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Section 1: 8-K (8-K)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
 
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 2020
  
 
REDWOOD TRUST, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Maryland
 
001-13759
 
68-0329422
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
One Belvedere Place
Suite 300
Mill Valley, California 94941
(Address of principal executive offices and Zip Code)
(415) 389-7373
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
  
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
RWT
New York Stock Exchange






Item 2.02.
Results of Operations and Financial Condition;
 
Item 7.01.
Regulation FD Disclosure.
On February 27, 2020, Redwood Trust, Inc. issued a press release announcing its financial results for the quarter ended December 31, 2019 and The Redwood Review - 4th Quarter 2019, copies of which are attached as Exhibit 99.1 and Exhibit 99.2, respectively, to this current report on Form 8-K.
On February 27, 2020, Redwood Trust, Inc. issued a press release announcing its Board of Directors’ authorization to declare a first quarter regular dividend of $0.32 per share, a copy of which is attached as Exhibit 99.3 to this current report on Form 8-K. The first quarter 2020 dividend is payable on March 30, 2020 to stockholders of record on March 16, 2020.
Redwood Trust, Inc. also announced that its Board of Directors has set May 20, 2020 as the date for the 2020 annual meeting of stockholders. The meeting will be held at 8:30 a.m. (Pacific) in Mill Valley, California. Stockholders of record as of March 20, 2020 will be entitled to vote at that meeting.
The information contained in this Item 2.02 and Item 7.01 and the attached Exhibits 99.1, 99.2 and 99.3 is furnished to and not filed with the Securities and Exchange Commission, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.
 
Item 9.01.
Financial Statements and Exhibits.
(d)
 
Exhibits
 
 
Exhibit 99.1
 
Press Release dated February 27, 2020
Exhibit 99.2
 
The Redwood Review – 4th Quarter 2019
Exhibit 99.3
 
Press Release dated February 27, 2020




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
Date: February 27, 2020
 
 
REDWOOD TRUST, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
 
 /s/ Collin L. Cochrane
 
 
 
 
 
 
 
 
 
 
 
Collin L. Cochrane
 
 
 
 
 
Chief Financial Officer






Exhibit Index
 
 
 
 
 
Exhibit No.
 
Exhibit Title
 
 
 
 
 
Exhibit 99.1
 
 
Exhibit 99.2
 
 
Exhibit 99.3
 
 


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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit

Exhibit 99.1

403023712_q319prlogoa02.jpg
    

REDWOOD TRUST REPORTS FOURTH QUARTER 2019 FINANCIAL RESULTS

MILL VALLEY, CA Thursday, February 27, 2020 – Redwood Trust, Inc. (NYSE:RWT), a leading innovator in housing credit investing, today reported its financial results for the quarter ended December 31, 2019 and selected financial results for the full year ended December 31, 2019.
Key Financial Results
GAAP net income was $49 million, or $0.38 per diluted common share
Non-GAAP core earnings(1) were $61 million, or $0.45 per diluted common share
GAAP return on equity was 10.9% for the fourth quarter; 10.6% for the year
Non-GAAP core return on equity was 13.6% for the fourth quarter; 11.6% for the year
Book value per common share was $15.98 at December 31, 2019
Economic return on book value(2) of 2.3% for the fourth quarter; 8.1% for the year
Recourse leverage ratio(3) of 3.1x at December 31, 2019
Paid a regular quarterly cash dividend of $0.30 per common share for the fourth quarter; $1.20 per common share for the year
Business Highlights
Completed our acquisition of CoreVest for $492 million in October
Originated $750 million of business purpose residential loans
Purchased $1.8 billion of jumbo loans as volumes improved from the third quarter
Closed two Select securitizations totaling $776 million and our first single-family rental (SFR) securitization totaling $395 million; sold $1.4 billion of jumbo whole loans
Deployed $634 million of capital into new investments in the fourth quarter of 2019, bringing full year 2019 deployment to a record $1.09 billion
In November, retired $201 million of 5.625% exchangeable debt at maturity
In February, announced a 6.7% dividend increase to $0.32 per share for the first quarter of 2020

“The fourth quarter capped a historic year for Redwood. We made significant progress executing on our strategic initiatives; optimizing our portfolio, expanding our reach into multifamily and business purpose lending and implementing operational efficiencies. We are now one of the largest originators of business purpose residential loans and have two of the largest and most highly regarded issuance platforms in the private-label securitization market,” said Chris Abate, Chief Executive Officer of Redwood Trust. “Our hard work is reflected in our fourth quarter and full year results, which culminated in today's announcement of a 6.7% dividend increase to $0.32 per share for the first quarter of 2020.”

Abate concluded, “We are committed to serving our mission to help make quality housing accessible to all Americans, whether it's rented or owned, and generating solid risk-adjusted returns that can sustainably grow our dividend over time for our shareholders.”
_____________________
(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.

