GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Redwood Trust Inc. Reports Operating Results (10-Q)

November 05, 2012 | About:
10qk

10qk

18 followers
Redwood Trust Inc. (RWT) filed Quarterly Report for the period ended 2012-09-30.

Redwood Trust, Inc. has a market cap of $1.2 billion; its shares were traded at around $15.92 with a P/E ratio of 20.5 and P/S ratio of 5.6. The dividend yield of Redwood Trust, Inc. stocks is 6.6%.

Highlight of Business Operations:

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) our statements relating to our overall outlook for Redwood and its businesses in the future (including our statement that the flexibility we have built into our operating platforms should enable us to react quickly as lenders, borrowers, and regulators converge toward an accepted mortgage financing framework) and our statements regarding the impact of Federal Reserve policies and plans on the value of our portfolio and volume of future business; (ii) any statements relating to future activities we may engage in, including sales of residential loans to the Agencies and any statements relating to our future level of investment in mortgage servicing rights and the profitability of such investments, future sales of whole loans (other than through securitization transactions) and the profitability of such sales; (iii) any statements relating to our competitive position and our ability to compete in the future; (iv) any statements relating to our future investment strategy and future investment activity, including, without limitation, that over time we expect the senior securities in our investment portfolio to pay down or be sold and replaced with investments created through our mortgage banking activities and from the purchase of subordinate securities from other securitization sponsors; (v) our statement that we are on track to reach our goal of investing $400 million or more of equity capital during 2012; (vi) our statement that we expect to have 55 active loan sellers by the end of 2012 and that we expect most of the 46 potential sellers who are in various stages of review and implementation to become active sellers in the near-term; (vii) our statement that our goal over the next 12-to-18 months is to increase our non-Agency loan production to a level where we are able to securitize $300 million or more of residential loans each month and our statements relating to acquiring residential mortgage loans that we have identified for purchase, including the amount of such loans that we have identified for purchase during the third quarter of 2012, in October 2012, and at the end of October 2012; (viii) statements relating to future residential loan securitization and sale transactions, the timing of the completion of those future transactions, and the number and size of those transactions we expect to complete in 2012 and future periods, which future transactions may not be completed when planned or at all, and, more generally, statements regarding the likelihood and timing of, and our participation in, future transactions of these types and our ability to finance residential loan acquisitions through the execution of these types of transactions, and the profitability of these transactions; (ix) any statements relating to the cash flows we expect to receive from our investments; (x) our statements relating to our estimate of our investment capacity (including that we estimate our investment capacity was $141 million at September 30, 2012) and our statement that we believe this level of investment capacity should sustain our capital needs into the first quarter of 2013; (xi) any statements relating to future market and economic conditions and the future volume of transactions in those markets, including, without limitation, future conditions in the residential and commercial real estate markets and related financing markets, and the related potential opportunities for our residential and commercial businesses; (xii) our statements that we currently anticipate investing $40 to $60 million in commercial mezzanine debt in the fourth quarter, that we plan to continue to generate fees by originating senior commercial loans and selling them to third parties that intend to securitize them, that the use of a warehouse facility to finance out mezzanine investments will potentially enhance the yield on these investments and free up equity capital for reinvestment, and that we continue to focus on establishing a more permanent financing source for our existing portfolio of mezzanine investments; (xiii) our expectations regarding credit reserves, credit losses, the adequacy of credit support, and impairments and their impact on our investments (including as compared to our original expectations and credit reserve levels) and the timing of losses and impairments, and statements that the amount of credit reserves we designate are adequate or may require changes in the future; (xiv) any statements relating to our expectations regarding future interest income and net interest income, future earnings, future gains, future earnings volatility, and future trends in operating expenses and the factors that may affect those trends; and (xv) our expectations and estimates relating to tax accounting and our anticipation of additional credit losses for tax purposes in future periods (and, in particular, our statement that, for tax purposes, we expect an additional $123 million of credit losses on securities to be realized in the future).

In the third quarter of 2012, we identified loans for purchase totaling $1.1 billion, up from $691 million in the second quarter and $419 million in the third quarter of 2011. In October 2012, we identified an additional $758 million of loans for purchase. While we are not certain whether our loan volume growth trajectory can be sustained for an extended period, we stand to benefit from these increased volumes, in part due to the fact that they generally allow us to complete securitizations more quickly. Our goal is to increase our non-agency loan production over the next 12 to 18 months to a level where we are able to securitize $300 million or more each month. At September 30, 2012, residential loans purchased and held on our balance sheet for future securitizations or whole loan sales totaled $416 million, and the pipeline of loans we have identified for purchase totaled $808 million. At October 26, 2012, residential loans purchased and held on our balance sheet for future securitizations or whole loan sales totaled $253 million (excluding the loans in SEMT 2012-5), and the pipeline of loans we have identified for purchase totaled $1.2 billion.

At September 30, 2012, our residential securities portfolio totaled $1 billion and was financed with a combination of $365 million of short-term debt, $179 million of non-recourse resecuritization debt, and $517 million of equity capital. Along with firming housing prices, we believe QE3 has been a net positive for our RMBS portfolio. The Feds aggressive purchases of Agency MBS is crowding out Agency investors, some of whom are turning to private label RMBS for higher yields while pushing prices higher. As a result, our RMBS portfolio was up over 2 points in price or $45 million in the quarter. Ample market liquidity afforded us an opportunity to rebalance our seasoned RMBS portfolio and free-up capital for new investments. Sales of securities in the third quarter of 2012 totaled $62 million for gains of $14 million, as compared to sales of $49 million for gains of $7 million in the second quarter of 2012. However, as is often the case, rising prices on securities reduced our expected returns on new acquisitions, and we reduced our acquisition activity in the third quarter of 2012.

Net interest income after provision and other MVA increased $12 million from the third quarter of 2011. This increase was the result of an increase in interest income of $8 million due to higher average earning assets and a decrease in negative other MVA of $6 million, partially offset by a $3 million increase in interest expense related to short-term debt financing costs for certain of these assets. Net interest income after provision and other MVA increased $16 million from the first nine months of 2011. This increase was the result of an increase in interest income of $21 million due to higher average earning assets and a decrease in negative other MVA of $6 million, partially offset by a $1 million increase in provision for loan losses and a $10 million increase in interest expense related to short-term debt financing costs for certain of these assets.

As we have no credit reserves or allowances for tax, any future credit losses on securities or loans will have a more significant impact on our estimated tax earnings than on our GAAP earnings and may create significant taxable income volatility to the extent the level of credit losses fluctuates during reporting periods. During the three months ended September 30, 2012 and 2011, we realized $6 million and $12 million, respectively, of credit losses on securities for tax purposes that we had previously provisioned for under GAAP. During the nine months ended September 30, 2012 and 2011, we realized $21 million and $43 million, respectively, of credit losses on securities for tax purposes that we had previously provisioned for under GAAP. We anticipate that credit losses will continue to be a significant factor for determining our 2012 taxable income. Credit losses are based on our tax basis, which can differ materially from our basis for GAAP purposes. We anticipate an additional $123 million of credit losses for tax on securities, based on our projection of principal balance losses and assuming a similar tax basis as we have recently experienced, although the timing of actual losses is difficult to accurately project. At September 30, 2012, for GAAP we had a designated credit reserve of $240 million on our securities, and an allowance for loan losses of $56 million for our consolidated residential and commercial loans.

Read the The complete Report

About the author:

10qk
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.0/5 (2 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK