Redwood Trust: Legacy Losses Obscure A Profitable Mortgage Banking Franchise

Eric Cottrell 3 Followers Follow Summary Redwood Trust is rated Buy with a 12-month base case price target of $5.52, reflecting a 35% total return potential. RWT trades at a 33% discount to GAAP book value, as the market over-penalizes legacy asset risks despite strong core mortgage banking performance. Core platforms delivered a 33% annualized return on capital and robust volume growth, but legacy losses continue to drag on consolidated earnings and dividend coverage. Re-rating depends on legacy runoff, sustainable consolidated EAD above the dividend, book value stabilization, and disciplined capital allocation to higher-return operations. Fly View Productions/iStock via Getty Images Investment Thesis Redwood Trust ( RWT ) is not a typical agency mortgage real estate investment trust. At present, a large part of its value is derived from pooling, pricing, securitizing, and distributing non-agency mortgages via Sequoia, Aspire, and CoreVest, together with This article was written by Eric Cottrell 3 Followers Follow Short and medium-term investment horizons, ranging from a couple of weeks to under a year. Although I prefer the short term, since it is more focused on the right here, right now.I have an MBA in finance and am a Ph.D. candidate in business. My passion is studying various companies' fundamentals and technicals and identifying opportunities to invest. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.