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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 14, 2019
 
  
 
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





Item 2.02.
Results of Operations and Financial Condition;
 
Item 7.01.
Regulation FD Disclosure.
On February 14, 2019, Redwood Trust, Inc. issued a press release announcing its financial results for the quarter ended December 31, 2018 and The Redwood Review - 4th Quarter 2018, copies of which are attached as Exhibit 99.1 and Exhibit 99.2, respectively, to this current report on Form 8-K.
The information contained in this Item 2.02 and Item 7.01 and the attached Exhibits 99.1 and 99.2 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 14, 2019
Exhibit 99.2
 
The Redwood Review – 4th Quarter 2018




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 14, 2019
 
 
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
 
 
 
 
 
 


(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit

Exhibit 99.1

396752262_q418prlogoa01.jpg
    

REDWOOD TRUST REPORTS FOURTH QUARTER 2018 FINANCIAL RESULTS

MILL VALLEY, CA Thursday, February 14, 2019 – Redwood Trust, Inc. (NYSE:RWT), a leading innovator in housing credit investing, today reported its financial results for the quarter ended December 31, 2018.
Financial Highlights
GAAP net loss was $(1) million, or $(0.02) per diluted common share
Non-GAAP core earnings(1) were $38 million, or $0.39 per diluted common share
Book value per common share was $15.89 at December 31, 2018
Economic return on book value(2) of (1.4)% for the fourth quarter and 7.8% for the year ended December 31, 2018
Recourse debt-to-equity leverage ratio(3) of 3.5x at December 31, 2018

Business Highlights
Deployed $235 million of capital into new investments in the fourth quarter of 2018, bringing year-to-date deployment to a record $810 million
Recent investment activity has further diversified our exposure to housing credit, including investments in excess servicing off of seasoned non-Agency securitizations and in re-performing loan securities
Purchased $1.6 billion of jumbo loans, bringing full-year purchases to $7.1 billion
Closed our twelfth Sequoia securitization of 2018, bringing total securitization volume in 2018 to $5.0 billion
In January 2019, raised $177 million of equity capital in a follow-on offering of common stock and announced our decision to exercise our option to acquire the remaining interest in 5 Arches
“The fourth quarter of 2018 capped a transformational year for Redwood Trust. We achieved record levels of capital deployment and while market volatility reached peak levels toward the end of the year, the quality of our cash flows remained very strong,” commented Chris Abate, Chief Executive Officer of Redwood Trust. “We’ve taken early steps in our strategic evolution, expanding our access to unique investment opportunities across the single-family and multifamily credit spectrums. Having recently added business-purpose lending capabilities through our pending acquisition of 5 Arches, we are well prepared to seize on the opportunities we see ahead.”
Fourth Quarter 2018 Redwood Review Available Online
A further discussion of Redwood's business, financial results, core earnings and taxable income, as well as a discussion of management's 2019 outlook, is included in the fourth quarter 2018 Redwood Review, which is available on the Company’s website at www.redwoodtrust.com.

_____________________
(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.

1



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.
Conference Call and Webcast
Redwood will host an earnings call today, February 14, 2019, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time to discuss its fourth quarter 2018 financial results. The number to dial in order to listen to the conference call is 1-866-548-4713 in the U.S. and Canada. International callers must dial 1-323-794-2093. Callers should reference call ID #5363923. A replay of the call will be available through midnight on February 28, 2019, 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 #5363923.
The live conference call will also be webcast in listen-only mode in the Newsroom section of Redwood’s website under "Events." 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 Friday, March 1, 2019, 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 2018 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.

2



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.






3



 
 
 
 
 
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.





4



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

 
(21
)
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.



5


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.




CONTACTS
Lisa M. Hartman
SVP, Head of Investor Relations
Phone: 415-384-3555
Email: lisa.hartman@redwoodtrust.com

6
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Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit


Exhibit 99.2

396752262_q42018outsidefrontcover.jpg


 
  T A B L E O F C O N T E N T S


Introduction
 
 
Shareholder Letter
 
 
Quarterly Overview
 
 
Ñ Fourth Quarter Highlights
 
 
Ñ Quarterly Earnings and Analysis
 
 
Ñ Book Value
 
 
Ñ Capital Allocations
 
 
Ñ 2019 Financial Outlook
 
 
Financial Insights
 
 
Ñ Balance Sheet Analysis
 
 
Financial Tables
 
 
Appendix
 
 
Ñ Dividends
 
 
Ñ Non-GAAP Measurements
 
 
Ñ Forward-Looking Statements


 
THE REDWOOD REVIEW I 4TH QUARTER 2018
1

 
F O R W A R D - L O O K I N G S T A T E M E N T S

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 2019, 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 2019 are described in the Appendix of this Redwood Review under the heading “Forward-Looking Statements.”



 
THE REDWOOD REVIEW I 4TH QUARTER 2018
2

 
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.
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, 2018, and references to the “third quarter” refer to the quarter ended September 30, 2018, unless otherwise specified.
We hope you find this Review helpful to your understanding of our business. We thank you for your input and suggestions, which have resulted in our changing the form and content of The Redwood Review over time.
 