1


Fourth Quarter 2019 Redwood Review Available Online
A further discussion of Redwood's business, financial results, core earnings and taxable income is included in the fourth quarter 2019 Redwood Review, which is available on the Company’s website at www.redwoodtrust.com.

2


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.
Conference Call and Webcast
Redwood will host an earnings call today, February 27, 2020, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time to discuss its fourth quarter 2019 financial results. The number to dial in order to listen to the conference call is 1-877-423-9813 in the U.S. and Canada. International callers must dial 1-201-689-8573. Callers should reference call ID #13697992. A replay of the call will be available through midnight on March 12, 2020, 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 #13697992.
The live conference call will also be webcast in listen-only mode in the Newsroom section of Redwood’s website under "Events." To listen to the webcast, please go to Redwood's website at least 15 minutes prior to the call to register and download and install any needed audio software. An audio replay of the call will also be available on Redwood's website following the call. Redwood plans to file its Annual Report on Form 10-K with the Securities and Exchange Commission by Monday, March 2, 2020, and also make it available on Redwood’s website.
About Redwood Trust
Redwood Trust, Inc. (NYSE: RWT) is a specialty finance company focused on making credit-sensitive investments in residential mortgages and related assets and engaging in mortgage banking activities. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, as well as through capital appreciation. Redwood Trust was established in 1994, is internally managed, and structured as a real estate investment trust (“REIT”) for tax purposes. For more information about Redwood, please visit our website at www.redwoodtrust.com.

Forward-Looking Statements:  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 2019 REIT taxable income and the expected timing for the filing of Redwood's Annual Report on Form 10-K. 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.

3



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.











4



 
 
 
 
 
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.


















5



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.

6



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.




CONTACTS
Lisa M. Hartman
SVP, Head of Investor Relations
Phone: 866-269-4976

7
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Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit


Exhibit 99.2

403023712_q42019redwoodreviewfrontcove.jpg


 
  T A B L E O F C O N T E N T S


Introduction
 
 
Shareholder Letter
 
 
Quarterly Results
 
 
Ñ Fourth Quarter Highlights
 
 
Ñ New Segment Overview
 
 
Ñ Quarterly Earnings and Analysis
 
 
Ñ Book Value and Economic Return
 
 
Ñ Return Contribution Analysis
 
 
Ñ Segment Results
 
 
Quarterly Positions
 
 
Ñ Capital Allocations
 
 
Ñ Leverage
 
 
Ñ Credit
 
 
Financial Tables
 
 
Appendix
 
 
Ñ CoreVest Acquisition
 
 
Ñ Dividends and Taxable Income
 
 
Ñ Non-GAAP Measurements
 
 
Ñ Forward-Looking Statements
 
 
Endnotes


 
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
1




 
I N T R O D U C T I O N

Note to Readers:
We file annual reports (on Form 10-K) and quarterly reports (on Form 10-Q) with the Securities and Exchange Commission. These filings and our earnings press releases provide information about Redwood and our financial results in accordance with generally accepted accounting principles (GAAP). These documents, as well as information about our business and a glossary of terms we use in this and other publications, are available through our website, www.redwoodtrust.com. We encourage you to review these documents.
Throughout this document, in addition to our GAAP results, we also present certain non-GAAP measures, including "core earnings" and other measures calculated in a manner consistent with core earnings. The Appendix to this document includes a detailed description of our non-GAAP measures and reconciliations to their equivalent GAAP measures.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries. Note that because we round numbers in the tables to millions, except per share amounts, some numbers may not foot due to rounding. References to the “fourth quarter” refer to the quarter ended December 31, 2019, and references to the “third quarter” refer to the quarter ended September 30, 2019, unless otherwise specified.
Forward-looking statements:
This Redwood Review 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, goals, 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 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 forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: statements we make regarding Redwood’s business strategy and strategic focus, statements related to our financial outlook and expectations for 2020 and future years, statements regarding our available capital and sourcing additional capital both internally and from the capital markets, and other statements regarding pending business activities and expectations and estimates relating to our business and financial results. Additional detail regarding the forward-looking statements in this Redwood Review and the important factors that may affect our actual results in 2020 are described in the Appendix of this Redwood Review under the heading “Forward-Looking Statements.”

