8-K
REDWOOD TRUST INC (RWT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 28, 2022
REDWOOD TRUST, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 001-13759 | 68-0329422 |
|---|---|---|
| (State or other jurisdiction<br><br>of incorporation) | (Commission<br><br>File Number) | (I.R.S. Employer<br><br>Identification No.) |
One Belvedere Place
Suite 300
Mill Valley, California 94941
(Address of principal executive offices and Zip Code)
(415) 389-7373
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | | --- | --- || ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | | --- | --- || ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | | --- | --- || ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | | --- | --- |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, par value $0.01 per share | RWT | New York Stock Exchange |
| Item 2.02. | Results of Operations and Financial Condition; | |
| --- | --- | |
| Item 7.01. | Regulation FD Disclosure. | |
| --- | --- |
On July 28, 2022, Redwood Trust, Inc. (the "Company") issued a press release announcing its financial results for the quarter ended June 30, 2022, the Redwood Trust Shareholder Letter - 2nd Quarter 2022 and The Redwood Review - 2nd Quarter 2022, copies of which are attached as Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3, respectively, to this current report on Form 8-K.
In addition, on July 28, 2022, the Company made available Supplemental Financial Tables presenting certain financial results for the quarter ended June 30, 2022. A link to the Supplemental Financial Tables is available at the Company’s website at http://www.redwoodtrust.com, in the Investor Relations section of the website under “Financials.” An archive of the presentation materials will be available at the same location for 90 days.
The information contained in this Item 2.02 and Item 7.01 and the attached Exhibits 99.1, 99.2 and 99.3 is furnished to and not filed with the SEC, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.
| Item 9.01. | Financial Statements and Exhibits. | | --- | --- || (d) | Exhibits | | --- | --- | | Exhibit 99.1 | Press Release dated July 28, 2022 | | Exhibit 99.2 | Redwood Trust Shareholder Letter - 2nd Quarter 2022 | | Exhibit 99.3 | The Redwood Review – 2nd Quarter 2022 | | Exhibit 104 | Cover Page Interactive Data File (embedded within the inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: July 28, 2022 | REDWOOD TRUST, INC. | |
|---|---|---|
| By: | /s/ BROOKE E. CARILLO | |
| Name: Brooke E. Carillo | ||
| Title: Chief Financial Officer |
Exhibit Index
| Exhibit No. | Exhibit Title |
|---|---|
| Exhibit 99.1 | Press Release dated July 28, 2022 |
| Exhibit 99.2 | Redwood Trust Shareholder Letter - 2nd Quarter 2022 |
| Exhibit 99.3 | The Redwood Review – 2nd Quarter 2022 |
| Exhibit 104 | Cover Page Interactive Data File (embedded within the inline XBRL document) |
Document
Exhibit 99.1
REDWOOD TRUST REPORTS SECOND QUARTER 2022 FINANCIAL RESULTS
MILL VALLEY, CA – Redwood Trust, Inc. (NYSE:RWT; "Redwood" or the "Company"), a leader in expanding access to housing for homebuyers and renters, today reported its financial results for the quarter ended June 30, 2022.
Key Financial Results and Metrics
•GAAP book value per common share was $10.78 at June 30, 2022, approximately a 10% decrease from $12.01 per share at March 31, 2022
•GAAP net loss of $(0.85) per diluted common share, of which $(0.74) per share was attributable to net fair value changes on long-term investments, substantially all of which were unrealized
•Economic return on book value of (8.3)%(1)
•Recourse leverage ratio of 2.5x at June 30, 2022(2)
•Declared and paid a regular quarterly dividend of $0.23 per common share for the second quarter 2022
Operational Business Highlights
Investment Portfolio
•Deployed $166 million of capital into new, attractively priced organic and third-party investments
•Credit performance remained strong with stable delinquencies and continued home price appreciation
•Investment Portfolio secured leverage of 1.4x as of June 30, 2022
Business Purpose Mortgage Banking
•Funded $923 million in business purpose loans, essentially flat with first quarter 2022 fundings
◦Second quarter fundings included $561 million of bridge loans (up 35% from the first quarter) and $361 million of single-family rental ("SFR") loans (down 28% from the first quarter)
•Securitized $563 million of loans in two transactions (one backed by $313 million of SFR loans, and one backed by $250 million of bridge loans with a 24-month revolving feature)
•Received a special servicing ranking from DBRS Morningstar, acknowledging CoreVest's successful performance in loan management
Residential Mortgage Banking
•Distributed $1.2 billion of jumbo loans through whole loan sales; at June 30, 2022, total net jumbo loan exposure was $751 million, down 44% from the end of the first quarter(3)
•Locked $1.0 billion of jumbo loans, down from $2.6 billion in first quarter 2022(4); loan purchase commitments were $0.5 billion, down from $2.0 billion in first quarter 2022(5)
◦Second quarter lock mix was 82% purchase money loans and 18% refinancings(4)
_____________________
See following page for footnotes.
Financing and Capital Markets Highlights
•Maintained robust balance sheet with unrestricted cash of $371 million and available capital of $190 million at June 30, 2022(6)
•Successfully closed new warehouse facility with up to $400 million of capacity to fund CLO-eligible multifamily bridge loans originated by CoreVest
•Raised $215 million of gross proceeds through a convertible debt offering with a 5-year term; use of proceeds includes opportunistic deployment of capital into attractive investments in our investment portfolio and operating businesses
•Repurchased 3.7 million shares of Redwood’s common stock at a cost of $33 million (including $25 million purchased in conjunction with RWT’s June convertible debt offering and an additional $8 million through open market purchases), resulting in $0.10 per share of book value accretion in the second quarter
RWT Horizons Highlights
•Completed three new investments in the second quarter of 2022
•Recognized approximately $10 million of pre-tax valuation gain from an early RWT Horizons investment
•Since inception, RWT Horizons has completed 24 technology venture investments in 21 companies with an aggregate of over $25 million of allocated capital
Environmental, Social, Governance ("ESG") Highlights
•Published inaugural ESG report, which included reporting aligned with Sustainability Accounting Standards Board ("SASB")
Post Q2'22 Activity
•Closed the previously announced acquisition of Riverbend Funding, LLC and its subsidiaries ("Riverbend"), a best-in-class private mortgage lender to investors in transitional residential and multifamily real estate, for an initial cash purchase price of approximately $44 million paid at closing(7)
•Redwood's Board of Directors approved a new share repurchase program with authorization to purchase up to $125 million of its common stock
"Our financial results reflect the historic volatility and spread widening that characterized markets during the second quarter,” said Christopher Abate, Chief Executive Officer of Redwood. “The magnitude of rapidly rising rates impacted our Residential Mortgage Banking business, while demand for shorter-term financing from our business purpose lending borrowers proved more resilient. Despite a challenging environment for execution and loan distribution, we enter the third quarter in a healthy risk position with low levels of inventory due to the depth of our distribution channels, and sound credit fundamentals within our investment portfolio."
Continued Abate, "With our recent capital raise, we are well-positioned to take advantage of an array of opportunities for our investment portfolio or within our capital structure, further driving shareholder value."
_____________________
(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) Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $9.3 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $35 million of intangible assets.
(3) Total net jumbo loan exposure represents the sum of $1.0 billion of loans held on balance sheet and $0.3 billion of loans identified for purchase (locked loans not yet purchased), less $0.5 billion of loans subject to forward sale commitments, each at June 30, 2022.
(4) Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.
(5) Loan purchase commitments include estimated potential fallout from locked pipeline that typically occurs through the lending process.
(6) Available capital of $190 million represents our available investable capital at June 30, 2022 and is adjusted for the cash purchase price paid for Riverbend Lending at closing of approximately $44 million (subject to certain adjustments including potential earnout consideration).
(7) Subject to certain adjustments including potential earnout consideration.
Second Quarter 2022 Redwood Review Available Online
A further discussion of Redwood's business and financial results is included in the second quarter 2022 Shareholder Letter and Redwood Review which are available within the “Quarterly Results” section under "Financials" on the Company’s investor relations website at ir.redwoodtrust.com.
Conference Call and Webcast
Redwood will host an earnings call today, July 28, 2022, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time to discuss its second quarter 2022 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 Thursday, August 11, 2022, 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 #13729620.
The conference call will be webcast live in listen-only mode through the Events and Presentations section of Redwood Trust's Investor Relations website at https://ir.redwoodtrust.com/events-and-presentations/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 Tuesday, August 9, 2022, 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. Our operating platforms occupy a unique position in the housing finance value chain, providing 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. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily assets. 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. We operate our business in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. Additionally, through RWT Horizons™, our venture investing initiative, we invest in early-stage companies strategically aligned with our business across the lending, real estate, and financial technology sectors to drive innovations across our residential and business-purpose lending platforms. Since going public in 1994, we have managed our business through several cycles, built a track record of innovation, and established a best-in-class reputation for service and a common-sense approach to credit investing. 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, Twitter, or Facebook.
