Filed
Pursuant to Rule 433
Registration
Statement No. 333-147604
Issuer
Free Writing Prospectus
Dated
January 14, 2009
Relating
to Prospectus Dated November 23, 2007
and
the Preliminary Prospectus Supplement
Dated
January 14, 2009
Redwood Trust, Inc. has filed a registration
statement (including prospectus) with the SEC for the offering to which this
communication relates. Before you invest, you should read the prospectus in that
registration statement, the preliminary prospectus supplement and other
documents the issuer has filed
with the SEC for more complete information about the issuer and the offering.
You may get these documents for free by visiting EDGAR on the SEC Web site at
www.sec.gov. Alternatively, the issuer, any underwriter, or any
dealer participating in the
offerings will arrange to send you the relevant prospectus if you request it by
contacting J.P. Morgan Securities Inc., Chase Distribution & Support
Service, Attn: Charles Buckheit/Bob Foley, 4 Chase Metrotech Center, CS Level,
Brooklyn, NY 11245 or by calling
1-866-430-0686.
|
FOR IMMEDIATE RELEASE
|
CONTACTS:
Martin S. Hughes
|
|
Redwood
Trust, Inc.
|
(415)
389-7979
|
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Wednesday,
January 14, 2009
|
|
|
Mike
McMahon
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|
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(415)
384-3805
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Redwood
Trust Provides Preliminary Information for Fourth Quarter 2008 and
Announces
Proposed Common Stock Offering
Mill Valley, CA – January 14, 2009 - Redwood Trust, Inc.
(NYSE: RWT) today announced the following preliminary information regarding
developments in its business and certain estimates for the fourth quarter of
2008. This information is set forth in a prospectus supplement we filed today
with the Securities and Exchange Commission in connection with our proposed
underwritten public offering of 17 million shares of our common stock, plus up
to an additional 2.55 million shares to cover overallotment. Net
proceeds from the offering will be used to acquire residential and commercial
real estate loans and mortgage securities and for other general corporate
purposes. The sole bookrunning manager for the offering is J.P. Morgan
Securities Inc.
During
the fourth quarter of 2008, prices for residential and commercial
mortgage-backed securities remained under pressure due to a combination of
deleveraging, the declining economy, continuing house price depreciation, lack
of credit, a limited number of buyers, and the Department of the Treasury’s
announcement in early November that it no longer intended to use TARP funds to
acquire non-agency mortgage securities. As a result, prices became increasingly
attractive and Redwood re-entered the secondary mortgage market in the fourth
quarter and invested $46 million in triple-A rated residential mortgage-backed
securities at a weighted average price of 64% of the face amount of the
securities and with average credit support of 12 percentage points. In
addition, we invested $4 million in credit enhancement residential
mortgage-backed securities at a weighted average price of 2% of the face amount
of the securities. During the first quarter of 2009, through January 9, 2009, we
invested $17 million primarily in prime triple-A rated residential
mortgage-backed securities at a weighted average price of 65% of face amount of
the securities and with average credit support of 12 percentage
points.
We
believe that many market participants will continue to liquidate their holdings
of mortgage-related securities due to liquidity and capital needs. We also
believe that the trend of ratings downgrades of those securities is likely to
continue and contribute to selling pressure. In this environment, we expect to
have opportunities to make additional acquisitions of mortgage-related
securities at prices that will provide us with attractive long-term
returns.
“Our
capital plan is flexible,” said Marty Hughes, Redwood’s President and Chief
Financial Officer, “and can be modified to enable us to take advantage of
investment opportunities that will contribute to the long-term growth of our
business. We have been engaged in a continuing analysis of funding alternatives,
and have concluded that a common stock offering would provide us with the best
source of additional capital to take advantage of the asset acquisition
opportunities available to us.”
We
currently estimate that our book value at December 31, 2008, computed in
accordance with generally accepted accounting principles (GAAP), will be $302
million, or $9.02 per share, a decline of $110 million, or $3.38 per share, from
September 30, 2008. We currently expect to record an impairment
charge on our income statement for the fourth quarter of 2008 in a comparable
amount.
