Non-agency REIT Redwood Trust’s book value per share dips slightly

Market Realist

Redwood Trust is a non-agency REIT

Redwood Trust is a non-agency mortgage REIT that focuses on mortgage banking activities and invests in mortgages and other real estate–related assets. Redwood is one of the premier jumbo mortgage originators and has been the first REIT to really stick its toe back in the private label issue market via its Sequoia securitization arm. Sequoia will issue senior securities against the pool of mortgages and Redwood typically holds for investment the junior and equity tranches. It also retains and trades mortgage servicing rights. Finally, Redwood is active on the commercial side and will issue commercial mortgage-backed securities (or MBS).

Highlights of the quarter

Redwood’s book value per share fell slightly to $14.65 from $14.69 the quarter before. Net interest income was flat, but the mortgage banking business lost money. On the conference call, the company referred to an “OMG” moment when non-agency MBS pricing was hurt because rate increases destroyed the lower coupon paper as durations extended. While the agency market suffered as well, the non-agency space, where Redwood operates, is thinner and less liquid than the agency markets, particularly TBAs.

The company announced some new initiatives on the origination side. It will offer a conforming loan product, which will make it more than simply a high-quality jumbo issuer. It’s also planning to operate in the non-qualified mortgage space, which means loans that don’t meet the criteria of qualified mortgages as defined by the Consumer Financial Protection Bureau. These are typically loans that have low loan-to-value ratios and service borrowers who may be asset-rich but are cash-poor. There are numerous programs initiated to help service this sector of the market, which is highly underserved.

Read-across to other mortgage REITs

Like most other REITs, Redwood’s book value was pretty much the same over the quarter. Unlike a lot of other REITs, Redwood’s book value increased in the second quarter as well. This is due to their more diversified income stream. Mortgage servicing rights increase in value as rates increase, which offset some of the losses on its mortgage-backed securities. Redwood’s closest comparable would be PennyMac (PMT) or some of the adjustable-rate mortgage (or ARM) REITS like Hatteras (HTS) or MFA Financial (MFA). Thirty-year fixed-rate jumbo mortgages are generally expensive, and lenders prefer to lend jumbo ARMs. Redwood is probably the least like the big agency REITs like Annaly (NLY) or American Capital Agency (AGNC).

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