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
2

 
S H A R E H O L D E R L E T T E R

Dear Fellow Shareholders:
Redwood ended 2019 on a strong note, with solid earnings and sustained momentum across our business lines. Our GAAP and non-GAAP core earnings were $0.38 and $0.45 per share, respectively, for the fourth quarter. We ended the full year with GAAP earnings of $1.46 per share and core earnings of $1.58 per share, resulting in a core ROE for 2019 of 11.6%. Our earnings for the full year were comprised of a healthy balance of investment returns and income from mortgage banking operations, and we made $1.1 billion of investments through a combination of organic and acquisition activity that we believe will help us deliver increased returns to our shareholders in the coming quarters and years.
In total, we were pleased with our financial results and today we announced a 6.7% increase to our regular quarterly dividend to shareholders to $0.32 per share for the first quarter of 2020. Our ability to raise our dividend despite the market volatility we experienced over the past year is significant in that it demonstrates the stability of our business model driven by diverse revenue streams.
What really set 2019 apart for Redwood was our strategic progress. Fueled in part by two acquisitions, it was a historic year for our business that set a new foundation for profitable growth. We are now a leading participant in several distinct areas of housing credit, and our consolidated portfolio has evolved to incorporate a diverse mix of residential, business purpose, and multifamily investments. We now operate out of four principal locations, and our earnings power is squarely driven by organically created investments and the associated platforms that produce them. Our risk-minded culture and our values, which emphasize passion, integrity, change, relationships, and results, underlie our methodical pursuit to become one of the nation’s most innovative investors in housing credit.
And it would not be Redwood if we didn't continue to move with a quick step, pushing our platform ahead towards the next phase of growth. Our strategic priorities for 2020 are focused on channeling regulatory changes and technological innovations to significantly advance our overall relevance to the housing market. We plan to confront key issues facing housing finance and drive the industry forward with actionable initiatives, which we expand on below.
Put simply, our corporate mission is to help make quality housing accessible to all Americans, whether it's rented or owned. We recognize that the needs of consumers have changed, and that for many the allure of a home has as much to do with comfort, proximity to work, and lifestyle as it does with pride of homeownership.
As we continue with this important work, we recently reorganized our business to create a more scalable infrastructure going forward. This will allow us to better manage the ever-evolving opportunities and risks facing our business and to create better visibility into the earnings power of our operating platforms and the investments they create.


 
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
3




 
S H A R E H O L D E R L E T T E R

We now manage our business through four distinct segments or "verticals." Our new structure provides for centralized strategic decision-making that drives the activities of these verticals. In turn, our businesses can operate end-to-end in their respective sectors while benefiting from corporate risk oversight and traditional shared services. Each of our verticals currently operates at a slightly different stage of maturity, creating what we view as a compelling mix of stable earnings generation and future upside. In sum, we believe this profile offers differentiated cash flows and return profiles that will contribute toward a robust earnings stream for our shareholders. As you might expect, accompanying these changes are refocused financial disclosures and analyses throughout this Redwood Review - we look forward to your feedback.
Reflecting on the macro environment in 2019, few expected it to be a record year for residential mortgage refinance activity, but that’s what we got. The Federal Reserve kept rates low after cutting three times in 2019 amid global trade tensions and signs of economic weakness. Inflation, meanwhile, remained low and the U.S. consumer balance sheet remained strong, in part driven by an increased propensity to save that is in turn putting downward pressure on benchmarks.  As we head deeper into 2020, the 30-year conforming mortgage rate has fallen once again to three-year lows and is within striking distance of all-time lows. This continues to provide ample fuel for refinance activity, which has boosted volumes year-to-date in 2020. Low rates have also contributed to increased borrower spending power, something that should in theory buoy home purchase demand amongst millennials who are now entering their prime home buying years. 
But buying power is a moot point when there is such limited housing stock. While the interest rate environment has contributed to what is now a decade-long run in housing, it also masks some worrisome trends that continue to garner our close attention. Most notably, the supply of quality, affordable homes in the United States badly lags new household formation. While this imbalance has greatly supported rising home prices, it’s made access to desirable housing more challenging for many - especially low to moderate income families, many of whom are would-be first-time home buyers. An expedient solution making the rounds in Washington is to relax underwriting standards and make it easier to offer loans with lower down payments to borrowers with higher debt-to-income ratios. While we support expanding homeownership opportunities for all Americans who desire to own their own homes, lowering underwriting standards had disastrous consequences leading up to the 2008 financial crisis and beyond. Additionally, these solutions ignore the fundamental problem - not enough homes.
At Redwood, our approach to residential underwriting remains unchanged. We emphasize safe, well-structured loans that borrowers can reliably afford. But more importantly, we are championing solutions in our business lines that offer more high quality and accessible housing for consumers. For instance, our business purpose lending initiatives focus not only on stabilized rentals, but also bridge lending - where homes are renovated, upgraded, and brought up to current building codes before getting resold or rented to consumers. We are actively expanding the bridge business to include more robust construction/redevelopment opportunities, including market-leading financing programs for build-to-rent communities, urban infill development, and modular home development, to name a few. These strategies all complement our consumer residential lending business and expand upon our mission.