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 statements related to the amount of residential mortgage loans that we identified for purchase during the second quarter of 2022, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase, residential mortgage loans subject to forward sale commitments, statements related to our authorization to repurchase up to $125 million of common stock, statements relating to our estimates of our available capital, and the expected timing for the filing of Redwood's Quarterly Report on Form 10-Q. Forward-looking statements involve numerous risks and uncertainties. Redwood's actual results may differ from Redwood's beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption “Risk Factors”. Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
REDWOOD TRUST, INC.
| ($ in millions, except per share data) | Three Months Ended | |||||
|---|---|---|---|---|---|---|
| 6/30/2022 | 3/31/2022 | |||||
| Financial Performance | ||||||
| Net income (loss) per diluted common share | $ | (0.85) | $ | 0.24 | ||
| Return on Equity (annualized) | (28.8) | % | 8.6 | % | ||
| Book Value per Share | $ | 10.78 | $ | 12.01 | ||
| Dividend per Share | $ | 0.23 | $ | 0.23 | ||
| Economic Return on Book Value (1) | (8.3) | % | 1.5 | % | ||
| Available Capital (in millions) | $ | 190 | $ | 140 | ||
| Recourse Leverage Ratio (2) | 2.5x | 2.1x | ||||
| Operating Metrics | ||||||
| Business Purpose Loans | ||||||
| SFR fundings | $ | 361 | $ | 505 | ||
| Bridge fundings | $ | 561 | $ | 415 | ||
| SFR securitized | $ | 313 | $ | — | ||
| Bridge securitized | $ | 250 | $ | — | ||
| SFR sold | $ | — | $ | 332 | ||
| Residential Jumbo Loans | ||||||
| Locks | $ | 1,011 | $ | 2,630 | ||
| Purchases | $ | 1,137 | $ | 2,008 | ||
| Securitized | $ | — | $ | 687 | ||
| Sold | $ | 1,238 | $ | 1,827 |
(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. As of June 30, 2022 and March 31, 2022, recourse debt excluded $9.3 billion and $9.6 billion, respectively, of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excluded $35 million and $38 million, respectively, of intangible assets.
REDWOOD TRUST, INC.
| Consolidated Income Statements (1) | Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions, except share and per share data) | 6/30/22 | 3/31/22 | 12/31/21 | 9/30/21 | 6/30/21 | |||||
| Interest income | $ | 167 | $ | 189 | $ | 162 | $ | 146 | $ | 139 |
| Interest expense | (127) | (136) | (112) | (104) | (108) | |||||
| Net interest income | 40 | 53 | 50 | 42 | 31 | |||||
| Non-interest income (loss) | ||||||||||
| Residential Mortgage banking activities, net | (18) | 8 | 12 | 33 | 21 | |||||
| Business Purpose Mortgage banking activities, net | (12) | 8 | 24 | 30 | 33 | |||||
| Investment fair value changes, net | (88) | (6) | 7 | 26 | 49 | |||||
| Other income, net | 7 | 6 | 4 | 2 | 2 | |||||
| Realized gains, net | — | 3 | — | 7 | 8 | |||||
| Total non-interest income (loss), net | (111) | 19 | 47 | 98 | 114 | |||||
| General and administrative expenses | (32) | (35) | (39) | (48) | (41) | |||||
| Loan acquisition costs | (3) | (4) | (4) | (5) | (4) | |||||
| Other expenses | (3) | (4) | (5) | (4) | (4) | |||||
| (Provision for) benefit from income taxes | 9 | 2 | (5) | 4 | (7) | |||||
| Net income (loss) | $ | (100) | $ | 31 | $ | 44 | $ | 88 | $ | 90 |
| Weighted average diluted shares (thousands) (2) | 119,660 | 140,506 | 143,540 | 141,855 | 141,761 | |||||
| Diluted earnings (loss) per common share | $ | (0.85) | $ | 0.24 | $ | 0.34 | $ | 0.65 | $ | 0.66 |
| Regular dividends declared per common share | $ | 0.23 | $ | 0.23 | $ | 0.23 | $ | 0.21 | $ | 0.18 |
(1)Certain totals may not foot due to rounding.
(2)In the periods presented above, weighted average diluted shares included shares from the assumed conversion of our convertible and/or exchangeable debt in accordance with GAAP diluted EPS provisions. Actual shares outstanding (in thousands) at June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021, and June 30, 2021 were 116,753, 120,289, 114,892, 114,662, and 113,053, respectively.
Analysis of Income Statement - Changes from First to Second Quarter 2022
•Net interest income decreased from the first quarter, as higher income from additional deployment of capital into our bridge loan portfolio was offset by expected decreases in yield maintenance income on our SFR securities and lower discount accretion income on our available-for-sale securities, primarily due to slower prepayments associated with rising interest rates.
•Income from Residential Mortgage Banking activities declined from the first quarter due to a combination of lower volumes and margins. While sharp increases in mortgage rates negatively impacted overall industry origination volumes, given the market volatility, we also focused on risk management and were deliberate in moderating volume and moving risk quickly. Profitability during the quarter was challenged as severe credit spread widening negatively impacted both securitization and whole loan sale executions and continued interest rate volatility drove higher hedging costs.
•Despite record funding volumes, income from Business Purpose Mortgage Banking activities declined from the first quarter as continued market volatility and credit spread widening negatively impacted valuations of our loan inventory held-for-sale and resulted in lower margins for SFR loans we originated during the quarter. Despite rising interest rates, demand for business purpose loans remained strong in the second quarter, with funded volumes in bridge loans increasing 35% quarter-over-quarter.
•Net negative investment fair value changes on our Investment Portfolio in the second quarter reflected the historic magnitude of credit spread widening in the market during the quarter. The negative fair value changes were partially offset by fair value increases in our IO securities and MSRs, which benefited from rising interest rates, and our home equity investments ("HEI"), which benefited from continued home price appreciation. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs remained stable across our portfolio.
•General and administrative expenses decreased from the first quarter, primarily due to a decrease in variable compensation, associated with the decrease in quarterly GAAP earnings.
•Other expenses were primarily comprised of acquisition-related intangible amortization expenses.
•Our benefit from income taxes resulted from GAAP losses incurred at our taxable REIT subsidiary in the second quarter.
| REDWOOD TRUST, INC. | ||||
|---|---|---|---|---|
| Consolidated Income Statements (1) | Six Months Ended June 30, | |||
| ($ in millions, except share and per share data) | 2022 | 2021 | ||
| Interest income | $ | 357 | $ | 267 |
| Interest expense | (263) | (211) | ||
| Net interest income | 94 | 56 | ||
| Non-interest income (loss) | ||||
| Mortgage banking activities, net | (14) | 137 | ||
| Investment fair value changes, net | (94) | 95 | ||
| Other income | 13 | 6 | ||
| Realized gains, net | 3 | 11 | ||
| Total non-interest income (loss) | (92) | 249 | ||
| General and administrative expenses | (67) | (84) | ||
| Loan acquisition costs | (8) | (7) | ||
| Other expenses | (8) | (8) | ||
| (Provision for) benefit from income taxes | 12 | (18) | ||
| Net income (loss) | $ | (69) | $ | 187 |
| Weighted average diluted shares (thousands) | 119,772 | 141,139 | ||
| Diluted earnings (loss) per common share | $ | (0.60) | $ | 1.38 |
| Regular dividends declared per common share | $ | 0.46 | $ | 0.34 |
(1)Certain totals may not foot due to rounding.
REDWOOD TRUST, INC.
| Consolidated Balance Sheets (1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions, except share and per share data) | 6/30/22 | 3/31/22 | 12/31/21 | 9/30/21 | 6/30/21 | |||||
| Residential loans | $ | 6,579 | $ | 7,217 | $ | 7,592 | $ | 6,216 | $ | 5,743 |
| Business purpose loans | 5,203 | 4,755 | 4,791 | 4,694 | 4,409 | |||||
| Consolidated Agency multifamily loans | 443 | 452 | 474 | 483 | 485 | |||||
| Real estate securities | 284 | 359 | 377 | 353 | 355 | |||||
| Other investments | 680 | 636 | 642 | 422 | 309 | |||||
| Cash and cash equivalents | 371 | 409 | 450 | 557 | 421 | |||||
| Other assets | 316 | 425 | 380 | 347 | 275 | |||||
| Total assets | $ | 13,876 | $ | 14,253 | $ | 14,707 | $ | 13,073 | $ | 11,996 |
| Short-term debt | $ | 1,870 | $ | 1,647 | $ | 2,177 | $ | 1,751 | $ | 1,485 |
| Other liabilities | 197 | 325 | 249 | 263 | 195 | |||||
| Asset-backed securities issued | 8,584 | 8,872 | 9,254 | 8,184 | 7,537 | |||||
| Long-term debt, net | 1,966 | 1,964 | 1,641 | 1,500 | 1,484 | |||||
| Total liabilities | 12,617 | 12,808 | 13,321 | 11,697 | 10,701 | |||||
| Stockholders' equity | 1,258 | 1,445 | 1,386 | 1,376 | 1,295 | |||||
| Total liabilities and equity | $ | 13,876 | $ | 14,253 | $ | 14,707 | $ | 13,073 | $ | 11,996 |
| Shares outstanding at period end (thousands) | 116,753 | 120,289 | 114,892 | 114,662 | 113,053 | |||||
| GAAP book value per share | $ | 10.78 | $ | 12.01 | $ | 12.06 | $ | 12.00 | $ | 11.46 |
(1)Certain totals may not foot due to rounding.
