REDWOOD TRUST REPORTS THIRD QUARTER 2024 FINANCIAL RESULTS
MILL VALLEY, CA – Redwood Trust, Inc. (NYSE:RWT; "Redwood", the "Company"), a leader in expanding access to housing for homebuyers and renters, today reported its financial results for the quarter ended September 30, 2024.
Key Q3 2024 Financial Results and Metrics
•GAAP book value per common share was $8.74 at September 30, 2024, relative to $8.73 per share at June 30, 2024
◦Economic return on book value of 2.1% for the third quarter and 6.8% year to date 2024(1)
•GAAP net income available to common stockholders of $13.1 million or $0.09 per basic and diluted common share
•Non-GAAP Earnings Available for Distribution ("EAD") of $25.2 million or $0.18 per basic common share(2)
•Recourse leverage ratio of 2.5x at September 30, 2024, relative to 2.1x at June 30, 2024(3)
•Declared and paid a regular quarterly dividend of $0.17 per common share, a 6.25% increase from the second quarter 2024
Q3 2024 Operational Business Highlights
Residential Consumer Mortgage Banking
•Generated 30% annualized GAAP Return on Capital ("ROC") and non-GAAP EAD ROC
•Locked $2.2 billion of loans,(4) compared to $2.7 billion in the second quarter of 2024
◦Achieved gross margins well in excess of our historical target range of 75bps to 100bps, driven by hedge outperformance and spread tightening on securitization execution during the quarter
◦Fixed-rate bulk volume from banks increased 1.8x from Q2'24
◦Lock volume split evenly between bulk and flow, while we also saw a 6% increase in locks from independent mortgage banks ("IMBs")
◦Refinance activity represented 27% of quarterly flow volume, up from 12% in the second quarter 2024
•Distributed $1.5 billion of jumbo loans across three securitizations
Residential Investor Mortgage Banking
•Generated 45% and 58% annualized GAAP ROC and non-GAAP EAD ROC, respectively, on $50 million of capital
•Funded $458 million of loans (65% bridge and 35% term), effectively flat from $459 million in the second quarter of 2024
◦Bridge loan volume increased 24% QoQ, including a record quarter of fundings for single asset bridge ("SAB") loans
◦Term loan production declined as many borrowers awaited clarity from September's Federal Reserve interest rate decision
•Continued to deepen distribution channels, selling $288 million of loans through whole loan sales and sales to joint ventures ("JVs") and an additional $63 million to existing bridge loan securitizations
Investment Portfolio
•Accretively deployed approximately $157 million of capital into internally sourced and third-party investments, the largest amount since the third quarter of 2022
•Re-performing loan ("RPL") and jumbo securities saw improvement in 90 day+ delinquency rates at 6.9% and 0.2%, respectively; 90 day+ delinquency rates for our combined Residential Investor portfolio increased to 6.5% from 5.4% at June 30, 2024, partially offset by resolutions(5)
•Payoffs in the Residential Investor portfolio increased 19% in the third quarter to $380 million, including $226 million of bridge loans
•Investment Portfolio recourse leverage ratio remained low at 0.7x at September 30, 2024
Financing / Corporate Highlights
•Unrestricted cash and cash equivalents of $254 million and unencumbered assets of approximately $300 million at September 30, 2024
•Total excess warehouse financing capacity of $4.8 billion at September 30, 2024
◦Successfully renewed or established financing facilities with key counterparties for $1.7 billion of capacity, including one additional line to support our JV with CPP Investments and another to support our Residential Consumer platform
•Closed two non-marginable financing transactions backed by CAFL securities and subordinate and interest-only SEMT securities, unlocking capital for redeployment
•Retired outstanding convertible debt maturing July 2024 with cash on hand; remaining convertible debt outstanding at September 30, 2024 totaled $364 million
Q4 2024 Highlights to Date(7)
•Distributed $1.5 billion of Residential Consumer jumbo loans through SEMT® securitizations of 30-year fixed rate jumbo loans ($0.4 billion), seasoned hybrid adjustable-rate loans ("ARMs") ($0.4 billion) and whole loan sales ($0.7 billion)(8)
•Distributed over $250 million of Residential Investor loans through whole loan sales and sales to JVs
•Launched an expanded set of ARM guidelines within our Residential Consumer platform
•Completed an opportunistic $40 million reopening of our 7.75% convertible notes due 2027; predominant use of proceeds was to repurchase convertible notes due 2025, effectively extending the maturity of our convertible debt outstanding
"Our operating platforms delivered their strongest performance in over three years, underscoring our deepening partnerships, sustained product demand and enhanced distribution capabilities,” said Christopher Abate, Chief Executive Officer of Redwood Trust. "As evidenced by the recent increase to our common dividend, our results reflect continued progress in growing earnings and deploying capital accretively."