 
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
4




 
S H A R E H O L D E R L E T T E R

As we look ahead into 2020, all eyes are on the U.S. housing regulator (FHFA), where its new director is focused on taking the GSEs out of conservatorship, reducing their footprint across the housing sector, and leveling the playing field for private capital to participate in a larger part of the market. We see this regulatory shift as a major opportunity for our residential lending business, and the catalyst for us to invest in our platform to support higher levels of growth and profitability. We’re now applying recent technological innovations to reimagine the entire non-agency loan production and distribution workstream. We plan to transform our correspondent loan acquisition platform to be more component-based, allowing us to implement the best technologies as they become available rather than through “all-or-none” systems that remain the standard in the industry.  We are also working to automate the revalidation of underwriting data to significantly reduce the time it takes us to purchase non-agency loans from originators, allowing them to recycle capital faster and make more loans. At the moment, technology to assist loan sellers in originating conventional loans that can be seamlessly sold exists only in the Agency origination space. We want to make it a reality in the private sector.
An equally compelling runway exists in our business-purpose lending segment. We are now one of the largest originators of business-purpose residential loans, with a platform capable of building on the momentum from a combined platform that originated a cumulative $2.4 billion of loans in 2019. We also have the largest and most highly-regarded SFR securitization platform in the housing market, which will help accelerate our strategy to grow profitably and organically generate assets with attractive risk adjusted returns. We have begun the process of combining the 5 Arches and CoreVest-platforms under a unified leadership structure, taking “best of breed” from both businesses to position for profitable future growth. Once fully integrated, we believe no competing platform will possess the same breadth of financing products and depth of expertise to deliver all-inclusive and customized solutions to residential real estate investors. A unified platform will also allow us to apply our technology advantage to a full suite of products and in the process remove redundant external costs in the day-to-day operation of the business. Importantly, we are still just scratching the surface of how business-purpose lending can leverage the broader Redwood platform. To wit: we have begun the process of offering single-family rental loan programs to our 180 residential loan sellers, secured the ability to pledge single-family rental loans on our FHLB borrowing facility, and lowered our cost of funds through both warehouse lines and securitization. All told, business purpose lending now represents almost 30% of our equity allocation.
Our multifamily initiative continues to grow and expand and is quickly emerging as a strategic and complementary facet of our housing finance strategy. Befittingly, we now designate multifamily investing as a core business at Redwood, with over $475 million of capital invested since 2017. We originate small-balance multifamily loans (both term and bridge) in our business-purpose lending segment - an area of desired growth - however, our capital deployment in traditional multifamily has been almost exclusively in programs offered by Freddie Mac. To date, we remain one of the few investors in newly issued Freddie Mac multifamily B-pieces (first loss credit risk) that is not also a multifamily operator. Given recent changes implemented by the FHFA, we are now exploring ways to expand how we provide liquidity to this rapidly growing market.

 
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
5




 
S H A R E H O L D E R L E T T E R

While we anticipate most of our investing activities to be driven from within our residential, business-purpose, and multifamily verticals, we continue to dedicate meaningful resources to other third-party investment activities. For over a quarter century, our role as an active investor and liquidity provider has been, and will remain, highly relevant to the mortgage capital markets. This effort will operate in coordination with our other businesses and actively focus on third-party opportunities that we find attractive, including non-agency RMBS, agency CRT bonds, securities backed by re-performing loans (RPLs), and other investments. Importantly, this vertical also allows us to continue tracking the pertinent markets and manage our capital both opportunistically and for liquidity management purposes.
Over the past two years we’ve made meaningful progress in diversifying revenues, integrating resources, and positioning Redwood to grow profitably in the years ahead.  Our business segments now speak for production and earnings generation across a compelling suite of sectors and collaborate toward a unifying vision of being one of the market’s most innovative mortgage investors. As we move forward, we’re committed to serving our mission while generating solid risk-adjusted returns that can sustainably grow our dividends over time for our shareholders.
We appreciate the trust and commitment exhibited by our long-term shareholders who have steadfastly supported Redwood’s evolution. We look forward to sharing a comprehensive overview of our business segments, a deep dive into recent government actions concerning housing finance reform and the role Redwood expects to play at our third annual Investor Day, to be held March 24th in New York City.

Thank you for your continued support.
403023712_q319ceosignaturea01.jpg
 
403023712_q319presidentsignaturea01.jpg
Christopher J. Abate
 
Dashiell I. Robinson
Chief Executive Officer
 
President

 
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
6




 
Q U A R T E R L Y R E S U L T S

Fourth Quarter Highlights
 
Key Financial Results and Metrics
 
 
 
Three Months Ended
 
 
12/31/2019
 
9/30/2019
 
 
 
 
 
 
Earnings per Share
$
0.38

 
$
0.31

 
Core Earnings per Share (non-GAAP)
$
0.45

 
$
0.37

 
Return on Equity
10.9
%
 
8.6
%
 
Core Return on Equity (non-GAAP)
13.6
%
 
10.9
%
 
 
 
