What Redwood Trust (RWT) Said on Its Q3 Earnings Call

Redwood Trust NYSE: RWT reported a third-quarter GAAP net loss attributable to common stockholders of $47 million, or $0.39 per share, as the company absorbed costs tied to the resolution of legacy investments. The company also announced plans to transition from a real estate investment trust structure to a taxable C-corporation beginning with the 2027 tax year, reduce its common dividend and conduct a one-for-five reverse stock split in January.

Book value per share ended the third quarter at $6.56, down 4.9% from $6.90 at June 30. Chief Financial Officer Brooke Carillo said the decline reflected losses on legacy asset resolutions and the company’s $0.18-per-share dividend, partly offset by approximately $0.25 per share of accretion from common-stock repurchases. Redwood’s economic return on book value was negative 2.3%.

Carillo said that excluding the $0.39-per-share GAAP loss from legacy investments, including a $0.07-per-share charge related to positioning certain home equity investment assets for liquidation, book value per share would have risen modestly from the prior quarter.

C-Corporation Conversion and Dividend Reset

Chief Executive Officer Chris Abate said Redwood’s planned departure from REIT status reflects the company’s evolution toward an operating platform serving loan originators and real estate investors. The company said it works with hundreds of institutions, including 70 of the top 100 U.S. banks, through underwriting, asset management, securitization and whole-loan distribution programs.

Redwood expects the conversion to generate an initial deferred-tax-asset benefit of $85 million to $90 million in the fourth quarter of 2026. That is expected to increase GAAP book value by approximately $0.73 to $0.77 per share, or about 11% from the Sept. 30 book value, subject to final tax and accounting determinations.

The company said the change will allow it to use approximately $304 million of federal net operating loss carryforwards and more than $1 billion of state carryforwards to offset future taxable income. Carillo said that, at an illustrative $30 million of quarterly taxable income, NOL utilization could reduce quarterly taxes by roughly $0.05 to $0.06 per share over the next several years, subject to applicable limitations.

Redwood’s board plans to reset the quarterly common dividend to $0.02 per share, beginning with the fourth-quarter dividend declaration expected in December, from the current $0.18 per share. The reduction would lower annual common dividend payments by about $75 million based on the Sept. 30 share count, before considering a planned preferred-for-common exchange offer.

Abate said the exchange offer is intended to provide an alternative for common shareholders who value income. The company expects to launch the offer the following week and disclosed an anticipated $50 million size, with the potential to increase it depending on demand. The new preferred shares are expected to carry an approximately 11% coupon, though the eventual investor yield could vary through the offer’s modified Dutch auction structure.

The board also approved a one-for-five reverse stock split planned for Jan. 4, 2027. Redwood said the split will proportionately reduce shares outstanding and increase per-share amounts without changing total equity.

Mortgage Banking Results Remain Profitable

Redwood’s mortgage banking segment generated $27 million of GAAP net income during the third quarter, compared with $40 million in the second quarter, and produced a 26% annualized non-GAAP return on capital. President Dash Robinson said the company achieved its ninth consecutive quarter of mortgage banking returns above 20%, despite higher benchmark rates and wider spreads.

Across its platforms, Redwood produced $6.6 billion of loans during the quarter, down from $8 billion in the second quarter, and distributed $8.8 billion through securitizations, whole-loan sales and joint ventures. The company said it reduced net inventory, releasing liquidity for working capital and capital deployment.

• Sequoia: Lock volume declined to $5.1 billion from $5.6 billion in the second quarter, while gain-on-sale margins increased to 113 basis points from 92 basis points. Sequoia distributed more than $7.1 billion of loans, including $5.8 billion through 10 securitizations.
• Aspire: Lock volume fell to $1.1 billion from $2.1 billion as Redwood deliberately reduced acquisitions amid widening spreads and extended distribution timelines. Aspire reported a $5 million GAAP loss, compared with $7 million of income in the prior quarter.
• CoreVest: Fundings were approximately flat sequentially at $406 million. Increased bridge and residential transition loan funding offset weaker term-loan demand, while the business was approximately break-even on a GAAP basis.

Robinson said Redwood was maintaining a cautious stance early in the fourth quarter as mortgage spreads remained wide, though management said the company’s relatively light undistributed pipeline could allow it to increase activity when market conditions improve. The combined undistributed pipeline at Sequoia and Aspire stood at about $800 million, according to management.

Legacy Portfolio Wind-Down Pressures Results

Legacy investments reduced consolidated non-GAAP earnings available for distribution by $0.20 per share, compared with a $0.11-per-share reduction in the second quarter. Non-accrual loans declined to $205 million at Sept. 30 from $291 million at year-end, and Redwood said it has reduced exposure in the legacy investment segment by nearly 40% since the third quarter of 2025.

The company has shifted away from complex loan modifications and toward note sales, refinancings, foreclosures and real estate-owned sales. Robinson said Redwood was evaluating offers on close to 70% of the remaining loans in the segment and aimed to reduce the position further through the fourth quarter and into early 2027.

Management said legacy carrying and resolution costs have averaged $0.12 to $0.14 per share per quarter during 2026. Those costs are expected to trend lower as secured debt is repaid and the portfolio declines, though executives said additional transaction costs or fair-value adjustments could arise as assets are sold.

Liquidity and Capital Actions

Redwood ended September with $201 million of unrestricted cash, up from $192 million at the end of June. During the quarter, the company raised $205 million through a 7% convertible offering, retired about $125 million of 2027 convertible notes, repurchased $34 million of common stock, invested $67 million in retained investments and paid $23 million in dividends.

Recourse debt fell by approximately $310 million to $4.2 billion as loan distributions exceeded production. Recourse leverage increased to 5.2 times from 5.0 times, reflecting lower equity following repurchases, the quarterly net loss and dividends.

Redwood also announced an expansion and maturity extension of its corporate secured financing facility with CPP Investments, extending the facility to March 2030. Abate said the planned C-corporation structure could give the company greater flexibility to retain earnings, pursue lower-cost financing and allocate capital among debt repurchases, mortgage banking growth and retained investments.

About Redwood Trust (NYSE:RWT)

Redwood Trust, Inc is a specialty finance company and real estate investment trust headquartered in Mill Valley, California. Founded in 1994 and traded on the New York Stock Exchange under the symbol RWT, the company focuses on investing in and financing residential real estate credit.

Redwood Trust's activities include acquiring, originating, securitizing and managing residential mortgage loans and related assets. Its portfolio has historically included jumbo and other non-agency residential mortgages, mortgage-backed securities, mortgage servicing rights and other residential credit investments.

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