Toggle SGML Header (+)


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): May 1, 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 2.01.
Completion of Acquisition or Disposition of Assets.
 
In a Current Report on Form 8-K filed on April 2, 2020 (the "April 2, 2020 8-K"), Redwood Trust, Inc. (the “Company”) previously announced that, as part of management’s efforts to respond to impacts of the novel coronavirus ("COVID-19") pandemic on the Company's business, including by managing liquidity and reducing debt during this period of volatility, it had completed the sale of certain securities during March 2020 and that it had entered into agreements to sell certain residential mortgage loans and securities that were expected to settle during April and May 2020. Upon the completion of COVID-19 related sales of securities and residential mortgage loans between March 18, 2020 and May 1, 2020, the Company received approximately $1.9 billion in gross proceeds. After the repayment of $1.7 billion of debt balances associated with such assets, the Company has generated net cash proceeds of $178 million. Remaining residential mortgage loan and securities sales transactions that are pending completion are expected to settle during the second quarter of 2020. The purchase and sale transactions were completed in a mix of transactions through securities dealers with unidentified counterparties and negotiated transactions with counterparties of the Company’s residential mortgage banking conduit.
Item 2.02.
Results of Operations and Financial Condition;
 
Item 7.01.
Regulation FD Disclosure.
On May 7, 2020, the Company issued a press release announcing its financial results for the quarter ended March 31, 2020 and The Redwood Review - 1st Quarter 2020, copies of which are attached as Exhibit 99.1 and Exhibit 99.2, respectively, to this current report on Form 8-K. Additional information related to the asset sales referenced above is included in the The Redwood Review - 1st Quarter 2020.
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 SEC, 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 8.01.
Other Events.

Relying on Order for Reporting Relief
 
On March 25, 2020, the SEC issued an order (the “Order”) under the Exchange Act of 1934, as amended (the “Exchange Act”), extending the deadlines for filing certain reports made under the Exchange Act, including quarterly reports on Form 10-Q, for registrants subject to the reporting obligations under the Exchange Act that have been particularly impacted by the COVID-19 pandemic and which reports have filing deadlines between March 1 and July 31, 2020. The Company is relying on the Order with respect to its Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (the “Form 10-Q”), which was due to be filed by with the SEC on or before May 11, 2020.

The Company is relying on the Order because, in light of the COVID-19 pandemic, non-essential businesses in the State of California have been closed by the state’s governor’s order, as a result of which Company personnel, its auditors, and its other advisors have been required to work and communicate remotely, which has slowed their ability to complete preparation and review of the Form 10-Q, as well as to assemble all documents necessary to complete the Form 10-Q. Additional information regarding the impact of COVID-19 on the Company's business, operations, and financial results is included in the April 2, 2020 8-K, including under the heading "Risk Factor Update". Accordingly, in reliance upon the Order, the Company currently expects to file the Form 10-Q in mid-May 2020, but in any case not later than June 8, 2020.

Item 9.01.
Financial Statements and Exhibits.
(d)
 
Exhibits
 
 
Exhibit 99.1
 
Press Release dated May 7, 2020
Exhibit 99.2
 
The Redwood Review – 1st Quarter 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: May 7, 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
 
 


(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit

Exhibit 99.1

403914113_q319prlogoa02.jpg
    

REDWOOD TRUST REPORTS FIRST QUARTER 2020 FINANCIAL RESULTS

MILL VALLEY, CA Thursday, May 7, 2020 – Redwood Trust, Inc. (NYSE:RWT), a leading innovator in housing credit investing, today reported its financial results for the quarter ended March 31, 2020.
Q1'20 Key Financial Results and Metrics
GAAP net loss was $(943) million, or $(8.28) per diluted common share
GAAP book value per common share was $6.32 at March 31, 2020; includes a $(0.78) per share impact from the impairment of intangible assets
Unrestricted cash balance was $375 million at March 31, 2020
Total recourse debt(1) of $4.6 billion at March 31, 2020

Company Update
At May 6, 2020, Redwood's unrestricted cash balance was $552 million and the company had met all margin calls due
Expect to reduce March 31, 2020 total recourse debt to $2.6 billion and total marginable debt to $1.1 billion on a pro forma basis(2) 
On a preliminary basis, Redwood's GAAP book value per common share as of April 30, 2020 is estimated to be approximately 5% higher than GAAP book value per common share at March 31, 2020(3) 
On May 6, 2020, Redwood announced the previously delayed first quarter dividend is now scheduled to be paid fully in cash on May 8, 2020

“Our first quarter results were significantly impacted by the COVID-19 pandemic, as uncertainty related to this health crisis and its impact on the economy triggered a collapse in liquidity and severe market dislocations. Despite the overall credit quality and underlying performance of our residential and business-purpose loan assets, Redwood incurred substantial losses in the quarter. Importantly, however, nearly two-thirds of the declines in our investments were negative mark-to-market adjustments on assets that remained on our balance sheet at quarter end. While it will likely take time for our industry to recover from the economic fallout caused by this health crisis, we believe our portfolio is well-positioned to recover meaningful value from quarter-end levels in the event market technicals subside and our nation gets back to work,” said Chris Abate, Chief Executive Officer of Redwood Trust.




_____________________
(1)
Recourse debt excludes $6.7 billion of consolidated securitization debt (ABS issued and servicer advance financing) that is non-recourse to Redwood.
(2)
Total recourse debt and total marginable debt on a pro forma basis reflects total recourse debt and total marginable debt, respectively, as of March 31, 2020 after giving effect to pending asset sale transactions and certain other activity that occurred on or prior to May 6, 2020, as if the transactions and activity had occurred on March 31, 2020. In general, these adjustments reflect asset sales that occurred from April 1, 2020 through April 30, 2020, and associated debt repayments, as well as new non-marginable warehouse facilities that were entered into since April 30, 2020. Additional discussion of this pro forma activity is included in the first quarter 2020 Redwood Review.
(3)
Redwood’s estimate of GAAP book value per common share as of April 30, 2020 reflects management’s preliminary estimate with respect to such information, based on information currently available, and may vary from Redwood’s actual financial results. Further, these preliminary estimates are not a comprehensive statement or estimate of Redwood’s financial results or financial condition. Accordingly, you should not place undue reliance on these preliminary estimates.

1


Redwood's Response to the Impact From COVID-19
Due to the continued volatility in the financial markets, including the residential credit markets, and economic impacts resulting from the global pandemic of COVID-19, Redwood has undertaken a number of initiatives to promote business continuity, prioritize liquidity through this period of volatility, adjust our operating platforms, focus on the safety and productivity of our employees, and continue to work with our counterparties, customers and operating partners. We expect to continue to review and adjust our efforts as the circumstances and impacts of the pandemic develop and we respond to the shifting business and financial landscape and heightened volatility in, among other things, financial markets, asset values and interest rates. More information on these initiatives, including, where practicable, select pro forma information and quarter-to-date information for the second quarter of 2020 are available in the company's first quarter 2020 Redwood Review.

First Quarter 2020 Redwood Review Available Online
A further discussion of Redwood's business, financial results and taxable income is included in the first quarter 2020 Redwood Review, which is available within the “Investor Information-Redwood Review” section on the Company’s website at www.redwoodtrust.com.





