Redwood Trust(RWT) - 2023 Q4 - Annual Results

Fourth Quarter 2023 Financial and Operational Highlights Key Q4 2023 Financial Results and Metrics In Q4 2023, Redwood Trust reported a GAAP net income of $19 million, or $0.15 per diluted share, a significant turnaround from the prior quarter's loss. GAAP book value per share saw a slight decrease of 1.5% to $8.64. The company's non-GAAP Earnings Available for Distribution (EAD) was $7 million, or $0.05 per share, reflecting an updated calculation methodology. The recourse leverage ratio improved to 2.2x, and a regular quarterly dividend of $0.16 per share was maintained Q4 2023 Key Financial Metrics | Metric | Q4 2023 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | GAAP Book Value per Share | $8.64 | $8.77 | -1.5% | | GAAP Net Income (to common) | $19 million | ($33 million) | N/A | | GAAP EPS (diluted) | $0.15 | ($0.29) | N/A | | EAD (non-GAAP) | $7 million | $13 million | -46.2% | | EAD per Share (non-GAAP) | $0.05 | $0.10 | -50.0% | | Recourse Leverage Ratio | 2.2x | 2.3x | Improved | | Quarterly Dividend per Share | $0.16 | $0.16 | Unchanged | - The company updated its calculation of non-GAAP Earnings Available for Distribution (EAD) in the fourth quarter of 2023[5] - The economic return on book value, which includes the change in book value plus dividends, was 0.3% for the quarter[5] Operational Business Highlights Residential Consumer Mortgage Banking The Residential Consumer Mortgage Banking segment experienced a seasonal decline in jumbo loan lock volume to $1.2 billion, but increased loan purchases to $1.0 billion. Gross margins were strong at 111 basis points, exceeding the historical target range. The company significantly expanded its partnerships with depository institutions, which accounted for 56% of lock volume Jumbo Loan Activity (Q4 vs Q3 2023) | Activity | Q4 2023 | Q3 2023 | | :--- | :--- | :--- | | Locked Volume | $1.2 billion | $1.6 billion | | Purchased Volume | $1.0 billion | $0.8 billion | | Distributed Volume | $743 million | $392 million | - Gross margins of 111bps were achieved, surpassing the historical target range of 75bps to 100bps[5] - Partnerships with depository institutions grew, with lock volume from these partners increasing to 56% in Q4 from 38% in Q3[5] Residential Investor Mortgage Banking This segment funded $343 million in business purpose lending (BPL) loans, down from $411 million in the prior quarter. The decrease was driven by bridge loans, while term loan fundings grew 10% quarter-over-quarter to $117 million. The company distributed $111 million of loans through whole loan sales and joint venture participations Business Purpose Lending (BPL) Activity (Q4 vs Q3 2023) | Activity | Q4 2023 | Q3 2023 | | :--- | :--- | :--- | | Total Fundings | $343 million | $411 million | | - Bridge Fundings | $226 million | $305 million | | - Term Fundings | $117 million | $106 million | | Distributed Volume | $111 million | $61 million | Investment Portfolio The Investment Portfolio deployed approximately $42 million of capital into internally sourced investments while divesting non-strategic third-party assets. Delinquency rates for reperforming loan (RPL) and jumbo securities remained stable at 8.4% and 0.2% respectively. However, 90-day+ delinquency rates for the combined CAFL securities and bridge loan portfolio increased to 4.7% from 3.9% in the previous quarter - The company focused on deploying capital into internally sourced investments while generating capital from sales of non-strategic third-party assets[9] 90 Day+ Delinquency Rates | Portfolio | Q4 2023 | Q3 2023 | | :--- | :--- | :--- | | RPL Securities | 8.4% | Stable | | Jumbo Securities | 0.2% | Stable | | CAFL Securities & Bridge Loans | 4.7% | 3.9% | Financing Highlights Redwood strengthened its financial position by unlocking $125 million of capital through three non-recourse securitizations, which also reduced portfolio recourse leverage. The company maintained a strong liquidity position with $293 million in unrestricted cash and $2.1 billion in excess warehouse financing capacity. Additionally, it repurchased $15 million of its convertible debt at a discount to par - Completed three non-recourse securitizations, including one for Home Equity Investments (HEI), one for reperforming loans (RPL), and one for bridge loans, unlocking $125 million of capital[9] Liquidity Position at Dec 31, 2023 | Metric | Amount | | :--- | :--- | | Unrestricted Cash & Equivalents | $293 million | | Unencumbered Assets | ~$290 million | | Excess Warehouse Financing Capacity | $2.1 billion | - Repurchased $15 million of convertible debt at a discount during the quarter, contributing to a total of $193 million