| CONTACTS |
|---|
| Investor Relations |
| Kaitlyn Mauritz |
| SVP, Head of Investor Relations |
| Phone: 866-269-4976 |
| Email: investorrelations@redwoodtrust.com |
8
Document
| Exhibit 99.2 |
|---|
| S H A R E H O L D E R L E T T E R<br><br><br><br>S E C O N D Q U A R T E R 2 0 2 2 |
| R E D W O O D<br><br>T R U S T |
Dear Shareholders,
The second quarter of 2022 was one of the most volatile periods in recent financial history, failing to produce many bright spots for us or an industry beleaguered by the impact of inflation, including record spikes in mortgage rates. The ongoing repricing of rate sensitive assets accelerated during the quarter, impacting values of even the safest mortgage-related investments. Our positioning became decisively more conservative in response - we were happy to cede flashy volume headlines in favor of Redwood’s time-tested approach to managing mortgage credit and market risk. Through that lens, we prioritized loan pipeline turnover and strong liquidity, knowing there were market forces at play beyond our control.
Considering the broader context of the last few economic cycles, we’ve frankly seen much worse, and are a bit dismayed that equity markets seem to be pricing in the second coming of the Great Financial Crisis of 2008. The story in 2022 is markedly different. At Redwood, we ended the second quarter with $371 million of unrestricted cash, low leverage, significant unencumbered assets and continued exceptional credit performance from our investment portfolio. Couple this with relatively light mortgage banking pipelines at quarter-end, and we feel well-positioned in a housing finance ecosystem still trying to find its footing.
Our book value declined approximately 10% during the quarter to $10.78 per share at June 30, 2022, primarily reflecting market dynamics in June that had a pronounced effect on the fair value of our investment portfolio. It is worth highlighting that our overall decline in GAAP book value included $(1.02) per share of investment portfolio fair value changes that almost exclusively reflect unrealized mark-to-market losses due to credit spread widening. These assets remain on our balance sheet and we generally expect to hold them for the long term. Importantly, we observed very little deterioration in expected future cash flows during the quarter. As such, substantially all of the GAAP losses in our investment portfolio segment were non-cash and are recoverable as markets stabilize. Our portfolio’s net discount to par now stands at approximately $3.35 per share.
Without shying away from our second quarter results, we believe our team’s intense focus and total commitment to Redwood’s stakeholders were exemplary during the quarter. A few examples of this are noteworthy. We actively managed our jumbo and single-family rental (“SFR”) pipelines as interest rate volatility spiked, guiding residential production volumes lower for our more rate-sensitive products, and adjusting our go-forward SFR pipeline as appropriate for higher rates. Along with a proactive hedging discipline, this allowed us to significantly mitigate the impact of negative price action in the underlying securities. This meant our adjusted margins for the second quarter – while certainly impacted by volatility – outperformed most market yardsticks. In our Residential business, for instance, margin declines during the second quarter were less than half the underperformance of jumbo loans versus their benchmarks during the same period.
______________________
This Shareholder Letter contains time-sensitive information and may contain forward-looking statements. The information contained herein is only accurate as of July 28, 2022. 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 2022 are described at the end of this Shareholder Letter under the heading “Forward-Looking Statements.”
We have also made several important enhancements to our capital position, highlighted by a $215 million long-term capital raise in early June, and successful extension or initiation since January of approximately $3.8 billion of warehouse facilities, over 60% of which are non-marginable. This allowed us to remain opportunistic, and we deployed approximately $245 million during the quarter, including $33 million into share repurchases at a significant discount to our June 30, 2022 book value. The remainder of capital deployment centered on business purpose lending (“BPL”) investments – largely bridge loans for which coupons have reset meaningfully higher – and incremental growth in our home equity investment (“HEI”) portfolio. We continue to believe that today’s investing environment is attractive and we intend to deliberately deploy this capital into accretive opportunities across organic and third-party investments as well as into our common shares.
So, in such a difficult period for our industry, what will our blueprint look like for the remainder of the year? After 28 years as an industry leader and public company filer, the answer may sound familiar. Across our enterprise we will continue to maintain a patient, long-term investor mindset that stretches well beyond fiscal quarters; aggressively manage risk; and work diligently to enhance our franchise while pursuing efficiencies.
Our mortgage banking platforms – the centerpiece of our corporate mission of making quality housing, whether rented or owned, accessible to all American households – will leverage their intangibles to emphasize profitability and maintain a leading and stable market presence. The functions we serve in the non-Agency ecosystem remain a critical source of market liquidity for hundreds of mortgage originators, thousands of real estate investors, and a deep cohort of whole loan and RMBS investors. While sentiment has begun to improve, most market participants remain uncertain around the economy, and we suspect they will stay tethered to Fed actions and the resulting path of interest rates. In keeping, we will continue to prioritize the path to consistent profitability, which will likely entail lower volume levels in the near-term relative to our long-term strategic growth ambitions.
In this vein, a key difference of Redwood’s versus others in the space is our operating DNA. As a purchaser of residential loans, we manage a much different cost structure than a traditional originator. As such, we have avoided the high fixed and regulatory costs that come with this territory. Our revenue model differs, too, and is more concentrated toward capital markets activities associated with the buying and selling of residential loans. In most cases this nuance serves us very well; we’ve tended to generate strong and durable returns over time with a modest workforce, making it easier to recalibrate when volumes dictate. Our ability to access diverse distribution channels remains a competitive differentiator.
As a direct BPL lender, we leverage customized technology to serve our clients more quickly, managing to what we believe is the market’s strongest net cost to originate. We can also pivot efficiently to meet both borrower demand and appropriate risk/reward thresholds for our capital. As such, approximately 60% of second quarter BPL originations were floating-rate bridge loans. While BPL mortgage banking income was impacted by significant spread widening on our securitizations, we were an early mover in adjusting our rate sheets and are addressing resurgent demand for our bridge product, with sponsors willing to pay attractive
rates for shorter-term loans with more prepayment flexibility. And while we expect BPL fundings to likely slow in the second half of the year, we’re continuing to serve our client base in ways most others cannot.
In cyclical markets like today’s, it’s not always a straight line that gets you to your destination the fastest. We’re now in the midst of a significant retrenchment by both established and would-be competitors who don’t possess the liquidity or track record to survive a sustained market downturn. Many of these competitors had only commenced operations in recent years – easily the most accommodating period in the history of the mortgage market thanks to quantitative easing by the Federal Reserve and record low mortgage rates. We expect this trend to bode well for Redwood – both in terms of organic growth opportunities and further strategic acquisitions. We’re already seeing credit standards tighten for a number of lenders, offering us an opportunity to deepen inroads across an array of product types.
Next, we expect to remain constructive on strategic M&A, with an emphasis on top-tier platforms that can be potentially acquired at prices we haven’t seen in many years. On July 1, 2022, we successfully closed the acquisition of Riverbend Lending (“Riverbend”), using the time between signing and closing to leverage our experience in integrating teams, most notably in human resources and technology. We anticipate full integration to be complete by the end of 2022. We believe Riverbend’s bridge production will add valuable diversity to CoreVest’s existing product and geographic footprint. And importantly, our track record in M&A has made Redwood one of the first calls in the industry as platforms come to market, from both bankers and directly from other platforms seeking to partner.
Finally, we’ll remain focused on the fundamentals backing our long-term investment portfolio, regardless of near-term market movements. The GAAP accounting rules are particularly harsh for illiquid assets such as ours, contributing to significant earnings volatility that is often untethered to the underlying cash flows. One of the most attractive aspects of our investment portfolio is its bespoke nature – it is unique to us and difficult, if not impossible, to replicate elsewhere. Many of our assets are now quite seasoned, with continued expectations of strong pay performance and low losses driven in part by the tailwinds of recent home price appreciation. For instance, the loans underpinning our core reperforming loan investments (SLST), which constitute approximately 20% of our investment portfolio (by capital), have over 15 years of seasoning, declining delinquencies through time, cumulative losses of less than 0.2% and HPA adjusted LTVs of around 45%. Taken as a whole, across our investment portfolio delinquencies remain low – at June 30, 90+ day delinquencies within our jumbo, SFR and bridge portfolios stood at 1.7%, 2.4% and 2.6% respectively.
