1
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-25643
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 12, 2001)
[REDWOOD LOGO]
REDWOOD TRUST, INC.
1,150,000 SHARES
COMMON STOCK
Redwood Trust, Inc. is offering 1,150,000 shares of its common stock.
Redwood Trust's common stock is traded on the New York Stock Exchange under the
symbol "RWT." The last reported sale price of the common stock on the New York
Stock Exchange on September 28, 2001 was $24.10 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE S-5.
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PER SHARE TOTAL
--------- -----------
Public Offering Price.................................... $24.00 $27,600,000
Underwriting Discounts and Commissions................... $ 1.00 $ 1,150,000
Proceeds to Redwood Trust, Inc........................... $23.00 $26,450,000
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Redwood Trust, Inc. has granted the underwriter a 30-day option to purchase
up to an additional 172,500 shares of common stock to cover over-allotments.
Delivery of the shares of common stock will be made on or about October 4, 2001.
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JOLSON MERCHANT PARTNERS
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS SEPTEMBER 28, 2001
2
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY,
SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS
SUPPLEMENT, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR
OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, THE "COMPANY," "REDWOOD TRUST," "WE," "US," AND "OUR"
REFER TO REDWOOD TRUST, INC.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
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The Company................................................. S-3
Recent Developments......................................... S-3
Use of Proceeds............................................. S-4
Risk Factors................................................ S-5
Forward-Looking Statements and Notice about Information
Presented................................................. S-5
Dividend Policy and Distributions........................... S-6
Capitalization.............................................. S-7
Selected Consolidated Financial Data........................ S-8
Business.................................................... S-11
Federal Income Tax Considerations........................... S-21
Underwriting................................................ S-24
Experts..................................................... S-26
Legal Matters............................................... S-26
Incorporation By Reference....................................S-26
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PROSPECTUS
PAGE
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About this Prospectus....................................... 2
Private Securities Litigation Reform Act of 1995............ 2
The Company................................................. 3
Use of Proceeds............................................. 3
Description of Securities................................... 3
Federal Income Tax Considerations........................... 9
Plan of Distribution........................................ 16
ERISA Investors............................................. 17
Legal Matters............................................... 18
Experts..................................................... 18
Where You Can Find More Information......................... 18
Incorporation by Reference.................................. 18
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S-2
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THE COMPANY
We are a real estate finance company specializing in owning, financing, and
credit enhancing high-quality jumbo residential mortgage loans. Jumbo
residential loans have mortgage balances that exceed the financing limit imposed
on Fannie Mae and Freddie Mac, both of which are United States government-
sponsored real estate finance entities. Most of the loans that we finance have
mortgage loan balances between $275,000 and $600,000.
We finance high-quality jumbo loans in two ways -- through our residential
credit enhancement portfolio and our residential retained loan portfolio. In our
residential credit enhancement portfolio, we enable the securitization and
funding of mortgage loans in the capital markets by committing our capital to
partially credit enhance the mortgage loans. We do this by structuring and
acquiring subordinated credit enhancement interests that are created at the time
the mortgage loans are securitized. After we have credit enhanced these mortgage
loans, collateralized mortgage-backed securities can be created with investment
grade debt ratings and then sold into the global capital markets to fund the
underlying mortgages. In essence, we perform the equivalent of a guarantee or
insurance function with respect to these mortgage loans. At June 30, 2001, the
aggregate principal value of mortgage loans we credit enhanced in our credit
enhancement portfolio was $38 billion, and the average mortgage loan balance was
$362,100.
In our residential retained mortgage loan portfolio, we acquire mortgage
loans and hold them on our balance sheet to earn interest income. We typically
fund the purchase of these mortgage loans through the issuance of long-term
amortizing debt. At June 30, 2001, the aggregate principal value of loans in our
residential retained loan portfolio was $1 billion, and the average mortgage
loan balance was $320,800.
We have elected and anticipate continuing to be organized as a real estate
investment trust (REIT). As a REIT, we distribute substantially all of our net
taxable earnings to stockholders as dividends. So long as we retain our REIT
status, we will not pay most types of corporate income taxes.
Redwood Trust, Inc. was incorporated in the State of Maryland on April 11,
1994, and commenced operations on August 19, 1994. Our principal executive
offices are located at 591 Redwood Highway, Suite 3100, Mill Valley, California
94941.
RECENT DEVELOPMENTS
In July 2001, we completed a secondary offering of 1,092,500 shares of
common stock for net proceeds of approximately $24 million, and in August 2001,
we completed a secondary offering of 1,150,000 shares of common stock for net
proceeds of approximately $26 million. Both offerings were to fund the continued
expansion of our residential loan finance business. As of the date of this
prospectus supplement, we have invested or have commitments to invest all of the
net proceeds of these offerings.
On August 9, 2001, our Board of Directors declared both a special and a
regular dividend on our common stock for the third quarter of 2001. The special
third quarter cash dividend of $0.18 per share of common stock was paid on
August 31, 2001 to stockholders of record on August 20, 2001. The regular
quarterly cash dividend for the third quarter of $0.57 per share of common stock
is payable on October 22, 2001 to stockholders of record as of September 28,
2001. Our Board of Directors also declared the third quarter preferred dividend
of $0.755 per share, payable on October 22, 2001, to preferred stockholders of
record as of September 28, 2001.
S-3
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USE OF PROCEEDS
The net proceeds to be received by us from the sale of the 1,150,000 shares
of common stock in this offering are estimated to be approximately $26,375,000
after deducting underwriting discounts and commissions and estimated expenses,
assuming the over-allotment option is not exercised by the underwriter. We
intend to use the net proceeds, together with borrowings, to purchase mortgage
assets. Pending use of the net proceeds to purchase such mortgage assets, the
net proceeds will be used to reduce short-term collateralized borrowings. These
borrowings generally bear interest at rates that adjust based on one-month LIBOR
and are secured by mortgage assets owned by us.
S-4
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RISK FACTORS
See the risk factors beginning on page 11 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, which is incorporated by reference,
for a discussion of certain factors that should be considered by prospective
purchasers of shares of our common stock.
The risk factors set forth in the Form 10-K incorporated by reference
herein address the following risks, among others:
- Mortgage loan delinquencies, defaults and credit losses could reduce our
earnings. We have other types of credit risk that could also cause
losses. Credit losses could reduce our cash flow and access to liquidity.
- Fluctuations in our results may be exacerbated by the leverage that we
employ and by liquidity risks.
- Changes in the market values of our assets and liabilities can adversely
affect our earnings, stockholders' equity and liquidity.
- Changes in mortgage prepayment rates may affect our earnings, liquidity
and the market values of our assets.
- Interest rate fluctuations can have various effects on us and could lead
to reduced earnings or increased earnings volatility.
- Hedging activities may reduce long-term earnings and may fail to reduce
earnings volatility or to protect our capital in difficult economic
environments.
- Maintaining REIT status may reduce our flexibility.
- Our cash balances and cash flows may become limited relative to our cash
needs.
- Increased competition could reduce our acquisition opportunities or
affect our operations in a negative manner.
- Mortgage assets may not be available at attractive prices, thus limiting
our growth or earnings.
- Accounting conventions can change, thus affecting our reported results
and operations.
- Our policies, procedures, practices, product lines, risks and internal
risk-adjusted capital guidelines are subject to change.
- We depend on key personnel for successful operations.
- Investors in our common stock may experience losses, volatility and poor
liquidity.
FORWARD-LOOKING STATEMENTS AND NOTICE ABOUT INFORMATION PRESENTED
This prospectus supplement and the accompanying prospectus contain or
incorporate by reference certain forward-looking statements. When used,
statements which are not historical in nature, including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend," and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including, among other
things, changes in interest rates on our mortgage assets and borrowings, changes
in prepayment rates on our mortgage assets, general economic conditions,
particularly as they affect the price of mortgage assets and the credit status
of borrowers, and the level of liquidity in the capital markets, as it affects
our ability to finance our mortgage asset portfolio.
Other risks, uncertainties and factors that could cause actual results to
differ materially from those projected are detailed from time to time in reports
filed by us with the Securities and Exchange Commission, or SEC, including Forms
10-Q and 10-K.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in or incorporated by reference into this prospectus supplement
and the accompanying prospectus might not occur.
This prospectus supplement contains statistics and other data that in some
cases have been obtained from, or compiled from, information made available by
servicing entities and information service providers.
S-5
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DIVIDEND POLICY AND DISTRIBUTIONS
We intend to distribute substantially all of our taxable income, which does
not ordinarily equal net income as calculated in accordance with GAAP, to our
stockholders so as to comply with the REIT tax rules. We currently declare
regular quarterly dividends. Our goal is to pay dividends on our common stock at
a conservative rate that is steady and that is sustainable given the levels of
cash flow we expect to generate from our operations over time. On August 9,
2001, our Board of Directors declared an increase in the regular quarterly
common stock dividend rate for the third quarter of 2001 to $0.57 per share.
This dividend is payable on October 22, 2001 to stockholders of record on
September 28, 2001. Based upon our current outlook, we believe that our cash
flows will be sufficient to sustain dividend payments at the common stock
dividend rate of $0.57 per share per quarter for the reasonably foreseeable
future. We have been increasing our dividend rate in the last few years as our
profits and cash flows have increased. Our Board of Directors will consider
additional increases to our regular dividend rate in the event that our current
business initiatives successfully increase our long-term rate of profitability
and cash flows.
In years such as 2001, our Board may declare one or more special dividends
in order to meet the annual minimum dividend distribution requirements necessary
to comply with the REIT tax rules. On August 9, 2001, our Board of Directors
declared a special cash dividend of $0.18 per share of our common stock, which
was paid on August 31, 2001 to stockholders of record on August 20, 2001.
The dividend policy with respect to our common stock is subject to revision
at the discretion of our Board of Directors. All distributions will be made by
us at the discretion of our Board of Directors and will depend on our taxable
and GAAP earnings, our cash flows and overall financial condition, maintenance
of REIT status and such other factors as our Board of Directors deems relevant.
No dividends will be paid or set apart for payment on shares of our common stock
unless full cumulative dividends have been paid on our Class B 9.74% Cumulative
Convertible Preferred Stock. As of June 30, 2001, the full cumulative dividends
have been paid on the preferred stock. On August 9, 2001, our Board of Directors
also declared a preferred dividend of $0.755 per share for the third quarter of
2001, payable on October 22, 2001 to preferred stockholders of record on
September 28, 2001.
Distributions to our stockholders will generally be subject to tax as
ordinary income, although a portion of such distributions may be designated by
us as capital gain or may constitute a tax-free return of capital. Our Board of
Directors may elect to maintain a steady dividend rate during periods of
fluctuating taxable income. In such event, our Board may choose to declare
dividends that include a return of capital. We will annually furnish to each
stockholder a statement setting forth distributions paid during the preceding
year and their characterization as ordinary income, capital gains or return of
capital. For a discussion of the Federal income tax treatment of our
distributions, see "Federal Income Tax Considerations -- Taxation of Holders of
Redwood Trust's Common Stock" in this prospectus supplement.
S-6
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001 (i)
on an actual basis, (ii) as adjusted for the issuance of 2,242,500 shares of our
common stock in July and August 2001, and (iii) as adjusted to give effect to
the issuance as described in clause (ii) above and the issuance of 1,150,000
shares of our common stock offered hereby. See "Use of Proceeds." The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and in
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
JUNE 30, 2001
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ACTUAL(1)(2) AS ADJUSTED(3) AS ADJUSTED(3)(4)
------------ -------------- -----------------
(IN THOUSANDS, UNAUDITED)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share; Class B
9.74% Cumulative convertible 902,068 shares
authorized, issued and outstanding ($28,645
aggregate liquidation preference)................. $ 26,517 $ 26,517 $ 26,517
Common stock, par value $0.01 per share; 49,097,932
shares authorized; 8,924,789 issued and
outstanding, actual; 11,167,289 shares issued and
outstanding, as adjusted(3); 12,317,289 shares
issued and outstanding, as adjusted(3)(4)......... 89 112 123
Additional paid-in capital........................... 244,305 294,058 320,422
Accumulated other comprehensive income............... 2,691 2,691 2,691
Cumulative earnings.................................. 41,579 41,579 41,579
Cumulative distributions to stockholders............. (91,167) (91,167) (91,167)
-------- -------- --------
Total stockholders' equity................... $224,014 $273,790 $300,165
======== ======== ========
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(1) Excludes as of June 30, 2001 (i) 1,479,709 shares of common stock issuable
upon exercise of outstanding options at a weighted average exercise price of
$22.30 per share and (ii) an aggregate of 437,975 shares available for
future issuance under our Stock Option Plan.
(2) At June 30, 2001, we also utilized borrowings of $861,226 of short-term debt
and $971,365 of long-term debt, net.
(3) Adjusted for the issuance of 2,242,500 shares in July and August 2001, with
net proceeds of $49,775,500 after underwriting discounts, commissions and
other estimated expenses.
(4) Adjusted for the issuance of 1,150,000 shares offered hereby, with net
proceeds of $26,375,000 after underwriting discounts, commissions and other
estimated expenses. Assumes no exercise of the underwriter's over-allotment
option.
