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Redwood earned a net income of $7 million, or 10 cents per share, during the second quarter of 2009, compared with a net loss of $35 million, or 65 cents per share, during the first quarter of 2009, and a net loss of $46 million, or $1.40 per share, for the second quarter of 2008.
Before the real estate bubble burst, Redwood purchased residential and commercial mortgages, packaged them as securities and sold them to investors. But the company hasn't been able to complete any new securitizations since credit markets froze in 2007.
Rick Shane, an analyst with New York-based Jefferies & Co., attributed part of Redwood's success during the quarter to its decision early this year to begin buying mortgage-backed securities that were undervalued.
Redwood invested $341 million during the second quarter and an additional $158 million in July, primarily in selected mortgage-backed securities, bringing total capital invested thus far in 2009 to $597 million.
"They put a large amount of capital to work and were able to buy securities at really attractive prices," Shane said. He said Redwood has already resold some of those securities, realizing 20 to 25 percent gains.
Martin Hughes, Redwood's president and chief financial officer, said that during the second quarter Redwood sold $50 million of securities for a gain of $7 million, and during July sold an
additional $9 million of securities for a gain of $3 million. Hughes said prices for high-value mortgage-based securities rose by 10 to 15 percent during the second quarter.
"The negative investment psychology has turned positive and, in some cases, is showing signs of animal spirits," Hughes said.
Hughes believes the run-up was largely driven by technical market and psychological factors and not fundamentals. He expects prices for mortgage-backed securities to remain high for some time, making it impractical for Redwood to continue its buying spree.
While reporting a profit for the second quarter, Redwood also incurred a taxable loss of $12 million, or 16 cents per share, during the quarter. The taxable loss reflects the fact that the Internal Revenue Service prohibits Redwood from establishing credit reserves for tax purposes, Hughes said.
Redwood Trust's stock, which trades on the New York Stock Exchange, closed at $17.79 per share on Thursday, down 40 cents.
Contact Richard Halstead via e-mail at rhalstead@marinij.com
Read more Business and stocks stories at the IJ's Business and stocks section.
To see more of The Marin Independent Journal or to subscribe to the newspaper, go to http://www.marinij.com/. Copyright (c) 2009, The Marin Independent Journal, Novato, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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