Following active use of our share repurchase program in the second quarter, today we announced a new $125 million common stock repurchase program (replacing our previously approved repurchase plan from 2018) and continued our previous authorization for the repurchase of outstanding corporate debt. We have tremendous confidence in our team, our portfolio and our liquidity and see an opportunity to express that constructively in a manner that we believe will continue to benefit shareholders. While the amount we may ultimately repurchase is of course dynamic, we would note that to date in the third quarter, our stock has traded, on average, at a 25% discount to our June 30, 2022 book value.
As we look towards the remainder of the year, we view today’s market challenges as significant long-term opportunities for Redwood. The housing market remains woefully undersupplied, creating a durable technical driver that supports investments in residential credit across a broad array of economic scenarios. Sentiment will continue to shift between fear of persistent inflation and what many now believe is an inevitable recession – underscored by the prospect that we may soon be living with both. But regardless of one’s take on the near-term fate of the economy, the addressable market in housing remains vast, and we believe that Redwood’s opportunities have never been greater as we work across multiple facets of housing finance – including residential, business purpose lending, fintech, and proptech. As the market continues to jump at every new economic datapoint, and lurch at every Fed blackline, we’re reminded of the popular Chinese proverb, “The best time to plant a tree was twenty years ago...the second-best time is now.”
We appreciate your patience, support, and trust in our team.
| Christopher J. Abate | Dashiell I. Robinson |
|---|---|
| Chief Executive Officer | President |
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 Measurement 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 “second quarter” refer to the quarter ended June 30, 2022, and references to the “third quarter” refer to the quarter ended September 30, 2022, unless otherwise specified.
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 2022 and future years, statements regarding our available capital and sourcing additional capital, statements regarding opportunities to deploy capital, including organic and third-party investments, strategic mergers and acquisitions, and common stock repurchases, and other statements regarding pending business activities and expectations and estimates relating to our business and financial results. Additional detail regarding the forward-looking statements in this shareholder letter and the important factors that may affect our actual results in 2022 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.
q222redwoodreview
1 Q2 2022 Redwood Review July 28, 2022 Exhibit 99.3
2 Forward Looking Statements This presentation contains forward-looking statements, including statements regarding our 2022 forward outlook, statements related to increasing our market share of BPL origination, estimates of upside and potential earnings in our investment portfolio from embedded discounts to par value on securities, and target yields on investment opportunities. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our 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, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and any subsequent Quarterly Reports on Form 10-Q and Annual Reports 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 may be described from time to time in reports the Company files with the Securities and Exchange Commission, including reports on Form 8-K. Additionally, this presentation contains estimates and information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on industry publications and reports. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those referred to above, that could cause results to differ materially from those expressed in these publications and reports.
3 Redwood’s mission is to help make quality housing, whether rented or owned, accessible to all American households R W T H O R I Z O N S Innovative Technology Organically and Through Partnerships Industry Leading Operating Platforms Ability to Organically Create Assets for Balance Sheet Best-in-Class Securitization Platforms and Distribution Channels Differentiated and Balanced Earnings Profile Integrated Business Model Our Differentiators Deep Product Set with Diversified Earnings Streams Track Record of Strong Performance and Earnings Generation Deep and Experienced Management Team Ticker: RWT IPO Date: 1995 Market Cap: $1.0 billion Indicative Dividend Yield: 11.9% Detailed Endnotes are included at the end of this presentation. TM
4Detailed Endnotes are included at the end of this presentation. Redwood Operates Across Three Complementary Business Lines Redwood’s business model is geared toward providing strategic capital for sustainable innovation in housing finance Residential Mortgage Banking Business Purpose Mortgage Banking Investment Portfolio Strategy / Overview ~$600bn ~$13bn~$100bn (Single Family Rental + Multifamily) 79%11% 10% % of Total Allocated Capital(1) Annual Market Opportunity(2) Organically Created Assets (RMBS and BPL loans), Third-Party Assets (RPLs, HEI, CRT, Multifamily Securities) Prime Jumbo, Expanded Prime Jumbo and Non-QM Loans SFR (Term) & Bridge (Fix & Flip, Multifamily, Build/Renovate to Rent) Products Market leading non-Agency correspondent platform serving 150+ bank and non-bank originators Includes assets organically created through mortgage banking activities and investments sourced through partnerships and third-parties Leading direct lender to single- family and multifamily housing investors; product set includes both term and bridge loans
5 Q2’22 Financial Performance $(0.85) per diluted share ~$(0.74) due to estimated market valuation adjustments on long-term investments $1.8 billion of allocated capital Detailed Endnotes are included at the end of this presentation. GAAP Net Loss GAAP Book Value Common Dividend Capital Allocation(3) Return on Capital(4) Capital and Financing Recourse Leverage Ratio(5) Unrestricted Cash ($mm) Q2’22 Total Economic Return: (8.3)%(1) 11.9% Indicative Dividend Yield as of June 30, 2022(2) $0.23 $0.23 Q1'22 Q2'22 $12.01 $10.78 Q1'22 Q2'22 2.1x 2.5x Q1'22 Q2'22 $409 $371 Q1'22 Q2'22 Q1'22 Q2'22 Investment Portfolio 79% Residential Mortgage Banking 11% Business Purpose Mortgage Banking 10% $0.24 $(0.85) GAAP ROC Adjusted ROC 3% 8% -19% 0% LTM Q2'22 Adjusted return on capital (“ROC”) is a non-GAAP measure that is reconciled to GAAP return on capital on slide 35 in the Endnotes.
6 Witnessed continued momentum in Business Purpose Lending (“BPL”) driven by elevated demand for short- duration bridge products Continued focus on residential loan product development Increased investable capital for attractive deployment opportunities Unrealized negative investment fair value changes in our investment portfolio drove substantially all fair value losses, which can be recovered in future quarters(2) Delinquencies in our investment portfolio remain low and our seasoned assets are supported by robust HPA over the last several years Continued strength in underlying cash flows Summary of Q2’22 Market Drivers and Performance We took decisive action and positioned strategically for the go forward as we navigated volatile markets in Q2’22 Q2’22 Market Trend Extreme Levels of Spread Widening Continued Strength in Portfolio Quality and Credit Performance Credit Spreads (bps) YoY HPA Growth 0% 10% 20% 30% 2013 2014 2015 2016 2017 2018 2019 2020 2021 Persistent Market Volatility Rapidly Rising Mortgage Rates Implied Treasury Volatility (bps) 30 Year Mortgage Rate 500 750 1,000 1,250 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Actively managed loan inventory; total net loan exposure of $751 million as of June 30, 2022 (down 44% compared to the end of Q1’22)(1) Redwood Positioning Sources: Implied Treasury Volatility represents the ICE BofA MOVE Index from January 1, 2022 through June 30, 202 (Source: Bloomberg). 30 Year Mortgage Rate represents the coupon on the Freddie Mac 30 Year Fixed Mortgage Rate (Source: Bloomberg, Freddie Mac). Credit Spreads represent On the Run Low-LTV CRT B2 Spreads January 1, 2022 through June 30, 2022 (Source: JPMorgan Markets Data Query). YoY HPA data represents home price appreciation from January 1, 2013 through June 30, 2022 (Source: HPA data per BofA Global Research and Corelogic as of June 2022). 60 120 180 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 3.27% 4.90% 5.83% 12/31/2021 3/31/2022 6/30/2022 Inverted yield curve with substantial intra-day volatility throughout the quarter Liquidity impacted demand across loan distribution channels Further rapid increase in mortgage rates due to rise in benchmark rates and technical factors Substantial decrease in industry volumes and market overhang of lower-coupon loans Substantial widening (and steepening) of the credit curve predominantly in June Seasoned and well-underwritten assets buoyed by significant home price appreciation (“HPA”) with LTVs continuing to decline
7 Q2’22 Business Performance Detailed Endnotes are included at the end of this presentation. $1.0 billion of locks(3) and $1.1 billion of loan purchases Sold $1.2 billion of whole loans; total net loan exposure of $751 million as of June 30, 2022 (down 44% compared to the end of Q1’22)(4) Residential Mortgage Banking Completed three new investments in Q2’22 Recognized approximately $10 million of pre-tax gain from an early RWT Horizons investment RWT Horizons $923 million of fundings (effectively flat QoQ) fueled by continued growth in Bridge fundings (+35% QoQ) Issued two securitizations (one backed by $250 million of bridge loans with a 24-month revolving feature and one backed by $313 million of SFR loans) Business Purpose Mortgage Banking TM Deployed $166 million of capital into new investments, including internally sourced investments (e.g. Bridge loans) and third-party investments (e.g. HEI) Overall portfolio credit was strong with continued low delinquencies and favorable loan resolutions relative to expectations Investment Portfolio Unrestricted cash and cash equivalents of $371 million at June 30, 2022 represented over 50% of marginable debt(1) Available capital was $190 million as of June 30, 2022(2) At quarter end, maintained $2.7 billion of excess capacity on loan warehouse facilities Investment portfolio secured leverage remains low at 1.4x Financing & Capital