S-7
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements and the related Notes included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2000 and in our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1998 1999 2000 2000 2001(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Interest income after credit expenses
from:
Residential credit enhancement
portfolio......................... $ 2,963 $ 4,202 $ 8,524 $ 3,750 $ 6,045
Residential retained loan
portfolio......................... 120,127 71,804 90,134 46,624 35,965
Investment portfolio................. 96,412 66,219 67,206 34,259 33,610
Commercial retained loan portfolio... 102 1,081 2,002 604 3,894
Cash and other interest income....... 2,080 2,658 1,395 590 576
--------- --------- --------- --------- ---------
Total interest income after credit
expenses............................. 221,684 145,964 169,261 85,827 80,090
Interest and hedging expenses.......... (199,638) (119,227) (138,603) (70,064) (58,423)
--------- --------- --------- --------- ---------
Net interest income after credit
expenses............................. 22,046 26,737 30,658 15,763 21,667
Equity in earnings (losses) of RWT
Holdings, Inc........................ (4,676) (21,633) (1,676) (1,099) --
Other income........................... 139 175 98 36 --
Operating expenses..................... (5,876) (3,835) (7,850) (4,386) (7,022)
Net unrealized/realized market value
gains (losses)....................... (38,943) 284 (2,296) (2,583) 2,228
Dividends on Class B preferred stock... (2,747) (2,741) (2,724) (1,362) (1,362)
Change in accounting principles(2)..... (10,061) -- -- -- (2,368)
--------- --------- --------- --------- ---------
Net income (loss) available to common
stockholders......................... $ (40,118) $ (1,013) $ 16,210 $ 6,369 $ 13,143
========= ========= ========= ========= =========
Core earnings: ongoing operations
before mark-to-market and
non-recurring expenses:
Net income........................... $ (40,118) $ (1,013) $ 16,210 $ 6,369 $ 13,143
(Gains) losses from market value
changes........................... 49,004 (38) 2,329 2,616 804
(Gains) losses from closed business
units............................. 3,780 17,673 46 46 --
--------- --------- --------- --------- ---------
Core earnings(3)............. $ 12,666 $ 16,622 $ 18,585 $ 9,031 $ 13,947
========= ========= ========= ========= =========
Average common shares -- diluted....... 13,200 9,768 8,902 8,863 9,121
Diluted net income (loss) per share.... $ (3.04) $ (0.10) $ 1.82 $ 0.72 $ 1.44
Core earnings per share................ $ 0.96 $ 1.71 $ 2.08 $ 1.02 $ 1.53
Dividends declared per Class B
preferred share...................... $ 3.02 $ 3.02 $ 3.02 $ 1.51 $ 1.51
Dividends declared per common share.... $ 0.28 $ 0.40 $ 1.61 $ 0.75 $ 1.05
Total common dividends declared........ $ 3,946 $ 3,513 $ 14,168 $ 6,592 $ 9,357
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(1) Effective January 1, 2001, we acquired 100% of the voting common stock of
RWT Holdings, Inc. (Holdings). Accordingly, Holdings has been consolidated
into our results of operations for the quarter ended June 30, 2001. Prior
periods do not reflect Holdings on a consolidated basis. Prior to the
acquisition of the voting common stock of Holdings, we accounted for
Holdings under the equity method.
(2) In 1998, we adopted SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, effective July 1, 1998. In accordance with the
transition provisions of SFAS 133, we recorded a net-of-tax
cumulative-effect-type transition adjustment of $10.1 million (loss).
In the first quarter of 2001, we adopted EITF 99-20 Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets, effective January 1, 2001. In accordance with
the transition provision of EITF 99-20, we recorded a net-of-tax
cumulative-effect-type transition adjustment of $2.4 million (loss).
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(3) Core earnings is calculated as GAAP earnings from ongoing operations less
mark-to-market adjustments and non-recurring expenses. Core earnings is not
a measure of earnings in accordance with generally accepted accounting
principles. Management believes that core earnings provides relevant and
useful information regarding Redwood's results of operations in addition to
GAAP measures of performance. Because all companies and analysts do not
calculate non-GAAP measures such as core earnings in the same fashion, core
earnings as calculated by us may not be comparable to similarly titled
measures reported by other companies.
DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Residential credit enhancement
portfolio (net)............. $ 7,707 $ 26,999 $ 80,764 $ 57,893 $ 158,704
Residential retained loan
portfolio................... 1,397,213 1,385,589 1,130,997 1,267,780 1,060,470
Investment portfolio.......... 1,257,655 941,781 764,775 883,052 739,187
Commercial retained loan
portfolio................... 8,287 8,437 57,169 9,800 67,043
---------- ---------- ---------- ---------- ----------
Total mortgage assets.............. 2,670,863 2,362,806 2,033,705 2,218,525 2,025,404
Total assets....................... 2,832,448 2,419,928 2,082,115 2,257,333 2,073,488
Short-term debt.................... 1,257,570 1,253,565 756,222 806,643 861,226
Long-term debt..................... 1,305,560 945,270 1,095,835 1,227,546 971,365
Total liabilities.................. 2,577,658 2,209,993 1,866,451 2,048,949 1,849,474
Total stockholders' equity......... $ 254,790 $ 209,935 $ 215,664 $ 208,384 $ 224,014
Number of Class B preferred shares
outstanding...................... 910 902 902 902 902
Number of common shares
outstanding...................... 11,252 8,783 8,810 8,789 8,925
Book value per common share........ $ 20.27 $ 20.88 $ 21.47 $ 20.69 $ 22.13
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
CASH FLOW DATA:
Net income (loss) available to
common stockholders.............. $ (40,118) $ (1,013) $ 16,210 $ 6,369 $ 13,143
Depreciation and amortization...... 32,046 6,773 4,170 1,588 3,610
Provision for credit losses........ 1,120 1,346 731 247 348
Equity in losses in RWT Holdings,
Inc.............................. 4,676 21,633 1,676 -- 251
Non-cash stock compensation........ -- -- -- 1,099 --
Net unrealized/realized market
value (gains) losses............. 49,004 (284) 2,296 2,583 140
---------- ---------- ---------- ---------- ----------
Cash flow before working capital,
capital expenditures and
portfolio activities............. 46,728 28,455 25,083 11,886 17,492
Working capital and capital
expenditures..................... 13,903 15,181 (3,922) 668 3,421
---------- ---------- ---------- ---------- ----------
Free cash flow(1).................. 60,631 43,636 21,161 12,554 20,913
Changes in investment in RWT
Holdings, Inc.................... (26,745) (9,927) 6,972 6,972 --
Common dividends paid.............. (8,946) (1,323) (12,488) (5,272) (8,324)
Sale/(purchase) of capital stock... (45,384) (37,334) 428 45 1,534
---------- ---------- ---------- ---------- ----------
Funds retained for portfolio
investing(1)..................... $ (20,444) $ (4,948) $ 16,073 $ 14,299 $ 14,123
========== ========== ========== ========== ==========
---------------
(1) Free cash flow represents cash flow from operations, excluding the effect of
portfolio trading activities. It assumes that we will reinvest all proceeds
from portfolio trading activities in mortgage assets. Free cash flow is
available to fund other long-term investments, including repurchases of our
stock, and dividends on common stock. Funds retained for portfolio investing
is free cash flow adjusted for such items and represents the portion of cash
flow from operations available for additional investments in mortgage
assets. The presentation of free cash flow and funds retained for portfolio
investing is intended to supplement the presentation of cash provided by
operating activities prepared in accordance with generally accepted
accounting principles. Since all companies do not calculate these
alternative measures of cash flow in the same fashion, free cash flow and
funds retained for portfolio investing may not be comparable to similarly
titled measures reported by other companies.
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DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
OTHER DATA:
Recourse assets(1)............. $ 1,523,280 $ 1,471,570 $ 983,097 $ 1,026,281 $ 1,009,885
Recourse debt(2)............... 1,257,570 1,253,565 756,222 806,643 861,226
Equity to recourse assets...... 16.7% 14.3% 21.9% 20.3% 22.2%
Recourse debt to equity........ 4.9x 6.0x 3.5x 3.9x 3.8x
Residential credit enhancement
portfolio (gross)(3)......... $ 542,558 $ 6,376,571 $22,633,860 $20,925,931 $38,278,631
Residential retained loan
portfolio.................... 1,397,213 1,385,589 1,130,997 1,267,780 1,060,470
----------- ----------- ----------- ----------- -----------
Total residential loans........ $ 1,939,771 $ 7,762,160 $23,764,857 $22,193,711 $39,339,101
=========== =========== =========== =========== ===========
Our internal credit reserve.... $ 9,081 $ 15,366 $ 31,866 $ 25,159 $ 83,290
External credit enhancement.... 19,005 26,111 86,840 79,403 91,004
----------- ----------- ----------- ----------- -----------
Total credit protection........ $ 28,086 $ 41,477 $ 118,706 $ 104,562 $ 174,294
=========== =========== =========== =========== ===========
Total credit protection as % of
total current residential
loans........................ 1.45% 0.53% 0.50% 0.47% 0.44%
Delinquencies (90+ days,
foreclosure, bankruptcy,
REO)......................... $ 30,276 $ 50,086 $ 57,376 $ 50,967 $ 103,200
Delinquencies as % of total
current residential loans.... 1.56% 0.65% 0.24% 0.23% 0.26%
Redwood's share of credit
losses....................... $ 3,509 $ 1,151 $ 800 $ 449 $ 293
Losses to external credit
enhancement.................. 7,455 1,995 3,750 1,893 1,374
----------- ----------- ----------- ----------- -----------
Total credit losses............ $ 10,964 $ 3,146 $ 4,550 $ 2,342 $ 1,667
=========== =========== =========== =========== ===========
Total credit losses as % of
total current residential
loans........................ 0.57% 0.04% 0.02% 0.02%* 0.01%*
------------
* Annualized.
(1) Represents all assets not pledged to secure long-term debt.
(2) Represents all borrowings other than long-term debt. Recourse on long-term
debt is limited to the assets pledged to secure such debt.
(3) Represents the principal balance of mortgage loans financed by
securitizations in which we own residential credit enhancement interests.
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BUSINESS
INDUSTRY OVERVIEW
There are approximately $5.2 trillion of residential mortgage loans
outstanding in the United States. The amount outstanding has grown at a rate of
between 5% and 10% per year for approximately 20 years as home ownership and
housing values have generally increased. New originations of residential
mortgage loans have ranged from $0.8 trillion to $1.4 trillion per year over the
last five years. Originations generally increase in years when refinancing
activity is stronger due to declines in long-term interest and mortgage rates.
Fannie Mae and Freddie Mac are prohibited from owning or guaranteeing
single-family mortgage loans with balances greater than $275,000 for loans in
the continental United States. These loans are commonly referred to as jumbo
mortgage loans. Originations of jumbo mortgage loans have remained at between
22% and 23% of total new residential mortgage originations for the last five
years. We believe that jumbo mortgages currently outstanding total over $1
trillion, which represents approximately 20% of the total residential mortgages
outstanding. We also believe that this outstanding balance of jumbo mortgages
has grown at a rate of between 5% and 10% per year along with the residential
mortgage market as a whole. New originations of jumbo residential mortgage loans
have ranged from between $190 billion and $328 billion per year for the last
five years.
Each year the amount of jumbo mortgages that require new financing consists
of new originations in addition to the seasoned loans that are sold into the
secondary mortgage market by financial institutions from their portfolios. The
size of the financing market for jumbo mortgages each year thus depends on the
economic conditions and other factors that determine the level of new
originations and the attractiveness to financial institutions of selling loans.
Historically, jumbo residential mortgages have been financed by financial
institutions, such as banks and thrifts, holding loans in portfolio on their
balance sheets. These institutions fund their mortgage finance activities
through deposits and other borrowings. Increasingly since the mid-1980s, jumbo
mortgages have been funded through mortgage securitization. We estimate that the
share of jumbo mortgages outstanding that have been securitized has been
increasing steadily from approximately 10% in 1990 to approximately 50% in 2001.
We believe that securitization has increased share as the financing method of
choice in the jumbo market relative to portfolio lending because securitization
is generally a more efficient form of funding.
Jumbo mortgage securitizations may consist of seasoned loans or newly
originated loans. Seasoned loan securitizations generally contain loans that are
being sold from the retained mortgage portfolios of the larger banks and
thrifts. Securitizations of new originations generally contain loans sold by the
larger originators of jumbo mortgage loans or by conduits. Conduits acquire
individual loans or small mortgage portfolios in order to aggregate mortgage
pools for securitization.
Virtually all of the demand for mortgage-backed securities comes from
investors that desire to hold the cash flows of a mortgage but that are not able
or willing to build the operations necessary to manage the credit risk of
mortgages. These investors demand that mortgage securities be rated investment
grade by the credit rating agencies. In order to create investment grade
mortgage-backed securities from a pool of residential mortgage loans, credit
enhancement for those mortgage loans must be provided.
In a securitization, a pool of mortgage loans can be credit enhanced
through a number of different methods. The senior/subordinated structure is the
most prevalent method for credit enhancement of jumbo mortgage loans. This
structure establishes a set of senior interests in the pool of mortgage loans
and a set of subordinated interests in the pool. The set of subordinated
interests is acquired by one or more entities that provide credit enhancement to
the underlying mortgage loans. Credit losses in the mortgage pool reduce the
principal of the subordinated interests first, thus allowing the senior
interests to be rated investment grade (mostly, AAA). Other forms of credit
enhancement, such as pool insurance provided by mortgage insurance companies,
bond insurance provided by bond insurance companies, and corporate guarantees
are often less efficient than the senior/subordinated structure due to
regulation and rating agency requirements, among other factors.
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Credit enhancers of jumbo mortgage loans profit from cash flows generated
from the ownership of the subordinated credit enhancement interests. The amount
and timing of credit losses in the underlying mortgage pools affect the yields
generated by these assets. These interests are generally purchased at a discount
to the principal value of the interest, and much of the potential return is
generated through the ultimate return of the remaining principal after realized
credit losses.
The business of enabling the securitization of jumbo residential mortgages
by assuming credit risk on the underlying mortgage loans is highly fragmented.
There are no industry statistics known to us that identify participants or
market shares. Credit enhancers of jumbo mortgage securitizations include banks
and thrifts (generally for their own originations), insurance companies, Wall
Street broker-dealers, hedge funds, other private investment firms, mortgage
REITs and others.
The liquidity crisis in the financial markets in 1998 caused many of the
participants in this market to withdraw. With reduced demand stemming from
reduced competition, and increased supply as a result from increased
originations and mortgage portfolio sales, prices of residential credit
enhancement interests declined. Prices further declined in 1999 as financial
turmoil continued and financial institutions reorganized themselves to focus on
their core businesses.
