Redwood Trust, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Redwood is a housing-credit specialty finance company operating residential mortgage banking, business purpose mortgage banking, and investment portfolio segments. The interim financial statements are unaudited.
Financial results and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $30.9 million | $97.3 million in Q1 2021 |
| Diluted EPS | $0.24 | $0.72 in Q1 2021 |
| Net interest income | $53.1 million | $25.8 million in Q1 2021 |
| Total non-interest income | $18.8 million | $134.3 million in Q1 2021 |
| Annualized GAAP return on equity | 8.6% | — |
| Book value per share | $12.01 | Down 0.4% from year-end 2021 |
| Total assets / equity | $14.25 billion / $1.45 billion | $14.71 billion / $1.39 billion at year-end |
| Cash and cash equivalents | $409 million unrestricted; $483 million including restricted cash | $450 million cash and cash equivalents at year-end |
Profitability and drivers: Net interest income rose $27.3 million year over year, reflecting larger average investment balances and higher discount accretion and yield-maintenance income. Mortgage banking income fell to $16.3 million from $82.6 million, while investment fair-value changes shifted to a $6.1 million loss from a $45.1 million gain. Management attributed the weaker comparison mainly to rising rates, volatility, wider credit spreads, lower mortgage activity and higher hedging costs. General and administrative expense declined to $34.9 million from $43.6 million, largely because of lower variable compensation. Redwood reported a $2.5 million tax benefit, versus an $11.5 million tax provision in Q1 2021.
Margins: Residential mortgage banking gross margin was 71 basis points, near the low end of the company’s stated historical range of 75–100 basis points. The filing does not provide a consolidated net interest margin percentage.
Cash flow: Operating cash flow was negative $291.7 million, principally reflecting mortgage loan acquisition and origination activity; excluding cash flows from held-for-sale loan purchases, originations, sales and principal payments, operating cash flow was positive $126 million. Investing activities provided $270.5 million, financing activities used $27.5 million, and cash, cash equivalents and restricted cash decreased $48.7 million.
Debt and liquidity: Short-term debt was $1.65 billion, down from $2.18 billion at year-end; long-term debt was $1.96 billion, up from $1.64 billion. Asset-backed securities issued were $8.87 billion, down from $9.25 billion; most are non-recourse obligations of consolidated securitization entities, not direct Redwood obligations. Management estimated $140 million of available capital and reported $2.10 billion of total capital, including $1.45 billion equity and $653 million of convertible notes and long-term debt. Redwood said it was in compliance with debt covenants, with more than $200 million of headroom on specified equity/net-worth covenants.
Material changes and operating activity
- Net income declined $66.3 million year over year as sharply lower mortgage banking and investment fair-value income more than offset stronger net interest income and lower corporate expenses.
- Residential mortgage loan locks were $2.6 billion; Redwood purchased $2.0 billion and distributed $2.5 billion through whole-loan sales and a securitization. Residential mortgage banking segment contribution fell to $7.5 million from $40.7 million.
- Business purpose loan fundings were $920 million, 25% above Q4 2021, including $415 million of bridge loans and $505 million of single-family rental loans. The segment recorded a $2.5 million loss, compared with $5.8 million contribution in Q1 2021.
- Investment portfolio segment contribution was $50.9 million, down from $77.7 million, with negative fair-value changes partly offset by higher net interest income. Redwood deployed $128 million into new investments and called $102 million of seasoned residential loan collateral.
- Redwood issued 5.23 million shares through its at-the-market program for net proceeds of approximately $67 million. It declared and paid a $0.23-per-share dividend.
Outlook, risks and unusual items
- Management described 2022 as a transition year amid inflation, supply-chain disruption, the war in Europe, Federal Reserve tightening and volatile credit markets. It cited potential opportunities from market volatility but gave no formal earnings or financial guidance.
- Management expects mortgage banking margins to remain pressured by rate volatility and spread widening, while noting possible recovery as industry origination capacity adjusts. Higher rates may increase funding costs; management also expects yield-maintenance income and AFS discount accretion of Q1 magnitude not to recur in future quarters.
- In April 2022, Redwood agreed to acquire Riverbend Funding in an all-cash transaction, expected to close in Q2 subject to customary conditions. Management also expected an approximately $10 million pre-tax gain in Q2 from a valuation change on an earlier venture investment; this was an expectation, not a reported Q1 result.
- Commitments included up to $792 million of additional bridge-loan advances and $250 million of HEI purchases, of which $70 million had been acquired by quarter-end. The company also entered a $25 million workforce-housing investment commitment and had funded $0.3 million at quarter-end.
- Key exposures include fair-value volatility—most fair-valued assets rely on Level 3 inputs—credit and prepayment risk, interest-rate and spread movements, leverage, liquidity, and reliance on warehouse facilities that are often uncommitted and require renewal. Some residential warehouse and securities-repurchase debt is subject to market-value margin calls. Redwood reported $75 million outstanding under securities repo and $1.22 billion under residential warehouse facilities with market-value margin provisions.
- LIBOR transition remained in progress. Redwood cited $966 million of repo or warehouse debt, $381 million of swaps, $858 million of bridge loans, and $140 million of trust-preferred and subordinated debt with LIBOR exposure; management said it expected most warehouse amendments in 2022 and most existing bridge loans to mature before LIBOR cessation.
- Contingencies included a $10 million residential loan/MSR repurchase reserve, a $7 million risk-sharing guarantee obligation against a maximum potential future payment of $44 million, and $2 million of reserves for specified litigation matters. No significant litigation update was reported.
Important facts for investors to verify
- Whether loan-sale and securitization margins recover, and how higher rates and wider spreads affect mortgage banking volumes and fair values.
- Whether investment fair-value losses, especially on Level 3 assets, and credit performance evolve as management expects.
- Availability, renewal and pricing of warehouse and other financing; margin-call exposure, covenant headroom and the company’s stated $140 million of available capital.
- Progress and final terms of the Riverbend acquisition, and realization and timing of the anticipated venture-investment gain.
- Funding needs under bridge-loan and HEI commitments, and the sustainability of the $0.23 quarterly dividend relative to REIT taxable income and cash generation.
- LIBOR-transition execution and changes in loan delinquencies, foreclosure activity, repurchase claims and litigation contingencies.