Redwood Trust, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Redwood is a housing-credit specialty finance company operating residential consumer mortgage banking, residential investor mortgage banking, and investment portfolio businesses. It is taxed as a REIT.
Financial results and position
| Metric | Q1 2024 | Comparable period / change |
|---|---|---|
| Total interest income | $204.7 million | $178.5 million in Q1 2023 |
| Net interest income | $24.2 million | $26.4 million in Q1 2023 |
| Non-interest income, net | $50.3 million | $21.1 million in Q1 2023 |
| Net income | $30.3 million | $4.6 million in Q1 2023 |
| Net income available to common stockholders / diluted EPS | $28.5 million / $0.21 | $3.2 million / $0.02 in Q1 2023 |
| Operating expenses | $43.8 million | $44.0 million in Q1 2023 |
| Book value per common share | $8.78 | $8.64 at December 31, 2023 |
| Return on common equity | 10.0% | 7.3% in Q4 2023 |
| Common dividend declared | $0.16 per share | $0.16 in Q4 2023 |
Net income improved mainly because investment fair-value changes shifted to a $21.8 million gain from a $4.4 million loss, while HEI income rose to $9.0 million from $4.3 million. These gains were partly offset by lower net interest income and mortgage banking income. Redwood reported a 107-basis-point gross margin in residential consumer mortgage banking, above its stated historical target range of 75–100 basis points.
At March 31, total assets were $15.06 billion, total liabilities $13.83 billion, and equity $1.22 billion. Cash and cash equivalents were $275 million, with another $65 million restricted. Short-term debt was $1.25 billion and long-term debt $1.71 billion. Asset-backed securities issued were $10.63 billion, largely non-recourse obligations of consolidated securitization entities; their assets and liabilities are included in Redwood’s consolidated statements but are generally not direct obligations of the parent.
Cash flows were affected by mortgage banking activity: operating cash flow was negative $954 million, investing cash flow positive $350 million, and financing cash flow positive $575 million. Management said operating cash flow was positive $16 million excluding net cash outflows from purchases, originations, sales and principal payments of held-for-sale loans and related derivative settlements. Cash, cash equivalents and restricted cash declined $28 million to $340 million.
Business developments and changes
- Residential consumer loan locks reached $1.8 billion, up 53% from Q4 2023; the company purchased $1.01 billion and distributed $1.4 billion through securitizations and whole-loan sales.
- Residential investor loan fundings were $326 million, versus $343 million in Q4 2023. The segment recorded a $5.5 million contribution loss, compared with a $1.0 million loss in Q1 2023.
- Investment Portfolio segment contribution rose to $57.6 million from $35.5 million a year earlier, principally reflecting stronger fair-value results and higher HEI income. Its net interest income fell to $29.5 million from $40.2 million.
- Redwood deployed approximately $115 million into investments, its largest quarterly deployment since Q3 2022. Management attributed portfolio fair-value gains chiefly to tighter credit spreads.
- In March, Redwood established a partnership with CPP Investments, including a planned $500 million joint venture and a secured revolving facility initially sized at $200 million. The joint venture could acquire up to $4 billion of residential investor loans over several years, including planned third-party financing. In April, Redwood increased the facility limit to $250 million and borrowed $100 million; it also closed a separate bridge-loan warehouse facility with up to $180 million of capacity.
- Redwood issued $60 million of 9.125% senior notes due 2029 and repurchased $31 million of its convertible debt during the quarter. A 15% workforce reduction was implemented; Q1 expenses included approximately $2 million of fixed compensation and $1 million of equity compensation related to restructuring.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management expects its full-year dividend distributions to exceed the REIT minimum distribution requirement and described the CPP partnership as a source of capital, potential fee income and support for growth. Management also reported pricing an additional $400 million Sequoia securitization early in Q2 and expects to continue pursuing financing capacity for HEI and residential investor loans.
- Credit and collateral: Residential investor bridge loans more than 90 days delinquent represented $104 million of unpaid principal balance; 92 such loans were in foreclosure. Redwood modified $50 million of bridge loans during Q1, generally reducing contractual rates, and extended maturities on $155 million. Further borrower stress, delinquencies or extensions could reduce income and fair values or cause credit losses.
- Funding and maturities: Redwood had $513 million of commitments for additional residential investor bridge-loan advances. It had $116 million principal amount of convertible notes due July 2024, plus secured facilities requiring renewal or refinancing. Management cited $275 million of unrestricted cash, approximately $370 million of unencumbered assets and $2.69 billion of excess warehouse capacity; many facilities are uncommitted and refinancing may cost more if rates remain elevated.
- Valuation and markets: A significant portion of assets and liabilities are measured using Level 3 fair-value estimates, making results sensitive to credit performance, interest rates, prepayments, home prices and spreads. Management cited inflation, monetary policy, market liquidity and funding costs among factors that could affect results.
- Other exposures: Potential maximum payments under agency risk-sharing arrangements were $44 million; the recorded guarantee obligation was $6 million. Repurchase reserves were approximately $5 million for residential consumer loans and MSRs, with a small reserve for residential investor loans. The filing reported no significant litigation update from the prior annual filing.
- REIT and dividend matters: Redwood stated it believes it qualifies as a REIT, but failure to meet the requirements could result in corporate tax and loss of REIT status. Management currently expects some 2024 common dividends to be ordinary income and the remainder generally return of capital; final tax characterization is not established.
Important facts for investors to verify
- Whether the Q1 earnings improvement is sustained or depends materially on volatile fair-value gains and HEI valuation assumptions.
- Bridge-loan delinquency, foreclosure, modification and extension trends, and realized recoveries versus carrying values.
- Repayment or refinancing of the July 2024 convertible notes and other near-term debt, including the cost and availability of warehouse facilities.
- Actual deployment, funding and returns from the CPP and Oaktree joint ventures, and the terms and dilution implications of warrants for up to approximately 6.58 million shares issued to CPP Investments.
- Cash available after bridge-loan commitments, dividends, debt maturities and other obligations; distinguish unrestricted from restricted cash and parent obligations from non-recourse securitization debt.
- Future dividend declarations and tax characterization, as well as any material changes in REIT compliance, repurchase claims or litigation.