2



REDWOOD TRUST, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Performance
 
Three Months Ended
 
($ in millions, except per share data)
 
3/31/2020
 
12/31/2019
 
3/31/2019
 
 
 
 
 
 
 
 
 
GAAP net (loss) income
 
$
(943
)
 
$
49

 
$
54

 
GAAP net (loss) income per diluted common share
 
$
(8.28
)
 
$
0.38

 
$
0.49

 
 
 
 
 
 
 
 
 
REIT taxable income (estimated)
 
$
38

 
$
44

 
$
29

 
REIT taxable income per share (estimated)
 
$
0.33

 
$
0.39

 
$
0.30

 
 
 
 
 
 
 
 
 
GAAP book value per share
 
$
6.32

 
$
15.98

 
$
16.00

 
Dividends per common share
 
$
0.32

 
$
0.30

 
$
0.30

 

Conference Call and Webcast
Redwood will host an earnings call tomorrow, May 8, 2020, at 5:00 a.m. Pacific Time / 8:00 a.m. Eastern Time to discuss its first quarter 2020 financial results. The number to dial in order to listen to the conference call is 1-800-458-4121 in the U.S. and Canada. International callers must dial 1-856-344-9290. Callers should reference call ID #6225951. A replay of the call will be available through midnight on May 22, 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 #6225951.
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 currently expects to file its Quarterly Report on Form 10-Q with the Securities and Exchange Commission in mid-May 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 single-family residential and multifamily 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 Redwood's preliminary estimate of GAAP book value per common share as of April 30, 2020, total recourse debt and total marginable debt on a pro forma basis, estimates of 2020 REIT taxable income and the expected timing for the filing of Redwood's Quarterly Report on Form 10-Q. 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)
 
3/31/20
 
12/31/19
 
9/30/19
 
6/30/19
 
3/31/19
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
198

 
$
193

 
$
150

 
$
149

 
$
131

Interest expense
 
(147
)
 
(148
)
 
(117
)
 
(116
)
 
(99
)
Net interest income
 
51

 
45

 
34

 
32

 
32

Non-interest (loss) income
 
 
 
 
 
 
 
 
 
 
Mortgage banking activities, net
 
(28
)
 
46

 
10

 
19

 
12

Investment fair value changes, net
 
(871
)
 
1

 
11

 
3

 
20

Other income
 
2

 
5

 
4

 
5

 
5

Realized gains, net
 
4

 
6

 
5

 
3

 
11

Total non-interest (loss) income, net
 
(893
)
 
58

 
30

 
30

 
48

General and administrative expenses
 
(33
)
 
(42
)
 
(27
)
 
(26
)
 
(23
)
Other expenses
 
(91
)
 
(7
)
 
(3
)
 
(2
)
 
(1
)
Benefit from (provision for) income taxes
 
22

 
(4
)
 

 
(2
)
 
(1
)
Net (loss) income
 
$
(943
)
 
$
49

 
$
34

 
$
31

 
$
54

 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted shares (thousands) (2)
 
114,077

 
152,983

 
136,523

 
130,697

 
126,278

Diluted (loss) earnings per common share
 
$
(8.28
)
 
$
0.38

 
$
0.31

 
$
0.30

 
$
0.49

Regular dividends declared per common share
 
$
0.32

 
$
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 first quarter of 2020, 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 March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019 were 114,838, 114,353, 112,102, 97,715, and 96,866, respectively.














4



REDWOOD TRUST, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets (1)
 
 
 
 
 
 
 
 
 
 
 
($ in millions, except share and per share data)
 
3/31/20
 
12/31/19
 
9/30/19
 
6/30/19
 
3/31/19
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans
 
$
6,711

 
$
7,715

 
$
8,682

 
$
7,283

 
$
7,274

 
Business purpose residential loans
 
3,464

 
3,507

 
336

 
251

 
161

 
Multifamily loans
 
470

 
4,409

 
3,792

 
3,750

 
2,176

 
Real estate securities
 
293

 
1,100

 
1,285

 
1,477

 
1,543

 
Other investments
 
446

 
358

 
348

 
372

 
414

 
Cash and cash equivalents
 
378

 
197

 
395

 
218

 
201

 
Other assets
 
538

 
710

 
639

 
501

 
424

 
Total assets
 
$
12,301

 
$
17,995

 
$
15,476

 
$
13,852

 
$
12,193

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
$
2,342

 
$
2,329

 
$
1,981

 
$
2,463

 
$
2,163

 
Other liabilities
 
318

 
370

 
411

 
338

 
270

 
Asset-backed securities issued
 
6,462

 
10,515

 
8,346

 
6,913

 
5,638

 
Long-term debt, net
 
2,454

 
2,953

 
2,954

 
2,573

 
2,573

 
Total liabilities
 
11,576

 
16,168

 
13,691

 
12,288

 
10,643

 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
725

 
1,827

 
1,785

 
1,564

 
1,550

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
12,301

 
$
17,995

 
$
15,476

 
$
13,852

 
$
12,193

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares outstanding at period end (thousands)
 
114,838

 
114,353

 
112,102

 
97,715

 
96,866

 
GAAP book value per share
 
$
6.32

 
$
15.98

 
$
15.92

 
$
16.01

 
$
16.00

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Certain totals may not foot due to rounding.




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

5
(Back To Top)

Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit


Exhibit 99.2

403914113_q12020outsidefrontcover001.jpg


 
  T A B L E O F C O N T E N T S


Introduction
 
 
Shareholder Letter
 
 
Current Company Update
 
 
Quarterly Results
 
 
Ñ First Quarter Overview
 
 
Ñ Quarterly Earnings and Analysis
 
 
Ñ Book Value
 
 
Ñ Segment Results
 
 
Pro Forma Financial Information
 
 
Ñ Capital Allocations
 
 
Ñ Recourse Debt Analysis
 
 
Quarterly Positions
 
 
Ñ Credit Overview
 
 
Ñ Mortgage Servicing Advance Obligations
 
 
Financial Tables
 
 
Appendix
 
 
Ñ Segment Overview
 
 
Ñ Dividends and Taxable Income
 
 
Ñ Forward-Looking Statements
 
 
Endnotes


 
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
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.
Within this document, in addition to our GAAP results, we also present certain non-GAAP measures. When we present a non-GAAP measure, we accompany it with a description of that measure and a reconciliation to the comparable GAAP measure.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries. Note that because we generally round numbers in the tables to millions, except per share amounts, some numbers may not foot due to rounding. References to the “first quarter” refer to the quarter ended March 31, 2020, and references to the “fourth quarter” refer to the quarter ended December 31, 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” and in our Current Report on Form 8-K filed on April 2, 2020. Many of these risks and uncertainties have been, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. 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.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
2

 
I N T R O D U C T I O N

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.”
Pro forma financial information:
This Redwood Review also contains selected pro forma financial information, giving effect to pending asset sale transactions and certain other activity that occurred on or prior to May 6, 2020, as if the transactions and activity had occurred on March 31, 2020. The pro forma financial data as of March 31, 2020 reflect our estimates with respect to such information, based on information currently available to management and a number of assumptions, and may vary from our actual results. We make no assurance that we will be able to complete these asset sale transactions during the expected time period on attractive terms or at all, including asset sales we have entered into that have not yet settled. The pro forma financial information is not necessarily indicative of the expected financial position or results of Redwood’s operations for the first quarter of 2020, the second quarter of 2020, or any future period. Differences could result from numerous factors, including exposure to new or increased risks as a result of the impact of the COVID-19 pandemic, changes in market conditions or benchmark interest rates, changes in Redwood’s capital structure, changes in Redwood’s portfolio of investments, changes in Redwood’s operating expenses, and for other reasons, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, the Current Report on Form 8-K filed on April 2, 2020, and any subsequent Quarterly Reports on Form 10-Q under the caption “Risk Factors.”


Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
3

 
S H A R E H O L D E R L E T T E R

Dear Fellow Shareholders:
Redwood entered the first quarter of 2020 building on the strong momentum gained over the past year. While January and February were filled with optimism and opportunities for growth, including record monthly loan volumes, dynamics quickly shifted as the spread of the novel coronavirus (COVID-19) accelerated into a global pandemic in mid-March. Significant dislocation in the financial markets quickly ensued, resulting in one of the fastest market declines in history. In the span of six weeks, the U.S. economy shed over 30 million jobs - more than we experienced during the entire Great Financial Crisis of 2007-2008. More important than the economic impact, we’ve lost more Americans to COVID-19 than we did during the entire Vietnam War. We extend our sincerest gratitude to the nurses, doctors, first responders and others who are protecting people’s lives and carrying out essential functions at substantial risk to themselves.
In the Great Financial Crisis, it was a bubble in residential housing and mortgage credit, rather than a public health pandemic, that led the way. Yet we’ve been impacted just as severely in the current crisis and in a small fraction of the time. Despite the overall strong credit quality and underlying performance of our residential and business-purpose loan assets, uncertainty related to the pandemic and its impact on the economy triggered a collapse in liquidity for any sector not explicitly supported by the federal government. And as we disclosed on April 2, 2020, our balance sheet sustained heavy losses as a result.
In our early April disclosure, we estimated that book value per share at March 31, 2020 would be between $7.03 and $7.67, which excluded any potential decline in the value of our intangible assets. Actual book value results at March 31, 2020 were consistent with this prior estimate (i.e., GAAP book value at March 31, 2020 was $6.32 per share after giving effect to a $(0.78) per share impact from the impairment of goodwill). These declines were driven by widespread panic among market participants and the systematic repricing of mortgage-related assets financed by large financial institutions. Importantly, however, nearly two-thirds of the declines in our investments, or $(5.36) per share, were negative mark-to-market adjustments on assets that remained on our balance sheet at quarter end that we generally expect to hold for the longer term. While we can’t be sure exactly where the economy goes from here, we believe our portfolio is well-positioned to recover meaningful value from quarter-end levels in the event market technicals subside and our nation gets back to work.
While no playbook existed to manage the sheer speed at which this economic downturn occurred, we took necessary and timely actions to preserve our franchise. With our employees working remotely, and with the help of our strongest counterparties, we managed to significantly reposition our balance sheet and boost our liquidity. As a result, at May 6, 2020, our unrestricted cash balance was $552 million. Additionally, our outstanding secured debt that remains subject to margin calls - primarily loan warehouse facilities used to aggregate residential and business purpose loans through our origination and acquisition activities - had declined from $4.2 billion at December 31, 2019 to approximately $1.1 billion at March 31, 2020 on a pro forma basis,(1) with several initiatives well underway that we expect will reduce it even further.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
4

 
S H A R E H O L D E R L E T T E R

One of the actions we took to preserve liquidity was to delay the payment of our $0.32 per share first quarter dividend, which was originally scheduled to be paid on March 30, 2020. While this was a difficult decision to make, we believe it was in Redwood’s best interest while we navigated through the onset of this crisis. We are pleased to have recently announced that the first quarter dividend is now scheduled to be paid fully in cash on May 8, 2020. We’ve taken, and continue to take, myriad additional steps to address the various impacts of the pandemic, many of which we explain in this Redwood Review or will further detail during our first quarter earnings call. The pain this crisis has bestowed upon our workforce, our shareholders, our business partners, and our friends and families has been acute and severe. While it will take time for our industry to recover from the economic fallout caused by this health crisis, we are cautiously optimistic that both Redwood, and the broader economy, can begin to turn the corner and resume more normalized business activities in the coming weeks and months.
What do we expect the post-crisis world to look like for Redwood? We can start with what we know. We know that the Fed took lessons learned from the last crisis and quickly moved to support the federally guaranteed mortgage market, and through its Agency mortgage-backed securities (MBS) purchase program, has driven Agency-conforming mortgage rates back to record lows. This should become a medium-term positive for the residential mortgage market, as it will allow many Agency-eligible borrowers to refinance their home loans, reduce their monthly payments, and free up cash to spend on other pressing household and family needs. And while the private residential lending markets did not receive this type of governmental support, we expect mortgage rates for these products to re-correlate with traditional benchmark rates over time. These benchmarks are significantly lower than before this crisis began and are expected to continue converging toward zero until the economy begins to grow again.
We also know that traditional sources of funding for mortgage aggregators - namely loan warehouse facilities - will need to be reimagined with the potential for another health crisis in mind. The business of aggregating, structuring, and distributing exposure to mortgage loans has always required financing to accommodate the scale, diversification needs, and return thresholds of whole loan and securities investors. In the past, the quality of the assets financed drove the structure and pricing of these facilities. Going forward, we’ll need to assume the prospect of another wave of COVID-19 impacts (or another health pandemic), a resulting shutdown of many or most of the significant components of the U.S. economy, and the associated market effects. Working with our lending counterparties to recast our borrowing facilities with these factors in mind is a necessary step to re-growing our loan origination and acquisition volumes. To that end, since April 30, 2020, we have closed two new non-marginable loan warehouse facilities to provide financing on business purpose and residential whole loans previously financed under marginable facilities.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
5

 
S H A R E H O L D E R L E T T E R

From a product perspective, we continue to believe in housing credit. The reforms undertaken since the Great Financial Crisis, coupled with discipline among both originators and investors, have created a cohort of high-quality residential and business purpose loan products that should continue to perform well through this crisis. The substantial improvements exhibited by the private mortgage sector in recent years should accelerate our market’s recovery relative to the last crisis. We also believe that the strength of our underwriting and knowledge of the loans we’ve originated or flowed through our conduits has the potential to differentiate our platform going forward.
But there remain significant challenges we must manage before turning the page on this crisis. We continue to monitor trends in borrower-requested loan forbearance closely, as well as the financial health of loan servicers. Unhelpful and loose rhetoric stemming from housing officials in Washington has perpetuated market panic and diluted otherwise unified efforts from the Federal Reserve, Congress, Treasury, and other stakeholders to support consumers through this health pandemic. One area that has already been impacted is the home purchase market, where borrowers are experiencing significantly tighter credit terms due to uncertainty amongst lenders on whether there will be reliable liquidity for newly originated loans.
But as is often said, the biggest challenges often present the greatest opportunities. Our franchise remains intact and our focus will be emerging from this crisis with an enhanced business model that is capable of delivering meaningful value to our shareholders while taking into account the likelihood of a prolonged recession and possible resurgence of COVID-19 in the coming months. Our posture will remain defensive in how we structure and manage around these significant risks, but we believe we will find the best path forward. With competition across our business lines expected to be significantly reduced, the need for our sourcing and structuring capabilities - especially with tighter underwriting criteria at banks - will remain strong.
Thank you for your continued support.
403914113_q319ceosignaturea01.jpg
 
