Ejection from the S&P600 Small Cap index effective July 8 has created an opportunity to buy Redwood Trust (RWT) at a deeply discounted valuation when its operating business has never been more attractive:
Good question. If you look at a long time frame then share count has risen, but it has fallen in the past 3 years due to the positive transformation in the business model.
Until 2023 RWT conducted business off its own balance sheet. Earnings were driven primarily by loan spreads and credit performance. In order to raise capital for growth RWT issued new equity when market conditions were favorable. RWT also pledged junior interests for additional financing, and then suffered significant losses in 2020 due to a margin squeeze.
Transformation to a platform business model with third-party capital means that RWT can grow the scale of its business, and volume related earnings, without committing more of its own equity. Shares outstanding of 126mm at 2Q26 are down from 131mm at 4Q23.
RWT and mortgage REITs have been weak due to rising US interest rates and a weak housing market. I think RWT's Jumbo segment (Sequoia) should be performing well because the K-shaped economy means that higher-end housing and higher-end consumers are doing well. RWT's BPL segment (Corevest) has higher exposure to rates, home prices, and middle class consumer finances.
Great article, any concerns about the rising share count?
Thanks!
Good question. If you look at a long time frame then share count has risen, but it has fallen in the past 3 years due to the positive transformation in the business model.
Until 2023 RWT conducted business off its own balance sheet. Earnings were driven primarily by loan spreads and credit performance. In order to raise capital for growth RWT issued new equity when market conditions were favorable. RWT also pledged junior interests for additional financing, and then suffered significant losses in 2020 due to a margin squeeze.
Transformation to a platform business model with third-party capital means that RWT can grow the scale of its business, and volume related earnings, without committing more of its own equity. Shares outstanding of 126mm at 2Q26 are down from 131mm at 4Q23.
RWT and mortgage REITs have been weak due to rising US interest rates and a weak housing market. I think RWT's Jumbo segment (Sequoia) should be performing well because the K-shaped economy means that higher-end housing and higher-end consumers are doing well. RWT's BPL segment (Corevest) has higher exposure to rates, home prices, and middle class consumer finances.