Craigla1

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

Greg, you owe us all a comment on their earnings. Not thet I disagree with your view, yet it would be helpful for you to put something out about their release yesterday.

Redwood Trust: Ravaged by Credit Losses

Not only is the dividend in jeopardy, but valuation on a multiple of book is highly inflated. Consider the following:

First of all, this mortgage REIT is practically in runoff mode (despite the fact they managed to buy a few mortgage-backed securities last quarter). Real estate loans & securities have gone from $12.1bn a year ago to $7.6bn. Interest income has gone from $220mm to $127mm, Q2 2007 to Q2 2008. A veritable shrinking company, whose core business is gone (never to return).

In runoff mode, you can only value this based on book value, as an ongoing annuity from earnings cannot be expected.

Book is down to $17/share, from $31.50 a year ago - and declining.

That said, most of you realize Sequoia and Acacia's asset backed securities and loans offset each other - with no recourse to the parent (Redwood). So let's look at Redwood alone. The consolidating balance sheet shows $611mm of equity at the Redwood and Opportunity Fund levels. Yet you need mark down the parent's investment in the subs (as this is worthless). This adjusts the equity (apart from Sequoia and Acacia) down to $430mm, or $12.96/share.

Now, RWT is going out and investing in MBS (the only thing left to do, as the mortgage REIT business is terminably shut down). Do you trust these guys to create value buying these securities, in a housing market which continues to plummet?

If you answer "yes," I know a CFO at FRE and FNM who wants to talk to you about their upcoming equity offerings ...

How about a valuation of .99x book, like ANH? That would value this puppy at $12.83/share.