Continued Abate, “As we progress through the final quarter of the year, we are excited to embrace this new chapter for our Company, with several favorable tailwinds propelling us forward. A more accommodative monetary policy and increasing clarity in bank regulations underscore the opportunity we see for Redwood. We are witnessing increased demand for our products in the non-Agency market and are well-positioned to leverage our leadership, expertise, and innovative solutions to meet this growing need.”
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1.Economic return on book value is based on the period change in GAAP book value per common share plus dividends declared per common share in the period.
2.Earnings available for distribution is a non-GAAP measure. See Non-GAAP Disclosures section that follows for additional information on this measure.
3.Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $14.3 billion of consolidated securitization debt (ABS issued and servicer advance financing), other liabilities and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $44.6 million of goodwill and intangible assets.
4.Lock volume represents loans identified for purchase from loan sellers. Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.
5.Re-performing loan ("RPL") and jumbo securities delinquency rate calculations are weighted by notional balances of loans collateralizing each of our securities investments. Bridge loan and CAFL securities delinquency rates are calculated as BPL term loans in our consolidated CAFL securitizations, loans held at JVs, unsecuritized bridge loans held for investment, and bridge and term loans held for sale with a delinquent payment greater than 90 days, divided by the total notional balance of loans in consolidated CAFL securitizations, loans held at JVs, unsecuritized bridge loans held for investment, and bridge and term loans held for sale. Calculation excludes third-party purchased bridge loans.
6.Secured recourse leverage ratio for our Investment Portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.
7.Represents Q4'24 activity through October 29, 2024 unless otherwise noted.
8.Includes securitizations and sales that have priced but not yet closed as of October 29, 2024.
Third Quarter 2024 Redwood Review and Supplemental Tables Available Online
A further discussion of Redwood's business and financial results is included in the third quarter 2024 Shareholder Letter and Redwood Review which are available under "Financial Info" within the Investor Relations section of the Company’s website at redwoodtrust.com/investor-relations. Additional supplemental financial tables can also be found within this section of the Company's website.
Conference Call and Webcast
Redwood will host an earnings call today, October 30, 2024, at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time to discuss its third quarter 2024 financial results. The number to dial in order to listen to the conference call is 1-877-423-9813 in the U.S. and Canada. International callers must dial 1-201-689-8573. A replay of the call will be available through midnight on Wednesday, November 13, 2024, and can be accessed by dialing 1-844-512-2921 in the U.S. and Canada or 1-412-317-6671 internationally and entering access code #13749054.
The conference call will be webcast live in listen-only mode through the News & Events section of Redwood’s Investor Relations website at https://www.redwoodtrust.com/investor-relations/news-events/events. To listen to the webcast, please go to Redwood's website at least 15 minutes before the call to register and to download and install any needed audio software. An audio replay of the call will also be available on Redwood's website following the call. Redwood plans to file its Quarterly Report on Form 10-Q with the Securities and Exchange Commission by Thursday, November 7, 2024, and also make it available on Redwood’s website.
About Redwood
Redwood Trust, Inc. (NYSE: RWT) is a specialty finance company focused on several distinct areas of housing credit where we provide liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities, and our publicly traded shares. We operate our business in three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking and Investment Portfolio. Through RWT Horizons®, our venture investing initiative, we invest in early-stage companies that have a direct nexus to our operating platforms. Additionally, through Aspire, our home equity investment (“HEI”) platform, we directly originate HEI to homeowners. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. Redwood Trust is internally managed and structured as a real estate investment trust ("REIT") for tax purposes. For more information about Redwood, please visit our website at www.redwoodtrust.com or connect with us on LinkedIn.