Selected Financial Highlights
 
 
Quarter:Year
 
GAAP Income
(Loss) per Share
 
Non-GAAP Core Earnings per Share (1)
 
REIT Taxable
Income per
Share
(2)
 
Annualized
GAAP Return
on Equity
 
GAAP Book
Value per
Share
 
Dividends
per Share
 
Economic Return on Book Value (3)
 
Q418
 
$(0.02)
 
$0.39
 
$0.32
 
—%
 
$15.89
 
$0.30
 
(1.4)%
 
Q318
 
$0.42
 
$0.39
 
$0.27
 
12%
 
$16.42
 
$0.30
 
3.0%
 
Q218
 
$0.38
 
$0.41
 
$0.35
 
11%
 
$16.23
 
$0.30
 
2.5%
 
Q118
 
$0.50
 
$0.60
 
$0.44
 
15%
 
$16.12
 
$0.28
 
3.6%
 
Q417
 
$0.35
 
$0.35
 
$0.44
 
10%
 
$15.83
 
$0.28
 
2.8%
 
2018
 
$1.34
 
$1.78
 
$1.38
 
9%
 
$15.89
 
$1.18
 
8%
 
2017
 
$1.60
 
$1.40
 
$1.17
 
12%
 
$15.83
 
$1.12
 
13%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Additional information on non-GAAP core earnings, including a definition and reconciliation to GAAP earnings per share, is included in the Non-GAAP Measurements section of the Appendix.
(2)
REIT taxable income per share for 2018 is an estimate until we file our tax return.
(3)
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.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
3

 
S H A R E H O L D E R L E T T E R

Dear Fellow Shareholders:
The fourth quarter of 2018 capped a transformational year for Redwood Trust. We recast our strategic vision with an emphasis on becoming the premier specialty finance lender to a changing housing market. That entailed a fresh look at the evolving needs of today’s homebuyers - both consumers and investors alike. Our approach keyed on better leveraging our reputation, residential credit acumen, deep industry relationships, and product structuring expertise, in order to expand our investing activity and sustainably increase the dividends we are able to pay to our shareholders over time. Having just capped off a record year of capital deployment in 2018, we’ve taken the early steps towards realizing this vision and are excited about the opportunities we see ahead.
The fourth quarter was a challenging one for industry participants, with market volatility reaching peak levels towards the end of the year. This pressured valuations across both fixed income and equity markets. Our year-end GAAP book valuation was impacted, but the decline was relatively modest, reflecting the conservatism of our leverage and the overall buoyancy of our credit-focused investment portfolio. Credit spreads have generally improved since early January, helping to retrace a good portion of last quarter’s book value reduction. Most importantly, the key driver of our core earnings and dividend - namely, the quality of our cash-flows - remained very strong. Non-GAAP core earnings per share, which was $1.78 for 2018, meaningfully outpaced 2017 core earnings per share of $1.40, on a capital base that expanded by 19% from the prior year. Dividends per share for 2018 exceeded the prior year by 5.4%, and we are charting a course aimed at higher sustainable dividends in the future.
At the center of our progress is continued strong momentum from our investment portfolio. We finished the fourth quarter with $235 million of capital deployed, bringing the total for 2018 to just over $800 million. Fundamental performance in our portfolio continues to reflect the strength of our underwriting and production quality. The breadth of our initiatives should enable us to continue sourcing investments that will drive net interest margins higher. The majority of our portfolio’s activity during the quarter remained in line with our strategy - larger, thicker investments in cash flows not easily sourced by our competitors.
To highlight a few of our investing initiatives, during the fourth quarter we purchased subordinate securities backed by a pool of re-performing loans; purchased an excess servicing strip from highly-seasoned non-agency securities; and laid the groundwork for last month’s investment in a light-renovation multifamily loan portfolio from Freddie Mac. All these investments - and several others - were sourced through strategic relationships rather than traditional bond offerings.
Additionally, our relationship with 5 Arches is a key contributor to our strategic vision. Last month, we announced our intention to complete the full acquisition of 5 Arches, with a closing date toward the end of the first quarter of 2019. As a wholly owned subsidiary, the platform will provide us with a direct origination capability in what we call the business-purpose lending market - namely, loans to investors in residential real estate. Since we took a minority stake in 5 Arches in May 2018, we have worked to validate both our investment thesis and the business’s operational fit. Our work concluded with us determining that 5 Arches is the right partner to help us address a