403914113_q319presidentsignaturea01.jpg
Christopher J. Abate
 
Dashiell I. Robinson
Chief Executive Officer
 
President

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
6

 
C U R R E N T C O M P A N Y U P D A T E


Current Company Update
On April 2, 2020, we published a company update that detailed key actions we had taken through March 27, 2020 as a result of the COVID-19 pandemic and the associated prospects of a potentially prolonged economic downturn. That update can be found as a Current Report on Form 8-K within the “Investor Information-SEC Filings” section of our website at www.redwoodtrust.com.
In this Redwood Review, we provide further updates on the actions we continue to take in preparation for further economic impacts that may be caused by the ongoing pandemic. Where practicable, we've included select pro forma information and quarter-to-date information for the second quarter of 2020. This information, combined with our first quarter results, is intended to provide more recent insight into these actions and their expected impact to our business, as well as how we are seeking to position Redwood as we navigate this complex and volatile environment.
Liquidity
As of May 6, 2020, we had unrestricted cash of $552 million and had met all margin calls due.
Updated Estimate of Book Value (1) 
On a preliminary basis, we estimate that our GAAP book value per common share as of April 30, 2020 was approximately 5% higher than GAAP book value per common share at March 31, 2020. This increase was primarily driven by observed spread tightening in many areas of our investment portfolio, recovering some of the mark-to-market losses we recorded in the first quarter.
Recent Asset Sales
Between April 1, 2020 and April 30, 2020, we settled sales of residential mortgage loans for aggregate proceeds of $1.5 billion and repaid $1.3 billion of associated borrowings. Additionally, as of April 30, 2020, we had entered into agreements to sell residential mortgage loans with a principal balance of $0.5 billion, which transactions are expected to settle on or before June 4, 2020, subject to customary closing conditions. Also, between April 1, 2020 and April 30, 2020, we completed the sale of $51 million of securities and repaid associated borrowings. Further detail on these transactions, including pro forma information and the expected impact to our balance sheet are presented in the Pro Forma Financial Information section that follows in this Redwood Review.
Changes to our Funding Structure
During the last several weeks, we have made significant progress de-levering our balance sheet through asset sales and debt repayments. In preparation for the potential of a prolonged recession, we have generated a substantial amount of cash and reduced our exposure to further volatility in asset prices by reducing both our marginable and absolute debt balances.
We have also made meaningful progress on plans to replace a significant amount of our remaining marginable warehouse facilities currently financing our whole-loan portfolios with new non-marginable facilities and other term facilities.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
7

 
C U R R E N T C O M P A N Y U P D A T E


Inclusive of our asset sales and associated debt repayments through April 30, 2020, and taking into account two new non-marginable loan warehouse facilities we closed since April 30th, on a pro forma basis(1) we had reduced our total recourse debt to approximately $2.6 billion and our total marginable debt to approximately $1.1 billion, compared to $5.1 billion of total recourse debt and $4.2 billion of marginable debt at December 31, 2019. A substantial amount of these reductions were associated with our FHLBC borrowing facility, which, as previously disclosed, we decided to begin to repay in March 2020.
Using our March 31, 2020 pro forma total recourse debt of $2.6 billion and our tangible book value at March 31, 2020, we estimate our March 31, 2020 recourse leverage ratio would be 4.0x on a pro forma basis.(2) 
Operations Update
We have undertaken a series of actions to help ensure the safety and productivity of our employees and help prevent the spread of COVID-19 among our workforce. Substantially all of our employees have been working remotely since March 16, 2020. We are maintaining our remote working policies to be consistent with actions taken and statements made by state and local government officials. In addition, we have implemented and tested our business continuity protocols to ensure the ongoing functional operation of our business as we work remotely. When applicable state and local guidelines allow our offices to fully reopen, we will do so only when we are confident that we have the processes and practices in place to safeguard the health and well-being of our employees.










Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
8

 
Q U A R T E R L Y R E S U L T S

First Quarter Overview
 
Key Financial Results and Metrics
 
 
 
Three Months Ended
 
 
3/31/2020
 
12/31/2019
 
 
 
 
 
 
Earnings (Loss) per Share
$
(8.28
)
 
$
0.38

 
Book Value per Share
$
6.32

 
$
15.98

 
Dividend per Share
$
0.32

 
$
0.30

 
Unrestricted Cash (in millions)
$
375

 
$
188

 
 
 
 
 
 
Ñ
Our first quarter 2020 results were significantly impacted by the COVID-19 pandemic, which ultimately led to substantial losses on our investments and an overall loss for the quarter. Nearly two-thirds of our investment losses, or $(5.36) per share, were on assets we continued to hold at March 31, 2020 that we generally have the intention to hold for longer-term investment. The remainder of our investment losses, or $(3.08) per share, were on assets we sold and hedges we settled during the first quarter of 2020, and assets that we had either entered into agreements to sell or that we have the intent to sell in the near-term. While our operating businesses saw increased volumes early in the first quarter, as markets became dislocated in March, profitability was negatively impacted due to less favorable execution on securitizations we completed in March, and lower marks on the remaining loan inventories we held at quarter-end. Additionally, as a result of the recent market dislocation, we determined all of the goodwill on our balance sheet was impaired, resulting in an expense of $(0.78) per share.
Ñ
We are not disclosing non-GAAP core earnings for the first quarter of 2020, as we determined that this measure, as we have historically calculated it, does not appropriately reflect the economic impact of the COVID-19 pandemic on our results. As financial markets stabilize, we will evaluate whether core earnings or other non-GAAP measures would help both management and investors evaluate our operating performance for future periods.
Ñ
On March 27, 2020, we announced the deferral of the payment of our previously declared first quarter dividend of $0.32 per share, which was originally scheduled to be paid on March 30, 2020. On May 6, 2020, we announced the first quarter dividend will now be paid fully in cash on May 8, 2020.
Ñ
Our unrestricted cash position increased meaningfully at March 31, 2020, as we repositioned our balance sheet to generate additional liquidity.


Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
9

 
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 (loss) income for the first quarter of 2020 and fourth quarter of 2019.
 
 
GAAP Net (Loss) Income
($ in millions, except per share data)
 
Three Months Ended
 
 
3/31/2020
 
12/31/2019
 
 
 
 
 
 
Net interest income
 
 
 
 
From investments
$
43

 
$
38

 
From mortgage banking activities
8

 
7

 
Total net interest income
51

 
45

 
 
 
 
 
 
Non-interest (loss) income
 
 
 
 
Residential mortgage banking, net
(23
)
 
17

 
Business purpose mortgage banking, net
(5
)
 
30

 
Investment fair value changes, net
(871
)
 
1

 
Other income, net
2

 
5

 
Realized gains, net
4

 
6

 
Total non-interest (loss) income, net
(893
)
 
58

 
 
 
 
 
 
General and administrative expenses
(33
)
 
(42
)
 
Other expenses
(91
)
 
(7
)
 
Benefit from (provision for) income taxes
22

 
(4
)
 
 
 
 
 
 
Net (loss) income
$
(943
)
 
$
49

 
 
 
 
 
 
(Loss) earnings per diluted common share
$
(8.28
)
 
$
0.38

 
 
 
 
 
 
 
 
GAAP Net (Loss) Income by Segment
($ in millions)
 
Three Months Ended
 
3/31/2020
 
12/31/2019
 
 
 
 
 
 
Residential Lending
$
(199
)
 
$
16

 
Business Purpose Lending
(228
)
 
19

 
Multifamily Investments
(225
)
 
11

 
Third-Party Residential Investments
(280
)
 
21

 
Corporate
(11
)
 
(18
)
 
Net (loss) income
$
(943
)
 
$
49

 




Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
10

 
Q U A R T E R L Y R E S U L T S

Analysis of Earnings and Losses
Ñ
Net interest income increased in the first quarter, compared to the fourth quarter of 2019, resulting from a higher average balance of invested capital during the first quarter, prior to the asset sales that occurred in late March.
Ñ
Mortgage banking activities at both our residential and business purpose lending segments were negatively impacted by lower profitability on securitizations that settled late in the first quarter and from lower marks on loan inventories held at quarter-end, resulting from the recent market dislocation.
Ñ
Negative investment fair value changes reflected significant declines in the value of our investments resulting from the market dislocation caused by the COVID-19 pandemic. Additionally, this line item includes losses associated with our decision to close-out substantially all of our outstanding interest rate hedges, as we determined that due to the recent market dislocations, the correlations between asset market values and interest rates had deteriorated and the hedges were no longer effective. Approximately $(510) million of investment losses were associated with assets we continued to hold at March 31, 2020 and that we generally have the intention to hold for longer-term investment. The remainder of our investment losses (approximately $(361) million) were on assets we sold and hedges we settled during the first quarter of 2020, and assets that we had either entered into agreements to sell or that we have the intent to sell in the near-term. See the "Q1 2020 Fair Value Changes on Assets Held at March 31, 2020" table below, which includes additional detail on the assets we held at March 31, 2020 and their associated losses recognized during the first quarter of 2020.
Ñ
The realized gains, net line item on our income statement presents net gains and losses on securities classified as available-for-sale. While we realized a significant amount of losses on the sale of securities during the first quarter of 2020, those losses were on securities classified under fair value accounting, for which losses are recorded in the Investment fair value changes line item.
Ñ
General and administrative expenses decreased in the first quarter, primarily due to a significant reduction in our variable compensation expense accrual, aligned with the quarter's financial results.
Ñ
Other expenses increased during the quarter, primarily due to the impairment of $89 million of goodwill at our Business Purpose Lending segment.
Ñ
Income tax provision changed to a benefit in the first quarter as a result of losses incurred at our taxable REIT subsidiaries (TRS), driven by mortgage banking losses as well as losses on investments held at our TRS.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
11

 
Q U A R T E R L Y R E S U L T S

The following table presents the investments we held at March 31, 2020 and their associated losses recognized in both our earnings and comprehensive income during the first quarter of 2020.
 
Q1 2020 Fair Value Changes on Assets Held at March 31, 2020
By Investment Type
($ in millions)
 
 
 
 
Q1 2020 Fair Value Changes (1)
 
 
 
 
 
Held-for-sale (2)
 
Held -for-investment
 
 
 
Fair Value of Assets at March 31, 2020
 
Income Statement (3)
 
Income Statement (3)
Balance
 Sheet (4)
Total
 
 
 
 
 
 
 
 
 
 
 
Residential Lending
 
 
 
 
 
 
 
 
 
Residential loans (5)
 
$
1,437

 
$
(73
)
 
$

$

$

 
Sequoia securities
 
275

 
 
 
(103
)
(59
)
(162
)
 
MSRs/Other
 
44

 
 
 
(19
)

(19
)
 
Residential mortgage banking (5)
 
894

 
(30
)
 



 
Total Residential Lending
 
2,650

 
(103
)
 
(122
)
(59
)
(181
)
 
 
 
 
 
 
 
 
 
 
 
Business Purpose Lending
 
 
 
 
 
 
 
 
 
SFR securities
 
167

 
 
 
(68
)

(68
)
 
Bridge investments
 
817

 
 
 
(40
)

(40
)
 
SFR loans (5)
 
414

 
(10
)
 
(23
)

(23
)
 
Total Business Purpose Lending
 
1,398

 
(10
)
 
(131
)

(131
)
 
 
 
 
 
 
 
 
 
 
 
Multifamily Investments
 
 
 
 
 
 
 
 
 
Multifamily B-pieces
 
49

 
 
 
(16
)
(2
)
(18
)
 
Other investments
 
37

 
 
 
(4
)

(4
)
 
Total Multifamily Investments
 
86

 

 
(20
)
(2
)
(22
)
 
 
 
 
 
 
 
 
 
 
 
Third-Party Residential Investments
 
 
 
 
 
 
 
 
 
RPL investments
 
369

 
 
 
(175
)

(175
)
 
CRT & third-party securities
 
73

 
 
 
(61
)
(26
)
(87
)
 
Other investments
 
104

 
 
 
(19
)
 
(19
)
 
Total Third-Party Residential Investments
 
546

 

 
(255
)
(26
)
(281
)
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
4,680

 
$
(113
)
 
$
(528
)
$
(87
)
$
(615
)
 



Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
12

 
Q U A R T E R L Y R E S U L T S

Book Value
 
Changes in Book Value per Share
($ in per share)
 
Three Months Ended
 
 
3/31/2020
 
12/31/2019
 
 
 
 
 
 
Beginning GAAP book value per share
$
15.98

 
$
15.92

 
Comprehensive (Loss) Income
 
 
 
 
Q1 2020 fair value changes on investments held at March 31, 2020 (1)
(5.36
)
 

 
Other Q1 2020 fair value changes on investments (2)
(3.08
)
 

 
Impairment of goodwill
(0.78
)
 

 
Change in value of long-term debt hedge
(0.29
)
 
0.09

 
Other comprehensive income, net
0.16

 
0.37

 
Total comprehensive (loss) income per share
(9.35
)
 
0.46

 
Dividends
(0.32
)
 
(0.30
)
 
Other, net
0.01

 
(0.10
)
 
 
 
 
 
 
Ending GAAP book value per share
$
6.32

 
$
15.98

 

Ñ
Our GAAP book value decreased $(9.66) per share during the first quarter of 2020, resulting primarily from negative investment fair value changes that were recorded both through our income statement and through accumulated comprehensive income on our balance sheet.
Ñ
During the first quarter, we recognized losses of $(5.36) per share on assets we continued to hold at March 31, 2020 that we generally have the intention to hold for longer-term investment. These losses represent the decline in price of the related assets from December 31, 2019 (or their purchase date, if purchased after December 31, 2019) to March 31, 2020.
Ñ
Other investment fair value changes of $(3.08) per share were associated with assets we sold and hedges we settled during the first quarter of 2020, and assets that we had either entered into agreements to sell or that we have the intent to sell in the near-term. For securities, these losses represent their decline in price from December 31, 2019 (or their purchase date, if purchased after December 31, 2019) to the price the assets were sold at during the first quarter. For loans, these losses represent the decline in price from December 31, 2019 (or their purchase date, if purchased after December 31, 2019) to the earlier of the date they were sold or March 31, 2020 (which in many cases represents agreed-upon sales prices for transactions entered into as of March 31, 2020 and that have since settled or are expected to settle after March 31, 2020).
Ñ
During the first quarter of 2020, we recorded a goodwill impairment of $0.78 per share, associated with the BPL operating platforms we acquired in 2019. At March 31, 2020, after excluding $0.60 per share of our remaining intangible assets, our non-GAAP tangible book value per share was $5.72.(3) 

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
13

 
Q U A R T E R L Y R E S U L T S

Segment Results
This section provides additional information on quarterly results and activity for each of our business segments. A detailed segment income statement is presented in Table 2 within the Financial Tables section of this Redwood Review.
Residential Lending
Ñ
Our Residential Lending segment incurred a $(199) million net loss during the first quarter of 2020, driven primarily by $(197) million of negative investment fair value changes and a $(19) million net loss from mortgage banking operations.
Ñ
As a result of the economic and financial market impacts of COVID-19, the terms of our borrowing facility with the Federal Home Loan Bank of Chicago (our "FHLBC Facility") evolved and we decided to reduce the financing we obtain from the FHLBC. Accordingly, in March we began entering into transactions to sell several pools of residential whole loans financed through this facility and in the coming weeks we expect to sell or refinance substantially all of the remaining assets financed through this facility and repay substantially all of our borrowings from the FHLBC. (See the Pro Forma Financial Information section that follows for additional details.)
Ñ
During the first quarter, we sold $83 million of securities from our residential lending investment portfolio.
Ñ
During the first quarter, our residential mortgage banking business purchased $2.7 billion of jumbo residential loans (the majority during the first two months of the quarter). In March 2020, in response to market conditions, we became more selective in making loan purchases.
Ñ
During the first quarter, we sold $2.7 billion of loans held in inventory for our mortgage banking business, including through three Select securitizations totaling $1.6 billion and through Select and Choice whole loan sales to third parties totaling $1.1 billion. At March 31, 2020, we held loans in inventory of $898 million. Subsequent to March 31, 2020, we sold a substantial portion of these loans. (See the Pro Forma Financial Information section that follows for additional details.)
Business Purpose Lending
Ñ
Our Business Purpose Lending segment incurred a $(228) million net loss during the first quarter of 2020, driven primarily by $(142) million of negative investment fair value changes and a $(12) million net loss from mortgage banking operations, exclusive of an $(89) million charge related to the full impairment of this segment's goodwill.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
14