Cautionary Statement; Forward-Looking Statements:
This press release and the related conference call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including the expected timing for the filing of Redwood's Quarterly Report on Form 10-Q. Forward-looking statements involve numerous risks and uncertainties. Redwood's actual results may differ from Redwood's beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, opportunities, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2023 under the caption “Risk Factors”. Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
REDWOOD TRUST, INC.
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| ($ in millions, except per share data) | Three Months Ended | | | |
| 9/30/2024 | | 6/30/2024 | | | |
| Financial Performance | | | | | | |
| Net income per diluted common share | $ | 0.09 | | | $ | 0.10 | | | | |
| Net income per basic common share | $ | 0.09 | | | $ | 0.10 | | | | |
| EAD per basic common share (non-GAAP) | $ | 0.18 | | | $ | 0.13 | | | | |
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| Return on Common Equity ("ROE") (annualized) | 4.5 | % | | 4.8 | % | | | |
| EAD Return on Common Equity ("EAD ROE") (annualized, non-GAAP) | 8.7 | % | | 6.5 | % | | | |
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| Book Value per Common Share | $ | 8.74 | | | $ | 8.73 | | | | |
| Dividend per Common Share | $ | 0.17 | | | $ | 0.16 | | | | |
Economic Return on Book Value (1) | 2.1 | % | | 1.3 | % | | | |
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Recourse Leverage Ratio (2) | 2.5x | | 2.1x | | | |
| Operating Metrics |
| Residential Investor Loans | | | | | | |
| Term fundings | $ | 159 | | | $ | 218 | | | | |
| Bridge fundings | 299 | | | 241 | | | | |
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| Term sold | 207 | | | 253 | | | | |
| Bridge sold | 81 | | | 162 | | | | |
| Residential Consumer Loans | | | | | | |
| Locks | $ | 2,226 | | | $ | 2,662 | | | | |
| Purchases | 2,024 | | | 1,902 | | | | |
| Securitized | 1,528 | | | 1,424 | | | | |
| Sold | 39 | | | 6 | | | | |
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(1) Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.
(2) Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. At September 30, 2024, and June 30, 2024, recourse debt excluded $14.3 billion and $12.8 billion, respectively, of consolidated securitization debt (ABS issued and servicer advance financing), other liabilities and other debt that is non-recourse to Redwood, and tangible stockholders' equity excluded $45 million and $47 million, respectively, of goodwill and intangible assets.
REDWOOD TRUST, INC. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Consolidated Income Statements (1) | | Three Months Ended |
| ($ in millions, except share and per share data) | | 9/30/24 | | 6/30/24 | | 3/31/24 | | 12/31/23 | | 9/30/23 |
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| Net Interest Income From: | | | | | | | | | | |
| Investment portfolio | | $ | 32.7 | | | $ | 29.9 | | | $ | 29.6 | | | $ | 30.8 | | | $ | 31.1 | |
| Residential consumer mortgage banking | | 9.5 | | | 11.2 | | | 6.0 | | | 0.7 | | | 1.2 | |
| Residential investor mortgage banking | | 1.8 | | | 1.5 | | | 0.9 | | | 0.9 | | | 0.7 | |
| Corporate/other | | (18.6) | | | (17.3) | | | (12.3) | | | (12.3) | | | (12.7) | |
| Net Interest Income | | $ | 25.5 | | | $ | 25.3 | | | $ | 24.2 | | | $ | 20.1 | | | $ | 20.4 | |
| Non-interest income (loss) | | | | | | | | | | |
| Residential consumer mortgage banking activities, net | | 26.7 | | | 6.2 | | | 7.8 | | | 8.4 | | | 9.0 | |
Residential investor mortgage banking
activities, net | | 12.9 | | | 12.7 | | | 6.7 | | | 6.3 | | | 10.5 | |
| Investment fair value changes, net | | (12.2) | | | 1.1 | | | 21.8 | | | 15.2 | | | (41.7) | |