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
4

 
S H A R E H O L D E R L E T T E R

significantly underserved cohort of today’s housing market. We are thrilled to welcome the 5 Arches team into the fold.
Turning to our traditional residential mortgage banking operations, we continue to manage cyclical headwinds that we expect to pressure industry volumes throughout 2019, as they have over the past few quarters. Notwithstanding the recent rally in benchmark rates - 30-year mortgage rates ticked back below 4.5% for the first time in almost a year - overall home purchase activity has begun to level off. While current mortgage rates are lower, they still remain above the rate enjoyed by most existing borrowers, effectively shutting off meaningful refinance activity. Amidst this challenging origination environment, we continue to leverage our platform’s strengths to drive efficiencies and returns. One of our goals is to continue improving workflow efficiencies and capital turnover. By increasing the speed with which we buy and sell loans, we reduce market risk and can safely operate the business more efficiently without compromising on the quality or service we provide to our loan sellers.
Additionally in 2019, we expect to continue expanding how we distribute our mortgage banking raw materials. Our flagship Sequoia securitization program remains best-in-class, having secured the most attractive yields of any prime non-agency issuer thus far in 2019. To complement our well-established securitization and bulk whole-loan distribution channels, we have begun to identify new sources of demand for residential credit that can further bolster our conduit liquidity. We will have much more to write on these initiatives in future Redwood Reviews.
In 2019, our emphasis remains on growing durable investment cash-flows that support our dividend. Our integrated businesses are squarely focused in residential housing credit, an area where we have more experience than any of our modern-day competitors. We will be celebrating Redwood’s 25th Anniversary, a testament to the sustainability and adaptability of our business model, at our second annual Investor Day, which is scheduled for March 14 in New York City. In addition to a comprehensive overview of our business, we plan to dive deep into recent government actions concerning housing finance reform, and the role Redwood expects to play. Please reach out to our Investor Relations Department for more information about the event.
Thank you for your support.


396752262_q418ceosignature.jpg
 
396752262_q418presidentsignature.jpg
Christopher J. Abate
 
Dashiell I. Robinson
Chief Executive Officer
 
President

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Fourth Quarter Highlights
 
Key Financial Results and Metrics
 
Three Months Ended
 
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
GAAP Earnings (Loss) per Share
$
(0.02
)
 
$
0.42

 
Non-GAAP Core Earnings per Share (1)
$
0.39

 
$
0.39

 
 
 
 
 
 
Book Value per Share
$
15.89

 
$
16.42

 
Economic Return on Book Value (2)
(1.4
)%
 
3.0
%
 
 
 
 
 
 
Recourse Leverage (3)
3.5x

 
3.1x

 
 
 
 
 
 
Ñ
Growth in portfolio net interest income from continued capital deployment and solid mortgage banking results were offset by the negative impact to GAAP earnings and book value from spread widening during the fourth quarter on the majority of our portfolio investments.
Ñ
Core earnings, a non-GAAP measure not impacted by most mark-to-market adjustments, were strong and remained consistent quarter-over-quarter. Despite recent volatility in credit spreads, cash flows and credit fundamentals in our investment portfolio remain strong.
Ñ
We deployed $235 million of capital into new investments in the fourth quarter of 2018, bringing our full-year deployment to a record $810 million. Recent activity has further diversified our exposure to housing credit, including investments in excess servicing off of seasoned non-Agency securitizations as well as re-performing loan securities.
Ñ
Residential jumbo loan purchase commitments were $1.3 billion, and we purchased $1.6 billion of jumbo loans during the fourth quarter of 2018, bringing our full-year purchases to $7.1 billion.
Ñ
We closed one Sequoia securitization of jumbo whole loans, totaling $0.5 billion, during the fourth quarter, bringing our total securitization volume in 2018 to $5.0 billion through 12 separate securitizations. Additionally during the fourth quarter, we sold $0.8 billion of jumbo whole loans to third parties, bringing our full-year whole loan sales to $2.2 billion.
Ñ
Additionally, in January 2019, we raised $177 million of equity capital in a follow-on offering, exercised our option to purchase the remainder of the 5 Arches platform, and invested in a limited partnership created to acquire $1 billion of light-renovation multifamily loans from Freddie Mac.
_____________________
(1) For details on GAAP and non-GAAP core earnings, see the Quarterly Earnings and Analysis section that follows on page 7 and the Non-GAAP Measurements section of the Appendix.
(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 debt (ABS issued and servicer advance financing) that is non-recourse to Redwood.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Quarterly Earnings and Analysis
Below we present GAAP net income and non-GAAP core earnings for the fourth and third quarters of 2018.
 
GAAP Net Income
($ in millions, except per share data)
 
Three Months Ended
 
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
Interest income
$
120

 
$
99

 
Interest expense
(85
)
 
(64
)
 
Net interest income
35

 
35

 
 
 
 
 
 
Non-interest income
 
 
 
 
Mortgage banking activities, net
11

 
11

 
Investment fair value changes, net
(39
)
 
10

 
Other income, net
4

 
3

 
Realized gains, net
6

 
7

 
Total non-interest (loss) income, net
(18
)
 
32

 
Operating expenses
(19
)
 
(21
)
 
Benefit from (provision for) income taxes
1

 
(5
)
 
 
 
 
 
 
GAAP net income (loss)
$
(1
)
 
$
41

 
 
 
 
 
 
GAAP diluted earnings per common share
$
(0.02
)
 
$
0.42

 
 
 
 
 
 
 
Non-GAAP Core Earnings (1)
($ in millions, except per share data)
 
Three Months Ended
 
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
GAAP net interest income
$
35

 
$
35

 
Change in basis and hedge expense
(1
)
 
(2
)
 
Non-GAAP economic net interest income (1)
34

 
33

 
 
 
 
 
 
Non-interest income
 
 
 
 
Mortgage banking activities, net
11

 
11

 
Core other fair value changes, net (1)

 

 
Other income, net
4

 
3

 
Core realized gains, net (1)
9

 
15

 
Total non-interest income, net
24

 
30

 
Operating expenses
(19
)
 