 
Q U A R T E R L Y R E S U L T S

Ñ
During the first quarter of 2020, we funded $206 million of business purpose bridge loans and received repayments of $123 million of such loans. In addition, we retained $42 million of securities from a single-family rental loan securitization we completed during the first quarter.
Ñ
As of March 31, 2020, we reclassified our single-family rental loans financed at the FHLBC to held-for-sale and currently plan to securitize a portion of these loans.
Ñ
BPL originations in the first quarter included $259 million of single-family rental loans and $227 million of bridge loans, largely during the first two months of the quarter. While we were able to price and complete a $374 million single-family rental loan securitization in early March with a modest impact to pricing, our remaining loan inventory experienced meaningful price declines through the end of March.
Multifamily Investments
Ñ
Our Multifamily Investments segment incurred a net loss of $(225) million during the first quarter of 2020, driven primarily by $(227) million of negative investment fair value changes.
Ñ
During the first quarter, we sold $430 million of multifamily securities, representing nearly all of our multifamily mezzanine securities, and all but two of our multifamily b-piece securities.
Third-Party Residential Investments
Ñ
Our Third-Party Residential Investments segment incurred a net loss of $(280) million during the first quarter of 2020, driven primarily by $(304) million of negative investment fair value changes.
Ñ
During the first quarter, we sold $210 million of third-party residential investments, including $95 million of recently issued subordinate securities, $74 million of RPL securities, $23 million of CRT securities, and $18 million of legacy securities. The proceeds from these sales were used to pay down associated repurchase debt.




Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
15


 
P R O F O R M A F I N A N C I A L I N F O R M A T I O N


Capital Allocations
The following table presents our allocations of capital by segment as of December 31, 2019, March 31, 2020, and as of March 31, 2020 on a pro forma basis to give effect to pending asset sale transactions and certain other activity that occurred on or prior to May 6, 2020.(1) 
 
Capital Allocation Detail
By Investment Type
($ in millions)
 
December 31, 2019
 
March 31, 2020
 
March 31, 2020 Pro Forma(1)
 
 
Fair Value of Assets (2)
 
Total Recourse Debt
 
Fair Value of Assets (2)
 
Total Recourse Debt
 
Fair Value of Assets (2)
 
Total Recourse Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Lending
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans
$
2,105

 
$
(1,776
)
 
$
1,437

 
$
(1,190
)
 
$

 
$

 
Sequoia securities
483

 
(320
)
 
275

 
(259
)
 
254

 
(230
)
 
MSRs/Other
63

 

 
44

 
(30
)
 
44

 
(20
)
 
Residential mortgage banking
544

 
(186
)
 
894

 
(841
)
 
226

 
(212
)
 
Total Residential Lending
3,195

 
(2,282
)
 
2,650

 
(2,321
)
 
524

 
(463
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Purpose Lending
 
 
 
 
 
 
 
 
 
 
 
 
SFR securities
191

 
(80
)
 
167

 
(103
)
 
167

 
(103
)
 
Bridge investments
764

 
(567
)
 
817

 
(626
)
 
817

 
(626
)
 
SFR loans
570

 
(432
)
 
415

 
(308
)
 
415

 
(308
)
 
Platform premium
161

 

 
69

 

 
69

 

 
Total Business Purpose Lending
1,686

 
(1,079
)
 
1,468

 
(1,037
)
 
1,468

 
(1,037
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily Investments
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily mezzanine
423

 
(334
)
 

 
(26
)
 

 

 
Multifamily B-pieces
234

 
(171
)
 
49

 
(50
)
 
49

 
(42
)
 
Other investments
61

 

 
37

 

 
37

 

 
Total Multifamily Investments
718

 
(505
)
 
86

 
(76
)
 
86

 
(42
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third-Party Residential Investments
 
 
 
 
 
 
 
 
 
 
 
 
RPL investments
611

 
(354
)
 
369

 
(300
)
 
364

 
(282
)
 
CRT & third-party securities
306

 
(142
)
 
73

 
(32
)
 
50

 
(1
)
 
Other investments
102

 

 
104

 

 
104

 

 
Total Third-Party Residential Investments
1,019

 
(496
)
 
546

 
(332
)
 
518

 
(283
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (3)
188

 

 
378

 

 
596

 

 
Other Assets and liabilities, net
169

 

 
151

 

 
143

 

 
Corporate debt

 
(786
)
 

 
(786
)
 

 
(786
)
 
Total Corporate / Other
357

 
(786
)
 
529

 
(786
)
 
739

 
(786
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Totals
$
6,975

 
$
(5,148
)
 
$
5,279

 
$
(4,554
)
 
$
3,335

 
$
(2,610
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Equity


 
$
1,827

 


 
$
725

 


 
$
725

 

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
16


 
P R O F O R M A F I N A N C I A L I N F O R M A T I O N


Residential Lending
Ñ
Between April 1, 2020 and April 30, 2020, we sold $1.5 billion of residential loans to third parties, including $1.0 billion of loans previously financed under our FHLBC facility and $0.5 billion of loans previously funded with warehouse debt. In addition, as of April 30, 2020, we had entered into agreements to sell residential mortgage loans with a fair value of $0.5 billion. Additionally, we expect to transfer all of our remaining residential loans under our FHLBC facility, to our new non-marginable loan warehouse facility, which we closed subsequent to April 30, 2020. Upon completion of these sales and financing arrangements, we expect to reduce our residential warehouse debt to $145 million, and borrowings under our FHLBC facility that fund residential loans to zero.
Ñ
Between April 1, 2020 and April 30, 2020, we sold $22 million of Sequoia securities and repaid associated repurchase debt.
Ñ
During April 2020, we paid down our secured revolving debt financing our MSR investments by $10 million.
Business Purpose Lending
Ñ
Since April 30, 2020, we established a new non-marginable warehouse facility and are exploring additional financing transactions to further reduce the remaining marginable financing for our business purpose loans.
Multifamily Investments
Ñ
Between April 1, 2020 and April 30, 2020, we repaid $26 million of securities repurchase debt that financed multifamily securities associated with sales that were executed as of March 31, 2020 and settled in April 2020. The settlement amount for these security sales is included in other assets as a trade receivable as of March 31, 2020, and the associated debt was repaid upon settlement of the receivable in April 2020.
Third-Party Residential Investments
Ñ
Between April 1, 2020 and April 30, 2020, we sold $29 million of securities in our third-party residential investments segment and repaid associated repurchase debt. We also paid down certain repurchase debt during April 2020 in accordance with new terms when the debt was refinanced.



Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
17


 
P R O F O R M A F I N A N C I A L I N F O R M A T I O N


Recourse Debt Analysis
The following summaries present the composition of our recourse debt and its characteristics as of March 31, 2020, on a pro forma basis(1), to give effect to debt paydowns associated with settled and pending asset sale transactions and certain other activity that occurred from April 1, 2020 to May 6, 2020.

