20 thoughts on “Redwood Trust To Sell New Fixed Rate Reset Preferred”

  1. Issuer:

    Redwood Trust, Inc. [“RWT”]

    Security:

    Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock

    Size:

    $50mm (2mm shares $25.00 per share liquidation preference)

    Expected Ratings:

    BBB- (Egan Jones)

    Maturity:

    Perpetual

    Price Guidance:

    10.00-10.125% (5yr resets)

    Offering Price:

    $25.00 per share

    Dividend Rate:

    (i)from the date of original issue to, but excluding April 15, 2028 (the “First Reset Date”) at a fixed rate of [ ]% per annum and (ii)from, and including, the First Reset Date for each Reset period at a rate equal to the Five-Year Treasury Rate plus a spread of [ ]% per annum

    First Reset:

    April 15, 2028

    Payment Dates:

    15th day of each January, April, July and October, beginning on 4/15/2023

    Redemption:

    At the issuer’s option, callable at Par at any time on or after 4/15/2028 or before upon the occurrence of a Change of Control, see ‘Special Optional Redemption’ in the red for details

    Conversion:

    Right upon the occurrence of a Change of Control, See ‘Conversion Rights’ in the red for details

    Use of Proceeds:

    For general purposes, which may include (i) the repurchase or repayment of all or a portion of our 4.75% convertible senior notes due 2023, (ii) the repurchase or repayment of a portion of our 5.625% convertible senior notes due 2024, our 5.75% exchangeable senior notes due 2025, or our 7.75% convertible senior notes due 2027, and/or (iii) funding of our business and investment activity, which may include funding our residential and business purpose lending mortgage banking businesses, acquiring mortgage-backed securities for our investment portfolio, funding other long-term portfolio investments, and funding strategic acquisitions and investments

    1. Do you have a link to this EarlyBird? I have a little of the 5.625% senor convertible notes which may be repurchased and I am trying to decide whether to hang onto it so it would be good to know if they plan to issue enough of the new preferred to cover the repurchase or repayment of all of the mentioned issues.

        1. Earlybird, Thanks
          Just saying, I know where some used car salespeople go when they need a second line of work.

  2. Private, it doesn’t feel the same as the last time in the great recession. So I don’t think we will see the loses like then. But I don’t think I would trust the preferred to stay pinned to par. The links I gave allow people to jump around and see the asking prices for rent in the North Bay. The construction loans for these large rental properties have to be rolled over into mortgage loans once they are finished. The long term loans pay off the short term loans.These projects take several years to develop and plan at the time they had to look good on paper for the developer to get funding.
    I wish I could show people the amount of multifamily rentals all coming to market at the same time.

  3. Let’s back up a step and recall how Mortgage REITS (MREITS) offer outsized dividend yields. The fundamental business model is to borrow at short term interest rates and lend at long term rates. And leverage this up by 5X to 10X. How else could ANY MREIT give investors say 8% yields when long term mortgages were going out the door at say 2.75%? With a broad brush, ANY investment vehicle that used this leverage mechanism is likely to blow up when the yield curve inverts, like it is right now. When I say any, you have to include traditional banks in this discussion. Same business model, borrow short-lend long, but hopefully with less leverage than MREITS.

    MREITS use different kinds of hedges to hopefully navigate around this and not blow up. Many did blow up in the 2007-8 GFC, but that was more due to credit quality/defaults, as opposed to inverted yield curves. I maintain that we all know that something(s) is going to blow up with the yield curve inversion. Many banks will be technically insolvent when you mark their loan books to market. If they are too big to fail, then all is good. If you are smaller bank XYZ in Podunk, who knows if they get bailed out or not. A bailout can be as simple as the Fed giving them access to the “discount window.” Or it can be the Farm Loan Bank Board. MREITS do NOT have these funding sources as options, so they are in a more precarious situation.

    My personal best guess is that some MREITS do not survive this yield curve inversion. Since I do not follow them closely, I cannot guess which ones are the likely candidates. Redwood DID survive the 2008 GFC, so kudos to their management. They used to write non-conforming (high dollar) mortgages to high credit score individuals. IIRC, their default rate was much lower than most of the other mortgage paper back then. Don’t know if they still have the same business model or not.

    I am in the same choir as Azure. Bottom line to me is that you should understand how any MREIT will survive this yield curve inversion cycle. What hedges do they have in place and how do they cushion the loss of book value? And understand they are NOT systemically important, hence they are NOT too big to fail.

    Redwood offering a preferred today is NOT a good look IMO. They did not traditionally use preferreds as a funding source, so their timing is very suspicious. Kind of like “we better find some suckers to fund us since our other sources of funds at low rates have dried up.”

    1. Marin County where they are at is one of the highest household wealth areas in California ( used to be #1) lot of people in the finance business in SF and Hollywood. Industrial Light and Magic is here. I can see High net worth individuals investing in RWT. If returns fall I can see withdrawals increasing.