(21
)
 
Core provision for income taxes (1)
(1
)
 
(5
)
 
 
 
 
 
 
Core earnings (1)
$
38

 
$
37

 
 
 
 
 
 
Core diluted earnings per common share (2)
$
0.39

 
$
0.39

 
(1)
Additional information on Redwood's non-GAAP measures, including: economic net interest income; core other fair value changes, net; core realized gains, net; core provision for income taxes; and core earnings as well as reconciliations to associated GAAP measures, is included in the Non-GAAP Measurements section of the Appendix.
(2)
Additional information on the calculation of non-GAAP core diluted EPS can be found in Table 2 in the Financial Tables section of this Redwood Review.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Ñ
Net interest income from our investment portfolio increased in the fourth quarter, benefiting from our elevated pace of capital deployment during the past six months. This increase was offset by lower net interest income from our mortgage banking business as loan purchase volume decreased in the fourth quarter. We note that gross interest income and interest expense increased meaningfully from the third to fourth quarter of 2018, primarily due to the consolidation of several securitizations we invested in during the second half of 2018.
Ñ
Mortgage banking activities, net, was $11 million for the fourth quarter of 2018, consistent with the third quarter of 2018. Our ability to utilize both securitization and whole loan sale execution in recent quarters has helped us maintain more consistent gross margins, amidst declines in volume across the industry and an increasingly competitive landscape.
Ñ
Investment fair value changes in both our loan and securities portfolios were negatively impacted by credit spread widening late in the fourth quarter. Our non-GAAP core earnings excludes these market valuation adjustments and was not impacted by these changes.
Ñ
Realized gains in the third quarter were $6 million on a GAAP basis and $9 million on a non-GAAP core basis, resulting from the sale of $115 million of securities, which freed up $58 million of capital for reinvestment after the repayment of associated debt.
Ñ
Operating expenses decreased to $19 million in the fourth quarter of 2018 from $21 million in the third quarter of 2018, primarily resulting from lower variable compensation expense commensurate with lower GAAP earnings in the fourth quarter. This decrease was partially offset by initial set-up costs associated with certain of our new investments made during the quarter.
Ñ
Income tax provision decreased to a benefit of $1 million during the fourth quarter of 2018, from a provision of $5 million for the third quarter of 2018, primarily due to spread widening during the fourth quarter on securities held at our taxable subsidiary. A reconciliation of GAAP and taxable income is set forth in Table 6 in the Financial Tables section of this Redwood Review.
Ñ
Additional details on our earnings are included in the Segment Results section that follows.


 
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Q U A R T E R L Y O V E R V I E W

Segment Results *
Investment Portfolio
The following table presents segment contribution from our investment portfolio for the fourth and third quarters of 2018.
 
Investment Portfolio Segment Contribution
($ in millions)
 
Three Months Ended
 
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
GAAP net interest income
$
40

 
$
39

 
Change in basis and hedge expense
(1
)
 
(2
)
 
Non-GAAP economic net interest income (1)
39

 
37

 
 
 
 
 
 
Non-GAAP other fair value changes, net (2)
(37
)
 
12

 
Other income, net
4

 
3

 
Realized gains, net
6

 
7

 
Operating expenses
(4
)
 
(3
)
 
Benefit from (provision for) income taxes
1

 
(3
)
 
Segment contribution (3)
$
9

 
$
54

 
Core earnings adjustments (4)
 
 
 
 
Eliminate mark-to-market changes on long-term investments and associated derivatives
37

 
(12
)
 
Include cumulative gain (loss) on long-term investments sold, net
4

 
8

 
Income taxes associated with core earnings adjustments
(2
)
 

 
Non-GAAP core segment contribution
$
47

 
$
50

 
(1)
Consistent with management's definition of non-GAAP economic net interest income set forth in the Non-GAAP Measurements section of the Appendix, this measure, as presented above, is calculated in the same manner, inclusive only of amounts allocable to this segment.
(2)
Non-GAAP other fair value changes, net, represents GAAP investment fair value changes adjusted to exclude the change in basis and hedge expense that is presented in the table above and included in non-GAAP economic net interest income.
(3)
Segment contribution totals above are presented in accordance with GAAP. Within the table, "change in basis and hedge expense" has been reallocated between investment fair value changes and net interest income as described above.
(4)
Consistent with management's definition of core earnings set forth on page 35, non-GAAP core segment contribution reflects GAAP segment contribution adjusted to reflect the portion of core earnings adjustments allocable to this segment.
Ñ
Segment contribution from our investment portfolio declined during the fourth quarter, as the increase in non-GAAP economic net interest income from net capital deployment was more than offset by the negative impact from spread widening on our investments.
Ñ
Despite recent credit spread widening, credit fundamentals in our investment portfolio remain strong, benefiting from continued stability in the general economy and in housing.
_____________________
*
We report on our business using two distinct segments: Investment Portfolio and Mortgage Banking. Table 3 in the Financial Tables section of this Redwood Review includes a comprehensive presentation of our segment results reconciled to net income.