403914113_q1margdebtv6.jpg

 
Debt Balances at March 31, 2020 Pro Forma (1)
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled Maturity
 
 
 
Q2 2020
 
Q3 2020
 
Q4 2020
 
Beyond 2020
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Securities repurchase debt
$
373

 
$

 
$

 
$

 
$
373

 
Warehouse/secured revolving debt

 

 
298

 
405

 
704

 
Non-marginable warehouse debt

 

 

 
444

 
444

 
Non-marginable secured term debt

 

 

 
286

 
286

 
Non-marginable corporate unsecured debt

 

 

 
786

 
786

 
FHLB debt

 

 

 
18

 
18

 
 
 
 
 
 
 
 
 
 
 
 
Total debt
$
373

 
$

 
$
298

 
$
1,939

 
$
2,610

 
Ñ
We expect to reduce our recourse debt from $4.6 billion at March 31, 2020 to $2.6 billion, on a pro forma basis.(1) 


Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
18


 
P R O F O R M A F I N A N C I A L I N F O R M A T I O N


After giving effect to debt paydowns associated with settled and pending asset sale transactions and certain other activity that occurred from April 1, 2020 to May 6, 2020, our pro forma(1) debt and associated asset balances would consist of the following:
Ñ
Securities repurchase debt of $373 million, financing $308 million of third-party securities, $56 million of Sequoia securities, and $47 million of multifamily b-pieces. On a pro forma basis, we expect to have $19 million of remaining cash margin posted against our pro forma securities repurchase debt, which is held by our counterparties, and $191 million of unencumbered securities.
Ñ
Warehouse debt of $704 million, financing $514 million of bridge loans, $154 million of SFR loans, and $140 million of residential loans, and secured revolving debt of $20 million, financing $49 million of MSRs and certificated servicing assets.
Ñ
New non-marginable warehouse facilities we entered into since April 30, 2020 of $444 million, financing $273 million of bridge loans, $222 million of SFR loans, and $39 million of residential loans.
Ñ
Non-marginable secured term debt of $286 million, financing $155 million of Sequoia securities and $103 million of SFR securities, with final maturity dates in 2024 and 2025.
Ñ
Unsecured corporate debt comprised of $245 million of 4.75% convertible notes due in 2023, $200 million of 5.625% convertible notes due in 2024, $201 million of 5.75% exchangeable notes due in 2025, and $140 million of trust-preferred securities due in 2037.
Ñ
FHLB debt of $18 million, financing $25 million of SFR loans.
Our recourse leverage ratio was 6.9x at March 31, 2020. Using our March 31, 2020 pro forma total recourse debt of $2.6 billion and our tangible book value at March 31, 2020, we estimate our March 31, 2020 recourse leverage ratio would be 4.0x on a pro forma basis.(2) 
Our ratio of cash to marginable recourse debt increased to 54% at March 31, 2020 on a pro forma basis(1), after giving effect to these pending and recently completed transactions.


Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
19

 
Q U A R T E R L Y P O S I T I O N S


Credit Overview
This section presents select credit characteristics for our major investment types, with current information as of March 31, 2020.
 
Residential Investments Credit Characteristics
March 31, 2020
 
($ in millions, except where noted)
 
 
Sequoia Select Securities
 
Sequoia Choice Securities
 
Re-Performing Loan Securities
 
 
 
 
 
 
 
 
Market value
$
105

 
$
136

 
$
369

 
Average FICO (at origination)
771

 
744

 
613

 
HPI updated LTV (1)
47
%
 
66
%
 
69
%
 
Average loan size (in thousands)
$
690

 
$
704

 
$
187

 
Gross weighted average coupon
4.0
%
 
5.0
%
 
4.5
%
 
Current 3-month prepayment rate
19
%
 
36
%
 
6
%
 
90+ days delinquency (as a % of UPB)
0.1
%
 
0.4
%
 
5.8
%
 
Investment thickness
4
%
 
11
%
 
21
%
 
 
 
 
 
 
 
 
Sequoia Select Securities — As of March 31, 2020, we had securitized $21.4 billion of Sequoia Select loans since 2010. Our securitized Select portfolio includes fully documented loans to prime borrowers with an average FICO score (at loan origination) of 771, maximum loan-to-value (at origination) of 80%, and a maximum debt-to-income ratio (at origination) of 43%. We retain all first-loss securities from our Sequoia Select securitizations, and on average we have exposure up to 4% of credit losses resulting from loans underlying the securities (represented by the thickness of the securities we currently own as investments).
Sequoia Choice Securities — As of March 31, 2020, we had securitized $3.4 billion of Sequoia Choice loans, since 2017. Our securitized Choice portfolio includes fully documented loans to prime borrowers with an average FICO score (at loan origination) of 744, maximum loan-to-value (at origination) of 90%, and a maximum debt-to-income ratio (at origination) of 49.9%. We retain all of the first-loss securities issued as part of our Sequoia Choice program, and on average we have exposure up to the first 11% of credit losses resulting from loans underlying the securities, (represented by the thickness of the securities we currently own as investments).
Re-performing Loan Securities — As of March 31, 2020, we held $369 million of securities collateralized by re-performing loans, and on average we have exposure to up to 21% of the credit losses resulting from loans underlying the securities (represented by the thickness of the securities we currently own as investments). The collateral underlying these securities are seasoned re-performing, and to a lesser extent non-performing, loans. In most cases, these loans experienced a credit event leading up to the securitization and were modified in order to keep the borrower in their home and current in their payments under recast loan terms. Central to the investment

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
20

 
Q U A R T E R L Y P O S I T I O N S


thesis in these securities is the view that a significant percentage of the underlying borrowers will improve upon their delinquency history and continue paying steadily under the modified or recast terms of the loan.
 
Business Purpose and Multifamily Investments Credit Characteristics
March 31, 2020
 
($ in millions, except where noted)
 
 
Multifamily B-Pieces
 
SFR Securities
 
BPL Bridge Loans
 
 
 
 
 
 
 
 
Market value
$
49

 
$
167

 
$
817

 
Average current DSCR (1)
1.5x

 
1.36x

 
N/A

 
LTV (at origination) (2)
72
%
 
68
%
 
68
%
 
Average loan size (in thousands)
$
20,116

 
$
2,650

 
$
399

 
Gross weighted average coupon
4.2
%
 
5.6
%
 
7.9
%
 
90+ days delinquency (as a % of UPB)
0.0
%
 
1.5
%
 
4.3
%
 
Investment thickness
10
%
 
11
%
 
N/A

 
 
 
 
 
 
 
 
Multifamily B-Pieces — As of March 31, 2020, we had $49 million of multifamily b-pieces, which represent first-loss risk on $1.0 billion of underlying multifamily loan collateral across two separate Freddie Mac sponsored securitizations. On average, we have exposure to the first 10% of credit losses resulting from loans underlying the securities (represented by the thickness of the securities we currently own as investments).
SFR Securities — As of March 31, 2020, we had $167 million of SFR securities, comprised of subordinate and interest-only securities retained from the eleven CAFL securitizations completed by CoreVest through March 31, 2020. We own and retain the first-loss securities from the CAFL securitizations, and on average have exposure to the first 11% of credit losses (represented by the current thickness of the securities we currently own as investments).
BPL Bridge Loans — As of March 31, 2020, we had $817 million of bridge loans held for investment. These loans are collateralized by residential and multifamily properties, many of which are being rehabilitated for either re-sale or rental purposes. The average loan term at origination is approximately 12 months.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
21

 
Q U A R T E R L Y P O S I T I O N S


Current Update on Forbearances
COVID-19 Related Forbearances
In response to the personal financial impacts of the COVID-19 pandemic, many residential mortgage borrowers are seeking forbearance with respect to monthly mortgage payment obligations. Across the mortgage industry, mortgage loan investors and servicers are seeking to provide such forbearances to impacted individuals as a loss mitigation response to the pandemic. At the same time, federal and state governmental authorities have sought to encourage a constructive and voluntary industry response to these forbearance requests, as well as mandate, in certain cases, responses to these forbearance requests by enacting statutes and promulgating various orders, regulations, and guidance.
Generally speaking, COVID-19 related payment forbearances granted to borrowers whose loans are securitized in Sequoia transactions, and borrowers whose loans are held for investment or sale by Redwood, initially enable the borrowers to reschedule one to three months of mortgage payments. While forbearance terms differ across the industry and may differ based on various factors, including state-specific requirements or guidance, payments subject to these forbearances are in many cases required to be paid in full at the end of the forbearance period. Borrowers who have been granted COVID-19 related forbearances may request, and may receive or be entitled to, an additional forbearance period in the future and/or may request or be entitled to additional modifications to payment and loan terms, including when rescheduled payments become due, under applicable law, regulation, regulatory guidance and/or commonly accepted servicing practices.
Our financial exposure to COVID-19 related forbearances is not limited to residential loans within Sequoia securitizations and residential whole loans held for investment or sale on our balance sheet. We are also exposed to the negative financial impact of COVID-19 related payment forbearances with respect a variety of other investments, including third-party issued mortgage-backed securities, mortgage servicing rights and related cash flows, re-performing residential mortgage loans, and business purpose loans. In addition, transactions we have entered into, including to finance loans with warehouse financing providers and to sell whole loans to third parties, may be negatively impacted by COVID-19 related payment forbearances, including by reducing our proceeds from these transactions.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
22

 
Q U A R T E R L Y P O S I T I O N S


Mortgage Servicing Advance Obligations
Redwood's liquidity exposure to advancing obligations associated with residential mortgage servicing rights (MSRs) is primarily related to our Sequoia private-label residential mortgage backed securities (RMBS). The collateral backing our Sequoia securities were generally originated as prime quality residential mortgage loans with strong credit characteristics. These loans were sourced from our residential mortgage platform through our network of loan sellers, including banks and independent mortgage companies, and were acquired after undergoing our review and underwriting process.
We outsource our residential mortgage servicing activity to third-party sub-servicers and do not directly service residential mortgage loans. We carry out a servicing oversight function and, in some cases, are obligated to reimburse our sub-servicers when they fund advances of principal and interest (P&I), taxes and insurance (T&I), and certain other amounts related to securitized mortgage loans.
Transactions With P&I Stop-Advance Features
Approximately 77% of our funding obligations related to P&I servicing advances are associated with Sequoia securitization transactions that include a stop-advance feature after 120 days of delinquency or forbearance and are structured with a “scheduled / scheduled” remittance type.(1) These obligations to fund advances of P&I payments for loans that are delinquent or subject to forbearance is, therefore, generally limited to four months of scheduled P&I payments. For certain Sequoia securitization transactions, the cash flows related to our associated MSRs are certificated as "AIOS" securities, which we also refer to as "Certificated MSRs." Other advancing obligations, including T&I servicing advances, are not subject to the stop-advance feature.
Transactions Without P&I Stop-Advance Features
While our funding obligations related to P&I servicing advances associated with Sequoia securitization transactions without stop-advance features do not have a specified maximum advance period or amount, for borrowers that experience long-term financing distress and are delinquent or subject to forbearance for longer periods, loss mitigation actions, including loan modifications, may allow us to recoup outstanding P&I advances earlier than ultimate loan resolution or liquidation.

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
23

 
Q U A R T E R L Y P O S I T I O N S


Mortgage Servicing P&I Advance Obligations
At April 30, 2020, mortgage loans in a delinquent status (whether or not subject to forbearance) accounted for approximately 3.2% of the aggregate principal (or notional) balance of Sequoia securitized loans for which we had servicing advance funding obligations (an increase from approximately 0.9% of principal balance that were in a delinquent status (whether or not subject to forbearance) with respect to the monthly mortgage payment due in March 2020). For every 10 percentage point increase in the principal balance of Sequoia securitized mortgage loans in a delinquent status (whether or not subject to forbearance)(collectively "DQ"), Redwood estimates that its average monthly P&I servicing advance funding obligation would increase by $6 million.
 
Mortgage Servicing P&I Advance Obligations
March 31, 2020
 
($ in millions)
 
 
Fair Value
 
Notional Principal Balance
 
Estimated Average Monthly P&I Advance Requirement (per 10 percentage points
of DQ)
 
Maximum Period of P&I Advance Obligation
 
 
 
 
 
 
 
 
 
 
MSRs - Non-Stop Advance
$
15

 
$
2,496

 
$
1

 
N/A
 
MSRs - Stop Advance
8

 
1,355

 
1

 
120 days
 
Certificated MSRs - Stop Advance
26

 
7,190

 
4

 
120 days
 
 
 
 
 
 
 
 
 
 
 
$
49

 
$
11,041

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
The table above does not include funding obligations related to non-P&I servicing advances - e.g., T&I servicing advances - which can vary based on seasonality and other factors.


Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
24


403914113_financialtabesdividerpage.jpg

Detailed endnotes are included at the end of this Redwood Review.
 
THE REDWOOD REVIEW I 1ST QUARTER 2020
25



403914113_rwtq12019appendixlogoa02.jpg
Table 1: GAAP Earnings (in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2020
Q1
 
2019
Q4
 
2019
Q3
 
2019
Q2
 
2019
Q1
 
 
Twelve Months 2019
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
From investments
$
43,115

 
$
37,639

 
$
27,679

 
$
27,565

 
$
26,952

 
 
$
119,835

 
From mortgage banking activities
8,295

 
7,234

 
5,834

 
4,757

 
4,813

 
 
22,638

 
Net interest income
51,410

 
44,873

 
33,513

 
32,322

 
31,765

 
 
142,473

 
Non-interest (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage banking activities, net
(23,081
)
 
16,540

 
5,016

 
15,361

 
10,826

 
 
47,743

 
Business purpose mortgage banking activities, net
(5,330
)
 
29,742

 
4,499

 
3,799

 
1,483

 
 
39,523

 
Investment fair value changes, net
(870,832
)
 
759

 
11,444

 
3,138

 
20,159

 
 
35,500

 
Realized gains, net
3,852

 
5,594

 
4,714

 
2,827

 
10,686

 
 
23,821

 
Other income
2,437

 
5,417

 
4,356

 
4,859

 
4,625

 
 
19,257

 
Total non-interest (loss) income, net
(892,954
)
 
58,052

 
30,029

 
29,984

 
47,779

 
 
165,844

 
Fixed compensation expense
(14,684
)
 
(12,899
)
 
(9,391
)
 
(9,252
)
 
(8,205
)
 
 
(39,747
)
 
Variable compensation expense (excluding commissions)
(11
)
 
(10,372
)
 
(3,489
)
 
(3,573
)
 
(4,402
)
 
 
(21,836
)
 
Equity compensation expense
(1,995
)
 
(3,270
)
 
(3,155
)
 
(4,024
)
 
(2,953
)
 
 
(13,402
)
 
Acquisition-related equity compensation expense (1)
(1,212
)
 
(1,010
)