| HEI income, net | | 10.7 | | | 15.8 | | | 9.0 | | | 11.7 | | | 10.3 | |
| Other income, net | | 6.0 | | | 6.3 | | | 4.5 | | | 1.8 | | | 2.3 | |
| Realized gains, net | | 0.2 | | | — | | | 0.4 | | | 0.6 | | | 0.1 | |
| Total non-interest income (loss), net | | $ | 44.2 | | | $ | 42.2 | | | $ | 50.3 | | | $ | 44.0 | | | $ | (9.6) | |
| General and administrative expenses | | (36.0) | | | (33.3) | | | (34.6) | | | (32.2) | | | (29.7) | |
| Portfolio management costs | | (6.4) | | | (4.9) | | | (3.6) | | | (4.3) | | | (3.7) | |
| Loan acquisition costs | | (3.2) | | | (3.7) | | | (2.2) | | | (2.6) | | | (1.9) | |
| Other expenses | | (2.2) | | | (5.2) | | | (3.4) | | | (2.9) | | | (4.6) | |
| (Provision for) benefit from income taxes | | (7.1) | | | (4.9) | | | (0.5) | | | (1.0) | | | (1.7) | |
| Net income (loss) | | $ | 14.8 | | | $ | 15.5 | | | $ | 30.3 | | | $ | 21.0 | | | $ | (30.8) | |
| Dividends on preferred stock | | (1.8) | | | (1.8) | | | (1.8) | | | (1.8) | | | (1.8) | |
| Net income (loss) available (related) to common stockholders | | $ | 13.1 | | | $ | 13.8 | | | $ | 28.5 | | | $ | 19.3 | | | $ | (32.6) | |
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| Weighted average basic common shares (thousands) | | 132,218 | | | 132,116 | | | 131,570 | | | 121,927 | | | 115,466 | |
Weighted average diluted common shares (thousands) (2) | | 132,358 | | | 132,124 | | | 131,570 | | | 122,474 | | | 115,466 | |
| Earnings (loss) per basic common share | | $ | 0.09 | | | $ | 0.10 | | | $ | 0.21 | | | $ | 0.15 | | | $ | (0.29) | |
| Earnings (loss) per diluted common share | | $ | 0.09 | | | $ | 0.10 | | | $ | 0.21 | | | $ | 0.15 | | | $ | (0.29) | |
| Regular dividends declared per common share | | $ | 0.17 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | |
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(1)Certain totals may not foot due to rounding.
(2)Actual shares outstanding (in thousands) at September 30, 2024, June 30, 2024, December 31, 2023 and September 30, 2023 were 132,237, 132,216, 131,871, 131,486, and 118,504, respectively.
Analysis of Income Statement - Changes from Second Quarter 2024 to Third Quarter 2024
•Net interest income increased from the second quarter due to accretive capital deployment, partially offset by a full quarter of expense on recently issued unsecured notes and lower interest income from residential consumer mortgage banking.
•Income from Residential Consumer Mortgage Banking increased from the second quarter, driven by a combination of spread tightening on securitization execution throughout the quarter and hedge outperformance. Gain on sale margins increased and were above our historic target range of 75 – 100 basis points.
•Income from Residential Investor Mortgage Banking activities increased slightly from the second quarter on relatively consistent volume and margins relative to the second quarter.
•Fair value changes on our Investment Portfolio in the third quarter primarily reflected improved credit performance and spread tightening on our SEMT and SLST securities, offset by incremental negative fair value changes on our bridge loans.
•HEI income, net decreased in the third quarter, as actual and projected trends in home price appreciation slowed, resulting in lower fair market value changes compared to the second quarter 2024.
•General and administrative (G&A) expenses increased from the second quarter primarily as a result of higher performance-based variable and equity compensation expenses relative to the second quarter given improved year-to-date earnings performance.
•Our provision for income taxes in the third quarter increased as a result of improved results from both our Residential Consumer and Residential Investor Mortgage Banking platforms.
REDWOOD TRUST, INC.