 
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Q U A R T E R L Y O V E R V I E W

Investment Portfolio Capital Deployment

396752262_q4capdeploya01.jpg
Ñ
We deployed $133 million of capital into proprietary investments in the fourth quarter, including $98 million into excess servicing investments, $30 million to complete an investment in securities backed by seasoned re-performing loans, and $5 million into Sequoia RMBS.
Ñ
We deployed $102 million into third-party investments in the fourth quarter, including $52 million into a multifamily b-piece investment, $16 million of residential securities, $22 million of Agency CRT securities, and $12 million of Agency multifamily securities.
Ñ
One of our excess servicing investments required us to consolidate $303 million of servicing-related assets and $263 million of short-term non-recourse securitization debt used to finance the servicing advances on our balance sheet in the fourth quarter. We expect to settle additional portions of this investment in the first quarter of 2019, further increasing our consolidated assets and non-recourse securitization debt.
Ñ
Our $30 million investment in seasoned re-performing loans during the fourth quarter represented the remaining portion of an $87 million investment that was partially funded with a $58 million deposit at the end of the third quarter. This transaction ("Freddie Mac SLST") required us to consolidate $1.2 billion of residential loans and $1.0 billion of non-recourse securitization debt on our balance sheet in the fourth quarter.
_____________________
* Proprietary investments include investments sourced either internally or through strategic relationships.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Mortgage Banking
 
Mortgage Banking Segment Contribution
($ in millions)
 
Three Months Ended
 
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
Net interest income
$
5

 
$
7

 
Mortgage banking activities, net
11

 
11

 
Mortgage banking income
16

 
18

 
 
 
 
 
 
Operating expenses
(7
)
 
(7
)
 
Provision for income taxes

 
(2
)
 
Segment contribution
$
9

 
$
9

 
 
 
 
 
 
Loan purchase commitments
$
1,252

 
$
1,457

 
Ñ
Segment contribution from our mortgage banking business in the fourth quarter of 2018 was consistent with the third quarter of 2018 as a decrease in mortgage banking income from lower volumes and consistent margins was offset by a lower tax provision. We define gross margins for this segment as mortgage banking income divided by loan purchase commitments.
Quarterly Loan Purchase Volume
($ in billions)
396752262_q4purchvola01.jpg
Ñ
Jumbo residential loan purchase volumes in the fourth quarter of 2018, as presented above, decreased 13% from the prior quarter and 20% from the same quarter last year. At December 31, 2018, our pipeline of jumbo residential loans identified for purchase was $0.5 billion.
Ñ
During the fourth quarter of 2018, we completed $1.3 billion of jumbo residential loan sales, including one Select securitization of $0.5 billion and $0.8 billion of whole loan sales to third parties.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Book Value
Quarter-End Book Value Per Share (1) 
396752262_q4bookvaluea01.jpg
Ñ
Our GAAP book value declined $0.53 per share to $15.89 per share during the fourth quarter of 2018. This decline was primarily due to negative market valuation adjustments that drove a GAAP loss for the quarter, a decrease in the value of derivatives hedging our long-term debt, and dilution from annual equity awards distributed in the fourth quarter.
Ñ
The decline in book value per share in the fourth quarter of 2018 contributed to an economic return on book value(2) of negative (1.4)% for the quarter and a full-year economic return on book value of 7.8%.
Ñ
As housing credit investors, we employ hedging strategies that seek to minimize our exposure to interest rates, and our book value is most sensitive to changes in actual and perceived credit performance, credit spreads, and the outlook for economic growth. While interest rates have been volatile over the past several quarters, we have also seen strong economic growth and housing credit performance, which has generally supported strong book value performance for Redwood during that time.




_____________________
(1) A detailed rollforward of book value per share is included in Table 5 in the Financial Tables section of this Redwood Review.
(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.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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Q U A R T E R L Y O V E R V I E W

Capital Allocations
We use a combination of equity and corporate debt (which we collectively refer to as “capital”) to fund our business.
Capital Allocation: By Source and By Business Use
(as of December 31, 2018)
396752262_q4capalloca03.jpg
Ñ
Our total capital of $2.1 billion at December 31, 2018 was comprised of $1.3 billion of equity capital and $0.8 billion of convertible notes and other long-term debt, including $201 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023, $200 million of convertible debt due in 2024, and $140 million of trust-preferred securities due in 2037, and has a weighted average cost of approximately 6.1%.
Ñ
We also utilize various forms of collateralized debt to finance certain investments and to warehouse our inventory of certain residential loans held-for-sale. We do not consider this collateralized debt as "capital" and, therefore, exclude it from our capital allocation analysis.
Ñ
The Balance Sheet Analysis portion of the Financial Insights section that follows describes our long-term and short-term borrowings in further detail.