In 2000 and continuing into 2001, the prices of assets and the margins
available in the jumbo residential credit enhancement business have remained
attractive. In general, we believe that few new competitors have entered the
market, so demand for credit enhancement interests has remained subdued. At the
same time, the supply of credit enhancement opportunities has increased as jumbo
mortgage securitizations have increased. In addition, a significant supply of
seasoned jumbo mortgage loan portfolios has been securitized recently by banks
that have origination capacities that far exceed both their balance sheet
capacities and their desires to hold loans in portfolio.
OUR SOLUTION
Over the past seven years, we have built a business model that allows us to
compete effectively in the high-quality jumbo mortgage finance market in the
United States. The key aspects of our solution are as follows:
Focused business model. We have a focused business model targeting the
credit enhancement and ownership of jumbo residential mortgage loans. We
specialize in funding jumbo mortgage loans through securitization.
Securitization of mortgages is either undertaken by us in our retained portfolio
or by others with credit enhancement by us in our credit enhancement portfolio.
At June 30, 2001, we enabled securitizations for a total of $39 billion of jumbo
mortgage loans ($38 billion securitized by others and $1 billion securitized by
us) for an approximate market share of 4% of all jumbo mortgage loans and 8% of
all securitized jumbo mortgage loans. We believe securitization has and will
continue to prove to be a more efficient form of financing jumbo mortgage loans
than funding through deposits on the balance sheets of depository institutions
(banks and thrifts). By focusing on this form of financing mortgages, we believe
our long-term growth opportunities will continue to be attractive. We believe
that opportunities will be particularly attractive if an increasing share of
jumbo mortgage loans continues to be securitized and if the jumbo residential
market as a whole continues to grow at the historical rate of between 5% and 10%
per year.
Specialized expertise and scalable operations. We have developed all of the
specialized expertise necessary to efficiently and economically credit enhance
and own jumbo residential mortgage loans. Our accumulated market knowledge,
relationships with mortgage originators and others, sophisticated risk-adjusted
capital policies, strict underwriting procedures, and successful experience with
shifting financial market conditions, allow us to acquire and securitize
mortgage assets and effectively mitigate the risks inherent with those
businesses. We build and maintain relationships with large mortgage originators,
banks that are likely to sell mortgage loan portfolios, and Wall Street firms
that broker mortgage assets. We continue to develop our staff, our analytics,
our models, and other capabilities that help us structure transactions and cash
flows, evaluate credit quality of individual loans and pools of loans,
underwrite loans effectively, and monitor trends in credit quality and expected
losses in our existing portfolios. We establish relationships with our servicing
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companies to assist with monthly surveillance, loss mitigation efforts,
delinquent loan work-out strategies, and REO liquidation. Aside from
collaborating on these issues, we insist that specific foreclosure time-lines
are followed and that representations and warranties made to us by sellers are
enforced. For balance sheet management, we work to project cash flows and
earnings, determine capital requirements, source borrowings efficiently,
preserve liquidity, and monitor and manage risks.
Even as we continue to develop our capabilities, we believe that our
operations are highly scalable. We do not expect our operating costs to grow at
the same rate as our net interest income should we expand our capital base and
our portfolios. Thus, growth in capital could be materially accretive to
earnings and dividends per share.
Emphasis on long-term asset portfolio. Through our operations, we seek to
structure and build a unique portfolio of valuable mortgage assets. For our
residential loan portfolios, we seek to structure long-term assets with expected
average lives of five to fifteen years. The long-term nature of these assets
reduces reinvestment risk and provides us with more stable, proprietary cash
flows.
Competitive advantage of our corporate structure. As a REIT, we pay only
limited income taxes, traditionally one of the largest costs of doing business.
In addition, we are not subject to the extensive regulations applicable to
banks, thrifts, insurance companies and mortgage banking companies; nor are we
subject to the rules governing regulated investment companies. The absence of
regulations in our market sector is a competitive advantage for us. The
regulations applicable to competitive financial companies can cause capital
inefficiencies and higher operating costs for certain of our competitors. Our
structure enables us to finance loans of higher quality than our competitors
typically do while earning an attractive return for stockholders.
Flexibility in mortgage loan portfolio orientation. We are open to other
areas of opportunity within real estate finance that compliment and benefit from
our core business activity of jumbo residential mortgage loan finance. We
currently finance U.S. real estate through our investment portfolio and our
commercial retained loan portfolio. Depending on the relative attractiveness of
the opportunities in these or new product lines, we may increase or decrease the
asset size and capital allocation of these portfolios over time.
We also look for product lines that fit our value orientation and the
structural advantages of our balance sheet. We look for product lines that do
not put us in competition with Fannie Mae and Freddie Mac, where we can develop
a competitive advantage over our competitors who may be hampered by regulation,
high operating costs, and other factors.
OUR STRATEGY
Our objective is to produce attractive growth in earnings per share and
dividends per share for stockholders primarily through the efficient financing
and management of high-quality jumbo residential mortgage loans.
The key aspects of our strategy are as follows:
Preserve portfolio quality. In our experience, the highest long-term
risk-adjusted returns in the lending business come from the highest quality
assets. For this reason, we focus only on "A," or prime, quality jumbo
residential mortgage loans. Within the prime mortgage loan category, there are
degrees of quality ("A," "Alt-A" and "A-"). As compared to the market as a
whole, we believe our portfolio is generally concentrated in the top quality end
of the "A" mortgage loan category. We generally review and acquire mortgage
loans from the large, high-quality, national origination companies, and we have
the top quality servicing companies processing our loan payments and assisting
with loss mitigation. While we may acquire or credit enhance loans that are less
than "A" quality, we currently intend to do so only for a small portion of our
portfolio and generally with respect to seasoned loans of this type that may
have less risk than newly-originated loans. We believe we have booked credit
reserves for our jumbo mortgage loans that exceed the level of reserves, as a
percentage of principal balances, of most bank and thrift portfolio lenders. We
do so because of the cyclical nature of the U.S. economy and to mitigate the
risk of potential mortgage asset defaults.
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Maintain geographic diversity. Our jumbo mortgage loan portfolio is as
diverse with respect to geography as is the U.S. jumbo mortgage market as a
whole. We finance loans in all 50 states. With the exception of California, no
one state represented more than 6% of the portfolio at June 30, 2001. Our
exposure to California mortgage loans was 53% of our portfolio at June 30, 2001,
whereas approximately 50% of the jumbo mortgage loans outstanding in the U.S.
are in California.
Effectively match fund. Our focus as a company is on the expert management
of jumbo mortgage loan credit risk, not on the anticipation of interest rates or
mortgage prepayment rates. Accordingly, we generally match the interest rate,
prepayment rate, and cash flow characteristics of our on-balance sheet assets to
our liabilities. Adjustable rate assets are funded with floating rate debt.
Fixed and hybrid assets are funded with matching debt that amortizes at the same
rate as the assets. Our equity is effectively invested in a mixture of
adjustable, hybrid, and fixed rate assets. We use interest rate agreements to
help us achieve our desired asset/liability mix on-balance sheet. Nevertheless,
our earnings are still sensitive to these factors to a degree. Our plan is to
continue to reduce (over time) the relative importance of our investment
portfolio on our balance sheet. This should help further reduce our on-balance
sheet leverage and the sensitivity of our earnings to changes in interest rates,
prepayment rates, and market value changes.
Manage capital levels. We manage our capital levels, and thus our access to
borrowings and liquidity, through sophisticated risk-adjusted capital policies
supervised by our senior executives. We believe these conservative and
well-developed guidelines are an important tool to helping us achieve our goals
and mitigate the risks of our business even when the market value of our assets
securing short-term borrowings decline. Through these policies, we assign a
capital adequacy guideline amount, expressed as an equity-to-assets ratio, to
each of our mortgage assets. For short-term funded assets, this ratio will
fluctuate over time, based on changes in that asset's credit quality, liquidity
characteristics, potential for market value fluctuation, interest rate risk,
prepayment risk and the over-collateralization requirements for that asset set
by our collateralized short-term lenders. Capital requirements for residential
mortgage securities rated below AA, residential credit enhancement interests,
retained interests from our securitizations of our residential retained
portfolio assets, and commercial mortgage whole loans are generally higher than
for higher-rated residential securities and residential whole loans. Capital
requirements for these less liquid assets depend chiefly on our access to secure
funding for these assets, the number of sources of such funding, the funding
terms, and on the amount of extra capital we decide to hold on hand to protect
against possible liquidity events with these assets. Capital requirements for
most of our retained interests in our securitizations of our residential
retained portfolio loans generally equal our net investment. The sum of the
capital adequacy amounts for all of our mortgage assets is our aggregate capital
adequacy guideline amount. In most circumstances in which our actual capital
levels decreased below our capital adequacy guideline amount, we would generally
expect to cease the acquisition of new mortgage assets until capital balance was
restored through prepayments, interest rate changes or other means.
Pursue growth. We intend to pursue a growth strategy over time, increasing
our market share of the high-quality jumbo residential market and increasing our
capital base and the size of our portfolios. As we increase our market share, we
believe we will be able to deepen our relationships with our customers, thus
potentially giving us certain pricing, cost and other competitive advantages. As
we increase the size of our capital base, we believe that we may benefit from
improved operating expense ratios, lower borrowing expenses, improved capital
efficiencies and related factors that may improve earnings and dividends per
share.
PRODUCT LINES
At June 30, 2001, we had four mortgage loan portfolios representing our
four product lines. Our current intention is to focus on the management and
growth of these four existing product lines. We operate our four product lines
as a single business segment, with common staff and management, joint financing
arrangements and flexible capital allocations between product lines.
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Residential Credit Enhancement Portfolio
We credit enhance high-quality jumbo residential mortgage loans through
structuring and acquiring subordinated credit enhancement interests that are
created at the time the mortgage loans are securitized. From time to time, we
acquire these credit enhancement interests in the secondary market for mortgage
assets, and other times we work with sellers/securitizers directly to choose
mortgage loans that will be included in a pool and to structure the terms of the
credit enhancement interest for that pool. The mortgage loans that we credit
enhance in this portfolio do not appear as assets on our balance sheet. Rather,
our net basis in credit enhancement interests is shown as a balance sheet asset.
Substantially all of the mortgage loans that we credit enhance are "A" quality
mortgage loans. At June 30, 2001, 1% of our portfolio consisted of seasoned
"Alt-A" mortgage loans that did not meet the credit quality characteristics at
origination of standard "A" quality mortgage loans but currently benefit from
home price appreciation and other benefits of seasoning. We do not seek to
credit enhance "B," "C" or "D" quality mortgage loans, commonly referred to as
subprime mortgage loans.
Generally, we credit enhance mortgage loans from the top 15 high-quality
national mortgage origination firms and certain other smaller firms that
specialize in high-quality jumbo residential mortgage loan originations. We also
work with large banks that are sellers of seasoned portfolios of high-quality
jumbo mortgage loans. We either work directly with these customers or we work in
conjunction with an investment bank on these transactions.
We credit enhance fixed rate, adjustable rate and hybrid mortgage loans.
Hybrid mortgage loans are loans that become adjustable after a 3- to 10-year
fixed rate period. For our credit enhancement portfolio, a "fixed rate" market,
where the percentage of newly originated mortgage loans that are fixed rate is
relatively high, is generally favorable. Since most fixed rate mortgage loans
are securitized, we expect to have an increased supply of credit enhancement
opportunities in a fixed rate market.
The principal value of the credit enhancement interests in any rated
senior/subordinated securitization is determined by the credit rating agencies,
Moody's Investors Service, Standard & Poor's Rating Services and Fitch IBCA.
These credit agencies examine each pool of mortgage loans in detail. Based on
their review of individual mortgage loan characteristics, they determine the
credit enhancement levels necessary to award investment grade ratings to the
bulk of the securities formed from these mortgage loans. Typically, the
principal value of the credit enhancement interests is equal to between 0.5% and
2.0% of the initial principal value of the mortgage loans. Once the credit
enhancement interests have all been contracted for by us and any other
purchasers, the credit enhanced investment grade securities can be sold to a
wide variety of capital market participants.
Our actual investment (and our risk) is less than the principal value of
our credit enhancement interests since we acquire these interests at a discount
to principal value. A portion of this discount we designate as our credit
reserve for future losses; the remainder we amortize into income over time.
Our first defense against credit loss is the quality of our mortgage loans.
Our mortgage loans are secured by the borrowers' homes. Compared to most
corporate and consumer loans, the mortgage loans that we credit enhance have a
much lower loss frequency and a much lower loss severity (the amount of the loan
principal and accrued interest that we lose upon default).
Our exposure to credit risks of the mortgage loans that we credit enhance
is further limited in a number of respects as follows:
- Risk tranching. A typical mortgage securitization has three credit
enhancement interests -- a "first loss" security and securities that are
second and third in line to absorb credit losses. Of our net investment
in credit enhancement assets, $19 million, or 12%, was directly exposed
to the risk of mortgage loan default at June 30, 2001. The remainder of
our net investment, $140 million, was in the second or third loss
position and benefited from credit enhancement provided by others through
their ownership of credit enhancement interests junior to our positions,
which totaled $91 million. Credit enhancement varies by specific asset.
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- Limited maximum loss. Our potential credit exposure to the mortgage loans
that we credit enhance is limited to our investment in the credit
enhancement securities that we acquire.
- Credit reserve established at acquisition. We acquire credit enhancement
interests at a discount to their principal value. We set aside a portion
of this discount as a credit reserve to provide for future credit losses.
In most economic environments, we believe that this reserve should be
large enough to absorb future losses. Thus, typically, most of our credit
reserves are established at acquisition and are, in effect, paid for by
the seller of the credit enhancement interest. If future credit results
are satisfactory, we may not need all of the amounts designated as
reserves. In such event, we may then reverse some of these reserves into
income over time.