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Consolidated Balance Sheets (1) | | | | | | | | | | | |
| ($ in millions, except share and per share data) | | 9/30/24 | | 6/30/24 | | 3/31/24 | | 12/31/23 | | 9/30/23 | |
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| Residential Consumer Loans | | $ | 11,157 | | | $ | 9,210 | | | $ | 7,617 | | | $ | 7,051 | | | $ | 5,847 | | |
| Residential Investor Loans | | 4,746 | | | 4,880 | | | 5,182 | | | 5,220 | | | 5,249 | | |
| Consolidated Agency multifamily loans | | 426 | | | 422 | | | 423 | | | 425 | | | 421 | | |
| Real estate securities | | 334 | | | 264 | | | 212 | | | 128 | | | 129 | | |
| Home equity investments (HEI) | | 590 | | | 574 | | | 561 | | | 550 | | | 431 | | |
| Other investments | | 342 | | | 350 | | | 337 | | | 344 | | | 340 | | |
| Cash and cash equivalents | | 254 | | | 276 | | | 275 | | | 293 | | | 204 | | |
| Other assets | | 579 | | | 515 | | | 451 | | | 493 | | | 399 | | |
| Total assets | | $ | 18,427 | | | $ | 16,491 | | | $ | 15,058 | | | $ | 14,504 | | | $ | 13,021 | | |
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| Asset-backed securities issued, net | | $ | 13,020 | | | $ | 11,556 | | | $ | 10,628 | | | $ | 9,812 | | | $ | 8,392 | | |
| Debt obligations, net | | 3,801 | | | 3,415 | | | 2,959 | | | 3,239 | | | 3,306 | | |
| Other liabilities | | 383 | | | 300 | | | 247 | | | 251 | | | 217 | | |
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| Total liabilities | | $ | 17,204 | | | $ | 15,270 | | | $ | 13,834 | | | $ | 13,302 | | | $ | 11,915 | | |
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| Stockholders' equity | | 1,223 | | | 1,221 | | | 1,224 | | | 1,203 | | | 1,106 | | |
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| Total liabilities and equity | | $ | 18,427 | | | $ | 16,491 | | | $ | 15,058 | | | $ | 14,504 | | | $ | 13,021 | | |
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| Common shares outstanding at period end (thousands) | | 132,237 | | | 132,216 | | | 131,871 | | | 131,486 | | | 118,504 | | |
| GAAP book value per common share | | $ | 8.74 | | | $ | 8.73 | | | $ | 8.78 | | | $ | 8.64 | | | $ | 8.77 | | |
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(1)Certain totals may not foot due to rounding.
Non-GAAP Disclosures
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Reconciliation of GAAP Net Income Available to Common Stockholders to non-GAAP EAD(1)(2) | | |
| | Three Months Ended |
| ($ in millions, except per share data) | | 9/30/24 | | 6/30/24 | | | |
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| GAAP Net income available to common stockholders | | $ | 13.1 | | | $ | 13.8 | | | | |
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| Adjustments: | | | | | | | |
Investment fair value changes, net(3) | | 12.2 | | | (1.1) | | | | |
Realized (gains)/losses, net(4) | | (0.2) | | | — | | | | |
Acquisition related expenses(5) | | 2.2 | | | 2.2 | | | | |
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Tax effect of adjustments(6) | | (2.1) | | | 3.7 | | | | |
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| Earnings available for distribution (non-GAAP) | | $ | 25.2 | | | $ | 18.6 | | | | |
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| Earnings per basic common share (GAAP) | | $ | 0.09 | | | $ | 0.10 | | | | |
| EAD per basic common share (non-GAAP) | | $ | 0.18 | | | $ | 0.13 | | | | |
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| GAAP Return on common equity (annualized) | | 4.5 | % | | 4.8 | % | | | |
EAD Return on common equity (non-GAAP, annualized)(7) | | 8.7 | % | | 6.5 | % | | | |
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1.Certain totals may not foot due to rounding.
2.EAD and EAD ROE are non-GAAP measures derived from GAAP Net income (loss) available (related) to common stockholders and GAAP Return on common equity ("GAAP ROE" or "ROE"), respectively. EAD is defined as: GAAP net income (loss) available (related) to common stockholders adjusted to (i) exclude investment fair value changes, net; (ii) exclude realized gains and losses; (iii) exclude acquisition related expenses; (iv) exclude certain organizational restructuring charges (as applicable); and (v) adjust for the hypothetical income taxes associated with these adjustments. EAD ROE is defined as EAD divided by average common equity. We believe EAD and EAD ROE provide supplemental information to assist management and investors in analyzing the Company’s results of operations and help facilitate comparisons to industry peers. Management also believes that EAD and EAD ROE are metrics that can supplement its analysis of the Company’s ability to pay dividends, by providing an indication of the current income generating capacity of the Company's business operations as of the quarter being presented. EAD and EAD ROE should not be utilized in isolation, nor should they be considered as an alternative to GAAP net income (loss) available (related) to common stockholders, GAAP ROE or other measurements of results of operations computed in accordance with GAAP or for federal income tax purposes.