1
We
currently estimate that our non-GAAP economic value at December 31, 2008 will be
$371 million, or $11.10 per share, a decline of $67 million, or $2.08 per share,
from our estimate of economic value at September 30, 2008. In
contrast to our GAAP book value which reflects certain of our investments and
long-term liabilities at cost, our non-GAAP economic value reflects at fair
value all of our investments using bid-side marks, and our long-term liabilities
using offered-side marks. The valuation of our investments in this
manner approximates the liquidation value of our assets and does not, in our
opinion, reflect the price, or offered-side asset values, we would have to pay
to replace our assets. Further information concerning the calculation
of estimated non-GAAP economic value, as well as a reconciliation of our
estimated non-GAAP economic value to our estimated GAAP book value, is set forth
later in this press release.
The
reductions in our estimated GAAP book value and estimated non-GAAP economic
value reflect a decline in the fair value of our assets primarily as a result of
an increase in the discount rate we used in valuing those assets, reflecting
what we believe to be a continuing reduction in market liquidity for
mortgage-related securities. We made no material changes in the
underlying cash flow assumptions in computing the fair value of assets we held
at December 31, 2008 and also held at September 30, 2008.
We
currently estimate that we had unrestricted cash of $126 million at December 31,
2008, a reduction of $51 million from September 30, 2008. Our cash
position was positively impacted by an estimated $27 million of cash from
operations, including an estimated $40 million in principal and interest from
investments and $1 million from management fees, offset by an estimated $12
million in operating expenses and $2 million in interest payments. During the
quarter, our sources of cash also included $1 million from asset sales, $2
million from the sale of shares pursuant to our dividend reinvestment plan, and
$2 million of other net changes in working capital (including a tax refund
offset by other items). Our uses of cash also included the payment of $26
million in dividends, the funding of $50 million of asset acquisitions, and the
repayment of $7 million of short-term debt. We had no short-term debt
outstanding at December 31, 2008. A table of estimated sources and uses of cash
is provided below.
The
estimate of our book value per share, our non-GAAP estimate of economic value
per share, our estimate of cash sources and uses and our estimate of
unrestricted cash are subject to revision, which could be material, as we
complete the preparation of our 2008 year-end financial statements
(including all required disclosures) and our 2008 year-end audit.
As we
previously announced on November 11, 2008, we declared a fourth quarter 2008
regular dividend for common shareholders of $0.75 per share, payable on January
21, 2009 to shareholders of record on December 31, 2008. We also announced at
that time that we would not pay a special dividend for 2008, and that it was our
intention to reduce our 2009 regular dividend to a rate of $0.25 per share per
quarter.
CAUTIONARY
STATEMENT: This press release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve numerous risks and
uncertainties. Redwood’s actual results may differ from our expectations,
estimates, and projections and, consequently, you should not rely on these
forward-looking statements as predictions of future events. Forward-looking
statements are not historical in nature and can be identified by words such as
“anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,”
“seek,” “plan,” and similar expressions or their negative forms, or by
references to strategy, plans, or intentions. Statements regarding the following
subjects, among others, are forward-looking by their nature:
|
|
–
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Our proposed offering of our
common stock and
the anticipated uses of the net
proceeds.
|
|
|
–
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Our estimate of book value per
share as of December 31, 2008, and the components thereof.
|
|
|
–
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Our non-GAAP estimate of
economic value per share as of December 31, 2008, and the components
thereof.
|
|
|
–
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Our estimate of unrestricted
cash at December
31, 2008.
|
|
|
–
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Our estimate of sources and
uses of cash during the fourth quarter of 2008.
|
|
|
–
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Our announcement of
Redwood’s intention to reduce
the 2009 regular dividend to a
rate of $0.25 per share per quarter.