- Acquisition discount. For many of our credit enhancement interests, the
discount that we receive upon our acquisition exceeds anticipated future
losses and, thus, exceeds our designated credit reserve. Since we own
these assets at a discount to our credit reserve adjusted value, the
income statement effect of any credit losses in excess of our reserve
would be mitigated.
- Mortgage insurance. A portion of our credit enhanced portfolio consists
of mortgage loans with initial loan-to-value (LTV) ratios in excess of
80%. For the vast majority of these higher LTV ratio loans, we benefit
from primary mortgage insurance (PMI) provided on our behalf by the
mortgage insurance companies or from pledged asset accounts. Thus, for
what would otherwise be our most risky mortgage loans, we have passed
much of the risk on to third parties and our effective loan-to-value
ratios are lower than 80%.
- Representations and warranties. As the credit enhancer of a mortgage
securitization, we benefit from representations and warranties received
from the sellers of the mortgage loans. In limited circumstances, the
sellers are obligated to repurchase delinquent mortgage loans from our
credit enhanced pools, thus reducing our potential exposure.
At June 30, 2001, we credit enhanced over 105,700 loans (with a principal
value of $38 billion) in our total credit enhancement portfolio. Of these, 61%
were fixed rate loans, 20% were hybrid loans (loans that become adjustable after
a 3- to 10-year fixed rate period), and 19% were adjustable-rate loans. The
average size of the loans that we credit enhanced was $362,100. At June 30,
2001, loans with principal balances of $600,000 or less comprised 92% of the
total number of loans that we credit enhanced (81% of the total balance). We
credit enhanced 1,269 loans with principal balances in excess of $1 million;
these loans had an average size of $1.4 million and a total loan balance of $1.7
billion. Loans over $1 million were 1% of the total number of loans that we
credit enhanced (4% of the total balance).
Most of the loans that we credit enhance are seasoned. On average, our
credit enhanced loans have 31 months of seasoning. Generally, the credit risk
for these loans is reduced as property values have appreciated and the loan
balances have amortized. In effect, the current LTV ratio for seasoned loans is
often reduced from the LTV ratio at origination. Of the loans we credit enhanced
as of June 30, 2001, 21% were originated in 2001, 14% were originated in 2000,
and 65% were originated in 1999 or earlier.
Loans with LTV ratios at origination in excess of 80% made up 10% of loan
balances; we benefit from primary mortgage insurance on 99% of these loans. With
this insurance, our effective LTV ratio at origination on these loans is
reduced. Our average effective LTV ratio at origination for all the loans we
credit enhance (including the effect of PMI, pledged collateral, and other
credit enhancements) was 71%. Given housing appreciation and loan amortization,
we estimate the average current effective LTV ratio for these loans is
approximately 53%.
For 75% of the loans in our portfolio as of June 30, 2001, a FICO credit
score was obtained at origination and is available. For these loans, the average
FICO score was 723. Borrowers with FICO scores over 720 comprised 58% of the
portfolio, those with scores between 680 and 720 comprised 22%, those with
scores between 620 and 680 comprised 17%, and those with scores below 620
comprised 3% of our credit enhancement portfolio.
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The geographic dispersion of our credit enhancement portfolio generally
mirrors that of the jumbo residential market as a whole. At June 30, 2001, most
of our loans were concentrated in the following states: California 54%, New York
5%, New Jersey 3%, Texas 3%, and Massachusetts 3%. No other state represented a
concentration greater than 3%.
For the loans that we credit enhance where the underlying property is
located in Northern California (26% of the total credit enhancement portfolio),
at June 30, 2001, the average loan balance was $386,200, the average FICO score
was 724, and the average LTV ratio at origination was 71%. On average, these
Northern California loans have 36 months of seasoning, with 22% originated in
2001, 14% in 2000, and 64% in 1999 or earlier. At June 30, 2001, Northern
California loans with principal balances of $600,000 or less comprised 91% of
the total number of Northern California loans (81% of the total balance of such
loans). At June 30, 2001, 320 of these loans had principal balances in excess of
$1 million; these loans had an average size of $1.4 million and a total loan
balance of $450 million. They represented 1% of the total number of Northern
California loans and 5% of the total balance of Northern California loans.
Delinquencies (over 90 days past due, foreclosure, bankruptcy and REO) in our
Northern California residential credit enhancement portfolio at June 30, 2001
were 0.08% of the current loan balance of this portfolio.
For the 28% of our loans where the residences are located in Southern
California, the average loan balance at June 30, 2001 was $383,600, the average
FICO score was 718, and the average LTV ratio at origination was 73%. These
Southern California loans have 44 months of seasoning, on average, with 17%
originated in 2001, 13% in 2000, and 70% in 1999 or earlier. At June 30, 2001,
Southern California loans with principal balance of $600,000 or less comprised
90% of the total number of loans (77% of the total balance of loans). At June
30, 2001, 414 of these loans had principal balances in excess of $1 million;
these loans had an average size of $1.4 million and a total loan balance of $595
million. They represented 2% of the total number of Southern California loans
and 6% of the total balance of Southern California loans. Delinquencies in our
Southern California residential credit enhancement portfolio at June 30, 2001
were 0.24% of the current loan balance of this portfolio.
Credit losses for the entire $38 billion portfolio that we credit enhanced
at June 30, 2001 totaled $1 million in the second quarter of 2001. The
annualized rate of credit loss was 0.01% of the portfolio. Of this loss, $0.8
million was borne by the external credit enhancements to our positions and $0.2
million was incurred by us and charged against our internal reserves. At
quarter-end, we had $91 million of external credit enhancements and $78 million
of internal credit reserves for this portfolio. External credit reserves serve
to protect us from credit losses on a specific asset basis and represent the
principal value of first and second loss interests that are junior to us and are
owned by others. Total reserves of $169 million represented 0.44% of our credit
enhancement interest.
Delinquencies in our credit enhancement portfolio increased from 0.23% of
the current balances at December 31, 2000 to 0.26% at June 30, 2001. This
increase was largely the result of acquisitions of credit enhancement interests
on seasoned loan pools that had delinquency levels higher than those of our
average portfolio. We expect delinquency and loss rates for our whole loan
portfolio to continue to increase from their modest levels, given the weakening
economy and the natural seasoning pattern of these loans. Potential future
acquisitions of seasoned pools of loans may also increase our average
delinquency rate.
Residential Retained Portfolio
For our retained portfolio, we acquire whole mortgage loans and undertake
the securitization of these loans ourselves (structured as an issuance of
long-term debt), as compared to our credit enhancement portfolio, where the
seller of the mortgages undertakes the securitization of the loans and we
acquire the credit enhancement interest from them. Although we have greater
control over mortgage underwriting and servicing in our retained portfolio than
we do generally with our acquisitions of credit enhancement interests, creating
retained loan portfolio interests entails certain risks. We undertake
securitizations ourselves only when we believe that we have a distinct advantage
in doing so relative to the alternative of allowing the seller to undertake the
securitization.
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The process of adding to our retained mortgage loan portfolio commences
when we underwrite and acquire mortgage loans from sellers. For our retained
portfolio, we generally acquire mortgage loans in bulk purchases so that we can
quickly build a portfolio large enough, usually $200 million or more, to support
an efficient issuance of long-term debt. Although there is a limited supply of
large portfolios for sale, competition to acquire portfolios of this size is
also limited. We source our portfolio acquisitions primarily from large,
well-established mortgage originators and the larger banks and thrifts.
Bulk sales of residential whole loan portfolios that meet our acquisition
criteria and that are priced attractively relative to our long-term debt
issuance levels have been rare in recent years. Many banks have portfolios of
adjustable rate and hybrid loans that they intend to sell. If interest rates
drop, a greater supply of such portfolios may become available. When banks and
mortgage originators are ready to sell, they may sell their portfolios as whole
loans, in which case we would likely have the opportunity to acquire loans for
our retained portfolio. Alternatively, they may hire a Wall Street firm to
assist them with a securitization, in which case we would likely have the
opportunity to acquire credit enhancement interests for our credit enhancement
portfolio.
We fund our mortgage loan acquisitions initially with short-term debt. When
we are ready to issue long-term debt, we contribute these loans to our
wholly-owned, special purpose financing subsidiary, Sequoia Mortgage Funding
Corporation (Sequoia). Sequoia, through a trust, then issues mostly investment
grade rated long-term debt that generally matches the interest rate and
prepayment characteristics of the loans and remits the proceeds of this offering
back to us. Our net investment equals our basis in the loans less the proceeds
that we received from the sale of long-term debt. The amount of equity that we
invest in these trusts to support our long-term debt issuance is determined by
the credit rating agencies, based on their review of the loans and the structure
of the transaction.
At June 30, 2001, our basis in our net retained interests from our
securitizations totaled $32 million and our basis in our portfolio of acquired
credit enhancement interests totaled $101 million. These assets are shown in a
different manner on our balance sheet. For our residential retained portfolio
securitizations, we show on our balance sheet both the underlying residential
whole loans, which totaled $980 million at June 30, 2001, and the long-term debt
that we issue to fund the loans, which totaled $954 million on such date. For
acquired credit enhancement interests, we show only the net amount as an asset,
which amount was $159 million at June 30, 2001.
In general, the net interest income that we generate per dollar of loans
financed in our retained portfolio is higher than it is for our credit
enhancement portfolio. In our retained portfolio, we are generally both credit
enhancing the loans and earning the spread between the yield on the mortgages
and the cost of funds of our long-term debt. The amount of capital that we
employ as a percentage of the underlying loans in our retained portfolio is also
generally higher than in our credit enhancement portfolio. The returns on equity
that we generate from our retained portfolio can be higher than we earn from our
credit enhancement portfolio, but also can be more variable with respect to
market factors such as changes in interest rates and mortgage prepayment rates.
At June 30, 2001, we owned 3,306 residential loans with a total value of
$1.1 billion. These were all "A" quality loans at origination. Of the total, 73%
were adjustable rate loans and 27% were hybrid loans. Our hybrid loans have
fixed rate coupons until December 2002, on average. Thereafter, such loans
become adjustable rate loans. The average loan size of our retained portfolio
was $320,800. At June 30, 2001, retained loans with principal balances of
$600,000 or less comprised 89% of the total number of such loans (68% of the
total balance). We owned 78 loans with a loan balance over $1 million; the
average size of these loans was $1.5 million. Loans with balances over $1
million made up 2% of the loans (11% of the balances) of our total retained loan
portfolio. Northern California loans were 13% of the total and Southern
California loans were 10% of the total. Loans originated in 1999 or earlier were
93% of the total. Loans where the original loan balance exceeded 80% LTV ratio
made up 7% of loan balances; we benefit from PMI on 99% of these loans (serving
to substantially lower our effective LTV ratio). Average effective LTV ratio at
origination for our residential retained portfolio (including the effect of PMI,
pledged collateral, and other
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credit enhancements) was 68%. Given housing appreciation and loan amortization,
we estimate the current effective LTV ratio of our retained loan portfolio is
roughly 54%.
We fund most of our residential retained loan portfolio through the
issuance of long-term debt through our special purpose subsidiary, Sequoia. The
financing is non-recourse to Redwood Trust. Our exposure to long-term financed
loans is limited to our investment in Sequoia, which at June 30, 2001, was $32
million or 3.3% of the loan balances financed with long-term debt. Short-term
funded residential mortgage loans retained at June 30, 2001 were $80 million.
Our current intention is to replace the short-term funding of these retained
loans with long-term debt through a Sequoia transaction currently scheduled for
the fourth quarter of 2001.
Credit losses were $12,000 in this portfolio in the second quarter of 2001.
We experienced an average 14% loss severity (the percentage of our liquidated
loan balances that became credit losses upon liquidation, including all foregone
interest). Our annualized credit loss rate was less than 0.01% of current
portfolio balances. We charged our $12,000 loss against our credit reserve for
this portfolio, which ended the quarter at $5.1 million (0.48% of the
portfolio). Delinquencies in this portfolio decreased to 0.46% of the portfolio
from 0.50% at the end of 2000. We expect that delinquencies and losses on the
current portfolio may increase from their current levels as a result of a weaker
economy and the further seasoning of these loans.
Investment Portfolio
In our investment portfolio, we finance real estate through acquiring and
funding mortgage securities. At June 30, 2001, we owned $0.7 billion of
securities in this portfolio. Generally, these securities have high credit
ratings. The substantial majority of this portfolio is rated AAA or AA, or
effectively has a AAA rating through a corporate guarantee from Fannie Mae or
Freddie Mac.
Since we can fund these securities with a low cost of funds in the
collateralized short-term debt (repo) markets, and since we have an efficient
tax-advantaged corporate structure, we believe that we have some advantages in
the mortgage-backed securities market relative to other capital market
investors.
The maintenance of an investment portfolio serves as several functions for
us:
- given our balance sheet characteristics, tax status and the capabilities
of our staff, mortgage securities investments can earn an attractive
return on equity;
- using a portion of our capital to fund mortgage assets with low levels of
credit risk acts as a diversification for our balance sheet;
- the high level of current cash flow from these securities, including
principal receipts from mortgage prepayments, and the general ability to
sell these assets into active trading markets has attractive liquidity
characteristics for asset/liability management purposes; and
- our investment portfolio can be an attractive place to employ capital,
and earn rates of return that are higher than cash, when our capital is
not immediately needed to support our credit-related product lines or
when we need flexibility to adjust our capital allocations.
The bulk of our investment portfolio consists of adjustable rate and
floating rate mortgage securities funded with floating rate short-term debt. We
do own some fixed rate assets in this portfolio that are either hedged or that
we hold unhedged to counter-balance certain characteristics of our balance
sheet.
The substantial majority of our investment portfolio securities are backed
by high-quality residential mortgage loans. We do have smaller positions in
residential securities backed by less than high-quality mortgage loans, but only
when such securities are substantially credit enhanced relative to the risks of
the loans and thus qualify for investment grade debt ratings. We also have
positions from time to time in commercial mortgage securities and in non-real
estate related securities, such as U.S. Treasuries and non-real estate
asset-backed securities.
