Patrick Harden

Redwood Trust: From $30 to $4 by Year-End?

This article is an excellent example of how a little knowledge is a dangerous thing.

FACT: Redwood Trust marks its CDO assets and liabilities in accordance with FAS 159. This is not questionable accounting, simply the prescribed GAAP accounting for such securities. This is not to say that I agree with the GAAP treatment, but marking to market both the assets and the paired liabilities, RWT presents a more accurate picture of its economic financial state.

FACT: Redwood Trust consistently covers its dividend with ordinary taxable income. Combined with the spillover from 2007 and the taxable income earned in the first quarter of 2008, Redwood Trust has already covered substantially all of its 2008 dividends with ordinary taxable income.

FACT: Redwood Trust holds most of its portfolio to maturity. The Company is not dependent on asset sales to generate cash flows, but rather depends on collection of interest payments and release of overcollateralization from its older vintage securitizations to support operations.

Will Redwood Trust perform as well as it did from 2003-2006? No, of course not. However, the Company is well-positioned to ride out the storm and absorb increased credit losses through the remainder of 2008 and 2009. With the dividend of $3.00/share remaining intact throughout the period, a reasonable yield of 10% supports a $30 stock price.

Short Redwood at risk of your own peril.