 
 
 
Book Value per Share
$
15.98

 
$
15.92

 
Dividend per Share
$
0.30

 
$
0.30

 
Economic Return on Book Value (1)
2.3
%
 
1.3
%
 
 
 
 
 
 
Recourse Leverage Ratio (2)
3.1x

 
2.7x

 
 
 
 
 
 
Ñ
The acquisition of CoreVest in October 2019 contributed to strong overall results for the quarter, as its origination platform helped drive strong mortgage banking income, and capital deployed into business purpose loan ("BPL") investments drove higher net interest income. Our results were also bolstered by strong performance from our residential mortgage banking platform, which saw increased volume and margins during the quarter, as well as improved returns on our investments from portfolio optimization.
Ñ
Our fourth quarter results contributed to an increase in book value of $0.06 per share and an economic return on book value of 2.3% for the quarter. Excluding acquisition-related items(3), which negatively impacted book value by $0.11 per share, our economic return on book value was 3.0%.
Ñ
On February 27, 2020, we announced a 6.7% increase to our regular quarterly dividend to shareholders to $0.32 per share for the first quarter of 2020.
Ñ
We deployed $634 million of capital during the fourth quarter, inclusive of the acquisition of CoreVest's operating platform and related financial assets. Total transaction consideration for CoreVest was $492 million, net of in-place financing (see the Appendix for additional details).
Ñ
We purchased $1.8 billion and sold $2.2 billion of residential jumbo loans during the fourth quarter, both through whole loans sales and two securitizations. At December 31, 2019, our pipeline of jumbo residential loans identified for purchase was $1.8 billion.
Ñ
We originated $750 million of business purpose loans across the CoreVest and 5 Arches platforms, including $435 million of single-family rental ("SFR") loans and $315 million of bridge loans. We sold $395 million of SFR loans through one securitization, Redwood's first SFR securitization since the acquisition of CoreVest, and CoreVest's 10th overall.
Ñ
Leverage increased modestly during the fourth quarter, as we deployed capital into the CoreVest acquisition that we had accumulated through the prior quarter-end.

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
7

 
Q U A R T E R L Y R E S U L T S

New Segment Overview
In advancing our strategic priorities, over the past two years we have increased our capital deployment across the broader housing credit market, including business purpose lending, through the acquisitions of 5 Arches and CoreVest and through increased investment activity in the multifamily sector. With these new asset classes growing to comprise more significant portions of our capital allocation, in the fourth quarter of 2019 we reorganized our operations into four business segments. These segments represent areas of the housing market we operate in through vertically integrated platforms.
Each new segment includes all revenue and direct expense associated with the origination, acquisition and management of its associated financial assets. Additionally, we allocate corporate long-term debt (previously included in our corporate segment) to each segment, allowing us to evaluate each segment's contribution to our overall return on equity. Our four new segments include:
Residential Lending Comprised of our residential mortgage banking operations and investments created from these activities, including: residential loans financed with the FHLB and investments retained from our residential loan securitization activities.
Business Purpose Lending Comprised of our business purpose mortgage banking operations (both 5 Arches and CoreVest), and investments created from these activities, including: SFR securities retained from CoreVest-sponsored securitizations, SFR loans financed with the FHLB, and investments in residential and small-balance multifamily bridge loans.
Multifamily Investments Comprised of multifamily securities and loans we have acquired, as well as other multifamily investments.
Third-Party Residential Investments Comprised of other residential investments not sourced through our residential mortgage banking activities, including: re-performing loan securities, third-party RMBS (including CRT securities and legacy securities), and other investments.
Prior Segments
 
New Segments
 
 
 
Mortgage Banking
 
Residential Lending
Residential Mortgage Banking
 
Residential Mortgage Banking
Business Purpose Mortgage Banking
 
Residential Lending Investments
 
 
 
Investment Portfolio
 
Business Purpose Lending
Residential Lending Investments (Redwood Created)
 
Business Purpose Mortgage Banking
Business Purpose Lending Investments
 
Business Purpose Lending Investments
Multifamily Investments
 
 
Third-Party Residential Investments
 
Multifamily Investments
 
 
 
 
 
Third-Party Residential Investments
 
 
 
Ñ
Refer to the Capital Allocations section later in this document for additional details on the capital allocations and investments within each of our segments.

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
8

 
Q U A R T E R L Y R E S U L T S

Quarterly Earnings and Analysis
Below we present GAAP net income and non-GAAP core earnings for the fourth and third quarters of 2019.
 