3.Investment fair value changes, net includes all amounts within that same line item on our consolidated statements of income, which primarily represents both realized and unrealized gains and losses on our investments (excluding HEI) and associated hedges. As noted above, realized and unrealized gains and losses on our HEI investments are reflected in a new line item on our consolidated income statements titled "HEI income, net".
4.Realized (gains)/losses, net includes all amounts within that line item on our consolidated statements of income.
5.Acquisition related expenses include transaction costs paid to third parties, as applicable, and the ongoing amortization of intangible assets related to the Riverbend, CoreVest and 5 Arches acquisitions.
6.Tax effect of adjustments represents the hypothetical income taxes associated with all adjustments used to calculate EAD.
7.EAD ROE is calculated by dividing EAD by average common equity for each respective period.
Non-GAAP Disclosures (Continued)
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| Reconciliation of GAAP Net Contribution to non-GAAP EAD | | | | | | |
Net Contribution by Mortgage Banking Segment(1)(2) | | | | | | |
| | Three Months Ended | | | | Three Months Ended |
| | 9/30/24 | | | | 6/30/24 |
| ($ in millions) | | Residential Consumer Mortgage Banking | | Residential Investor Mortgage Banking | | | | Residential Consumer Mortgage Banking | | Residential Investor Mortgage Banking |
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| GAAP Net contribution | | $ | 22.8 | | | $ | 5.7 | | | | | $ | 9.9 | | | $ | 0.6 | |
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| Adjustments: | | | | | | | | | | |
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Acquisition related expenses(3) | | — | | | 2.2 | | | | | — | | | 2.2 | |
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Tax effect of adjustments(4) | | — | | | (0.6) | | | | | — | | | (0.6) | |
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| EAD Net contribution (non-GAAP) | | $ | 22.8 | | | $ | 7.3 | | | | | $ | 9.9 | | | $ | 2.2 | |
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| Capital utilized (average for period) | | $ | 307 | | | $ | 50 | | | | | $ | 255 | | | $ | 67 | |
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| Return on capital (GAAP) | | 30 | % | | 45 | % | | | | 16 | % | | 4 | % |
EAD Net Contribution return on capital (non-GAAP)(5) | | 30 | % | | 58 | % | | | | 16 | % | | 13 | % |
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1.Certain totals may not foot due to rounding.
2.EAD Net contribution and EAD Net contribution ROC are non-GAAP measures derived from GAAP Net contribution and GAAP Return on capital ("GAAP ROC" or "ROC"), respectively. GAAP ROC is defined as: GAAP Net contribution by segment adjusted to (i) exclude investment fair value changes, net (as applicable); (ii) exclude realized gains and losses (as applicable); (iii) exclude acquisition related expenses; (iv) exclude certain organizational restructuring charges (as applicable); and (v) adjust for the hypothetical income taxes associated with these adjustments. Each of these adjustments to arrive at EAD Net contribution are the same adjustments used to calculate EAD, as applicable to each segment for which it is being calculated. EAD Net contribution ROC presents a measure of profitability relative to the amount of capital utilized in the operations of each segment during a period and is calculated by dividing annualized non-GAAP EAD Net contribution by the average capital utilized by the segment during the period. Management utilizes these measures internally in analyzing each of the Company’s business segments’ contribution to EAD. See prior page for a further description of how management utilizes EAD and why EAD may assist investors, as well as limitations related to using EAD-based metrics. We caution that EAD Net contribution and EAD Net contribution ROC should not be utilized in isolation, nor should they be considered as alternatives to GAAP Net Contribution, GAAP ROC or other measurements of results of operations computed in accordance with GAAP.
3.Acquisition related expenses include transaction costs paid to third parties, as applicable, and the ongoing amortization of intangible assets related to the Riverbend, CoreVest and 5 Arches acquisitions.
4.Tax effect of adjustments represents the hypothetical income taxes associated with all adjustments used to calculate EAD.
5.EAD ROC is calculated by dividing EAD by average capital utilized for each respective period.