|
These
forward-looking statements are subject to risks and uncertainties, including,
among other things, those described in Redwood’s Prospectus Supplement dated
January 14, 2009, the accompanying Prospectus dated November 23, 2007, and the
documents incorporated in the Prospectus Supplement and the Prospectus by
reference. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
Important factors, among others, that may affect our actual results include:
changes in interest rates; changes in mortgage prepayment rates; the timing of
credit losses within our portfolio; our exposure to adjustable-rate and negative
amortization mortgage loans; the state of the credit markets and other general
economic conditions, particularly as they affect the price of earning assets and
the credit status of borrowers; the concentration of the credit risks we are
exposed to; the ability of counterparties to satisfy their obligations to us;
legislative and regulatory actions affecting the mortgage industry or our
business; the availability of high quality assets for purchase at attractive
prices; declines in home prices and commercial real estate prices; increases in
mortgage payment delinquencies; changes in the level of liquidity in the capital
markets which may adversely affect our ability to finance our real estate asset
portfolio; changes in liquidity in the market for real estate securities, the
re-pricing of credit risk in the capital markets, inaccurate ratings of
securities by rating agencies, rating agency downgrades of securities, and
increases in the supply of real estate securities available-for-sale, each of
which may adversely affect the values of securities we own; the extent of
changes in the values of securities we own and the impact of adjustments
reflecting those changes on our income statement and balance sheet, including
our stockholders’ equity; our ability to maintain the positive stockholders’
equity necessary to enable us to pay the dividends required to maintain our
status as a real estate investment trust for tax purposes; changes in our
investment, financing, and hedging strategies and the new risks that those
changes may expose us to; changes in the competitive landscape within our
industry, including changes that may affect our ability to retain or attract
personnel; our failure to manage various operational risks associated with our
business; our failure to maintain appropriate internal controls over financial
reporting; our failure to properly administer and manage our securitization
entities; risks we may be exposed to if we expand our business activities, such
as risks relating to significantly increasing our direct holdings of loans;
limitations imposed on our business due to our REIT status and our status as
exempt from registration under the Investment Company Act of 1940; our ability
to successfully deploy the proceeds from this offering and raise
additional capital to fund our investing activity; and other factors not
presently identified. In addition, the estimate of our book value per
share, our non-GAAP estimate of economic value per share, our estimate of cash
sources and uses and our estimate of unrestricted cash are subject to revision,
which could be material, as we complete the preparation of our 2008 year-end
financial statements (including all required disclosures) and as we complete our
2008 year-end audit.
2
This
press release does not constitute an offer to sell or a solicitation of an offer
to buy any securities, nor shall there be any sale of these securities in any
state or jurisdiction in which such an offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state or jurisdiction.
3
The following supplemental non-GAAP
balance sheet presents our estimated assets and liabilities at December 31, 2008
as calculated under GAAP, and as adjusted to reflect our estimate of economic
value. We show our investments in the Opportunity Fund (the Fund) and
the Sequoia and Acacia securitization entities as separate line items, similar
to the equity method of accounting, reflecting the reality that the underlying
assets and liabilities owned by these entities are legally not ours; we own only
the securities or interests that we have acquired from these
entities. Data in the table below, except for our estimates of
economic value, are derived from the estimated consolidating balance sheet set
forth below. As noted earlier in this press release, our estimate of
economic value is calculated using bid-side asset marks as required to determine
fair value under GAAP. This method of calculating economic value more
closely relates to liquidation value and does not represent the higher amount we
would have to pay at the offered-side price to replace our existing
assets.
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Components
of Estimated Book Value (a)
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|||||||||||||
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December
31, 2008
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|||||||||||||
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(Unaudited,
$ in millions, except per share data)
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|||||||||||||
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Estimated
GAAP
Book
Value
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Adj.
|
Estimate
of
Economic
Value
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|||||||||||
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Real estate
securities at Redwood
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|||||||||||||
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Residential
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$ | 145 | $ | 145 | |||||||||
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Commercial
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42 | 42 | |||||||||||
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CDO
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4 | 4 | |||||||||||
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Total real
estate securities at Redwood
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191 | 191 | |||||||||||
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Cash and cash
equivalents
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126 | 126 | |||||||||||
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Investments
in the Fund
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28 | 28 | |||||||||||
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Investments
in Sequoia
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97 | (32 | ) |
(b)
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65 | ||||||||
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Investments
in Acacia
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16 | (7 | ) |
(c)
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9 | ||||||||
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Short-term
debt - Redwood
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- | - | |||||||||||
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Long-term
debt - Redwood
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(150 | ) | 108 |
(d)
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(42 | ) | |||||||
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Other
assets/liabilities, net (e)
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(6 | ) | (6 | ) | |||||||||
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Stockholders'
equity
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$ | 302 | $ | 371 | |||||||||
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Book
value per share
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$ | 9.02 | $ | 11.10 | |||||||||
(a)
In reviewing the components of estimated book value and economic value, there
are a number of important factors and limitations to consider. The estimates of
book value and economic value are calculated as of a particular point in time
based on our existing assets and liabilities and do not incorporate other
factors that may have a significant impact on that value, most notably the
impact of future business activities. As a result, the estimated values do not
necessarily represent an estimate of our net realizable value, liquidation
value, or our market value as a whole. Amounts we ultimately realize from the
disposition of assets or settlement of liabilities may vary significantly from
the estimated values. Because temporary changes in market conditions can
substantially affect value, we do not believe that short-term fluctuations in
the value of our assets and liabilities are necessarily representative of the
effectiveness of our investment strategy or the long-term underlying value of
our business. When quoted market prices or observable market data are not
available to estimate fair value, we rely on unobservable inputs, which are
generally more subjective and involve a high degree of management judgment and
assumptions. These assumptions may have a significant effect on our estimates of
value, and the use of different assumptions as well as changes in market
conditions could have a material effect on our results of operations or
financial condition.
