Redwood Trust, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports selected fourth-quarter operating activity. Redwood is a mortgage-focused specialty finance company operating Residential Lending, Business Purpose Lending, and Third-Party Investments; it is taxed as a REIT.
Financial results and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net interest income | $123.9 million | $142.5 million |
| Mortgage banking income, net | $78.5 million | $87.3 million |
| Investment fair-value changes, net | $(588.4) million | $35.5 million |
| Net income (loss) | $(581.8) million | $169.2 million |
| Diluted EPS | $(5.12) | $1.46 |
| Book value per share | $9.91 | $15.98 |
| Common dividends per share | $0.725 | $1.20 |
| Unrestricted cash at year-end | $461 million | $197 million |
- Interest income was $571.9 million and interest expense was $448.0 million. The filing reports average yields of 4.8% on interest-earning assets and 4.1% on interest-bearing funding; it does not provide a single consolidated operating-margin measure.
- Cash flow from operating activities was negative $505.5 million, reflecting in part the timing and scale of loan purchases and sales. Investing activities provided $4.07 billion; financing activities used $3.31 billion.
- Year-end total assets were $10.36 billion and total liabilities were $9.24 billion. These totals include consolidated securitization entities; their liabilities are generally non-recourse to Redwood. Redwood reported $1.76 billion of total capital, including $1.11 billion of equity and $0.65 billion of convertible notes and long-term debt.
- Recourse debt declined to $1.39 billion from $5.15 billion; the recourse leverage ratio fell to 1.3x from 3.1x. Marginable debt was $97 million, versus $4.12 billion at year-end 2019.
- Net interest income fell 13% year over year, principally due to a smaller investment portfolio after asset sales and higher costs on certain replacement financing. Redwood purchased $4.48 billion of residential loans and originated $1.43 billion of business-purpose loans in 2020.
Material changes and unusual items
- COVID-19 market disruption drove substantial first-quarter valuation declines, asset sales, and deleveraging. Approximately $360 million of losses were realized on asset sales and derivative settlements; some earlier unrealized losses subsequently recovered, but not all.
- Investment fair-value losses totaled $588.4 million for the year. The company also recorded an $88.7 million non-cash goodwill impairment, writing off the remaining goodwill from its 5 Arches and CoreVest acquisitions.
- Redwood settled or closed substantially all interest-rate hedges during the first quarter after determining they were no longer effective; cash payments from derivative settlements and other hedging activity were $187 million in the first half.
- Residential Lending reported a $129.0 million segment loss, Business Purpose Lending a $95.1 million loss, and Third-Party Investments a $291.4 million loss. Business Purpose Lending’s result included the goodwill impairment; Third-Party Investments and Residential Lending were heavily affected by valuation declines and asset sales.
- Redwood repurchased $125 million principal amount of convertible and exchangeable debt for approximately $97 million, recording a $25 million gain, and repurchased $22 million of common stock.
- The company reduced 2020 dividends to $0.725 per share from $1.20 in 2019. Distributions paid in 2020 were expected to be characterized as 100% return of capital for federal tax purposes.
Outlook, commentary, risks, and contingencies
- Management described the company as ending 2020 with more than $460 million of cash, improving portfolio credit trends, and recovering operating platforms. Fourth-quarter residential loan locks were a record $3.78 billion, up 81% sequentially; Business Purpose Lending originations were $448 million, up 71% sequentially.
- Management’s 2021 priorities include growing residential and business-purpose lending, investing in assets produced by those platforms, and technology initiatives. It cited potential diversification into expanded-prime and non-QM residential products. This is management commentary, not a quantified earnings or dividend guidance commitment.
- Management estimated approximately $200 million of capital available for investment at year-end and expected up to $600 million of loans in certain securitizations to become redeemable in 2021, below their estimated fair values.
- Key risks include renewed market volatility, credit losses and borrower forbearance, valuation uncertainty in illiquid Level 3 assets, short-term or uncommitted financing access, margin calls and covenant compliance, interest-rate and prepayment changes, and reliance on securitization markets and counterparties.
- Redwood’s Federal Home Loan Bank of Chicago membership terminated in February 2021, ending an historically attractive financing source. The company said it did not expect FHLBC borrowings to exceed the remaining $1 million.
- Redwood recorded $10 million of expense related to residential loan seller demands and had a $2.5 million accrual for estimated related costs at year-end. It said it believed demands were resolved or adequately accrued, but cautioned that actual losses could be higher. Separate reserves of $2 million related to specified legacy litigation matters.
- At December 31, 2020, 31 bridge loans with $34 million fair value were over 90 days delinquent; 25 were in foreclosure. The filing also reports delinquent loans in consolidated securitizations. Management stated overall portfolio credit performance was improving, but outcomes remain exposed to economic conditions and borrower payment behavior.
Important facts for investors to verify
- Whether reported losses and the $9.91 book value per share reflect lasting asset impairment or temporary market dislocation, including assumptions used to value Level 3 assets.
- Current recourse leverage, liquidity, financing capacity, covenant headroom, and refinancing plans for facilities and debt coming due or callable in 2021–2023.
- Subsequent credit performance, delinquencies, forbearance, foreclosures, and realized losses across residential, bridge, single-family rental, and securitized loan exposures.
- Progress on business-platform volume and profitability, including whether fourth-quarter momentum continued into 2021 and whether lending growth can offset reduced investment income.
- Final resolution and total cost of residential loan seller demands and other litigation, and the effect of the FHLBC membership termination on earnings.
- Future dividend decisions and tax characterization. The filing states the Board retains discretion over distributions; 2020’s return-of-capital treatment should not be taken as a forecast of future dividends.