Although we have the ability to hold these mortgage securities to maturity,
and our average holding period is quite long, we do sell securities from time to
time. We do this either as part of our management of
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this portfolio or in order to free capital for other uses. Because of this
flexible approach, we manage this portfolio on a total-rate-of-return basis,
taking into account both prospective income and prospective market value trends
in our investment analysis. To preserve management flexibility, we generally use
mark-to-market accounting for this portfolio. As a result of market value
fluctuations, quarterly reported earnings from our investment portfolio can be
variable.
Our current plan is to reduce the relative importance of our investment
portfolio in our asset mix over time as we acquire residential mortgage assets.
We currently plan to add to this portfolio when prospective returns are
attractive relative to our other opportunities and, on a temporary basis, when
we raise new equity capital.
Commercial Retained Loan Portfolio
Our primary business focus is on residential mortgage loan finance. On a
limited basis, we also pursue opportunities in the commercial mortgage loan
market. For several years, we have been originating commercial real estate
mortgage loans. Currently, our goal is to increase the size of our portfolio
either through origination or acquisition, although we also seek to sell our
commercial loans from time to time. We finance our commercial portfolio with
committed bank lines and through selling senior participations in our mortgage
loans. We may acquire other types of commercial mortgage loans in the future.
Total commercial loans were $67 million at June 30, 2001.
To date, we have not experienced any delinquencies or credit losses in our
commercial mortgage loan portfolio, nor do we anticipate any material credit
problems at this time. We have not established a general credit reserve for
commercial loans. A slowing economy, and factors particular to each mortgage
loan, could cause credit issues in the future. If this occurs, we may need to
provide for future losses and create a specific credit reserve on an
asset-by-asset basis for our commercial mortgage loans held for investment, or
reduce the reported market value for our loans held for sale. Other factors may
also affect the market value of these mortgage loans.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, together with that set forth under the same
heading in the prospectus, summarizes the material federal income tax
consequences that may be relevant to a prospective purchaser of common stock. It
is not exhaustive of all possible tax considerations. It does not give a
detailed discussion of any state, local or foreign tax considerations, nor does
it discuss all of the aspects of federal income taxation that may be relevant to
a prospective investor in light of such investor's particular circumstances or
to certain types of investors subject to special treatment under federal income
tax laws, including insurance companies, certain tax-exempt entities, financial
institutions, broker/dealers, foreign corporations and persons who are not
citizens or residents of the United States.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP AND SALE AND
THE POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
In the opinion of GnazzoThill, A Professional Corporation, special tax
counsel to Redwood Trust, Redwood Trust, exclusive of any taxable affiliates,
has been organized and operated in a manner which qualifies it as a REIT under
the Code since the commencement of its operations on August 19, 1994 through
June 30, 2001, the date of Redwood Trust's latest unaudited financial statements
received by special tax counsel. However, whether Redwood Trust does and
continues to so qualify will depend on actual operating results and compliance
with the various tests for qualification as a REIT relating to its income,
assets, distributions, ownership and certain administrative matters, the results
of which are not reviewed by special tax counsel on an ongoing basis. No
assurance can be given that the actual results of Redwood Trust's operations for
any one taxable year will satisfy those requirements. Moreover, certain aspects
of Redwood Trust's planned method of operations have not been considered by the
courts or the Internal Revenue Service in any published authorities that
interpret the requirements of REIT status. There can be no assurance that the
courts or the Internal Revenue Service will agree with this opinion. In
addition, qualification as a REIT depends on future transactions and events that
cannot be known at this time. Accordingly, special tax counsel will be unable to
opine whether Redwood Trust will in fact qualify as a REIT under the Code in all
events and for all periods.
The opinions of special tax counsel are based upon existing law including
the Internal Revenue Code of 1986, as amended, existing treasury regulations,
revenue rulings, revenue procedures, proposed regulations and case law, all of
which is subject to change both prospectively or retroactively. Moreover,
relevant laws or other legal authorities may change in a manner that could
adversely affect Redwood Trust or its stockholders.
In the event that Redwood Trust does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that Redwood Trust would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings and
cash available for distribution to its stockholders would be reduced.
TAXATION OF HOLDERS OF REDWOOD TRUST'S COMMON STOCK
General
In addition to the information already set forth under the heading
"Taxation of Redwood Trust's Stockholders" in the prospectus, prospective
investors should consider the following:
If Redwood Trust, or a portion of its assets, were to be classified as a
taxable mortgage pool, any "excess inclusion income" generated by such taxable
mortgage pool that is allocated to a stockholder would not be allowed to be
offset by a net operating loss of such stockholder.
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Redwood Trust is required under treasury regulations to demand annual
written statements from the record holders of designated percentages of its
capital stock disclosing the actual and constructive ownership of such stock and
to maintain permanent records showing the information it has received as to the
actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
Tax-Exempt Entities
Subject to the discussion below regarding a "pension-held REIT," a
tax-exempt stockholder is generally not subject to tax on distributions from
Redwood Trust or gain realized on the sale of its securities, provided that such
stockholder has not incurred indebtedness to purchase or hold its securities,
that its shares are not otherwise used in an unrelated trade or business of such
stockholder, and that Redwood Trust, consistent with its present intent, does
not hold a residual interest in a real estate mortgage investment conduit (a
"REMIC") that gives rise to "excess inclusion" income as defined under section
860E of the Code. However, if Redwood Trust was to hold residual interests in a
REMIC, or if a pool of its assets were to be treated as a "taxable mortgage
pool," a portion of the dividends paid to a tax-exempt stockholder may be
subject to tax as unrelated business taxable income ("UBTI"). Although Redwood
Trust does not believe that it, or any portion of its assets, will be treated as
a taxable mortgage pool, no assurance can be given that the Internal Revenue
Service might not successfully maintain that such a taxable mortgage pool
exists.
If a qualified pension trust (i.e., any pension or other retirement trust
that qualifies under Section 401 (a) of the Code) holds more than 10% by value
of the interests in a "pension-held REIT" at any time during a taxable year, a
substantial portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is a REIT
(i) that would not have qualified as a REIT but for the provisions of the Code
which look through qualified pension trust stockholders in determining ownership
of stock of the REIT and (ii) in which at least one qualified pension trust
holds more than 25% by value of the interest of such REIT or one or more
qualified pension trusts, each owning more than a 10% interest by value in the
REIT, hold in the aggregate more than 50% by value of the interests in such
REIT. Assuming compliance with the Ownership Limit provisions in Redwood Trust's
Articles of Incorporation it is unlikely that pension plans will accumulate
sufficient stock to cause Redwood Trust to be treated as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
Federal income taxation under Sections 501(c)(7), (c)(9), (c)(17), and (c)(20)
of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
Information Reporting and Backup Withholding
Redwood Trust will report to its U.S. stockholders and the Internal Revenue
Service the amount of distributions paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates that fact; or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide Redwood Trust with its correct taxpayer identification number may also
be subject to penalties imposed by the Internal Revenue Service. Any amount paid
as backup withholding will be creditable against the stockholder's income tax
liability. In addition, Redwood Trust may be required to withhold a portion of
dividends and capital gain distributions to any stockholders that do not certify
under penalties of perjury their non-foreign status to Redwood Trust.
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TAXATION OF REDWOOD TRUST
In addition to the information already set forth under the heading
"Taxation of Redwood Trust" in the prospectus, prospective investors should
consider the following:
Qualified REIT Subsidiary
Redwood Trust currently holds some of its assets through Sequoia Mortgage
Funding Corporation, a wholly-owned subsidiary, which is treated as a "qualified
REIT subsidiary." As a "qualified REIT subsidiary," Sequoia is generally ignored
as a separate entity for federal income tax purposes and its assets, liabilities
and income are treated as assets, liabilities and income of Redwood Trust for
purposes of each of the REIT qualification tests.
Taxable Subsidiaries
As noted in the prospectus, Redwood Trust has also made elections to treat
several other wholly-owned subsidiaries as "taxable REIT subsidiaries." As of
the end of each calendar quarter, securities of one or more "taxable REIT
subsidiaries" must represent no more than 20% of the value of Redwood Trust's
assets. If Redwood Trust were to make investments in non-government securities
of other entities that did not qualify as either "qualified REIT subsidiaries"
or "taxable REIT subsidiaries" under the REIT asset tests, Redwood Trust
generally would be required to limit its ownership of such securities that do
not otherwise qualify as real estate assets as follows: (i) the securities of
any one issuer must represent no more than 5% of the value of Redwood Trust's
total assets as of the end of each calendar quarter; and (ii) Redwood Trust must
not hold securities possessing more than 10% of the total voting power or total
value of the outstanding securities of any one issuer as of the end of each
calendar quarter.
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UNDERWRITING
The underwriter, Jolson Merchant Partners, Inc., has agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us 1,150,000 shares of common stock. The underwriter is committed to
purchase and pay for all shares if any are purchased.
The underwriter has advised us that it proposes to offer the shares of
common stock to the public at the public offering price listed on the cover page
of this prospectus supplement and to selected dealers at that price less a
concession of not in excess of $0.60 per share, of which $0.10 may be reallowed
to other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the underwriter. No such reduction
shall change the amount of proceeds to be received by us as listed on the cover
page of this prospectus supplement. The common stock is offered by the
underwriter, subject to receipt and acceptance by it and subject to its right to
reject any order in whole or in part.
The underwriter has advised us that it does not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Under Rule 15c6-1 of the Exchange Act, trades in the market generally are
required to settle in three business days, unless the parties to that trade
expressly agree otherwise. We have agreed with the underwriter that, subject to
the terms and conditions of the underwriting agreement, the initial trading date
and the settlement date for the sale of the 1,150,000 shares of our common stock
will be on or about October 4, 2001, which is after the record date of our
dividend for the third quarter of 2001. Accordingly, purchasers will not be able
to trade these shares of common stock before the initial trading date and the
settlement date.
Over-Allotment Option
We have granted to the underwriter an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 172,500 additional
shares of common stock to cover over-allotments, if any, at the public offering
price less the underwriting discounts and commissions listed on the cover page
of this prospectus supplement. If the underwriter exercises its over-allotment
option to purchase any of the 172,500 additional shares of common stock, these
additional shares will be sold by the underwriter on the same terms as those on
which the 1,150,000 shares offered hereby are being sold. We will be obligated,
pursuant to the over-allotment option, to sell shares to the underwriter to the
extent the over-allotment option is exercised. The underwriter may exercise the
over-allotment option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering.
The following table shows the per share and total underwriting discount we
will allow to the underwriter:
TOTAL
----------------------------
NO EXERCISE FULL EXERCISE
PER SHARE OF OPTION OF OPTION
--------- ----------- -------------
Public offering price.................................. $24.00 $27,600,000 $31,740,000
Underwriting discount and commissions to be paid by
us................................................... $ 1.00 $ 1,150,000 $ 1,322,500
------ ----------- -----------
Proceeds, before expenses, to us....................... $23.00 $26,450,000 $30,417,500
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $75,000.
Indemnity
We will indemnify the underwriter against specified civil liabilities,
including liabilities under the Securities Act, and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-Up Agreements
We and our executive officers have agreed, subject to specified exceptions,
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of common
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stock or any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus supplement or thereafter acquired directly by
those holders or with respect to which they have the power of disposition,
without the prior written consent of Jolson Merchant Partners. This restriction
terminates at the close of trading on the 90th date after (and including) the
day the common stock issued in this offering commences trading on the New York
Stock Exchange. However, Jolson Merchant Partners may, in its sole discretion
and at any time or from time to time before the termination of the 90-day
period, without notice, release all or any portion of the securities subject to
lock-up agreements. There are no existing agreements between the underwriter and
any of our stockholders who have executed a lock-up agreement providing consent
to the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Jolson Merchant Partners, subject to
specified exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, provided,
however, that we may issue and sell our common stock pursuant to our existing
stock option, stock ownership and dividend reinvestment plans that are in effect
as of the date of this prospectus supplement, and that we may issue our common
stock upon the conversion of securities or the exercise of warrants outstanding
as of the date of this prospectus supplement.
Listing
Our common stock is quoted on the New York Stock Exchange under "RWT."
Syndicate Short Sales
The underwriter has advised us that it may make short sales of our common
stock in connection with this offering, resulting in the sale by the underwriter
of a greater number of shares than it is required to purchase pursuant to the
underwriting agreement. The short position resulting from those short sales will
be deemed a "covered" short position to the extent that it does not exceed the
172,500 shares subject to the underwriter's over-allotment option and will be
deemed a "naked" short position to the extent that it exceeds that number.
A naked short position is more likely to be created if the underwriter is
concerned that there may be downward pressure on the trading price of the common
stock in the open market that could adversely affect investors who purchased
shares in the offering. The underwriter may reduce or close out its covered
short position either by exercising the over-allotment option or by purchasing
shares in the open market. In determining which of these alternatives to pursue,
the underwriter will consider the price at which shares are available for
purchase in the open market as compared to the price at which it may purchase
shares through the over-allotment option. Any "naked" short position will be
closed out by purchasing shares in the open market. Similar to the other
stabilizing transactions described below, open market purchases made by the
underwriter to cover all or a portion of its short position may have the effect
of preventing or retarding a decline in the market price of our common stock
following this offering. As a result, our common stock may trade at a price that
is higher than the price that otherwise might prevail in the open market.
Stabilization
The underwriter has advised us that, pursuant to Regulation M under the
Securities Act, it may engage in transactions, including stabilization bids or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilization bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriter for
the purpose of fixing or maintaining the price of the common stock. A "penalty
bid" is an arrangement permitting the underwriter to claim the selling
concession otherwise
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accruing to a syndicate member in connection with the offering if the common
stock originally sold by that syndicate member is purchased by the underwriter
in the open market pursuant to a stabilizing bid or to cover all or part of a
syndicate short position. The underwriter has advised us that stabilizing bids
and open market purchases may be effected on the New York Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.