(b)
Our Sequoia investments consist of credit enhancement securities, investment
grade securities, and interest-only securities we acquired from the Sequoia
entities. We calculated the $65 million estimate of economic value for these
securities using the same valuation process that we followed to fair value our
other real estate securities. In contrast, the $97 million of GAAP carrying
value of these investments represents the difference between residential real
estate loans owned by the Sequoia entities and the asset-backed securities (ABS)
issued by these entities to third-party investors. For GAAP purposes, we account
for these loans and ABS issued at cost, not at fair value.
4
(c)
Our Acacia investments consist of ABS issued that we acquired from the Acacia
entities and equity interests in those entities. The $9 million estimate of
economic value of our investment interests in Acacia entities represents the
value of ABS acquired using bid-side marks from third parties, plus the net
present value of projected cash flows from Acacia management fees discounted at
45%. We valued our equity interests at zero. In contrast, the $16
million of GAAP value of these investments represents the difference between
securities owned by the Acacia entities and the asset-backed securities issued
by these entities to third-party investors. We account for these securities and
ABS issued at fair value.
(d)
We issued $150 million of 30-year long-term debt at Redwood at an interest rate
of LIBOR plus 225 basis points. Under GAAP, these notes are carried at cost.
Economic value is difficult to estimate with precision as the market for the
notes is currently inactive. We estimated the $42 million economic value
using the same valuation process used to fair value our other financial assets
and liabilities. Estimated economic value is $108 million lower than our
estimated GAAP carrying value because of changes in projected interest rates,
and, given the significant overall contraction in credit availability and
re-pricing of credit risk, if we issued this long-term debt at Redwood at
December 31, 2008, investors would have required a substantially higher interest
rate.
(e)
Other assets/liabilities, net are comprised of real estate loans of $3 million,
$4 million of deferred taxes, $6 million of accrued interest receivable, and
other assets of $27 million, less dividends payable of $25 million, and
accrued interest and other liabilities of $21 million.
The table
below provides a breakout of our estimated GAAP fair value of our unaudited real
estate securities portfolio by type of security and vintage at December 31,
2008.
|
Real
Estate Securities at Redwood and Market Value as a % of
Principal
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|||||||||||||||||||||||||||||||||
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December
31, 2008
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|||||||||||||||||||||||||||||||||
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(Unaudited,
$ in millions)
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|||||||||||||||||||||||||||||||||
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<=2004
|
2005
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2006-2008
|
Total
|
||||||||||||||||||||||||||||||
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Market
Value
|
%
|
Market
Value
|
%
|
Market
Value
|
%
|
Market
Value
|
%
|
||||||||||||||||||||||||||
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Residential
|
|||||||||||||||||||||||||||||||||
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Prime
|
|||||||||||||||||||||||||||||||||
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IGS
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$ | 15 | 25 | % | $ | 41 | 47 | % | $ | 17 | 38 | % | $ | 73 | 37 | % | |||||||||||||||||
|
CES
|
18 | 10 | % | 2 | 3 | % | 2 | 2 | % | 22 | 6 | % | |||||||||||||||||||||
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Non-prime
|
|||||||||||||||||||||||||||||||||
|
IGS
|
1 | 32 | % | 25 | 41 | % | 16 | 39 | % | 42 | 40 | % | |||||||||||||||||||||
|
CES
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1 | 2 | % | 1 | 4 | % | 6 | 2 | % | 8 | 2 | % | |||||||||||||||||||||
|
Total
Residential
|
35 | 13 | % | 69 | 28 | % | $ | 41 | 7 | % | 145 | 13 | % | ||||||||||||||||||||
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Commercial
CES
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10 | 21 | % | 9 | 7 | % | 23 | 7 | % | 42 | 8 | % | |||||||||||||||||||||
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CDO
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- | - | 4 | 9 | % | - | - | 4 | 9 | % | |||||||||||||||||||||||
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Total
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$ | 45 | 14 | % | $ | 82 | 21 | % | $ | 64 | 7 | % | 191 | 12 | % | ||||||||||||||||||
5
The following table shows
a breakout of
the
consolidating components of our estimate of our unaudited consolidated
balance sheet at December 31, 2008.