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| CONTACTS |
| Investor Relations |
| Kaitlyn Mauritz |
| Head of Investor Relations |
| Phone: 866-269-4976 |
| Email: [email protected] |
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| Exhibit 99.2 |
S H A R E H O L D E R L E T T E R T H I R D Q U A R T E R 2 0 2 4 |
R E D W O O D T R U S T |
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Dear Fellow Shareholders:
As we work towards the end of a productive year, we find ourselves at the dawn of a new rate regime and a too close to call presidential election. Many macroeconomic questions remain – particularly with respect to the speed and impact of monetary and fiscal policy shifts. What we do know is that the U.S. will have a new Administration and, in turn, a fresh take on improving access to quality housing – a challenge we have undertaken since Redwood’s founding three decades ago. Each major party candidate has acknowledged the need for more scalable solutions, with proposals that include enhanced down-payment assistance programs, incentives for increased construction, and easing of the maze of local regulations that blunt housing development. In an otherwise polarized environment, it seems many have found common cause in an issue that is central to our Company’s core mission. It’s why we’re confident that the need for our products will only grow, particularly as more regions of the country turn to the non-Agency sector for creative solutions.
As we rise to meet this formidable challenge, our platform continues to make good operating progress. We recently increased our common dividend for the first time since 2021 – up 6.25% to $0.17 per share for the third quarter 2024 – reflecting continued growth in our operating activities. Our combined mortgage banking returns were the highest in over three years, as each business unlocked operating leverage to achieve strong performance. Overall, we generated GAAP earnings of $0.09 per share and Earnings Available for Distribution (“EAD”) of $0.18 per share1. Our GAAP book value per share was $8.74 at September 30th, 2024, slightly higher than June 30th, 2024, resulting in a total economic return of 2.1% on the quarter inclusive of our common dividend2. Our Investment Portfolio also maintained embedded upside to continued strong performance and a rally in rates, with a $2.09 per share net discount to par at September 30, 2024.
Balance sheet optimization remained a focus during the third quarter. We unlocked incremental capital through two non-marginable refinancings secured by seasoned bonds from our Sequoia and CAFL issuance platforms. This work facilitated $157 million of capital deployed during the quarter, a high-water mark for the year. Combined with other measures to reduce or extend our debt outstanding, our debt maturing between now and year-end 2026 is down almost 80% from December 31, 2023.
Our mortgage banking activities in the third quarter played a pivotal role in driving overall performance, with GAAP contribution from these business units tripling versus the second quarter. Residential Consumer continued to benefit from deeper penetration with banking partners on both current production and seasoned portfolios. As portfolio lending from a handful of banks ticked up during the third quarter, we believe our competitive moat, particularly our products and distribution channels, continues to position Redwood as the natural take-out for non-Agency collateral across our seller
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1 Earnings Available for Distribution (“EAD”) is a non-GAAP measure. See “Non-GAAP Measures” slides in the Endnotes of our Q3’24 Redwood Review for additional information and reconciliation of third quarter Non-GAAP EAD per share of $0.18 to GAAP earnings per share of $0.09.
2 Total economic return is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period, divided by beginning period GAAP book value per common share.
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This Shareholder Letter contains time-sensitive information and may contain forward-looking statements. The information contained herein is only accurate as of October 30, 2024. We undertake no obligation to update or revise the information contained herein, including forward-looking statements, whether as a result of new information, future events, or otherwise. Additional detail regarding the forward-looking statements in this Shareholder Letter and the important factors that may affect our actual results in 2024 are described at the end of this Shareholder Letter under the heading “Forward-Looking Statements.”
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network. To that point, our bulk purchases of fixed-rate production from banks nearly doubled during the quarter. With over 200 sellers now onboarded, we have locked loans with almost 80% of our seller base this year. Given the elevated numbers of sellers we have onboarded, we are pleased with the momentum we are seeing from new sellers and are focused on deeper wallet share gains in the coming quarters. Clarity around the capital rules will further codify our go-forward strategy with banks, but we don’t believe will impact their relevance to our go-forward consumer strategy.
As was the case with the broader market, we also observed a brief uptick in refinance activity in the third quarter due to a brief period of declining mortgage rates. With rates now nearly 70 basis points higher than prior to September’s FOMC announcement, that refinance window may have been fleeting, but the increase in activity is evidence that homeowners and originators alike are ready to transact once a more durable reprieve eventually emerges.
