — | | | 3 | |
| Income from Opportunity Fund | | | 1 | | | — | | | — | | | — | | | (1 | ) | | — | |
| Loss from Sequoia | | | (16 | ) | | — | | | — | | | — | | | 16 | | | — | |
| Loss from Acacia | | | (66 | ) | | — | | | — | | | — | | | 66 | | | — | |
| Minority interest allocation | | | — | | | (1 | ) | | — | | | — | | | — | | | | ) |
| Credit for income taxes | | | 7 | | | — | | | — | | | — | | | — | | | 7 | |
| Net (Loss) Income | | $ | (329 | ) | $ | 1 | | $ | (16 | ) | $ | (66 | ) | $ | 81 | | $ | (329 | ) |
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Consolidating Balance Sheet | | | | | | | | | | | | | |
| September 30, 2008 | | | | | | | | | | | | | |
| ($ in millions) | | | | Opportunity | | | | | | Intercompany | | Redwood | |
| | | Redwood | | Fund | | Sequoia | | Acacia | | Adjustments | | Consolidated | |
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| Real estate loans | | $ | 3 | | $ | — | | $ | 6,084 | | $ | 14 | | $ | — | | $ | 6,101 | |
| Real estate securities, at fair value: | | | | | | — | | | — | | | — | | | — | | | — | |
| Trading securities | | | 7 | | | — | | | — | | | 567 | | | — | | | 574 | |
| Available-for-sale securities | | | 221 | | | 67 | | | — | | | 82 | | | (82 | ) | | 288 | |
| Other investments | | | — | | | — | | | — | | | 79 | | | — | | | 79 | |
| Cash and cash equivalents | | | 177 | | | — | | | — | | | — | | | — | | | 177 | |
| Total earning assets | | | 408 | | | 67 | | | 6,084 | | | 742 | | | (82 | ) | | 7,219 | |
| Investment in Opportunity Fund | | | 35 | | | — | | | — | | | — | | | (35 | ) | | — | |
| Investment in Sequoia | | | 111 | | | — | | | — | | | — | | | (111 | ) | | — | |
| Investment in Acacia | | | 19 | | | — | | | — | | | — | | | (19 | ) | | — | |
| Restricted cash | | | — | | | 6 | | | — | | | 57 | | | — | | | 63 | |
| Other assets | | | 25 | | | — | | | 53 | | | 14 | | | — | | | 92 | |
| Total Assets | | $ | 598 | | $ | 73 | | $ | 6,137 | | $ | 813 | | $ | (247 | ) | $ | 7,374 | |
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| Short-term debt - Redwood | | $ | 7 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 7 | |
| Other liabilities | | | 29 | | | 3 | | | 14 | | | 121 | | | — | | | 167 | |
| Asset-backed securities issued - Sequoia | | | — | | | — | | | 6,012 | | | — | | | (82 | ) | | 5,930 | |
| Asset-backed securities issued - Acacia | | | — | | | — | | | — | | | 673 | | | — | | | 673 | |
| Long-term debt - Redwood | | | 150 | | | — | | | — | | | — | | | — | | | 150 | |
| Total liabilities | | | 186 | | | 3 | | | 6,026 | | | 794 | | | (82 | ) | | 6,927 | |
| Minority interest | | | — | | | 35 | | | — | | | — | | | — | | | 35 | |
| Total stockholders’ equity | | | 412 | | | 35 | | | 111 | | | 19 | | | (165 | ) | | 412 | |
| Total Liabilities and Stockholders’ Equity | | $ | 598 | | $ | 73 | | $ | 6,137 | | $ | 813 | | $ | (247 | ) | $ | 7,374 | |
REDWOOD TRUST, INC. | | | | | | | | | | | |
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Taxable Income & GAAP (Loss) Income Differences | | Third | | Second | | First | | Fourth | | Third | |
| ($ in millions, except share data) | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | |
| | | 2008 | | 2008 | | 2008 | | 2007 | | 2007 | |
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| GAAP net (loss) income | | $ | (111 | ) | $ | (46 | ) | $ | (172 | ) | $ | (1,077 | ) | $ | (61 | ) |
Difference in taxable income calculations | | | | | | | | | | | | | | | | |
| Amortization and credit losses | | | 4 | | | (7 | ) | | 6 | | | (15 | ) | | 10 | |
| Operating expenses | | | 3 | | | 1 | | | 2 | | | 9 | | | (2 | ) |
| Gross realized gains on calls and sales | | | (11 | ) | | (6 | ) | | (5 | ) | | (5 | ) | | (3 | ) |
| Market valuation adjustments, net | | | 127 | | | 61 | | | 194 | | | 1,119 | | | 103 | |
| Provision for income taxes | | | (10 | ) | | 1 | | | 1 | | | (2 | ) | | 2 | |
| Total differences in GAAP and taxable income | | | 113 | | | 50 | | | 198 | | | 1,106 | | | 110 | |
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| Taxable income | | $ | 2 | | $ | 4 | | $ | 26 | | $ | 29 | | $ | 49 | |
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| Total taxable income per share | | $ | 0.07 | | $ | 0.11 | | $ | 0.79 | | $ | 0.91 | | $ | 1.74 | |
REDWOOD TRUST, INC. | | | | | |
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Taxable Income & GAAP (Loss) Income Differences | | Nine Months Ended | |
| ($ in millions, except share data) | | September 30, 2008 | |
| | | 2008 | | 2007 | |
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| GAAP net (loss) income | | $ | (329 | ) | $ | (31 | ) |
Difference in taxable income calculations | | | | | | | |
| Amortization and credit losses | | | 3 | | | 31 | |
| Operating expenses | | | 5 | | | (6 | ) |
| Gross realized gains on calls and sales | | | (22 | ) | | (6 | ) |
| Market valuation adjustments, net | | | 382 | | | 142 | |
| Provision for income taxes | | | (7 | ) | | 5 | |
| Total differences in GAAP and taxable income | | | 361 | | | 166 | |
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| Taxable income | | $ | 32 | | $ | 135 | |
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| Total taxable income per share | | $ | 0.97 | | $ | 4.88 | |