|
Estimated
Consolidating Balance Sheet
|
|||||||||||||||||||||||||||
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December
31, 2008
|
|||||||||||||||||||||||||||
|
(Unaudited,
$ in millions)
|
|||||||||||||||||||||||||||
|
Redwood
|
Opportunity
Fund
|
Sequoia
|
Acacia
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Intercompany
|
Redwood
Consolidated
|
||||||||||||||||||||||
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Real estate
loans
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$ | 3 | $ | - | $ | 4,644 | $ | 12 | $ | - | $ | 4,659 | |||||||||||||||
|
Real estate
securities
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191 | 48 | - | 408 | (74 | ) | 573 | ||||||||||||||||||||
|
Other
investments
|
- | - | - | 78 | - | 78 | |||||||||||||||||||||
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Cash and cash
equivalents
|
126 | - | - | - | - | 126 | |||||||||||||||||||||
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Total earning
assets
|
320 | 48 | 4,644 | 498 | (74 | ) | 5,436 | ||||||||||||||||||||
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Investment in
the Opportunity Fund
|
28 | - | - | - | (28 | ) | - | ||||||||||||||||||||
|
Investment in
Sequoia
|
97 | - | - | - | (97 | ) | - | ||||||||||||||||||||
|
Investment in
Acacia
|
16 | - | - | - | (16 | ) | - | ||||||||||||||||||||
|
Other
assets
|
37 | 5 | 44 | 60 | - | 146 | |||||||||||||||||||||
|
Total
assets
|
$ | 498 | $ | 53 | $ | 4,688 | $ | 558 | $ | (215 | ) | $ | 5,582 | ||||||||||||||
|
Short-term
debt - Redwood
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
|
Other
liabilities
|
46 | 2 | 9 | 195 | - | 252 | |||||||||||||||||||||
|
Asset-backed
securities issued - Sequoia
|
- | - | 4,582 | - | (74 | ) | 4,508 | ||||||||||||||||||||
|
Asset-backed
securities issued - Acacia
|
- | - | - | 347 | - | 347 | |||||||||||||||||||||
|
Long-term debt
- Redwood
|
150 | - | - | - | - | 150 | |||||||||||||||||||||
|
Total
liabilities
|
196 | 2 | 4,591 | 542 | (74 | ) | 5,257 | ||||||||||||||||||||
|
Minority
interest
|
- | 23 | - | - | - | 23 | |||||||||||||||||||||
|
Total
stockholders’ equity
|
302 | 28 | 97 | 16 | (141 | ) | 302 | ||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 498 | $ | 53 | $ | 4,688 | $ | 558 | $ | (215 | ) | $ | 5,582 | ||||||||||||||
The table
below shows management’s estimated sources and uses of our cash during the
fourth quarter of 2008. This table excludes the gross cash flows generated by
the Redwood Opportunity Fund, and our Sequoia and Acacia securitization
entities, but does include the cash flows paid to Redwood as a result of our
investments in those entities.
|
Redwood
|
||||
|
Estimated
Sources and Uses of Cash
|
||||
|
Three
Months Ended December 31, 2008
|
||||
|
(Unaudited,
$ in millions)
|
||||
|
Sources:
|
||||
|
Cash from
investments
|
$ | 40 | ||
|
Proceeds from
asset sales
|
1 | |||
|
Sale of
shares
|
2 | |||
|
Asset
management fees
|
1 | |||
|
Changes in
working capital
|
2 | |||
|
Total
Sources
|
46 | |||
|
Uses:
|
||||
|
Asset
acquisitions
|
(50 | ) | ||
|
Reduction in
short term borrowings
|
(7 | ) | ||
|
Dividends
|
(26 | ) | ||
|
Operating
expenses
|
(12 | ) | ||
|
Interest
expense
|
(2 | ) | ||
|
Total
Uses
|
(97 | ) | ||
|
Net
Uses of Cash
|
$ | (51 | ) | |
|
Beginning
Cash Balance at 09/30/08
|
177 | |||
|
Ending
Cash Balance at 12/31/08
|
$ | 126 | ||
6