Redwood Trust, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Redwood is a specialty finance company and REIT focused on U.S. residential, business-purpose and multifamily housing credit. Its three segments are Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. This annual report covers the year ended December 31, 2022; the company also reported a fourth-quarter GAAP loss of $0.40 per diluted share and year-end book value of $9.55 per common share.
Financial results and key metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net income (loss) | $(163.5) million | $319.6 million |
| Diluted EPS | $(1.43) | $2.37 |
| Net interest income | $155.5 million | $148.2 million |
| Non-interest income (loss), net | $(162.7) million | $393.8 million |
| Operating expenses | $176.2 million | $203.9 million |
| Book value per share | $9.55 | $12.06 |
| Common dividends per share | $0.92 | $0.78 |
| Economic return on book value | (13)% | 30% |
Net interest income rose modestly, but results were more than offset by negative mortgage-banking activity and investment valuation changes. Investment fair value changes were a loss of $175.6 million, versus a gain of $128.0 million in 2021; mortgage banking activity was a loss of $13.7 million, versus income of $235.7 million. The filing attributes much of the investment markdown to spread widening and rate volatility, while management said underlying credit indicators were generally stable. The filing does not provide a single consolidated operating-margin measure.
At December 31, 2022, assets were $13.03 billion, liabilities $11.95 billion and equity $1.08 billion. Balance-sheet liabilities include $7.99 billion of asset-backed securities issued by consolidated securitization entities; those entities’ assets and liabilities are generally not Redwood’s direct legal obligations. Unrestricted cash was $258.9 million. Total short-term debt was $2.03 billion, including $176.0 million of convertible notes due in 2023; long-term debt had a net carrying value of $1.73 billion. The filing reports $843 million of convertible notes and long-term debt in its capital summary.
Cash flows were $(139.1) million from operating activities, $213.9 million provided by investing activities, and $(276.9) million used in financing activities. Management also presents operating cash flow of $68 million after excluding loan origination, purchase, sale and related derivative cash flows. Cash dividends paid were $111.7 million.
Material changes versus 2021
- Residential loan distribution fell to $4.5 billion from $11.2 billion; adjusted loan purchase commitments fell to $2.75 billion from $11.52 billion. Management reduced capital allocated to residential mortgage banking by 70% during 2022.
- Business-purpose loan fundings increased to $2.84 billion from $2.29 billion, but segment contribution shifted to a $44.3 million loss from $38.5 million of income, reflecting weaker distribution economics and higher expenses.
- Investment Portfolio economic interests increased to $3.73 billion from $2.69 billion, led by BPL bridge loans and HEIs. The portfolio recorded a $9.1 million segment loss, compared with $293.2 million of contribution in 2021, primarily due to valuation losses.
- Riverbend was acquired in July 2022. The acquisition added capacity and product breadth to the business-purpose lending platform; the company recorded $23.4 million of goodwill and $13.3 million of acquired intangible assets.
- Common shares repurchased totaled 7.1 million for $56 million. Redwood also issued $215 million of 7.75% convertible notes and raised $68 million net through common-stock issuance.
Outlook, management commentary and risks
Management provided qualitative rather than quantified 2023 guidance. It expected residential mortgage volumes to remain challenged and planned to maintain a lower capital allocation to that segment. It cited resilient borrower demand in business-purpose lending and expected expense reductions from workforce and cost actions. Headcount had fallen about 24% since July 1, 2022; the company reported 306 employees in February 2023, versus 347 at year-end 2022.
Management estimated the Investment Portfolio had approximately $500 million, or $4.33 per share, of net discount at year-end and a projected forward loss-adjusted economic yield of 15%. These are estimates dependent on assumptions about credit losses, prepayments, interest rates and discount rates, and are not assured returns. Management expected moderate home-price declines in 2023, with geographic variation, but acknowledged recession and housing-credit uncertainty.
After year-end, Redwood issued 2.8 million shares of 10% Series A preferred stock for approximately $67 million net proceeds, completed a Sequoia securitization and sold $213 million of BPL loans to an institutional investor. Management said proceeds and other available liquidity were intended to address the remainder of its 2023 convertible-bond maturity.
Principal risks include higher and volatile interest rates, widening credit spreads, lower mortgage originations, credit deterioration or home-price declines, illiquid or hard-to-value assets, reliance on short-term and often uncommitted financing, margin calls, refinancing and debt maturities, and reduced access to securitization or whole-loan sale markets. The company also highlights geographic concentration, BPL bridge-loan and HEI valuation risks, litigation and repurchase claims, regulatory uncertainty, and REIT qualification and deferred-tax-asset realization. Redwood reported compliance with financing covenants through the filing date. It had $7 million of residential and MSR repurchase reserves, a further $1 million BPL repurchase reserve, and $2 million of aggregate reserves for specified legacy litigation matters; actual losses could exceed reserves.
Most important facts for investors to verify
- Whether 2023 cash, asset-sale proceeds, preferred capital and refinancing capacity were sufficient to address the convertible notes due in 2023 and other near-term obligations.
- Whether residential and BPL loan distribution, securitization execution and lending margins recovered enough to support segment profitability.
- How the $500 million estimated portfolio discount and 15% projected forward loss-adjusted yield compare with realized cash flows and subsequent asset valuations.
- Whether BPL delinquencies, foreclosures, borrower refinancing capacity and home-price movements developed consistently with management’s assumptions.
- How much financing remained available and on what terms, including exposure to margin calls, uncommitted facilities and covenant requirements.
- Whether deferred tax assets remain realizable and whether litigation, repurchase or other contingent liabilities require additional reserves.