Other Agreements
The underwriter may in the future perform financial advisory services for
us.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to the Annual Report on Form 10-K for the year ended December 31,
2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
Selected legal matters relating to the common stock will be passed on for
us by Tobin & Tobin, a professional corporation, San Francisco, California.
Legal matters relating to our tax status as a REIT will be passed on by
GnazzoThill, A Professional Corporation, San Francisco, California. Certain
legal matters will be passed upon for the underwriter by O'Melveny & Myers LLP,
San Francisco, California.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus supplement, which means that we can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this prospectus
supplement, except for any information superseded by information in this
prospectus supplement.
We have filed the documents listed below with the Commission under the
Securities Exchange Act of 1934, or the Exchange Act, and these documents are
incorporated herein by reference:
- Our Annual Report on Form 10-K for the year ended December 31, 2000;
- Our Quarterly Report on Form 10-Q for the quarters ended March 31, 2001
and June 30, 2001; and
- Our Definitive Proxy Statement filed April 2, 2001.
Any statement contained in a document incorporated by reference shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this prospectus supplement modifies or supersedes that
statement.
You may obtain copies of all documents which are incorporated in this
prospectus supplement by reference (other than the exhibits to such documents
unless the exhibits are specifically incorporated herein by reference in the
documents that this prospectus supplement incorporates by reference) without
charge upon written or oral request to Redwood Trust, Inc., 591 Redwood Highway,
Suite 3100, Mill Valley, CA 94941, telephone (415) 389-7373.
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PROSPECTUS
MARCH 12, 2001
COMMON STOCK, PREFERRED STOCK, WARRANTS,
AND SHAREHOLDER RIGHTS TO PURCHASE
COMMON STOCK AND PREFERRED STOCK
$384,075,000
RWT
REDWOOD TRUST, INC.
------------------------------
By this prospectus, we may offer, from time to time, securities consisting
of:
- shares of our common stock
- shares of our preferred stock
- any warrants to purchase our common stock or preferred stock
- rights to purchase our common stock or preferred stock issued to our
shareholders
- any combination of the foregoing
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you decide to invest.
This prospectus may not be used to consummate sales of these securities
unless it is accompanied by a prospectus supplement.
The New York Stock Exchange lists our common stock under the symbol "RWT."
We also currently have one class of outstanding preferred stock listed under the
symbol "RWTB."
To ensure we qualify as a real estate investment trust, no person may own
more than 9.8% of the outstanding shares of any class of our common stock or our
preferred stock, unless our Board of Directors waives this limitation.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 12, 2001
28
TABLE OF CONTENTS
PAGE
----
About this Prospectus....................................... 2
Private Securities Litigation Reform Act of 1995............ 2
The Company................................................. 3
Use of Proceeds............................................. 3
Description of Securities................................... 3
Federal Income Tax Considerations........................... 9
Plan of Distribution........................................ 16
ERISA Investors............................................. 17
Legal Matters............................................... 18
Experts..................................................... 18
Where You Can Find More Information......................... 18
Incorporation by Reference.................................. 18
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this process, we may offer and sell any combination of the securities covered by
this prospectus in one or more offerings up to a total dollar amount of
$384,075,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer to sell securities, we will provide
a supplement to this prospectus that will contain specific information about the
terms of that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information you may
need to make your investment decision.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This prospectus and the documents incorporated by reference herein contain
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on our current expectations, estimates and
projections. Statements that are not historical facts, including statements
about our beliefs and expectations, are forward-looking statements. These
statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, our actual results may
differ from our current expectations, estimates and projections. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Important factors that may impact our actual results include changes in
interest rates, changes in the yield curve, changes in prepayment rates, the
supply of mortgage loans and mortgage securities, our ability to obtain
financing, the terms of any financing and other factors described in this
prospectus.
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THE COMPANY
Redwood Trust, Inc. is a real estate finance company specializing in
owning, financing and credit-enhancing high-quality jumbo residential mortgage
loans nationwide. We also finance U.S. real estate in a number of other ways,
including through our investment portfolio (investment-grade mortgage
securities) and our commercial loan portfolio. Our primary source of revenues is
monthly payments made by homeowners on their mortgages. Our primary expense is
the cost of borrowed funds. Since we are structured as a Real Estate Investment
Trust (REIT), we distribute the bulk of our net earnings to shareholders as
dividends. Our REIT status permits us to deduct dividend distributions to
stockholders from our taxable income, thereby eliminating the "double taxation"
that generally results when a corporation earns income and distributes that
income to stockholders in the form of dividends. We are self-advised and
self-managed. Our principal executive offices are located at 591 Redwood
Highway, Suite 3100, Mill Valley, CA 94941, telephone 415-389-7373.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, we
intend to use the net proceeds from the securities for acquisition of mortgage
assets and general corporate purposes. Pending any such uses, we may invest the
net proceeds from the sale of any securities or may use them to reduce
short-term or adjustable-rate indebtedness. If we intend to use the net proceeds
from a sale of securities to finance a significant acquisition of a business, a
related prospectus supplement will describe the material terms of such
acquisition.
DESCRIPTION OF SECURITIES
GENERAL
The following is a brief description of the material terms of our
securities that may be offered under this prospectus. This description does not
purport to be complete and is subject in all respects to applicable Maryland law
and to the provisions of our Charter and Bylaws, including any applicable
amendments or supplements thereto, copies of which are on file with the
Commission as described under "Available Information" and are incorporated by
reference herein.
We may offer under this prospectus one or more of the following types of
securities: shares of common stock, par value $0.01 per share; shares of
preferred stock, in one or more classes or series; common stock warrants;
preferred stock warrants; shareholder rights; and any combination of the
foregoing, either individually or as units consisting of one or more of the
foregoing types of securities. The terms of any specific offering of securities,
including the terms of any units offered, will be set forth in a prospectus
supplement relating to such offering.
Our current authorized equity capitalization consists of 50 million shares
which may be comprised of common stock and preferred stock. The common stock and
the only currently issued, authorized and outstanding preferred stock, the Class
B 9.74% Cumulative Convertible Preferred Stock (the "Class B Preferred Stock"),
are listed on the New York Stock Exchange, and we intend to so list any
additional shares of our common stock which are issued and sold hereunder. We
may elect to list any future class or series of our securities issued hereunder
on an exchange, but we are not obligated to do so.
COMMON STOCK
Common stockholders are entitled to receive dividends when, as and if
declared by our board of directors, out of legally available funds. In the case
of the Class B Preferred Stock and in the event any future class or series of
preferred stock is issued, dividends on any outstanding shares of preferred
stock are required to be paid in full before payment of any dividends on the
common stock. If we have a liquidation, dissolution or winding up, common
stockholders are entitled to share ratably in all of our assets available for
distribution after payment of all our debts and other liabilities and the
payment of all liquidation and other
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preference amounts to preferred stockholders then outstanding. There are no
preemptive or other subscription rights, conversion rights, or redemption or
sinking fund provisions with respect to shares of common stock.
Each holder of common stock is entitled to one vote per share with respect
to all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights, if any, of any class or series of
preferred stock that may be outstanding from time to time. Our charter and
bylaws contain no restrictions on our repurchase of shares of the common stock.
All the outstanding shares of common stock are, and additional shares of common
stock will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Subject to the terms of the outstanding Class B Preferred Stock, our board
of directors is authorized to designate with respect to each class or series of
preferred stock the number of shares in each such class or series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative, and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions if any, the terms and conditions on which shares can be
converted into or exchanged for shares of another class or series, and the
voting rights, if any.
Any preferred stock issued may rank prior to the common stock as to
dividends and will rank prior to the common stock as to distributions in the
event of our liquidation, dissolution or winding up. The ability of our board of
directors to issue preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among other
things, adversely affect the voting powers of common stockholders. The shares of
Class B Preferred Stock are, and any future shares of preferred stock will be,
validly issued, fully paid and nonassessable.
SECURITIES WARRANTS
We may issue securities warrants for the purchase of common stock or
preferred stock, respectively referred to as common stock warrants and preferred
stock warrants. Securities warrants may be issued independently or together with
any other securities offered by this prospectus and any accompanying prospectus
supplement and may be attached to or separate from such other securities. Each
issuance of the securities warrants will be issued under a separate securities
warrant agreement to be entered into by us and a bank or trust company, as
securities warrant agent, all as set forth in the prospectus supplement relating
to the particular issue of offered securities warrants. Each issue of securities
warrants will be evidenced by securities warrant certificates. The securities
warrant agent will act solely as an agent of ours in connection with the
securities warrants certificates and will not assume any obligation or
relationship of agency or trust for or with any holder of securities warrant
certificates or beneficial owners of securities warrants.
If we offer securities warrants pursuant to this prospectus in the future,
the applicable prospectus supplement will describe the terms of such securities
warrants, including the following, where applicable:
- the offering price;
- the aggregate number of shares purchasable upon exercise of such
securities warrants, and in the case of securities warrants for preferred
stock, the designation, aggregate number and terms of the class or series
of preferred stock purchasable upon exercise of such securities warrants;
- the designation and terms of the securities with which such securities
warrants are being offered, if any, and the number of such securities
warrants being offered with each such security;
- the date on and after which such securities warrants and any related
securities will be transferable separately;
- the number of shares of preferred stock or shares of common stock
purchasable upon exercise of each of such securities warrant and the
price at which such number of shares of preferred stock or common stock
may be purchased upon such exercise;
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- the date on which the right to exercise such securities warrants shall
commence and the expiration date on which such right shall expire;
- federal income tax considerations; and
- any other material terms of such securities warrants.
Holders of future securities warrants, if any, will not be entitled by
virtue of being such holders, to vote, to consent, to receive dividends, to
receive notice with respect to any meeting of stockholders for the election of
our directors or any other matter, or to exercise any rights whatsoever as
stockholders of Redwood Trust.
STOCKHOLDER RIGHTS
We may issue, as a dividend at no cost, stockholder rights to holders of
record of our securities or any class or series thereof on the applicable record
date. If stockholders rights are so issued to existing holders of securities,
each stockholder right will entitle the registered holder thereof to purchase
the securities pursuant to the terms set forth in the applicable prospectus
supplement.
If stockholder rights are issued, the applicable prospectus supplement will
describe the terms of such stockholder rights including the following where
applicable:
- record date;
- subscription price;
- subscription agent;
- aggregate number of shares of preferred stock or shares of common stock
purchasable upon exercise of such stockholder rights and in the case of
stockholder rights for preferred stock, the designation, aggregate number
and terms of the class or series of preferred stock purchasable upon
exercise of such stockholder rights;
- the date on which the right to exercise such stockholder rights shall
commence and the expiration date on which such right shall expire;
- federal income tax considerations; and
- and other material terms of such stockholder rights.
In addition to the terms of the stockholder rights and the securities
issuable upon exercise thereof, the prospectus supplement may describe, for a
holder of such stockholder rights who validly exercises all stockholder rights
issued to such holder, how to subscribe for unsubscribed securities, issuable
pursuant to unexercised stockholder rights issued to other holders, to the
extent such stockholder rights have not been exercised.
Holders of stockholder rights will not be entitled by virtue of being such
holders, to vote, to consent, to receive dividends, to receive notice with
respect to any meeting of stockholders for the election of our directors or any
other matter, or to exercise any rights whatsoever as stockholders of Redwood
Trust, except to the extent described in the related prospectus supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFER AND REPURCHASE OF SHARES
In order that we may meet the requirements for qualification as a REIT at
all times, our charter prohibits any person from acquiring or holding beneficial
ownership of a number of shares of common stock or preferred stock
(collectively, the "capital stock") in excess of 9.8% of the outstanding shares
of the related class of capital stock. For this purpose, the term "beneficial
ownership" means beneficial ownership, as determined under Rule 13d-3 under the
Securities Exchange Act of 1934, of capital stock by a person, either directly
or constructively under the constructive ownership provisions of Section 544 of
the Code and related provisions.
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Under the constructive ownership rules of Section 544 of the Code, a holder
of a warrant will be treated as owning the number of shares of capital stock
into which such warrant may be converted. In addition, the constructive
ownership rules generally attribute ownership of securities owned by a
corporation, partnership, estate or trust proportionately to its stockholders,
partners or beneficiaries, respectively. The rules may also attribute ownership
of securities owned by family members to other members of the same family and
treat securities with respect to which a person has an option to purchase as
actually owned by that person. The rules further provide when securities
constructively owned by a person are considered to be actually owned for the
application of such attribution provisions. To determine whether a person holds
or would hold capital stock in excess of the 9.8% ownership limit, a person will
be treated as owing not only shares of capital stock actually owned, but also
any shares of capital stock attributed to that person under the attribution
rules described above. Accordingly, a person who individually owns less than
9.8% of the shares outstanding may nevertheless be in violation of the 9.8%
ownership limit.
Any transfer of shares of capital stock warrants that would cause us to be
disqualified as a REIT or that would create a direct or constructive ownership
of shares of capital stock in excess of the 9.8% ownership limit, or result in
the shares of capital stock being beneficially owned, within the meaning of
Section 856(a) of the Code, by fewer than 100 persons, determined without any
reference to any rules of attribution, or result in us being closely held within
the meaning of Section 856(h) of the Code, will be null and void, and the
intended transferee will acquire no rights to those shares or warrants. These
restrictions on transferability and ownership will not apply if our board
determines that it is no longer in our best interests to continue to qualify as
a REIT.