8 Q2’22 Corporate Highlights Detailed Endnotes are included at the end of this presentation. Convertible Notes Offering Acquisition ESG Share Repurchase Published Inaugural ESG Tear Sheet Announced and Closed Acquisition of Riverbend Lending, a Leading Single Asset Bridge Lender(2) Issued $215 Million 7.75% Convertible Notes due 2027(1) Repurchased $33 Million of Common Stock (3.7mm shares) Opportunistic capital raise to bolster liquidity position, increasing capital available to deploy into attractive assets Adds complementary origination and distribution capabilities Repurchased common stock at accretive levels, resulting in $0.10 per share of book value accretion in Q2’22 Enhanced and increased disclosure around Redwood’s ESG practices, including metrics aligned with SASB standards
9 Recent Strategic Actions Position Redwood to Deliver on Goals Detailed Endnotes are included at the end of this presentation. Despite market volatility, we have continued to focus on positioning ourselves for the long term and executing on our goals Risk Management Capital Management Strategic Execution Disrupt and Capitalize Drive Efficiencies Increase Market Reach and Wallet Share Grow Sustainably Create Value through Unique Portfolio Long-Term Goals Raised capital to take advantage of attractive investment opportunities $243 million of capital deployment in Q2’22 Focused on products with less interest rate sensitivity(1) Targeted assets in 12% - 18%+ yield range(2) We continue to consider buying back our common shares to be an accretive use of our capital Further enhanced secured financing capacity at attractive levels Continued to execute on our long-term strategy and vision Closed acquisition of Riverbend Lending Expanded product offerings to address evolving market needs Furthered strategic partnerships with RWT Horizons portfolio companies and made three additional investments Aligned expenses with business performance Acute focus on interest rate and credit risk in light of ongoing volatility Active management of interest rate hedges Preserved capital by moving risk quickly to retain a competitive advantage when markets normalize Entered Q3’22 with low mortgage banking inventory Maintained low levels of leverage across investment portfolio and operating businesses
10 Strong Capital Position Focused on Value Creation Detailed Endnotes are included at the end of this presentation. We have a diverse set of organic and third-party opportunities where we believe we can deploy capital accretively in today’s markets 1 2 3 4 Capital Deployment Opportunities Organic Investments Investments created and underwritten by Redwood’s operating businesses Third-Party Investments Investments in accretive third-party opportunities Share Buybacks Create additional value for shareholders in the form of accretive share repurchases Strategic M&A Seek businesses that are complementary or additive to our existing platforms Q2’22 Capital Deployed by Type(1) Note: Represents Q2’22 capital deployed, proforma for acquisition of Riverbend Lending which closed on July 1, 2022. Organic Investments 44% Third-Party Investments 24% Share Buybacks 14% Strategic M&A 18% $243mm Q2’22 capital deployed into new assets had a target yield between 12% - 18%+(2)
11 $412 $450 Cash & Financeable Loans Pledgable & Unencumbered Assets Excess Warehouse Capacity for Newly Originated Loans Liquidity and Near-Term Corporate Debt Maturities $199 $150 $172 $355 Aug-23 Jul-24 Oct-25 Beyond 2025 ($mm) Corporate Debt Scheduled Maturities Sources of Liquidity and Capital as of 06/30/22 Corporate Debt comprised of Convertible and Exchangeable Notes as well as Trust Preferred Securities and Subordinated Notes Redwood maintains a highly efficient and liquid balance sheet with $371 million in cash and cash equivalents at June 30, 2022 Additionally, Redwood has significant secured funding capacity and unencumbered assets which can be drawn upon to support capital deployment Redwood generally maintains excess secured financing facility capacity as a cash management strategy and unencumbered assets to minimize interest expense Our cash on hand and other sources of liquidity provide sufficient funding to cover opportunistic capital deployment and upcoming corporate debt maturities Detailed Endnotes are included at the end of this presentation. In addition to $412 million of cash & financeable loans, we also have over $450 million of other unencumbered assets and approximately $2.7 billion of unused warehouse capacity to support go forward mortgage banking production (1) $2,661 $371 Cash & Cash Equivalents $41, Financeable Loans ($mm) (2)
12 Attractive Funding Structure Our overall funding structure limits our exposure to rising interest rates and is well constructed for the current environment Financing and Leverage Summary Redwood has a balanced financing profile that includes both fixed and floating rate liabilities, cushioning the impact of higher rates Since January 2022, we have entered into new or renegotiated borrowing facilities with approximately $3.8 billion of funding capacity across 10 different facilities at terms consistent with pre-renewal levels As of June 30, 2022, we had $2.7 billion of excess capacity on loan warehouse facilities We maintain a conservative stance towards leverage with overall recourse leverage of 2.5x(1) Summary of $3.3 Billion of Secured Debt Financing(3) This debt finances our Residential and BPL loans held in inventory Predominantly short-term, floating rate debt Loan inventory held on average 1-3 months, minimizing overall interest rate risk which we also hedge New loans originated/locked daily at current market rates, while existing inventory is sold or securitized Mortgage Banking Funding ~40% ($1.3 billion) of debt finances our Mortgage Banking Segments This debt finances certain assets in our investment portfolio ~65% ($1.3bn) of this debt is related to our holdings of bridge loans which have remaining average terms of ~18 months and are predominantly variable rate The remaining ~35% is predominantly fixed rate with a term greater than 1 year Investment Portfolio Funding ~60% ($2.0 billion) of debt finances our Investment Portfolio Segment Detailed Endnotes are included at the end of this presentation. Q2’22 Recourse Leverage by Business Segment(1) 2.8x 4.5x 0.7x 0.4x 2.5x BPL Mortgage Banking Residential Mortgage Banking Investment Portfolio Corporate Total RWT Our leverage is higher in our operating businesses where we turn capital over quickly Redwood’s total recourse leverage is ~30% below the mREIT peer average(2)
13 HEI, Multifamily, CRT and Other, $403 RPL Securities, $437 Business Purpose Bridge Loans, $1,652 SFR (CAFL) Securities, $307 Called Residential Jumbo Loans, $221 Residential Jumbo (Sequoia) Securities, $350 MSRs & Other, $50 Investment Portfolio Investment Portfolio by Economic Investments ($mm)(1)Quarterly Performance Overall portfolio performance during Q2’22 was largely driven by extreme levels of credit spread widening across assets which largely occurred in June Negative fair value changes on the investment portfolio predominantly reflect unrealized mark-to- market losses Given reset in basis, these assets have attractive forward-looking return profiles Our investment portfolio sits in a healthy fundamental credit position given strong cash flows, underlying seasoning and robust HPA During the quarter, we deployed $166 million of capital into new investments with attractive ROEs ~$58 million of HEI ~$84 million of bridge loans We see additional opportunities in today’s market to deploy capital at attractive levels $3.4 Billion Housing Credit Investments 75% Organically Created Detailed Endnotes are included at the end of this presentation. Credit performance remains strong across our portfolio of investments, though significant credit spread widening in Q2’22 impacted fair value changes Investment Portfolio by Capital $1.4bn Third-Party, $0.8bn (25%) BPL, $2.0bn (57%) Residential, $0.6bn (18%) HEI, Multifamily, CRT and Other, 27% RPL Securities, 23% Business Purpose Bridge Loans, 24% SFR (CAFL) Securities, 9% Called Residential Jumbo Loans, 2% Residential Jumbo (Sequoia) Securities, 11% MSRs & Other, 4% (2)
14 Investment Portfolio (Continued) Detailed Endnotes are included at the end of this presentation. Credit performance in our underlying portfolio remains stable and supported by significant levels of HPA, seasoning and other favorable credit characteristics During the second quarter, our investment portfolio continued to demonstrate strong performance across a range of credit metrics and we are not seeing notable deterioration in housing credit through Q2’22 We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral Given the seasoned nature of our investments (particularly our SLST and SEMT securities), many of these investments are supported by substantial home price appreciation and borrower equity in the underlying homes Overall portfolio delinquencies have remained low and we have seen continued favorable loan resolutions Improving LTVs backed by increases in HPA support low overall losses Underlying Loan Seasoning (Years) Low Delinquencies (% 90+ DQ) 12.1 10.2 10.2 10.9 13.3 2.0 2.1 1.5 1.5 1.71.7 1.7 1.9 2.1 2.4 4.9 3.7 1.9 4.2 2.6 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 SLST (RPL) SEMT (Jumbo) CAFL (SFR) BridgeSeasoned assets that have lower sensitivity to changes in interest rates Delinquencies have remained low 15.6 4.2 2.6 1.0 SLST (RPL) SEMT (Jumbo) CAFL (SFR) Bridge Declining LTVs (HPA Adjusted LTVs(1)) 50.5 49.7 48.1 46.6 44.2 53.7 53.3 48.6 47.9 46.4 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 SLST (RPL) SEMT (Jumbo) Assets are supported by elevated levels of HPA that are well in excess of modeled expectations