 
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Q U A R T E R L Y O V E R V I E W

 
Capital Allocation Detail
By Investment Type
December 31, 2018
($ in millions)
 
GAAP Fair Value
 
Collateralized Debt
 
Allocated Capital
 
% of Total Capital
 
 
 
 
 
 
 
 
 
 
Residential loans (1)
$
2,427

 
$
(2,000
)
 
$
427

 
20%
 
 
 
 
 
 
 
 
 
 
Securities portfolio
 
 
 
 
 
 
 
 
Third-party residential securities
610

 
(266
)
 
344

 
16%
 
Re-performing residential loan securities (2)
351

 
(184
)
 
166

 
8%
 
Sequoia residential securities
486

 
(180
)
 
306

 
14%
 
Multifamily securities
555

 
(360
)
 
194

 
9%
 
Total securities portfolio (3)
2,001

 
(989
)
 
1,012

 
48%
 
 
 
 
 
 
 
 
 
 
Business purpose loans
113

 
(66
)
 
46

 
2%
 
Other investments
439

 
(263
)
 
176

 
8%
 
Other assets/(liabilities)
200

 
(86
)
 
113

 
5%
 
Cash and liquidity capital
 
 
 
 
176

 
N/A
 
 
 
 
 
 
 
 
 
 
Total Investments
$
5,179

 
$
(3,404
)
 
$
1,951

 
92%
 
 
 
 
 
 
 
 
 
 
Mortgage banking
 
 
 
 
$
170

 
8%
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
$
2,121

 
100%
 
(1)
Includes $43 million of FHLB stock.
(2)
Re-performing residential loan securities represent third-party securities collateralized by seasoned re-performing residential loans.
(3)
In addition to our $1.5 billion of securities on our GAAP balance sheet, securities presented above also include $194 million, $229 million, and $126 million of securities retained from Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively. For GAAP purposes, we consolidate these securitizations.
Ñ
During the fourth quarter of 2018, we continued to optimize our portfolio by selling appreciated, lower-yielding securities and deploying capital into higher-yielding alternatives, including into new initiatives. (See Tables 8 and 9 in the Financial Tables section for additional detail on asset activity and balances.)
Ñ
During the fourth quarter of 2018, we reallocated capital from our mortgage banking business to our investment portfolio, leveraging operational changes that will allow us to manage our mortgage banking business with less capital.
Ñ
As of December 31, 2018, our cash and liquidity capital included $85 million of capital available for investment.

 
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Q U A R T E R L Y O V E R V I E W

2019 Financial Outlook(1)  
For 2019, we remain focused on maintaining an elevated pace of capital deployment into a diverse set of housing credit investment opportunities. With proceeds from our recent capital raise and continued portfolio optimization, we are pursuing accretive investments that will drive higher net interest income and overall returns for the company. We anticipate 2019 to remain an environment of heightened competition in the mortgage origination market overall and building off of new operational efficiencies, we expect to continue reallocating capital from our mortgage banking business into our investment portfolio to optimize our overall returns. Following are additional details on our expected activity in 2019:
For our investment portfolio
Ñ
We expect to allocate over 90% of our capital towards portfolio investments and generate returns on equity of 11-13%. Investment returns include an estimate of net interest income, hedging costs, the effect of principal paydowns, realized gains, direct operating expenses, and taxes.
Ñ
Our return range incorporates the potential variability in timing of our capital deployment (partially impacted by the timing of subsequent larger investments) and the associated returns, as well as the gains we may realize from portfolio sales.
For our mortgage banking business
Ñ
We expect to allocate 6-7% of our capital to support our mortgage banking business, and to generate a return on equity in the mid-teens. Mortgage banking returns include an estimate of loan purchase volume, gross margins, direct operating expenses, and taxes.
Ñ
Returns on our mortgage banking business will also be impacted by our ability to continue diversifying our loan distribution channels and improving distribution timelines.
For our corporate overhead
Ñ
We expect our baseline corporate operating expenses to be between $48 million and $50 million, with variable compensation commensurate with company performance.



_____________________
(1)
As with all forward-looking statements, our forward-looking statements relating to our 2019 financial outlook 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” and other risks, uncertainties, and factors that could cause actual results to differ materially from those described above and under the heading "Forward-Looking Statements" in the Appendix to this Redwood Review, including those described in the “Forward-Looking Statements” at the beginning of this Redwood Review. Although we may update our 2019 financial outlook subsequently in 2019, as a general matter we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 
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F I N A N C I A L I N S I G H T S

Balance Sheet Analysis
The following table presents our consolidated balance sheets at December 31, 2018 and September 30, 2018.
 
Consolidated Balance Sheets (1)
($ in millions)
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
Residential loans
$
7,255

 
$
5,922

 
Business purpose loans
141

 
116

 
Multifamily loans
2,145

 
942

 
Real estate securities
1,452

 
1,470

 
Other investments
439

 
114

 
Cash and cash equivalents
176

 
174

 
Other assets
330

 
402

 
 
 
 
 
 
Total assets
$
11,937

 
$
9,140

 
 
 
 
 
 
Short-term debt
 
 
 
 
Mortgage loan warehouse debt
$
861

 
$
578

 
Security repurchase facilities
989

 
781

 
Business purpose loan warehouse facilities
88

 
65

 
Servicer advance financing
263

 

 
Convertible notes, net
200

 

 
Other liabilities
206

 
176

 
Asset-backed securities issued
 
 
 
 
Residential
3,391

 
2,531

 
Multifamily
2,019

 
876

 
Long-term debt, net
2,572

 
2,771

 
Total liabilities
10,589

 
7,778

 
 
 
 
 
 
Stockholders’ equity
1,349

 
1,361

 
 
 
 
 
 