Any purported transfer of shares of capital stock or warrants that would
result in a purported transferee owning, directly or constructively, shares in
excess of the 9.8% ownership limit due to the unenforceability of the transfer
restrictions described above will constitute excess securities. Excess
securities will be transferred by operation of law to Redwood Trust as trustee
for the exclusive benefit of the person or persons to whom the excess securities
are ultimately transferred, until such time as the purported transferee
retransfers the excess securities. While the excess securities are held in
trust, a holder of such securities will not be entitled to vote or to share in
any dividends or other distributions with respect to such securities and will
not be entitled to exercise or convert such securities into shares of capital
stock. Subject to the 9.8% ownership limit, excess securities may be transferred
by the purported transferee to any person (if such transfer would not result in
excess securities) at a price not to exceed the price paid by the purported
transferee (or, if no consideration was paid by the purported transferee, the
fair market value of the excess securities on the date of the purported
transfer), at which point the excess securities will automatically be exchanged
for the stock or warrants, as the case may be, to which the excess securities
are attributable. If a purported transferee receives a higher price for
designating an ultimate transferee, such purported transferee shall pay, or
cause the ultimate transferee to pay, such excess to us. In addition, such
excess securities held in trust are subject to purchase by us at a purchase
price equal to the lesser of (a) the price per share or per warrant, as the case
may be, in the transaction that created such excess securities (or, in the case
of a devise or gift, the market price at the time of such devise or gift),
reduced by the amount of any distributions received in violation of the charter
that have not been repaid to us, and (b) the market price as reflected in the
last reported sales price of such shares of stock or warrants on the trading day
immediately preceding the date of the purchase by us as reported on any exchange
or quotation system over which such shares of stock or warrants may be traded,
or if not then traded over any exchange or quotation system, then the market
price of such shares of stock or warrants on the date of the purported transfer
as determined in good faith by our board of directors, reduced by the amount of
any distributions received in violation of the charter that have not been repaid
to us.
Upon a purported transfer of excess securities, the purported transferee
shall cease to be entitled to distributions, voting rights and other benefits
with respect to the shares of capital stock or warrants except the right to
payment of the purchase price for the shares of capital stock or warrants on the
retransfer of securities as provided above. Any dividend or distribution paid to
a purported transferee on excess securities prior to our discovery that shares
of capital stock have been transferred in violation of our articles of
incorporation shall be repaid to us upon demand. If these transfer restrictions
are determined to be void,
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invalid or unenforceable by a court of competent jurisdiction, then the
purported transferee of any excess securities may be deemed, at our option, to
have acted as an agent on our behalf in acquiring the excess securities and to
hold the excess securities on our behalf.
All certificates representing shares of capital stock and warrants will
bear a legend referring to the restrictions described above.
Any person who acquires shares or warrants in violation of our Charter, or
any person who is a purported transferee such that excess securities result,
must immediately give written notice or, in the event of a proposed or attempted
transfer that would be void as set forth above, give at least 15 days prior
written notice to us of such event and shall provide us such other information
as we may request in order to determined the effect, if any, of the transfer on
our status as a REIT. In addition, every record owner of more than 5.0%, during
any period in which the number of record stockholders is 2,000 or more, or 1.0%,
during any period in which the number of record stockholders is greater than 200
but less than 2,000 or more, or 1/2%, during any period in which the number of
record stockholders is 200 or less, of the number or value of our outstanding
shares must send us an annual written notice by January 31 describing how the
shares are held. Further, each stockholder upon demand is required to disclose
to us in writing such information with respect to the direct and constructive
ownership of shares and warrants as our board deems reasonably necessary to
comply with the REIT provisions of the Code, to comply with the requirements of
any taxing authority or governmental agency or to determine any such compliance.
Our board may increase or decrease the 9.8% ownership limit. In addition,
to the extent consistent with the REIT provisions of the Code, our board may,
pursuant to our Charter, waive the 9.8% ownership limit for a purchaser of our
stock. As a condition to such waiver the intended transferee must give written
notice to the board of the proposed transfer no later than the fifteenth day
prior to any transfer which, if consummated, would result in the intended
transferee owning shares in excess of the ownership limit. Our board may also
take such other action as it deems necessary or advisable to protect our status
as a REIT.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of our capital stock and warrants to
receive a premium for their shares or warrants that might otherwise exist in the
absence of such provisions. Such provisions also may make us an unsuitable
investment vehicle for any person seeking to obtain ownership of more than 9.8%
of the outstanding shares of our capital stock.
MARYLAND CONTROL SHARE ACQUISITION STATUTE
The Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
shares of stock owned by such a person, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-tenth or more but less than one third, (ii) one-third or more but
less than a majority, or (iii) a majority or more of all voting power. "Control
shares" do not include shares of stock the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A "control
share acquisition" means, subject to certain exceptions, the acquisition of,
ownership of, or the power to direct the exercise of voting power with respect
to, control shares.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions, including an undertaking to pay
expenses, may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders' meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the
"control shares," except those for which voting rights have previously been
approved, for fair value determined, without regard to absence of voting rights,
as of the date of the last control share acquisition or of any meeting of
stockholders at which the voting rights of such shares are
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considered and not approved. If voting rights for "control shares" are approved
at a stockholders meeting and the acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the stock, as determined for purposes of such
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context of
"control share acquisitions."
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a provision of the
charter or bylaws of the corporation adopted prior to the acquisition of the
shares. The control share acquisition statute could have the effect of
discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if the acquisition would be in our
stockholders' best interests.
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services LLC is the transfer agent and registrar with
respect to our securities.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences that may be relevant to a prospective purchaser of securities. It
is not exhaustive of all possible tax considerations. It does not give a
detailed discussion of any state, local or foreign tax considerations, nor does
it discuss all of the aspects of federal income taxation that may be relevant to
a prospective investor in light of such investor's particular circumstances or
to certain types of investors subject to special treatment under federal income
tax laws, including insurance companies, certain tax-exempt entities, financial
institutions, broker/dealers, foreign corporations and persons who are not
citizens or residents of the United States.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP AND SALE AND
THE POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion of various aspects of federal
taxation contained in this prospectus is based on the Code, administrative
regulations, judicial decisions, administrative rulings and practice as in
effect today, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met, entities that invest primarily in real
estate assets, including mortgage loans, and that otherwise would be taxed as
corporations are, with certain limited exceptions, not taxed at the corporate
level on their taxable income that is currently distributed to their
stockholders. This treatment eliminates most of the "double taxation," at the
corporate level and then again at the stockholder level when the income is
distributed, that typically results from the use of corporate investment
vehicles. A qualifying REIT, however, may be subject to certain excise and other
taxes, as well as normal corporate tax, on taxable income that is not currently
distributed to its stockholders.
Redwood Trust made an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1994.
In the opinion of GnazzoThill, A Professional Corporation, special tax
counsel to Redwood Trust, Redwood Trust, exclusive of any taxable affiliates,
has been organized and operated in a manner which qualifies it as a REIT under
the Code since the commencing of its operations on August 19, 1994 through
September 30, 2000, the date of Redwood Trust's latest unaudited financial
statements received by special tax counsel. However, whether Redwood Trust does
and continues to so qualify will depend on actual operating results and
compliance with the various tests for qualification as a REIT relating to its
income, assets, distributions, ownership and certain administrative matters, the
results of which are not reviewed by special tax counsel on an ongoing basis. No
assurance can be given that the actual results of Redwood Trust's operations for
any one taxable year will satisfy those requirements. Moreover, certain aspects
of Redwood Trust's planned method of operations have not been considered by the
courts or the Internal Revenue Service in any published authorities that
interpret the requirements of REIT status. There can be no assurance that the
courts or the Internal Revenue Service will agree with this opinion. In
addition, qualification as a REIT depends on future transactions and events that
cannot be known at this time. Accordingly, special tax counsel will be unable to
opine whether Redwood Trust will in fact qualify as a REIT under the Code in all
events and for all periods.
The opinions of special tax counsel are based upon existing law including
the Internal Revenue Code of 1986, as amended, existing treasury regulations,
revenue rulings, revenue procedures, proposed regulations and case law, all of
which is subject to change both prospectively or retroactively. Moreover,
relevant laws or other legal authorities may change in a manner that could
adversely affect Redwood Trust or its stockholders.
In the event that Redwood Trust does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that Redwood Trust would, as a consequence, be
subject to potentially
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significant tax liabilities, the amount of earnings and cash available for
distribution to its stockholders would be reduced. See "Termination or
Revocation of REIT Status" below for more detail.
QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, Redwood Trust must
meet certain tests which are described immediately below.
Ownership of Stock. For all taxable years after the first taxable year for
which a REIT election is made, Redwood Trust's shares of stock must be
transferable and must be held by a minimum of 100 persons for at least 335 days
of a 12 month year, or a proportionate part of a short tax year. Redwood Trust
must also use the calendar year as its taxable year for income tax purposes. In
addition, at all times during the second half of each taxable year, no more than
50% in value of the stock of Redwood Trust may be owned directly or indirectly
by five or fewer individuals. In determining whether Redwood Trust's shares are
held by five or fewer individuals, the attribution rules of Section 544 of the
Code (as modified by Section 856(h)(1)(B)(i) of the Internal Revenue Code)
apply. Redwood Trust's Charter imposes certain repurchase provisions and
transfer restrictions that are intended to avoid having more than 50% of the
value of Redwood Trust's stock being held by five or fewer individuals, directly
or constructively, at any time during the last half of any taxable year. These
repurchase transfer restrictions should not cause the stock to be treated as
"non-transferable" for purposes of qualification as a REIT. Redwood Trust
intends to satisfy both the 100 stockholder and 50%/5 stockholder individual
ownership limitations described above for as long as it seeks qualification as a
REIT.
Nature of Assets. On the last day of each calendar quarter at least 75% of
the value of Redwood Trust's assets must consist of qualified REIT assets,
government securities, cash and cash items (the "75% Assets Test"). Redwood
Trust expects that substantially all of its assets will be "qualified REIT
assets." Qualified REIT assets generally include interests in real property,
interests in mortgage loans secured by real property, and interests in other
REITs, REMICs and regular interests in FASITs.
For tax years beginning before December 31, 2000, on the last day of each
calendar quarter, of the investments in securities not included in the 75%
Assets Test, the value of any one issuer's securities may not exceed 5% by value
of Redwood Trust's total assets and Redwood Trust may not own more than 10% of
any one issuer's outstanding voting securities. For tax years beginning after
December 31, 2000, of the investments in securities not included in the 75%
Assets Test, the securities of one or more taxable REIT subsidiary may not
exceed 20% by value of Redwood Trust's total assets and, other than with respect
to taxable REIT subsidiaries, the value of any one issuer's securities may not
exceed 5% by value of Redwood Trust's total assets and Redwood Trust may not own
more than 10% of the voting power or value of any one issuer's securities.
Pursuant to its compliance guidelines, Redwood Trust intends to monitor closely,
on not less than a quarterly basis, the purchase and holding of Redwood Trust's
assets in order to comply with the above assets tests. In particular, as of the
end of each calendar quarter Redwood Trust intends to limit and diversify its
ownership of securities of any other entity, hedging contracts and other
mortgage securities that do not constitute qualified REIT assets to less than
25%, in the aggregate, by value of its portfolio, to less than 20% by value in
any taxable REIT subsidiary and, other than with respect to any taxable REIT
subsidiary, to less than 5% by value as to any single issuer, including the
stock of any taxable affiliate of Redwood Trust, and to less than 10% of the
voting stock or value of any single issuer. If such limits are ever exceeded,
Redwood Trust intends to take appropriate remedial action to dispose of such
excess assets within the 30 day period after the end of the calendar quarter, as
permitted under the Code.
When purchasing mortgage-related securities, Redwood Trust may rely on
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute qualified REIT assets and
income for purposes of the 75% Assets Test, and the source of income tests
discussed below. If Redwood Trust invests in a partnership, Redwood Trust will
be treated as receiving its share of the income and loss of the partnership and
owning a proportionate
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share of the assets of the partnership and any income from the partnership will
retain the character that it had in the hands of the partnership.
Sources of Income. Redwood Trust must meet two separate income-based tests
for each year to qualify as a REIT.
1. THE 75% TEST. At least 75% of Redwood Trust's gross income for the
taxable year must be derived from the following sources among others: (1)
interest, other than interest based in whole or in part on the income or
profits of any person, on obligations secured by mortgages on real property
or on interests in real property; (2) gains from the sale or other
disposition of interests in real property and real estate mortgages, other
than gain from property held primarily for sale to customers in the
ordinary course of Redwood Trust's business, known as "dealer property";
(3) income from the operation, and gain from the sale, of property acquired
at or in lieu of a foreclosure of the mortgage secured by such property or
as a result of a default under a lease of such property, known as
"foreclosure property"; (4) income received as consideration for entering
into agreements to make loans secured by real property or to purchase or
lease real property, including interests in real property and interests in
mortgages on real property, for example, commitment fees; (5) rents from
real property; and (6) income attributable to stock or debt instruments
acquired with the proceeds from the sale of stock or certain debt
obligations, or new capital, of Redwood Trust received during the one-year
period beginning on the day such proceeds were received, or qualified
temporary investment income. The investments that Redwood Trust intends to
make will give rise primarily to mortgage interest qualifying under the 75%
income test.
2. THE 95% TEST. In addition to deriving 75% of its gross income from
the sources listed above, at least an additional 20% of Redwood Trust's
gross income for the taxable year must be derived from those sources, or
from dividends, interest or gains from the sale or disposition of stock or
other securities that are not dealer property. Income attributable to
assets other than qualified REIT assets, such as income from or gain on the
disposition of qualified liability hedges, that Redwood Trust holds,
dividends on stock including any dividends from a taxable affiliate,
interest on any other obligations not secured by real property, and gains
from the sale or disposition of stock or other securities that are not
qualified REIT assets will constitute qualified income for purposes of the
95% income test only, and will not be qualified income for purposes of the
75% income test. Income from mortgage servicing, loan guarantee fees or
other contracts under which Redwood Trust would earn fees for performing
services, and asset hedging will not qualify for either the 95% or 75%
income tests. Redwood Trust intends to maintain its REIT status by
carefully monitoring its income, including income from hedging
transactions, futures contracts and sales of Mortgage Assets to comply with
the 75% income test and the 95% income test. Redwood Trust intends to
severely limit its acquisition of any assets or investments the income from
which does not qualify for purposes of the 95% income test. Moreover, in
order to help ensure compliance with the 95% income test and the 75% income
test, Redwood Trust has adopted guidelines the effect of which will be to
limit substantially all of the assets that it acquires, other than the
shares of Holdings and qualified liability hedges, to qualified REIT
assets. The policy of Redwood Trust to maintain REIT status may limit the
type of assets, including hedging contracts, that Redwood Trust otherwise
might acquire.