15 Investment Portfolio (Deep Dive into SLST 2018-2) Detailed Endnotes are included at the end of this presentation. Our SLST 2018-2 investment serves as an example of the strong and stable underlying credit performance of our RPL investments Original (July 2018) Current (July 2022) Balance ($bn) $1.45bn $0.89bn Pool Factor 1.00 0.67 Weighted-Average Seasoning (Years) 11.8 15.8 Wtd Avg HPA- Adjusted LTV(1) 62% 43% Accumulated Net Loss (% Orig UPB) 0.00% 0.23% Accumulated Net Loss ($mm) $0.0mm $3.0mm DQ: 30 / 60 / 90+ 39% / 16% / 0% 12% / 4% / 13% SLST 2018-2 Summary Our SLST 2018-2 investment, which represents ~50% of our RPL position as of Q2’22, has demonstrated continued strength as indicated by stable delinquencies and pay performance, declining LTVs and low overall net losses Cash flows have been healthy and, on average over the last 6 months, 94% of scheduled payments have been made each month, far exceeding the expectations implied by delinquency rates Stable Delinquency Levels (% 90+ DQ) HPA Adjusted LTV(1) 35.0 40.0 45.0 50.0 55.0 60.0 65.0 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 This investment has benefitted from significant home price appreciation since our initial investment Overall delinquencies in the investment have remained stable 0.0% 5.0% 10.0% 15.0% 20.0% Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Average: 12.5%
16 YoY Actual Book Value Change Detailed Endnotes are included at the end of this presentation. Potential Upside to Book Value P O T E N T I A L U P S I D E T O B O O K V A L U E At June 30, 2022, our securities portfolio had approximately $391 million of net discount to par value, which we have the potential to realize over time, offset by any net losses on the underlying loans Substantially all of the negative investment fair value changes that impacted our book value in Q2’22 were unrealized(1) Based on our current estimates, we expect low realized losses and ultimate recovery of asset valuations will help us realize potential book value upside over time While we have previously seen upside potential from call rights on outstanding RMBS, we expect call activity will remain limited in the near term given the overall interest rate and prepayment environment Looking Forward – 2022 and Beyond We See Additional Drivers of Long-Term Potential Book Value Upside in our Securities Portfolio $11.46 ($0.68) $10.78 $3.35 $8.00 $10.00 $12.00 $14.00 $16.00 Book Value 6/30/21 2021 Change in Book Value Book value 6/30/22 Potential Book Value Upside on Securities Bo ok V al ue P er S ha re (1)
17 $312 $394 $366 $505 $361 $215 $245 $367 $415 $561 $527 $639 $733 $920 $923 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 SFR Bridge Business Purpose Mortgage Banking Quarterly Highlights Composition of Quarterly Fundings(1) Detailed Endnotes are included at the end of this presentation. CoreVest continues to see record volumes even as rates have moved higher; demand remains strong across SFR and Bridge products Quarterly Funded Volume ($mm) SFR (39%) Bridge (61%) Multifamily 30% Renovate / Build to Rent 25% Fix and Flip 3% Other 3% SFR 39% CoreVest funded $923 million of loans in Q2’22 (effectively unchanged QoQ) Given rate volatility, borrowers are opting for short-term fully prepayable bridge loans relative to term loans, leading to strong volumes in Bridge (+35% QoQ), particularly in Multifamily (+31%) and Renovate / Build to Rent (+74%) SFR production decreased QoQ as we adjusted pricing to align with the moves in interest rates and credit spreads Continue to originate bridge loans which provide attractively yielding assets for retention in our investment portfolio Spread widening significantly impacted gain on sale margins and ultimately profitability Subsequent to quarter end, closed acquisition of Riverbend Lending, adding capacity, product breadth and geographic footprint to existing bridge platform
18 Business Purpose Lending Market Opportunity Durability of BPL Demand Amidst Higher Rates Estimated CoreVest Market Share Growth(3) Detailed Endnotes are included at the end of this presentation. Current dynamics in the housing market continue to support growth in Business Purpose Lending and demand for CoreVest’s diverse product suite Rental Growth vs Rising HPA(1)(2) CoreVest’s Growing Market Share in a Growing Market BPL is an attractive and growing industry with less cyclical attributes and has demonstrated continued demand amidst higher interest rates Demand for short-term bridge loans remains elevated with real estate investors favoring prepayment flexibility despite higher spreads Housing shortage combined with high housing prices and increased home mortgage rates is driving demand for more rental units National home prices have increased 30% in the last 2 years(1) Conventional mortgage rates have increased 300bps since the beginning of 2022 Multifamily starts are up 16% YoY Millennials transitioning from apartments to single-family rental homes CoreVest maintains a broad network of quality real estate investors with a strong base (>55%) of repeat borrowers 1.4% 2.3% 3.7% 2020 2021 2022 Annualized 1.0 1.1 1.1 1.2 1.2 1.3 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 2017 2018 2019 2020 2021 2022 R en t G ro w th H PA G ro w th HPA Growth Rent Growth
19 - 5 10 15 20 25 ≤ 2.75 3 3.25 3.5 3.75 4 4.25 4.5 4.75 5 > 5.00 Ou tst an din g B ala nc e ( $b n) WAC '22 '21 '20 ≤ '19 Conservatively positioned given market backdrop $1.0 billion of quarterly locks, down 62% from $2.6 billion in Q1’22(1) Moved risk quickly (including through forward loan sales), while keeping inventory intentionally light; sold $1.2 billion of whole loans Entering Q3’22, total net loan exposure of $751 million (down 44% from March 31, 2022) with an average mortgage rate over 5%(2) Profitability in the quarter was impacted by deterioration in the prices of jumbo loans, and was partially offset by active risk management and hedging Residential Mortgage Banking Quarterly Volume ($bn) Summary of Outstanding Jumbo Balances Across the Residential Market Quarterly Highlights Detailed Endnotes are included at the end of this presentation. As volatility persists, Redwood has maintained leadership as a partner of choice to both our loan sellers and buyers / investors (1) $3.9 $4.7 $2.8 $2.6 $1.0 $3.5 $3.2 $3.2 $2.0 $1.1 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 Locked Jumbo Loans Purchased Jumbo Loans The majority of jumbo inventory yet to be sold or securitized in the current market is at lower coupons, impacting executions for those seeking to securitize We believe this overhang will clear in the coming quarters Redwood has sold substantially all of its lower coupon jumbo mortgages, which should benefit our margin performance going forward ~80% of outstanding jumbo has less than 3.5% WAC compared to RWT inventory of 5% Jumbo Outstanding Balance (Split by WAC and Loan Vintage)(3) Average coupon of Redwood inventory
20 Industry Leading Distribution Platform is a Clear Differentiator Business Purpose Mortgage Banking (CAFL) Residential Mortgage Banking (Sequoia) Detailed Endnotes are included at the end of this presentation. Distribution channels were challenged during Q2’22 as investor demand slowed in light of ongoing volatility $ millions $ millions $276 $606 $304 $563 $202 $332 $276 $606 $506 $332 $563 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 Securitizations Sales $1,530 $449 $1,335 $687 $1,795 $2,361 $1,457 $1,827 $1,238 $3,325 $2,810 $2,792 $2,515 $1,238 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 Securitizations Sales Redwood Distribution Overview Industry leader for our speed, innovation, quality and ability to successfully distribute loans Various distribution channels support our execution (securitizations, whole loan sales and private structured transactions) Track record of whole loan sales to repeat investors improves liquidity and diversity of distribution outlets across market environments Recent Distribution Activity Distribution channels in Q2’22 were challenged amidst market volatility In Residential Mortgage Banking, we focused on moving risk and selling our lower coupon inventory expediently to whole loan investors In Business Purpose Mortgage Banking, we successfully executed two securitizations (one SFR and one bridge) As markets normalize, we expect securitization activity to pick up, particularly as banks seek a place to invest deposits
21 R W T H O R I Z O N S Horizons by the Numbers Detailed Endnotes are included at the end of this presentation. Invests primarily in early-stage companies that drive innovation in financial and real estate technologyTM Horizons Opportunity Thesis Enhance efficiency and scale in Redwood businesses Early-stage companies with opportunity for valuation upside Partnerships drive growth and technological enhancements Alignment with Redwood’s mission, values and goals $25mm+ of Investment Commitments 24 Total Investments 21 Portfolio Companies Q2’22 Portfolio Composition 3 New Investments in Q2’22 Blockchain 23% Lending Infrastructure 14% Alternative Financing Solutions 14% Construction Technology 12% Real Estate Marketplace 11% Real Estate Technology 6% Other 20%
22 Components of RWT’s Strategy Expanding Share of Housing Market Consumer Demand for Expanded Credit Products Technology Drives Innovation Credit Remains Solid We continue to target increased wallet share by broadening our focus in the non-government areas of housing including debt & equity Greater focus on expanded credit products and rising home prices provide avenues of growth for our Residential business Positive credit trends support strong investment portfolio fundamentals and further book value upside Ability to create and retain quality assets and control overall credit profile RWT Horizons supports development of key technologies that benefit the housing finance ecosystem Detailed Endnotes are included at the end of this presentation. Growing BPL Market Borrower demand remains strong and presents significant opportunities for full life-cycle lenders like CoreVest We believe there are a number of current dynamics in the market that support our strategy and provide tailwinds for our execution going forward
23 Financial Results
24 Detailed Endnotes are included at the end of this presentation.
25 Detailed Endnotes are included at the end of this presentation.
26 Detailed Endnotes are included at the end of this presentation.
27 (1) Detailed Endnotes are included at the end of this presentation.