 
 
 
 
GAAP Net Income and Non-GAAP Core Earnings
($ in millions, except per share data)
 
Three Months Ended
 
 
12/31/2019
 
9/30/2019
 
12/31/2019
 
9/30/2019
 
 
GAAP
 
GAAP
 
Core
 
Core
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
From investments
$
38

 
$
28

 
$
28

 
$
25

 
From mortgage banking activities
7

 
6

 
7

 
6

 
Total net interest income
45

 
34

 
35

 
31

 
 
 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
Residential mortgage banking, net
17

 
5

 
17

 
5

 
Business purpose mortgage banking, net
30

 
4

 
30

 
4

 
Investment fair value changes, net
1

 
11

 

 

 
Other income, net
5

 
4

 
5

 
4

 
Realized gains, net
6

 
5

 
23

 
25

 
Total non-interest income, net
58

 
30

 
74

 
38

 
 
 
 
 
 
 
 
 
 
General and administrative expenses
(42
)
 
(27
)
 
(41
)
 
(25
)
 
Other expenses
(7
)
 
(3
)
 

 

 
Provision for income taxes
(4
)
 

 
(7
)
 

 
 
 
 
 
 
 
 
 
 
Earnings
$
49

 
$
34

 
$
61

 
$
43

 
 
 
 
 
 
 
 
 
 
Earnings per diluted common share
$
0.38

 
$
0.31

 
$
0.45

 
$
0.37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Net Income and Non-GAAP Core Earnings by Segment
($ in millions)
 
Three Months Ended
 
12/31/2019
 
9/30/2019
 
12/31/2019
 
9/30/2019
 
 
GAAP
 
GAAP
 
Core
 
Core
 
 
 
 
 
 
 
 
 
 
Residential Lending
$
16

 
$
9

 
$
20

 
$
14

 
Business Purpose Lending
19

 
(1
)
 
24

 
2

 
Multifamily Investments
11

 
10

 
7

 
16

 
Third-Party Residential Investments
21

 
29

 
24

 
23

 
Corporate
(18
)
 
(13
)
 
(15
)
 
(11
)
 
Earnings
$
49

 
$
34

 
$
61

 
$
43

 




See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
9

 
Q U A R T E R L Y R E S U L T S

Analysis of Earnings
Ñ
Business purpose mortgage banking activities improved in the fourth quarter, as new originations from CoreVest increased volume meaningfully in addition to increased volume from 5 Arches. In addition, improvements in single-family rental securitization execution during the fourth quarter helped drive incremental profitability on the inventory of SFR loans we acquired from CoreVest, as well as our subsequent fourth quarter production.
Ñ
Net interest income improved in the fourth quarter as we redeployed capital out of lower-yielding assets in our residential lending and other portfolios and deployed capital into additional business purpose lending investments, primarily through our CoreVest acquisition.
Ñ
Residential mortgage banking activities also improved, as loan purchase commitments increased 42% from the third quarter, partly driven by elevated bulk deal activity in the fourth quarter. Gross margins were towards the higher end of our long-term expectations of 75-100 basis points, partly driven by improved securitization execution during the fourth quarter.
Ñ
Realized gains remained elevated, as continued spread tightening created opportunities for us to sell $225 million of lower-yielding securities, freeing up $150 million of capital for redeployment.
Ñ
General and administrative expenses increased in the fourth quarter due to the addition of $8 million of GAAP expenses from CoreVest, as well as higher overall variable compensation expense, which rose due to improved GAAP earnings in the fourth quarter.
Ñ
Other expenses, primarily comprised of acquisition-related intangible amortization expense and contingent consideration expense, increased due to the addition of intangible assets from the acquisition of CoreVest.
Ñ
Provision for income taxes increased in the fourth quarter due to higher mortgage banking income at our taxable subsidiary, as compared to the third quarter.


See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
10

 
Q U A R T E R L Y R E S U L T S

Book Value and Economic Return
 
Changes in Book Value per Share
($ in per share)
 
Three Months Ended
 
 
12/31/19
 
9/30/2019
 
 
 
 
 
 
Beginning GAAP book value per share
$
15.92

 
$
16.01

 
GAAP earnings (per basic share)
0.42

 
0.33

 
Add back intangible amortization expense (non-GAAP)
0.03

 
0.01

 
Dividends
(0.30
)
 
(0.30
)
 
Non-cash equity award compensation
(0.04
)
 
0.02

 
Changes in unrealized gains on securities, net
(0.05
)
 
0.02

 
Change in long-term debt hedge
0.09

 
(0.11
)
 
Other, net
0.02

 
(0.05
)
 
Ending book value before acquisition-related items (non-GAAP)
16.09

 
15.93

 
Intangible amortization expense
(0.03
)
 
(0.01
)
 
CoreVest acquisition equity consideration
(0.08
)
 

 
 
 
 
 
 
Ending GAAP book value per share
$
15.98

 
$
15.92

 

Ñ
Our GAAP book value increased $0.06 per share during the fourth quarter of 2019, largely due to GAAP earnings exceeding our dividend.
Ñ
Included in our change in GAAP book value was $(0.11) per share associated with acquisition related items. These included $(0.08) per share from the one-time impact of equity-based purchase consideration for CoreVest (treated as compensation for GAAP), and $(0.03) per share of expense related to intangible amortization associated with both the CoreVest and 5 Arches acquisitions.
Ñ
Excluding these acquisition-related items(1), our non-GAAP book value increased $0.17 per share, and our economic return on book value was 3.0% during the fourth quarter.
Ñ
Our intangible assets related to both acquisitions will be amortized through 2026, and we expect to incur $(0.03) per share of intangible amortization expense per quarter for the next several quarters.


