Redwood Trust, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 25, 2022. The filing also discusses fourth-quarter 2021 performance and early-2022 conditions. Redwood is a housing-credit specialty finance company with Residential Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio segments. It is taxed as a REIT.
Financial results and position
- Net income: $319.6 million in 2021, versus a net loss of $581.8 million in 2020. Diluted EPS was $2.37 versus a loss of $5.12.
- Key income items: Net interest income was $148.2 million, up from $123.9 million. Net mortgage banking activities income was $235.7 million, versus $78.5 million. Investment fair-value changes were a gain of $128.0 million, compared with a loss of $588.4 million. Total non-interest income was $393.8 million, versus a loss of $475.4 million.
- Profitability and shareholder returns: Return on equity was 25%; year-end book value was $12.06 per share, up from $9.91. Dividends were $0.78 per share for the year, compared with $0.725 in 2020. Management reported a 30% economic return on book value and total shareholder return above 60%.
- Operating scale: Residential loans purchased totaled $12.9 billion, up 189% from 2020; business-purpose loans originated and purchased totaled $2.3 billion, up 60%. Investment-portfolio assets were $11.8 billion at year-end, compared with $9.0 billion.
- Cash flow: Operating cash flow was negative $5.69 billion, largely reflecting mortgage-loan acquisition and origination activity. Excluding cash flows from held-for-sale loan activity, operating cash flow was positive $28 million. Investing cash flow was positive $1.40 billion and financing cash flow was positive $4.28 billion.
- Liquidity and capital: Unrestricted cash was $450 million; management estimated approximately $150 million of capital available for investment. Total capital was $2.04 billion, including $1.39 billion of equity and $652 million of convertible notes and long-term debt.
- Debt and leverage: Reported short-term debt was $2.18 billion and long-term debt was $1.64 billion. The balance sheet also included $9.25 billion of asset-backed securities issued by consolidated securitization entities; the filing states these entities’ obligations are generally not legal obligations of Redwood. Redwood reported $1.39 billion of equity and $14.71 billion of total assets.
Material changes versus 2020
- The return to profitability primarily reflected stronger mortgage banking income and a $716.5 million year-over-year improvement in investment fair-value changes. The 2020 comparison included severe pandemic-related market losses, including approximately $360 million of realized losses on asset sales and derivative settlements.
- Business-purpose mortgage banking returned to a segment contribution of $38.5 million from a $67.7 million loss; 2020 included an $89 million non-cash goodwill impairment. Residential mortgage banking contributed $82.4 million versus a loss of $9.0 million.
- Residential mortgage purchases and business-purpose originations expanded substantially. General and administrative expenses increased to $170.9 million from $115.2 million, including higher variable compensation and costs associated with growth and systems work.
- In the fourth quarter, Redwood reorganized its reporting segments, moving retained investments into a separate Investment Portfolio segment and presenting both mortgage-banking platforms separately. Prior-period segment data was conformed.
Outlook, risks, and unusual items
- Management described rising rates, inflation, Federal Reserve tightening, and geopolitical uncertainty as challenging conditions. It expects industry mortgage origination and refinancing volumes to decline, while seeking to gain residential market share through expanded-credit products and purchases of high-balance loans.
- Management cited business-purpose lending growth and pipeline activity as supportive, and expects continued opportunities in single-family rental, bridge, build-for-rent, and multifamily lending. This is commentary, not formal quantified earnings guidance.
- Management expects up to $700 million of loans to become callable in 2022, and another $1.4 billion through 2024, at call prices below estimated fair value. Actual benefits depend on market conditions and call activity.
- RWT Horizons had 15 investments and approximately $25 million committed at year-end; management’s goal was to allocate $50 million to $100 million by the end of 2022.
- Fair-value estimates are a significant source of earnings volatility: most financial assets are Level 3 measurements relying on assumptions. The auditor identified valuation of certain real-estate securities and interests in consolidated securitizations as a critical audit matter.
- Principal risks include credit losses, prepayment and interest-rate movements, widening spreads, leverage and margin calls, renewal of short-term or uncommitted financing, securitization-market access, property-market exposure, and regulatory, litigation, cybersecurity, and REIT-compliance risks. The company reported compliance with financing covenants and margin calls through the filing date.
- LIBOR exposure at year-end included $2.47 billion of repo or warehouse debt, $2.10 billion of swaps and swaptions, $708 million of bridge loans, and $140 million of trust-preferred and subordinated debt. Management said transition work was underway, with most warehouse amendments expected in the first half of 2022.
- Notable contingencies include a $625 million commitment for future bridge-loan advances, a remaining commitment of up to $94 million to acquire HEIs, and a $9 million residential-loan and MSR repurchase reserve. The filing reports $2 million of reserves for specified legacy litigation and a $0.5 million accrual related to residential loan-seller demands.
- Management and the independent auditor concluded that internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2021 earnings came from recurring net interest and mortgage banking activity versus fair-value changes, calls, and other valuation-sensitive items.
- The liquidity available after considering short-term debt maturities, collateral requirements, facility renewals, and the distinction between Redwood obligations and consolidated securitization-entity liabilities.
- Credit quality and delinquency trends in residential, business-purpose, bridge, and securitized portfolios, including the effect of higher rates and weaker housing or rental conditions.
- Whether projected securitization calls, investment deployment, and residential and business-purpose growth opportunities materialize on expected terms.
- Progress on LIBOR contract amendments and the effect of the transition on financing costs, hedges, and asset yields.
- Whether taxable income, liquidity, and REIT requirements support future dividends; the board retains discretion over dividend payments.