retired in 2023[9] Q1 2024 Highlights to Date Subsequent to quarter-end and through February 16, 2024, Redwood continued its capital markets activity by closing two jumbo securitizations totaling approximately $800 million, issuing $60 million of senior unsecured notes, and repurchasing an additional $18 million of convertible debt. The company's unrestricted cash position increased significantly to $396 million - Key activities in Q1 2024 (through Feb 16) include: - Closed two jumbo securitizations backed by ~$800 million of loans - Issued $60 million of senior unsecured notes due 2029 - Repurchased $18 million of convertible debt at a discount - Increased unrestricted cash and cash equivalents to $396 million[9] Financial Statements and Analysis Consolidated Income Statements For Q4 2023, Redwood reported net income of $21 million, a significant recovery from a $31 million loss in Q3 2023, primarily driven by positive investment fair value changes. Net interest income remained stable at $20 million. For the full year 2023, the company recorded a net loss of $2 million, a marked improvement from a $164 million net loss in 2022, aided by stronger performance in mortgage banking and HEI income Quarterly Income Statement Highlights ($ in millions) | Account | Q4 2023 | Q3 2023 | | :--- | :--- | :--- | | Net Interest Income | $20 | $20 | | Total Non-interest Income (Loss) | $44 | ($10) | | Net Income (Loss) | $21 | ($31) | | Net Income (Loss) to Common | $19 | ($33) | Annual Income Statement Highlights ($ in millions) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $93 | $155 | | Total Non-interest Income (Loss) | $73 | ($163) | | Net Loss | ($2) | ($164) | | Net Loss to Common | ($9) | ($164) | Analysis of Income Statement Changes (Q4 vs Q3 2023) The swing to profitability in Q4 from Q3 was primarily caused by positive fair value changes in the Investment Portfolio, driven by declining interest rates impacting RPL securities and spread tightening on CAFL securities. This was partially offset by lower income from both the Residential Consumer and Investor Mortgage Banking segments due to seasonality and spread normalization. The company also began separately reporting 'HEI income, net,' which increased during the quarter due to improving home price trends - Net interest income remained stable quarter-over-quarter[21] - Positive net fair value changes on the Investment Portfolio were the primary driver of the improved quarterly results, reflecting the impact of declining rates on RPL securities and spread tightening on CAFL securities[21] - Income from both mortgage banking segments decreased due to seasonality in the consumer business and spread normalization in the investor business[21] - A new line item, 'HEI income, net', was introduced. This income increased in Q4 as home price trends continued to improve[21] Consolidated Balance Sheets As of December 31, 2023, total assets increased to $14.5 billion from $13.0 billion at the end of Q3, driven by growth in residential loans and a corresponding increase in asset-backed securities issued. Total stockholders' equity rose to $1.20 billion from $1.11 billion, although GAAP book value per common share declined slightly to $8.64 due to an increase in shares outstanding Key Balance Sheet Items ($ in millions, except per share data) | Account | 12/31/2023 | 9/30/2023 | | :--- | :--- | :--- | | Total Assets | $14,504 | $13,021 | | Total Liabilities | $13,302 | $11,915 | | Stockholders' Equity | $1,203 | $1,106 | | GAAP Book Value per Common Share | $8.64 | $8.77 | Non-GAAP Disclosures Reconciliation of GAAP Net Income to Earnings Available for Distribution (EAD) The company's non-GAAP Earnings Available for Distribution (EAD) was $7 million ($0.05 per share) for Q4 2023, compared to $13 million ($0.10 per share) in Q3 2023. The decrease was primarily due to lower mortgage banking income. Redwood updated its EAD calculation in Q4, which now excludes all investment fair value changes (except for HEI income, which is no longer part of that line item) and realized gains/losses, among other adjustments EAD Reconciliation (Q4 vs Q3 2023, $ in millions) | Line Item | Q4 2023 | Q3 2023 | | :--- | :--- | :--- | | GAAP Net Income to Common | $19 | ($33) | | Adjustments: | | | | Investment fair value changes, net | ($15) | $42 | | Realized (gains)/losses, net | ($1) | $0 | | Acquisition related expenses | $3 | $3 | | EAD (non-GAAP) | $7 | $13 | - In Q4 2023, the company changed its EAD calculation. The adjustment for 'Investment fair value changes, net' no longer includes fair value changes related to HEI investments, as those are now reported in a separate 'HEI income, net' line item and are included in EAD[26]