28 Detailed Endnotes are included at the end of this presentation.
29 Detailed Endnotes are included at the end of this presentation. Details regarding non-GAAP measures, including Adjusted Net Contribution and Adjusted Return on Capital, are reconciled to corresponding GAAP measures on slide 35 of this presentation.
30 Detailed Endnotes are included at the end of this presentation. Details regarding non-GAAP measures, including Adjusted Net Contribution and Adjusted Return on Capital, are reconciled to corresponding GAAP measures on slide 35 of this presentation.
31 Detailed Endnotes are included at the end of this presentation.
32 Detailed Endnotes are included at the end of this presentation.
33 Detailed Endnotes are included at the end of this presentation.
34 Endnotes
35 Non-GAAP Measures Adjusted Net Contribution and Adjusted Return on Capital Adjusted Net Contribution and Adjusted Return on Capital are non-GAAP measures derived from GAAP Net Contribution and Return on Capital, respectively. Adjusted Net Contribution presents a measure of the profitability of our business operations, exclusive of non-cash amortization for amounts related to historical business acquisitions (adjusted for tax effects) for our mortgage banking operations and realized gains, investment fair value changes for our investment portfolio and investments held at our Corporate level, and interest expense on our corporate unsecured debt. Adjusted Return on Capital presents an alternative measure of profitability relative to the amount of capital utilized in the operations of our business during a period and is calculated by dividing annualized non-GAAP Adjusted Net Contribution by the average capital utilized by the business during the period. Management utilizes these measures internally as an alternative way of analyzing the performance of Redwood’s operations, as management believes it provides useful comparative results of profitability, exclusive of non-cash amortization for amounts related to historical business acquisitions, realized gains and investment fair value changes (each adjusted for tax effects). We caution that Adjusted Net Contribution and Adjusted Return on Capital should not be utilized in isolation, nor should they be considered as alternatives to GAAP Net Contribution, GAAP Return on Capital or other measurements of results of operations computed in accordance with GAAP. The following table presents a reconciliation of GAAP net contributions from our segments and on a consolidated basis, reconciled to Adjusted Contribution, and the associated GAAP return on capital and non-GAAP Adjusted Return on Capital. $ in millions
36 Slide 3 (Redwood’s Mission is to Help Make Quality Housing, Whether Rented or Owned, Accessible to all American Households) Source: Company financial data as of June 30, 2022 unless otherwise noted. Market data per Bloomberg as of June 30, 2022. Slide 4 (Redwood Operates Across Three Complementary Business Lines) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Allocated capital includes working capital and platform premium for mortgage banking operations and all investments net of associated debt for investment portfolio. Note, capital allocation excludes corporate capital and RWT Horizons. Further detail on the components of allocated capital is included on slide 28 of this presentation. 2. Annualized Addressable Market Opportunity. Residential Mortgage Banking represents Q1’22 volumes of Jumbo and Expanded Credit origination annualized (Source: Inside Mortgage Finance as of May 19, 2022). Business Purpose Mortgage Banking based on combined opportunity for SFR and Multifamily Rental. SFR based on June 2022 data and potential financing opportunity for SFR of $140 billion over 3-4 years (Source: John Burns Real Estate Consulting, LLC and internal Company estimates). Multifamily based on Freddie Mac 2022 multifamily origination estimate of $450 billion and applying the estimated percentage from latest available FNMA data for origination by non-traditional multifamily lenders. Investment Portfolio represents 2022 estimated investment opportunities across PLS Subs, CRT, HEI, MF, Bridge and CAFL SFR investments (Source: internal Company estimates). Endnotes Slide 5 (Q2’22 Financial Performance) Source: Company financial data as of June 30, 2022 unless otherwise noted. Market data per Bloomberg as of June 30, 2022. 1. 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. 2. Indicative dividend yield based on RWT closing stock price of $7.71 as of June 30, 2022. 3. Allocated capital includes working capital and platform premium for mortgage banking operations and all investments net of associated debt for investment portfolio. Capital allocation excludes corporate capital and RWT Horizons. Further detail on the components of allocated capital is included on slide 28 of this presentation. 4. Adjusted Return on Capital is a non-GAAP metric. Please refer to Non- GAAP Measures on slide 35 for more information. 5. Recourse leverage ratio is defined as recourse debt at Redwood exclusive of other liabilities, divided by tangible stockholders' equity. Recourse debt excludes $9.3 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $35 million of intangible assets. Slide 6 (Summary of Q2’22 Market Drivers and Performance) 1. Total net loan exposure represents the sum of $1.0 billion of loans held on balance sheet and $0.3 billion of loans identified for purchase (locked loans not yet purchased), less $0.5 billion of loans subject to forward sale commitments, each at June 30, 2022. 2. Based on our current estimates, we expect low realized losses and ultimate recovery of asset resolutions will help Redwood realize positive fair value changes for its investment portfolio over time. There are several factors that may impact our ability to realize all, or a portion, of these positive fair value changes which many be out of our control, including credit performance and prepayment speeds. Actual fair value changes may differ materially.
37 Endnotes Slide 7 (Q2’22 Business Performance) Source: Company financial data as of June 30, 2022. 1. Non-marginable debt and marginable debt refers to whether such debt is subject to margin calls based solely on the lender’s determination, in its discretion, of the market value of underlying collateral that is non- delinquent. 2. Available capital is an internal estimate of the portion of our cash and cash equivalent balance adjusted for internal risk capital, and capital allocated to our operating businesses to fund growth in loan purchase and origination volume. Available capital of $190 million represents our available investable capital at June 30, 2022 and is adjusted for the cash purchase price paid for Riverbend Lending at closing (subject to certain adjustments including potential earnout consideration) of approximately $44 million. 3. Does not account for potential fallout from pipeline that typically occurs through the lending process. 4. Total net loan exposure represents the sum of $1.0 billion of loans held on balance sheet and $0.3 billion of loans identified for purchase (locked loans not yet purchased), less $0.5 billion of loans subject to forward sale commitments, each at June 30, 2022. Slide 8 (Q2’22 Corporate Highlights) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Includes partial exercise of initial purchasers’ option to purchase additional notes. 2. The acquisition of Riverbend Lending closed on July 1, 2022. Slide 9 (Recent Strategic Actions Position Redwood to Deliver on Goals) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Capital deployment includes, among others, share repurchases and funding for the acquisition of Riverbend Lending. Initial cash purchase price paid for Riverbend Lending at closing (subject to certain adjustments including potential earnout consideration) was approximately $44 million. 2. Target yields on investment opportunities are based on our current market observations, estimates and assumptions, including our assumptions regarding credit losses, prepayment speeds, market interest rates, and discount rates, all of which are subject to significant uncertainty. Actual results may vary materially. Slide 10 (Strong Capital Position Focused on Value Creation) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Capital deployment includes, among others, share repurchases and funding for the acquisition of Riverbend Lending. Initial cash purchase price paid for Riverbend Lending at closing (subject to certain adjustments including potential earnout consideration) was approximately $44 million. 2. Target yields on investment opportunities are based on our current market observations, estimates and assumptions, including our assumptions regarding credit losses, prepayment speeds, market interest rates, and discount rates, all of which are subject to significant uncertainty. Actual results may vary materially. Slide 11 (Liquidity and Near-Term Corporate Debt Maturities) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Includes $139 million of Trust Preferred securities and subordinated notes and $215 million of 7.75% convertible notes due 2027. 2. Includes $7 million of residential loans and $44 million of BPL loans adjusted for assumed warehouse advance rates. Slide 12 (Attractive Funding Structure) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $9.3 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $35 million of intangible assets. 2. Represents average of mREIT Peer group which includes CIM, IVR, MFA, MITT, NRZ, NYMT, PMT, TWO as of March 31, 2022 available data. 3. $3.3 billion of secured debt includes $2.2 billion of recourse debt and $1.1 billion of non-recourse debt financing bridge loans and SLST securities. Slide 13 (Investment Portfolio) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Figures reflect our investments held in our Investment Portfolio on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP (and excludes the assets within these consolidated securitizations that appear on our balance sheet) as of period end for each of the periods presented. 2. “HEI, Multifamily, CRT, and Other” includes $145 net investment in HEI assets, $53 million of multifamily securities, $68 million of CRT, $32 million of third-party securities, and $105 million of other investments.
