Overview

Redwood Trust, Inc. is a specialty finance company focused on several areas of housing credit. The company operates in three main segments: Residential Consumer Banking, Residential Investor Mortgage Banking, and Investment Portfolio.

In the third quarter of 2024, Redwood continued to make progress on its strategic goals. The company increased its common dividend for the first time since 2021, reflecting growth in its operating activities. Redwood delivered a total economic return of 2.1% for the quarter, including the dividend.

The company’s mortgage banking activities played a key role in driving overall performance, with GAAP contribution from these businesses tripling versus the prior quarter. Residential Consumer Mortgage Banking income increased due to lower interest rates, strategic positioning, and spread tightening on securitizations. Residential Investor Mortgage Banking also saw improved volumes and distribution economics.

Redwood’s Investment Portfolio maintained embedded upside, with a $2.09 per share net discount to par at quarter-end. The company continued to optimize its balance sheet, unlocking incremental capital through non-marginable refinancings of seasoned bonds.

Results of Operations

Redwood’s net interest income increased $5 million and $2 million during the three and nine-month periods, respectively. This was primarily driven by higher net interest income from Residential Consumer Mortgage Banking, partially offset by lower net interest income from the Investment Portfolio and higher corporate interest expense.

Mortgage banking activities, net increased $20 million during both the three and nine-month periods, mainly due to higher Residential Consumer Mortgage Banking revenues. This segment saw a significant increase in loan purchase volumes from both banks and independent mortgage lenders, as well as improved securitization economics.

Investment fair value changes, net increased $29 million and $70 million during the three and nine-month periods, respectively. This was primarily due to strong credit performance and spread tightening across Redwood’s securities and whole loan portfolios.

Operating expenses increased $8 million and $14 million during the three and nine-month periods, mainly related to higher variable and equity compensation associated with improved operating results.

Redwood’s tax provision increased year-over-year, primarily due to higher GAAP income earned at the company’s taxable REIT subsidiary from mortgage banking activities.

Segment Performance

Residential Consumer Mortgage Banking This segment’s contribution increased $18 million and $33 million during the three and nine-month periods, respectively. The increase was driven by significantly higher loan purchase and lock volumes, as Redwood focused on building its network of bank sellers and increasing wallet share with independent mortgage lenders.

Redwood’s residential consumer mortgage loan conduit locked $2.23 billion and $6.67 billion of loans during the three and nine-month periods, respectively. The company purchased $2.02 billion and $4.93 billion of loans and distributed $39 million and $247 million through whole loan sales.

Residential Investor Mortgage Banking This segment’s contribution increased $7 million and $6 million during the three and nine-month periods, respectively. The increase was primarily attributable to consistent volumes and improved distribution economics, including from whole loan sales and sales to joint ventures.

Redwood funded $458 million and $1.24 billion of residential investor loans during the three and nine-month periods, with 65% and 60% being bridge loans, respectively. The company’s single-asset bridge loan originations reached record volumes for the second consecutive quarter.

Investment Portfolio This segment’s contribution increased $31 million and $63 million during the three and nine-month periods, respectively. The increase was primarily due to strong credit performance and spread tightening across Redwood’s securities portfolio, partially offset by negative fair value changes on the company’s bridge loan investments.

At September 30, 2024, Redwood’s Investment Portfolio had a fair value of $3.46 billion, with 77% of the investments being organically created through the company’s mortgage banking platforms.

Liquidity and Capital Resources

Redwood’s total capital was $2.04 billion at September 30, 2024, consisting of $1.22 billion of equity capital and $819 million of debt. The company had $254 million of unrestricted cash and cash equivalents at quarter-end.

Redwood uses a variety of financing sources to support its operations, including loan warehouse facilities, securities repurchase agreements, a corporate secured revolving facility, and long-term debt. At September 30, 2024, the company had $2.09 billion of secured recourse debt outstanding, of which $974 million was marginable and $1.12 billion was non-marginable.

The company’s cash flows can be volatile from quarter to quarter, depending on the timing and amount of loan originations, acquisitions, sales, and other investment activities. During the nine months ended September 30, 2024, Redwood’s net cash used in operating activities was $5.01 billion, primarily due to increased residential consumer loan purchases and residential investor loan originations. Net cash provided by investing activities was $1.54 billion, and net cash provided by financing activities was $3.43 billion.

Redwood has commitments to fund up to $429 million of additional advances on existing residential investor bridge loans. The company expects to meet its obligations coming due in less than one year from September 30, 2024, most likely from borrowings under existing, new, or amended financing arrangements, or through other sources of capital.

Analysis and Outlook

Redwood’s performance in the third quarter of 2024 demonstrates the company’s ability to capitalize on opportunities in the housing finance market. The significant increase in Residential Consumer Mortgage Banking income, driven by higher volumes and improved securitization economics, highlights Redwood’s competitive advantages in this segment.

The company’s Residential Investor Mortgage Banking platform also delivered strong results, with consistent volumes and enhanced distribution capabilities. Redwood’s focus on single-asset bridge loans and smaller-balance products has allowed it to navigate the challenges in the residential investor market.

Redwood’s Investment Portfolio continues to perform well, with the securities portfolio maintaining embedded upside through strong credit performance and a rally in rates. The company’s ability to unlock capital through non-marginable refinancings has also strengthened its balance sheet.

Looking ahead, Redwood remains focused on gaining market share in its Residential Consumer Mortgage Banking segment, deepening its distribution channels in Residential Investor Mortgage Banking, and actively managing its Investment Portfolio to capitalize on market opportunities. The company’s strategic initiatives, combined with its unique position in the housing finance value chain, position it well to deliver attractive returns to shareholders.

However, Redwood’s business is subject to various risks, including those related to debt financing, market volatility, credit performance, and regulatory changes. The company’s ability to navigate these challenges will be crucial in determining its future success.

Overall, Redwood’s third-quarter results demonstrate the company’s operational and financial strength, as it continues to execute on its strategic priorities and adapt to the evolving housing finance landscape.