Total liabilities and equity
$
11,937

 
$
9,140

 
(1)
Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to the primary beneficiary (Redwood Trust, Inc.). At December 31, 2018 and September 30, 2018, assets of consolidated VIEs totaled $6.3 billion and $3.7 billion, respectively, and liabilities of consolidated VIEs totaled $5.7 billion and $3.4 billion, respectively. See Table 10 in the Financial Tables section of this Redwood Review for additional detail on consolidated VIEs.
Ñ
During the fourth quarter of 2018, we invested in the subordinate bonds of an Agency multifamily securitization and a re-performing loan securitization that we were required to consolidate under GAAP. Additionally, we invested in excess servicing assets that required us to consolidate servicing-related assets and liabilities, including $263 million of non-recourse securitization debt. See Table 9 in the Financial Tables section of this Redwood Review for additional information on these securitizations.

 
THE REDWOOD REVIEW I 4TH QUARTER 2018
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F I N A N C I A L I N S I G H T S

Recourse Financing
We finance our business with a diversified mix of long-term and short-term recourse debt. The following charts present the composition of our recourse debt and its characteristics at the end of the fourth quarter:
396752262_q4recoursefin1.jpg
 
Borrowing Type
Average Cost of Funds
Average Remaining Term (yrs.)
 
 
 
FHLBC Borrowings
2.5%
7
Unsecured Corporate Debt
6.1%
6
Mortgage Warehouse
4.2%
<1
Securities Repurchase
3.4%
<1
 
 
 
Weighted Average Cost of Funds
3.6%
 
 
 
 


Ñ
Our long-term unsecured corporate debt is comprised of $200 million of 5.625% convertible notes due in 2024, $245 million of 4.75% convertible notes due in 2023, $201 million of 5.625% exchangeable notes due in 2019, and $140 million of trust-preferred securities due in 2037 (that we hedge to yield approximately 6.9%).
Ñ
Our FHLBC borrowings and securities repurchase debt are used to finance our whole loan and securities investments, respectively, and we utilize mortgage warehouse facilities to finance our mortgage banking activities. These are discussed in further detail in the following sections.
Ñ
Our recourse debt to equity leverage ratio was 3.5x at the end of the fourth quarter of 2018, an increase from 3.1x at the end of the third quarter. (1) 
Ñ
In addition to our recourse financing, we have non-recourse ABS debt issued by securitization entities and other non-recourse short-term securitization debt that we consolidate.

_____________________
(1)
See Table 7 in the Financial Tables section of this Redwood Review for details of how our recourse debt to equity leverage ratio is calculated.

 
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F I N A N C I A L I N S I G H T S

Residential Loan Investments
Ñ
At December 31, 2018, we had $2.4 billion of residential loans held-for-investment. These loans are prime-quality, first lien jumbo loans, most of which were originated between 2013 and 2018. At December 31, 2018, 87% of these loans were fixed-rate and the remainder were hybrid, and in aggregate, had a weighted average coupon of 4.14%.
Ñ
At December 31, 2018, the weighted average FICO score of borrowers backing these loans was 768 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 66% (at origination). At December 31, 2018, 0.03% of these loans (by unpaid principal balance) were more than 90 days delinquent.
Ñ
We finance our residential loan investments with $2.0 billion of FHLB debt through our FHLB-member subsidiary. The interest cost for these borrowings resets every 13 weeks, and we seek to effectively fix the interest cost of this debt over its weighted average maturity by using a combination of swaps, TBAs, and other derivative instruments.
Ñ
In connection with these borrowings, our FHLB-member subsidiary is required to hold $43 million of FHLB stock.
Business Purpose Loan Investments
Ñ
At December 31, 2018, our $113 million of business purpose loans held-for-investment were comprised of short-term, residential bridge loans, most of which were originated in 2018. At December 31, 2018, the portfolio contained 157 loans with a weighted average coupon of 9.16%, and a weighted average LTV ratio of 76% (at origination). At December 31, 2018, seven of these loans with a cumulative unpaid principal balance of $12 million were more than 90 days delinquent. These loans had a weighted average current LTV ratio of 82% (at origination), and we currently expect to recover the full carrying amount of these loans.
Ñ
We finance our business purpose loan investments with warehouse debt that had a balance of $66 million at December 31, 2018.
Other Investments
Ñ
At December 31, 2018, we had $439 million of other investments, primarily comprised of $313 million of investments in excess servicing assets ($57 million of capital invested, net of non-recourse securitization debt collateralized by servicing-related assets and other consolidated assets and liabilities), $60 million of MSRs retained from our Sequoia securitizations, $40 million of investments in customized financing for our jumbo loan sellers, and our minority investment in 5 Arches.

 
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F I N A N C I A L I N S I G H T S

Securities Portfolio
At December 31, 2018, we had $2.0 billion invested in real estate securities. We categorize these securities by (i) whether they were issued through our Sequoia platform, by third parties, or by an Agency in a CRT, and (ii) by priority of cash flow (senior, mezzanine, and subordinate). The following table presents the fair value of our real estate securities at December 31, 2018.
 