38 Slide 14 (Investment Portfolio Continued) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Source: Bloomberg (HPI LTV (Amort) %), Home Price Indexed Amortized Loan to Value. Slide 15 (Investment Portfolio Deep Dive into SLST 2018-2) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Source: Bloomberg (HPI LTV (Amort) %), Home Price Indexed Amortized Loan to Value. Slide 16 (We See Additional Drivers of Long-Term Potential Book Value Upside in our Securities Portfolio) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Represents potential book value per share upside on the securities portfolio due to the net discount to par value. There are several factors that may impact our ability to realize all, or a portion, of this amount which may be outside our control, including credit performance and prepayment speeds. Actual realized book value returns may differ materially. Slide 17 (Business Purpose Mortgage Banking) Source: Company financial data as of June 30, 2022. 1. Composition percentages are based on unpaid principal balance. Slide 18 (Business Purpose Lending Market Opportunity) Source: Company financial data as of June 30, 2022. 1. HPA data per BofA Global Research and Corelogic as of June 2022. 2. Rent Growth data per Beekin as of June 2022. 3. Market share based on combined opportunity for Single Family Rental (“SFR”) and Multifamily Rental. SFR based on March 2022 data and potential financing opportunity for SFR of $112 billion over 3-4 years (Source: John Burns Real Estate Consulting, LLC and internal Company estimates). Multifamily based on Freddie Mac 2022 multifamily origination estimate of $450 billion and applying the estimated percentage from latest available FNMA data for origination by non-traditional multifamily lenders. Endnotes Slide 19 (Residential Mortgage Banking) Source: Company financial data as of June 30, 2022 unless otherwise noted. 1. Does not account for potential fallout from pipeline that typically occurs through the lending process. 2. Total net loan exposure represents the sum of $1.0 billion of loans held on balance sheet and $0.3 billion of loans identified for purchase (locked loans not yet purchased), less $0.5 billion of loans subject to forward sale commitments, each at June 30, 2022. 3. Source: JP Morgan and CoreLogic. Slide 20 (Industry Leading Distribution Platform is a Clear Differentiator) Source: Company financial data as of June 30, 2022 unless otherwise noted. Slide 21 (RWT Horizons) Source: Company financial data as of June 30, 2022 unless otherwise noted. Slide 24 (Appendix: Income Statement) 1. Net interest income from “Corporate (unsecured debt)” consists primarily of interest expense on corporate unsecured debt as well as net interest income from Legacy Sequoia consolidated VIEs.
39 Endnotes Slide 25 (Appendix: Consolidated Balance Sheet) 1. The format of this consolidated balance sheet is provided to more clearly delineate between the assets and liabilities belonging to securitization entities (Consolidated VIEs) that we are required to consolidate on our balance sheet in accordance with GAAP, versus the assets that are legally ours and the liabilities of ours for which there is recourse to us (At Redwood). Each of these Consolidated VIEs is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained or acquired in these entities (generally subordinate and interest-only securities), the fair value of which is represented by our equity in each entity, as presented in this table. 2. Includes our consolidated Legacy Sequoia, Servicing Investment, and Point entities. 3. Includes certain business purpose bridge and SFR loans and associated non-recourse secured financing. 4. At March 31, 2022, and December 31, 2021, other assets at Redwood included a total of $34 million of assets held by third-party custodians and pledged as collateral to the GSEs in connection with credit risk-sharing arrangements. These pledged assets can only be used to settle obligations to the GSEs under these risk-sharing arrangements. Slide 26 (Appendix: Net Interest Income Analysis) 1. Interest Income, interest expense and average capital for investment portfolio assets presented in this table are in relation to our economic investments (including our economic investments in consolidated VIEs) and do not present amounts associated with the assets within VIEs that we consolidate under GAAP. See the Consolidated Balance Sheet on slide 25 for additional information on consolidated VIEs. 2. GAAP NII yield on capital represents our levered yield only in respect to net interest income earned on associated investments. Our economic yield (for which a component of our effective interest may be included within investment fair value changes on our income statement) in most instances varies from this GAAP NII yield. Slide 28 (Appendix: Capital Allocation Summary) 1. Amounts of assets in our investment portfolio, as presented in this table, represent our economic investments (including our economic investments in consolidated VIEs) and do not present the assets within VIEs that we consolidate under GAAP. See the Consolidated Balance Sheet on slide 25 for additional information on consolidated VIEs. 2. Non-recourse debt presented within this table excludes ABS issued from whole loan securitizations consolidated on our balance sheet, including Sequoia, CAFL SFR, Freddie Mac and Servicing Investment securitization entities, as well as ABS issued from our Point HEI securitization and non- recourse debt used to finance certain servicing investments. 3. Capital allocated to mortgage banking operations represents the working capital we have allocated to manage our loan inventory at each of our operating businesses. This amount generally includes our net capital in loans held on balance sheet (net of financing), capital to acquire loans in our pipeline, net capital utilized for hedges, and risk capital. 4. Corporate capital includes among other things, capital allocated to RWT Horizons and other strategic investments and available capital. Slide 29 (Appendix: Mortgage Banking Key Results) 1. "Mortgage banking income (loss)" presented in this table represents the sum of net interest income earned on loan inventory, income from mortgage banking activities, and other income within each of our mortgage banking operations. 2. "Acquisition amortization expenses" within this table represent purchase related stock-based consideration amortization expense (a component of General and administrative expenses) and amortization of purchase intangibles (a component of Other expenses), each on a tax-adjusted basis. 3. Adjusted Net Contribution and Adjusted Return on Capital are non-GAAP measures. Please refer to Non-GAAP Measures on slide 35 for more information. 4. Capital utilized during the quarter for business purpose mortgage banking operations includes $35 million of platform premium.
40 Endnotes Slide 30 (Appendix: Investment Portfolio Key Results) 1. Realized gains and investment fair value changes presented in this table to calculate Adjusted Net Contribution (non-GAAP), are presented on a tax-adjusted basis. 2. Adjusted Net Contribution and Adjusted Return on Capital are non-GAAP measures. Please refer to Non-GAAP Measures on slide 35 for more information. 3. Secured debt includes both recourse debt and non-recourse debt (including for bridge loans and resecuritized RPL securities), secured by our investment assets. 4. Leverage ratio is calculated as Secured debt balances divided by capital invested, as presented within this table. Slide 31 (Appendix: Investment Portfolio Detail) 1. Economic investments and associated secured debt presented in Investment Portfolio Detail table include our economic investments in consolidated VIEs and exclude the assets and debt within the VIEs that we consolidate under GAAP. See the Consolidated Balance Sheet on slide 25 for additional information on consolidated VIEs. 2. HEI investments presented in Investment Portfolio Detail and Rollforward tables include HEIs we own directly as well as our economic interests in our consolidated Point HEI entity. 3. Other third-party investments presented in the Investment Portfolio Detail table primarily includes investments in MSRs and our economic investments in consolidated Servicing Investment entities. 4. Amounts presented in Investment Portfolio Rollforward table represent our economic investments, which exclude assets of VIEs consolidated on our GAAP balance sheet and include our economic interests in those same consolidated VIEs. See the Consolidated Balance Sheet on slide 25 for additional information on consolidated VIEs. 5. Other investments presented in Investment Portfolio Rollforward table includes other investments within Organic Residential, Organic Business Purpose and Third-Party presented in the Investment Portfolio Detail table. Slide 32 (Appendix: Investment Portfolio Credit Characteristics) 1. Underlying loan performance information provided in this table is generally reported on a one-month lag. As such, the data reported in this table is from June 2022 reports, which reflect a loan performance date of May 31, 2022. 2. Sequoia Select and Sequoia Choice securities presented in this table include subordinate securities and do not include interest only or certificated servicing securities. 3. HPI updated average LTV is calculated based on the current loan balance and an updated property value amount that is formulaically adjusted from value at origination based on the FHFA home price index (HPI). 4. Delinquency percentages at underlying securitizations are calculated using unpaid principal balance ("UPB"). Aggregate delinquency amounts by security type are weighted using the market value of our investments in each securitization. Includes loans over 90 days delinquent and all loans in foreclosure (regardless of delinquency status). 5. "Investment thickness" represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. Investment thickness is not applicable to our BPL Bridge Loan investments as they are whole loans. 6. Average current debt service coverage ratio (or DSCR) with respect to a loan is the ratio by which net operating income of the underlying property exceeds its fixed debt costs. 7. Average loan to value (or LTV) (at origination) is calculated based on the original loan amount and the property value at the time the loan was originated. Slide 33 (Appendix: Recourse Debt Balances) 1. Non-Marginable debt and marginable debt refers to whether such debt is subject to margin calls based solely on the lender’s determination in its discretion of the market value of underlying collateral that is non- delinquent. 2. Average borrowing cost represents the weighted average contractual cost of recourse debt outstanding at the end of each period presented and does not include deferred issuance costs or debt discounts.