We priced three Sequoia (SEMT) securitizations during the third quarter, bringing our year-to-date total through the end of September to nine securitizations backed by over $4 billion of collateral. We have maintained a reliable monthly securitization cadence that promotes strong execution levels, a measure of contrast with other market participants that issue more episodically. To that point, we have continued to be active on the distribution front in the fourth quarter, already distributing $1.5 billion of jumbo collateral through a combination of securitizations and whole loan sales – activity we have prioritized to get ahead of any potential volatility on the horizon. These efforts continue to set us apart and place Redwood as a leading non-bank issuer of securitized jumbo collateral.
In addition to the absolute level of mortgage rates, the shape of the Treasury yield curve also plays a big part in how our market operates. More recently, the curve has once again turned positive (however slightly), providing an opportunity to aggregate and securitize hybrid adjustable-rate mortgage (“ARM”) loans. Early in the fourth quarter, we priced our first hybrid ARM securitization since 2010, backed by a regional bank portfolio of seasoned ARMs we locked in the second quarter. Furthering this momentum, we recently launched revamped hybrid ARM guidelines to our seller base, with favorable early feedback from both banks and nonbanks, alike.
Turning to our Residential Investor business, the third quarter marked the first full quarter of our joint venture with CPP Investments. This partnership has allowed us to capitalize on quality origination opportunities while operating our business with less working capital. We funded $458 million of investor loans during the third quarter, roughly flat to the third quarter but with continued growth in our smaller-balance, more liquid products. Most notably, our single-asset bridge (“SAB”) originations reached record volumes for the second consecutive quarter. With a healthy pipeline heading into the fourth quarter across our product offerings, we remain focused on deepening our distribution channels and serving a broader array of housing investors, both in our traditional focus areas and in products for which bank participation has declined in recent quarters.
As we set our sights on a new year and new leadership in Washington, we continue to believe our platform’s value to the market in support of greater housing accessibility will only grow. The industry is in dire need of positive disruption as it continues to grapple with an estimated undersupply of 3 to 4 million homes. In many corners of the market, there also remains a significant knowledge gap between prospective homeowners and the non-Agency housing finance solutions available to them. That’s why much of our focus heading into 2025 will be on “mission expanding” strategies designed to leverage areas of high potential growth, common-sense use cases for prospective homeowners, and a strong nexus between technology and consumer adoption. As always, this work will be coupled with expanded access to private market investors – an area that now represents a deep competitive strength.
Thank you for your continued support,
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| Christopher J. Abate | Dashiell I. Robinson | Brooke E. Carillo |
| Chief Executive Officer | President | Chief Financial Officer |
Note to Readers
We file annual reports (on Form 10-K) and quarterly reports (on Form 10-Q) with the Securities and Exchange Commission. These filings, our Redwood Review presentation and our earnings press releases provide information about Redwood and our financial results in accordance with generally accepted accounting principles (GAAP). These documents, as well as information about our business and a glossary of terms we use in this and other publications, are available through our website, www.redwoodtrust.com. We encourage you to review these documents. Within this document, in addition to our GAAP results, we may also present certain non-GAAP measures. When we present a non-GAAP measure, we provide a description of that measure and a reconciliation to the comparable GAAP measure within the Non-GAAP Measures section of the Endnotes to the Redwood Review, which can be found on our website, www.redwoodtrust.com, under “Financials” within the “Investor Relations” section. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc., and its consolidated subsidiaries. Note that because we generally round numbers in the tables to millions, except per share amounts, some numbers may not foot due to rounding. References to the “third quarter” refer to the quarter ended September 30, 2024, the “second quarter” refer to the quarter ended June 30, 2024, and the “fourth quarter” refer to the quarter ended December 31, 2024, unless otherwise specified.
Cautionary Statement; Forward-Looking Statements
This shareholder letter may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan,” "could" and similar expressions or their negative forms, or by references to strategy, plans, goals, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, including reports on Forms 10-K, 10-Q, and 8-K. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Statements regarding the following subjects, among others, are forward-looking by their nature: statements we make regarding Redwood's business strategy and strategic focus, statements related to our financial outlook and expectations for 2024 and future years, estimates of upside and potential earnings in our Investment Portfolio from embedded discounts to par value on securities, and opportunities for our residential consumer and residential investor mortgage banking businesses. Additional detail regarding the forward-looking statements in this shareholder letter and the important factors that may affect our actual results in 2024 are described in the Redwood Review under the heading “Forward-Looking Statements,” which can be found on our website, www.redwoodtrust.com, under “Financials” within the “Investor Relations” section.