Securities Portfolio - By Source and Security Type
December 31, 2018
($ in millions)
 
Interest-Only Securities
 
Senior
 
Mezzanine
 
Subordinate
 
Total
 
% of Total Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sequoia (1)
$
77

 
$

 
$
234

 
$
175

 
$
486

 
24
%
 
Third Party New Issue (2)
45

 
77

 
171

 
325

 
618

 
31
%
 
Third Party Legacy (2)
2

 
88

 

 
16

 
105

 
5
%
 
Agency CRT (3)

 

 

 
238

 
238

 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total residential securities
$
123

 
$
165

 
$
405

 
$
754

 
$
1,447

 
72
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily securities (3)(4)

 

 
447

 
108

 
555

 
28
%
 
Total securities portfolio
$
123

 
$
165

 
$
852

 
$
862

 
$
2,001

 
100
%
 
(1)
Presents securities retained from our Sequoia securitizations that were issued from 2012 through 2018. These securities included $15 million of interest-only securities, $134 million of mezzanine securities, and $45 million of subordinate securities retained from our Sequoia Choice securitizations, which were consolidated for GAAP purposes.
(2)
Presents RMBS issued by third parties after 2012 as New Issue and prior to 2008 as Legacy. New issue securities include $229 million of subordinate securities issued from an Agency residential securitization that is consolidated for GAAP purposes.
(3)
Agency CRT and Multifamily securities were issued after 2012.
(4)
Multifamily securities include $18 million of mezzanine securities and $108 million of subordinate securities issued from Agency multifamily securitizations that are consolidated for GAAP purposes.
At December 31, 2018, our securities consisted of fixed-rate assets (82%), adjustable-rate assets (14%), hybrid assets that reset within the next year (3%), and hybrid assets that reset between 12 and 36 months (1%). For the portions of our securities portfolio that are sensitive to changes in interest rates, we seek to minimize this interest rate risk by using various derivative instruments.
We finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. At December 31, 2018, we had short-term debt incurred through repurchase facilities of $989 million, which was secured by $1.2 billion of real estate securities. The remaining $780 million of securities were financed with capital.

 
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F I N A N C I A L I N S I G H T S

The following table presents the fair value of our real estate securities that are financed with repurchase debt, at December 31, 2018.
 
Real Estate Securities Financed with Repurchase Debt
December 31, 2018
($ in millions, except weighted average price)
 
Real Estate Securities (3)
 
Repurchase Debt
 
Allocated Capital
 
Weighted Average Price (1)
 
Financing Haircut (2)
 
 
 
 
 
 
 
 
 
 
 
 
Residential securities
 
 
 
 
 
 
 
 
 
 
Senior
$
148

 
$
(133
)
 
$
15

 
$
99

 
10
%
 
Mezzanine
369

 
(311
)
 
57

 
97

 
16
%
 
Subordinate
258

 
(185
)
 
73

 
74

 
28
%
 
Total residential securities
774

 
(629
)
 
145

 
 
 
 
 
Multifamily securities
447

 
(360
)
 
87

 
94

 
19
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,221

 
$
(989
)
 
$
232

 
$
90

 
19
%
 
(1)
GAAP fair value per $100 of principal.
(2)
Allocated capital divided by GAAP fair value.
(3)
Includes $130 million, $229 million, and $18 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively.     
Ñ
In addition to the allocated capital listed in the table above that directly supports our repurchase facilities (i.e., “the haircut”), we continue to hold a designated amount of supplemental risk capital available for potential margin calls or future obligations relating to these facilities.
Ñ
At December 31, 2018, we had securities repurchase facilities with eight different counterparties.
Ñ
Additional information on the residential securities we own is set forth in Table 9 in the Financial Tables section of this Redwood Review.


 
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F I N A N C I A L I N S I G H T S

Residential Loans Held-for-Sale
Ñ
At December 31, 2018, we had $1.0 billion of residential mortgages held-for-sale financed with $861 million of warehouse debt. These loans included $863 million of Select loans, and $186 million of expanded-prime Choice loans.
Ñ
Our warehouse capacity at December 31, 2018 totaled $1.4 billion across four separate counterparties.
Ñ
At December 31, 2018, our pipeline of jumbo residential loans identified for purchase was $0.5 billion.
Ñ
We seek to minimize the exposure we have to interest rates on our loan pipeline (for loans both on balance sheet and identified for purchase) by using a combination of TBAs, interest rate swaps, and other derivative instruments.
Ñ
At December 31, 2018, we had 501 loan sellers, which included 191 jumbo sellers and 310 MPF Direct sellers from various FHLB districts.
Business Purpose Loans Held-for-Sale
Ñ
At December 31, 2018, we had $28 million of business purpose loans held-for-sale, collateralized by single-family rental properties.
Ñ
At December 31, 2018, the weighted average coupon on these loans was 5.9% and the LTV ratio was 64% (at origination).
Ñ
We financed these loans with $22 million of short-term warehouse debt.



 
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  G L O S S A R Y

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396752262_rwtq42018appendixlogoa01.jpg
Table 1: GAAP Earnings (in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
Q4
 
2018
Q3
 
2018
Q2
 
2018
Q1
 
2017
Q4
 
2017
Q3
 
2017
Q2
 
2017
Q1
 
 
Twelve Months 2018
 
Twelve Months 2017
 
Interest income
$
116,858

 
$
96,074

 
$