    2. Tex, put me in line behind Azure and you. Mreits have long been out of my comfort zone.

  4. From Motley Fool: “In the third quarter of 2023, Redwood reported a loss of $0.44 per share under generally accepted accounting principles (GAAP), which was driven primarily by mark-to-market losses on its investment portfolio. These mark-to-market losses were unrealized, which means if the market bounces back, so should Redwood’s book value per share. Earnings available for distribution came in at $0.16 per share, which didn’t cover the $0.23 per-share dividend.

    A housing recession will mean problems for Redwood
    Redwood Trust’s earnings going forward will be a function of the housing market and the mortgage-backed securities market. There has been a lot of talk in the business press about the U.S. entering a housing recession. Homebuilding is in decline, mortgage banking is moribund, and affordability has fallen. All these things will negatively affect Redwood’s business lines.

    Ultimately most of Redwood’s loans are not issued to individual homeowners; they are to real estate investors. Rising rates will eat into the expected cash flows of these real estate investors, which will make default more of a risk if rents don’t rise as expected. In addition, hedging these loans against interest rate risk is much harder than a typical mortgage. This makes the portfolio harder to manage.

    Redwood has a lower dividend yield than most of the mortgage REIT space at 12.4%. The company does have a more diversified income stream than most mortgage REITs, however, the entire mortgage space is suffering including mortgage-backed security investors and originators. The risk that this will continue well into 2023 is the main reason why Redwood’s dividend yield is so high.”
    Let me encourage each and every one of you to do your own deep due diligence and post your findings to help others. Wishing you all profitable investing, I am Azure

    1. AB,
      You dug a little deeper than I did and the author on SA from Wisconsin who said he lived in Calif. for a while and had done some analyst work.
      I commented here I think I am waiting for the other shoe to drop on the real estate market and its like watching a slow motion train wreck.
      I contemplated posting links here to all the Google maps of unfinished apartments just in one city here. Short story, my observation is 5 or 6 with 200 plus apts are all going to be finished at the same time and competing for renters. Add in the other towns here and the next 2 counties around us and that is a lot of available rentals. Until they get rented the cash flow is going to be tight.
      My 2 cents is RWT is going to test its 52 week lows and the preferred will probably drift down.
      It can always be different, but being associated with building business and lived here 44yrs.

      1. I obviously don’t know what you looked or what information you found, but IMHO, the rental market in Marin and Sonoma counties is white hot. LOTs of housing was lost to fires in the past few years. The rich could rebuild (and move out while they did so), but working class people have really struggled. I know several families who are living on borrowed boats (in the lakes – so NOT yachts), in travel trailers and campers, and we were up talking to some migrants last month who are literally living in caves and tents. So, I doubt they will struggle to fill apartments if they are reasonably priced.
        Not sure how it will play out, but the economy in that area won’t keep going if they don’t fix their housing shortage.

        That said, I won’t be buying into this REIT…

        1. Private, usually housing prices for both buyers/sellers and renters are determined by supply and demand. Layoffs and firings in the San Francisco area have continued to accelerate and I’m certain many will leave for greener pastures, lower taxes and a more business friendly environment. You may be interested in reading this article https://wolfstreet.com/2022/12/19/san-francisco-silicon-valley-housing-markets-puke-huge-price-drops-as-startups-crypto-tech-social-media-make-a-total-mess/
          Wishing you profitable investing, Azure

          1. Thanks AB, I had seen the data, and I live it every day (I live in silicon valley).

            Lots of techies and retirees are moving out, but that is not who I was talking about. The dirty little secret of the greater bay area is that is a fairly big “undeclass” who don’t benefit directly from the big money in SF, SV, or the North Bay/wine country.

            I am talking about are the “working class” people like restaurant staff, auto mechanics, store clerks, and the “working poor” like the ag workers who work the fields and vineyards, cleaners, gardeners – all the “behind the scenes” people that make the “lifestyles of the rich and famous” possible. They are the ones who are desperately looking for places to rent – because they have few long-term options. They will likely never be able to afford to buy a house anywhere in this region of California. For many of the poor, the only way they can even get an apartment is to have several families go together (and hope the landlord doesn’t find out).

            My point was only that with all the housing loss in that region from the fires, rentals should be snapped up quickly. Some of the municipalities (and non-profits, and even some of the employers) are looking for ways to subsidize or otherwise adjust rents up there to keep from losing these people. Interesting little “economic microclimate”.

            Anyway, just one of my pet projects.

            1. Private,
              Most or all of first generation immigrants are hardworking and they succeed.
              They do buy homes. I have been to many Quinceanera’s , birthday parties and retirement parties with people who worked with my wife at COSTCO.
              Others started their own businesses landscaping, stereo install, running a taxi before there was UBER. My shop foreman just bought his first house last year and has his son living there and helping pay the mortgage.
              Its not impossible, hard work, family sharing and helping and a little luck.
              The shop foreman also works weekend in the vineyards doing the pruning and other vineyard work. Working 7 days a week they want it more than some people I know.

      2. Charles, where is “one city here,” if you care to say? I see the same thing in Seattle, although I made that observation 10 years ago and was dead wrong. Seattle does have a lot of in-migration, so maybe what I perceive to be oversupply will be sucked up.

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