See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
11

 
Q U A R T E R L Y R E S U L T S

Return Contribution Analysis
Below we present non-GAAP core returns for the fourth and third quarters of 2019, by segment.
 
Non-GAAP Core Return Contribution Summary
($ in millions)
 
Three Months Ended
 
 
12/31/2019
 
 
9/30/2019
 
 
Average Allocated Equity
 
Core Earnings
 
Core ROE
 
 
Average Allocated Equity
 
Core Earnings
 
Core ROE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Banking
$
130

 
$
11

 
33.5
%
 
 
$
130

 
$
5

 
15.5
 %
 
Investments
336

 
9

 
11.0
%
 
 
426

 
9

 
8.1
 %
 
Total
466

 
20

 
17.3
%
 
 
556

 
14

 
9.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Purpose Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Banking
255

 
17

 
27.4
%
 
 
55

 

 
(1.0
)%
 
Investments
172

 
7

 
16.1
%
 
 
32

 
2

 
23.6
 %
 
Total
427

 
24

 
22.9
%
 
 
87

 
2

 
8.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily Investments
146

 
7

 
20.4
%
 
 
159

 
16

 
39.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third-Party Residential Investments
294

 
24

 
32.8
%
 
 
308

 
23

 
29.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
468

 
(15
)
 
N/A

 
 
482

 
(11
)
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,800

 
$
61

 
13.6
%
 
 
$
1,592

 
$
43

 
10.9
 %
 
Ñ
Residential Lending — Returns from mortgage banking increased during the fourth quarter, as both volume and margins improved from the third quarter. Returns from investments improved during the fourth quarter, as we sold lower-yielding assets, which resulted in gains and positioned the remaining portfolio with a higher average yield.
Ñ
Business Purpose Lending — Overall returns improved in the fourth quarter, as we benefited from higher loan originations and higher income from investments resulting from our CoreVest acquisition, as well as increased originations from 5 Arches.
Ñ
Multifamily Investments — Returns declined during the fourth quarter, as the pace of portfolio optimization in the portfolio slowed relative to the third quarter, resulting in fewer realized gains.
Ñ
Third-Party Residential Investments — Returns on third-party investments remained elevated, as we recognized gains from sales of primarily CRT and mezzanine securities during the third and fourth quarters of 2019.
Ñ
Corporate — Average allocated equity for corporate included $350 million of average capital available for investment during the fourth quarter, driven in part by the issuance in September 2019 of $201 million of convertible bonds, and subsequent repayment of $201 million of exchangeable bonds in mid-November. Corporate overhead expenses increased in the fourth quarter, as variable compensation was adjusted to reflect improved full-year financial results.

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
12

 
Q U A R T E R L Y R E S U L T S

Below we present non-GAAP core returns for our investments organized by segment for the fourth quarter of 2019.
 
 
 
Non-GAAP Core Returns on Investments by Business Segment
($ in millions)
 
Three Months Ended December 31, 2019
 
 
Residential Lending
 
Business Purpose Lending
 
Multifamily Investments
 
Third-Party Residential Investments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
5

 
$
7

 
$
4

 
$
10

 
$
27

 
Other income
3

 

 
1

 

 
4

 
Investment income
8

 
8

 
5

 
10

 
31

 
 
 
 
 
 
 
 
 
 
 
 
Realized gains
3

 

 
3

 
17

 
23

 
General and administrative expenses
(2
)
 
(1
)
 
(1
)
 
(1
)
 
(4
)
 
Provision for income taxes

 

 

 
(2
)
 
(2
)
 
Core earnings
$
9

 
$
7

 
$
7

 
$
24

 
$
48

 
 
 
 
 
 
 
 
 
 
 
 
Average equity
336

 
172

 
146

 
294

 
948

 
 
 
 
 
 
 
 
 
 
 
 
Core investment income yield
9.5
%
 
18.6
%
 
13.7
%
 
13.6
%
 
13.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Core return on equity
11.0
%
 
16.1
%
 
20.4
%
 
32.8
%
 
20.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Ñ
As we deploy our capital available for investment and our pace of portfolio optimization slows, we expect an increasing portion of future quarterly earnings to come from investment income, and less from realized gains.


See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
13

 
Q U A R T E R L Y R E S U L T S

Segment Results
Residential Lending
The following table presents non-GAAP core results from our residential lending segment for the fourth and third quarters of 2019.
 
Residential Lending: Non-GAAP Core Earnings
($ in millions)
 
Three Months Ended
 
 
12/31/2019
 
 
9/30/2019
 
 
Investments
 
Mortgage Banking
 
Total Residential Lending
 
 
Investments
 
Mortgage Banking
 
Total Residential Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
5

 
$
5

 
$
10

 
 
$
7

 
$
5

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking activities, net

 
17

 
17

 
 

 
5

 
5

 
Other income, net
3

 

 
3

 
 
2

 

 
2

 
Realized gains, net
3

 

 
3

 
 
1

 

 
1

 
Total non-interest income, net
6

 
17

 
23

 
 
3

 
5

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
(1
)
 
(9
)
 
(10
)
 
 
(1
)
 
(5
)
 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes

 
(2
)
 
(2
)
 
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Core earnings
$
9

 
$
11

 
$
20

 
 
$
9

 
$
5

 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key performance indicators
 
 
 
 
 
 
 
 
 
 
 
 
 
Average equity
$
336

 
$
130

 
$
466

 
 
$
426

 
$
130

 
$
556

 
Core return on equity
11.0
%
 
33.5
%
 
17.3
%
 
 
8.1
%
 
15.5
%
 
9.9
%
 
Core pre-tax margin (1)
 
 
60
%
 
 
 
 
 
 
48
%
 
 
 
Loan purchase commitments
 
 
$
2,419

 
 
 
 
 
 
$
1,700

 
 
 
Ñ
Core net interest income from investments decreased in the fourth quarter, as average equity invested in this segment declined due to proceeds from portfolio optimization activities being redeployed into other asset classes.
Ñ
Core mortgage banking results for our residential lending segment improved in the fourth quarter, as loan purchase commitments increased to $2.4 billion from $1.7 billion in the third quarter, and gross margins on securitization and whole loan sales improved from the third quarter. We define gross margins for this segment as the sum of mortgage banking net interest income and mortgage banking activities divided by loan purchase commitments.
Ñ
Core general and administrative expenses increased in the fourth quarter, as variable compensation was adjusted to reflect improved full-year financial performance of this segment.
Ñ
Core pre-tax margin improved in the fourth quarter, as revenue growth from higher volume and margins outpaced the increase in general and administrative expenses during the quarter.

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
14

 
Q U A R T E R L Y R E S U L T S

Residential Investments
Ñ
We deployed $6 million of capital into Sequoia RMBS retained from securitizations completed in the fourth quarter.
Ñ
During the fourth quarter, we sold $26 million of lower-yielding securities in this segment, which freed up approximately $5 million of capital for redeployment.
Ñ
The decline in average capital in this segment during the fourth quarter was primarily attributable to a reduction in the capital associated with our residential whole loans that are held for investment and financed with the FHLB, as paydowns of residential whole loans were replaced with single-family rental loans originated in our business purpose lending segment.
Residential Mortgage Banking

Quarterly Jumbo Loan Purchase Volume
($ in billions)
403023712_q4purchasevolume.jpg
Ñ
The continued lower interest rate environment, as well as an increase in bulk pool acquisitions, helped elevate loan purchase commitments and purchase volumes in the fourth quarter.
Ñ
At December 31, 2019, our pipeline of jumbo residential loans identified for purchase was $1.8 billion.
Ñ
During the fourth quarter, we sold $843 million of Select whole loans to third parties, completed two Select securitizations totaling $776 million, and sold $581 million of Choice whole loans to third parties.
 

See Appendix for details on non-GAAP measures. Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 4TH QUARTER 2019
15

 
Q U A R T E R L Y R E S U L T S

Business Purpose Lending
The following table presents non-GAAP core results from our business purpose lending segment for the fourth and third quarters of 2019.
 
Business Purpose Lending: Non-GAAP Core Earnings
($ in millions)
 
Three Months Ended
 
 
12/31/2019
 
 
9/30/2019
 
 
Investments
 
Mortgage Banking
 
Total Business Purpose Lending
 
 
Investments
 
Mortgage Banking
 
Total Business Purpose Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
7

 
$
2

 
$
9

 
 
$
2

 
$
1

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking activities, net

 
30

 
30

 
 

 
4

 
4

 
Other income, net

 
1

 
2

 
 

 
2

 
2

 
Realized gains, net

 

 

 
 

 

 

 
Total non-interest income, net

 
31

 
31

 
 

 
6

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
(1
)
 
(14
)
 
(14
)
 
 

 
(7
)
 
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes

 
(2
)
 
(2
)
 
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Core earnings
$
7

 
$
17

 
$
24

 
 
$
2

 
$

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key performance indicators