For purposes of determining whether Redwood Trust complies with the 75%
income test and the 95% income test detailed above, gross income does not
include gross income from "prohibited transactions." A "prohibited transaction"
is one involving a sale of dealer property, other than foreclosure property. Net
income from "prohibited transactions" is subject to a 100% tax. See "-- Taxation
of Redwood Trust" in this prospectus for more detail.
If Redwood Trust fails to satisfy one or both of the 75% or 95% income
tests for any year, it may face either (a) assuming such failure was for
reasonable cause and not willful neglect, a 100% tax on the greater of the
amounts of income by which it failed to comply with the 75% test of income or
the 95% income test, reduced by estimated related expenses or (b) loss of REIT
status. There can be no assurance that Redwood Trust will always be able to
maintain compliance with the gross income tests for REIT qualification despite
Redwood Trust's periodic monitoring procedures. Moreover, there is no assurance
that the relief provisions
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for a failure to satisfy either the 95% or the 75% income tests will be
available in any particular circumstance.
Distributions. Redwood Trust must distribute to its stockholders on a pro
rata basis each year an amount equal to (1) 95% of its taxable income before
deduction of dividends paid and excluding net capital gain, plus (2) 95% of the
excess of the net income from foreclosure property over the tax imposed on such
income by the Code, less (iii) any "excess noncash income." Beginning with the
2001 tax year, this distribution requirement has been reduced to 90%. Redwood
Trust intends to make distributions to its stockholders in amounts sufficient to
meet this distribution requirement. Such distributions must be made in the
taxable year to which they relate or, if declared before the timely filing of
Redwood Trust's tax return for such year and paid not later than the first
regular dividend payment after such declaration, in the following taxable year.
A nondeductible excise tax, equal to 4% of the excess of such required
distributions over the amounts actually distributed will be imposed on Redwood
Trust for each calendar year to the extent that dividends paid during the year,
or declared during the last quarter of the year and paid during January of the
succeeding year, are less than the sum of (1) 85% of Redwood Trust's "ordinary
income," (2) 95% of Redwood Trust's capital gain net income, and (3) income not
distributed in earlier years.
If Redwood Trust fails to meet the distribution test as a result of an
adjustment to Redwood Trust's tax returns by the Internal Revenue Service,
Redwood Trust, by following certain requirements set forth in the Code, may pay
a deficiency dividend within a specified period which will be permitted as a
deduction in the taxable year to which the adjustment is made. Redwood Trust
would be liable for interest based on the amount of the deficiency dividend. A
deficiency dividend is not permitted if the deficiency is due to fraud with
intent to evade tax or to a willful failure to file timely tax return.
TAXATION OF REDWOOD TRUST
In any year in which Redwood Trust qualifies as a REIT, it generally will
not be subject to federal income tax on that portion of its taxable income or
net capital gain which is distributed to its stockholders. Redwood Trust will,
however, be subject to tax at normal corporate rates upon any net income or net
capital gain not distributed. Redwood Trust intends to distribute substantially
all of its taxable income to its stockholders on a pro rata basis in each year.
In addition, Redwood Trust will also be subject to a tax of 100% of net
income from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% income tests,
reduced by approximated expenses, if the failure to satisfy such tests is due to
reasonable cause and not willful neglect and if certain other requirements are
met. Redwood Trust may be subject to the alternative minimum tax on certain
items of tax preference.
If Redwood Trust acquires any real property as a result of foreclosure, or
by a deed in lieu of foreclosure, Redwood Trust may elect to treat such real
property as "foreclosure property." Net income from the sale of foreclosure
property is taxable at the maximum federal corporate rate, currently 35%. Income
from foreclosure property will not be subject to the 100% tax on prohibited
transactions. Redwood Trust will determine whether to treat such real property
as foreclosure property on the tax return for the fiscal year in which such
property is acquired.
For tax years beginning prior to 2001, REITs were generally limited to
holding non-voting stock in taxable affiliates. However, beginning with the 2001
tax year, REITs may own directly all of the stock, including voting stock, of a
taxable REIT subsidiary. Effective January 1, 2001, RWT Holdings, Inc.
("Holdings") and Redwood Trust elected to treat Holdings as a taxable REIT
subsidiary of Redwood Trust. Any other taxable subsidiaries of Redwood Trust
generally will also be converted to qualified taxable REIT subsidiaries. The
aggregate value of these taxable REIT subsidiaries must be limited to 20% of the
total value of Redwood Trust's assets. In addition, the taxable REIT
subsidiaries may not, directly or indirectly, operate or manage a lodging
facility or healthcare facility or provide to any person, under franchise,
license or otherwise, rights to any lodging facility or healthcare facility
brand name. In addition, Redwood Trust will be subject to a 100% penalty tax
equal to any rent or other charges that it imposed on any taxable REIT
subsidiary in excess of an arm's-length price for comparable services.
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Redwood Trust will derive income from its taxable REIT subsidiaries by way
of dividends. Such dividends are non-real estate source income for purposes of
the 75% income test. Therefore, when aggregated with Redwood Trust's other
non-real estate source income, such dividends must be limited to 25% of Redwood
Trust's gross income each year. Redwood Trust will monitor the value of its
investment in its taxable REIT subsidiaries to ensure compliance with all
applicable income and asset tests.
Redwood Trust's taxable REIT subsidiaries are generally subject to
corporate level tax on their net income and will generally be able to distribute
only net after-tax earnings to its stockholders, including Redwood Trust, as
dividend distributions.
Redwood Trust will also be subject to the nondeductible 4% excise tax
discussed above if it fails to make timely dividend distributions for each
calendar year. Redwood Trust intends to declare its fourth regular annual
dividend during the final quarter of the year and to make such dividend
distribution no later than thirty-one (31) days after the end of the year in
order to avoid imposition of the excise tax. Such a distribution would be taxed
to the stockholders in the year that the distribution was declared, not in the
year paid. Imposition of the excise tax on Redwood Trust would reduce the amount
of cash available for distribution to Redwood Trust's stockholders. Shareholders
may also be required to include on their own returns certain undistributed
long-term capital gains earned by Redwood Trust and on which it has paid tax.
Shareholders shall receive a credit for the tax so paid by the REIT and shall
increase the basis in their stock by the excess of such gains over such tax
paid.
TERMINATION OR REVOCATION OF REIT STATUS
Redwood Trust's election to be treated as a REIT will be terminated
automatically if Redwood Trust fails to meet the requirements described above.
In that event, Redwood Trust will not be eligible again to elect REIT status
until the fifth taxable year which begins after the year for which Redwood
Trust's election was terminated unless all of the following relief provisions
apply:
- Redwood Trust did not willfully fail to file a timely return with respect
to the termination taxable year;
- inclusion of incorrect information in such return was not due to fraud
with intent to evade tax; and
- Redwood Trust establishes that failure to meet requirements was due to
reasonable cause and not willful neglect.
Redwood Trust may also voluntarily revoke its election, although it has no
intention of doing so, in which event Redwood Trust will be prohibited, without
exception, from electing REIT status for the year to which the revocation
relates and the following four taxable years.
If Redwood Trust fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, Redwood Trust would be subject to
tax, including any applicable alternative minimum tax, on its taxable income at
regular corporate rates. Distributions to stockholders of Redwood Trust with
respect to any year in which Redwood Trust fails to qualify as a REIT would not
be deductible by Redwood Trust nor would they be required to be made. Failure to
qualify as a REIT would result in Redwood Trust's reduction of its distributions
to stockholders in order to pay the resulting taxes. If, after forfeiting REIT
status, Redwood Trust later qualifies and elects to be taxed as a REIT again,
Redwood Trust could face significant adverse tax consequences.
TAXATION OF REDWOOD TRUST'S STOCKHOLDERS
General Taxation. For any taxable year in which Redwood Trust is treated as
a REIT for federal income purposes, amounts distributed by Redwood Trust to its
stockholders out of current or accumulated earnings and profits will be
includible by the stockholders as ordinary income for federal income tax
purposes unless properly designated by Redwood Trust as capital gain dividends.
In the latter case, the distributions will generally be taxable to the
stockholders as long-term capital gains.
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Distributions of Redwood Trust will not be eligible for the dividends
received deduction for corporations that are stockholders. Stockholders may not
deduct any net operating losses or capital losses of Redwood Trust.
Upon a sale or disposition of either common stock or preferred stock, a
stockholder will generally recognize a capital gain or loss in an amount equal
to the difference between the amount realized and the stockholder's adjusted
basis in such stock, which gain or loss will be long-term if the stock has been
held for more than one year. Any loss on the sale or exchange of shares of the
stock of Redwood Trust held by a stockholder for six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividend
received on the stock held by such stockholders.
If Redwood Trust makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in excess
of the tax basis will be taxable as gain realized from the sale of Redwood
Trust's shares.
Redwood Trust will notify stockholders after the close of Redwood Trust's
taxable year as to the portions of the distributions which constitute ordinary
income, return of capital and capital gain. Dividends and distributions declared
in the last quarter of any year payable to stockholders of record on a specified
date in such quarter will be deemed to have been received by the stockholders
and paid by Redwood Trust on December 31 of the record year, provided that such
dividends are paid before February 1 of the following year. If either common or
preferred stock is sold after a record date but before a payment date for
declared dividends on such stock, a stockholder will nonetheless be required to
include such dividend in income in accordance with the rules above for
distributions, whether or not such dividend is required to be paid over to the
purchaser.
Generally, a distribution of earnings from a REIT is considered for
estimated tax purposes only when the distribution is made. However, if Redwood
Trust is at any time deemed to be a "closely-held REIT" (a REIT in which at
least 50% of the vote or value is owned by 5 or fewer persons), any stockholder
owning 10% or more of the vote or value of Redwood's shares must accelerate
recognition of year end distributions such shareholder receives from Redwood
Trust in computing estimated tax payments. Redwood Trust is not currently, and
does not intend to be, a "closely-held REIT."
Redwood Trust maintains a Dividend Reinvestment and Stock Purchase Plan or
DRP Plan, Registration No. 333-18061, effective January 2, 1997. DRP
participants will generally be treated as having received a dividend
distribution equal to the fair market value on the investment date of the plan
shares that are purchased with the participants' reinvested dividends and/or
optional cash payments on such date, plus the brokerage commissions, if any,
allocable to the purchase of such shares, and participants will have a tax basis
in the shares equal to such value. DRP participants may not, however, receive
any cash with which to pay the resulting tax liability. Shares received pursuant
to the DRP will have a holding period beginning on the day after their purchase
by the plan administrator.
Preferred Stock. Distributions, including constructive distributions, made
to holders of preferred stock, other than tax-exempt entities, will generally be
subject to tax as described above. For federal income tax purposes, earnings and
profits will be allocated to distributions with respect to the preferred stock
before they are allocated to distributions with respect to common stock.
Conversion of preferred stock into common stock. In general, no gain or
loss will be recognized for federal income tax purposes upon conversion of the
preferred stock solely into shares of common stock. The basis that a holder will
have for tax purposes in the shares of common stock received upon conversion
will be equal to the adjusted basis of the holder in the shares of preferred
stock so converted, and, provided that the shares of preferred stock were held
as a capital asset, the holding period for the shares of common stock received
would include the holding period for the shares of preferred stock converted. A
holder, however, generally will recognize gain or loss on the receipt of cash in
lieu of fractional shares of common stock in an amount equal to the difference
between the amount of cash received and the holder's adjusted basis for tax
purposes in the fractional share of preferred stock for which cash was received.
Furthermore, under certain
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circumstances, a holder of shares of preferred stock may recognize gain or
dividend income to the extent that there are dividends in arrears on the shares
at the time of conversion into common stock.
Adjustments to conversion price. Adjustments in the conversion price, or
the failure to make such adjustments, pursuant to the anti-dilution provisions
of the preferred stock or otherwise may result in constructive distributions to
the holder so preferred stock that could, under certain circumstances, be
taxable to them as dividends pursuant to Section 305 of the Code. If such a
constructive distribution were to occur, a holder of preferred stock could be
required to recognize ordinary income for tax purposes without receiving a
corresponding distribution of cash.
EXERCISE OF SECURITIES WARRANTS
Upon a holder's exercise of a securities warrant, the holder will, in
general, not recognize any income, gain or loss for federal income tax purposes,
will receive an initial tax basis in the security received equal to the sum of
the holder's tax basis in the exercised securities warrant and the exercise
price paid for such security and will have a holding period for the security
received beginning on the date of exercise.
SALE OR EXPIRATION OF SECURITIES WARRANTS
If a holder of a securities warrant sells or otherwise disposes of such
securities warrant, other than by exercise, the holder generally will recognize
capital gain or loss, long-term capital gain or loss if the holder's holding
period for the securities warrant exceeds twelve months on the date of
disposition. Otherwise, the holder will recognize short-term capital gain or
loss equal to the difference between the cash and fair market value of other
property received and the holder's tax basis, on the date of disposition, in the
securities warrant sold. Such a holder generally will recognize a capital loss
upon the expiration of an unexercised securities warrant equal to the holder's
tax basis in the securities warrant on the expiration date.
TAXATION OF STOCKHOLDER RIGHTS
If Redwood Trust makes a distribution of stockholder rights with respect to
its common stock, such distribution generally will be tax free and a
stockholder's basis in the rights received in such distribution will be zero. If
the fair market value of the rights on the date of issuance is 15% or more of
the value of the common stock or, if the stockholder so elects regardless of the
value of the rights, the stockholder will make an allocation between the
relative fair market values of the rights and the common stock on the date of
the issuance of the rights. On the exercise of the rights, the stockholder will
generally not recognize gain or loss. The stockholder's basis in the shares
received from the exercise of the rights will be the amount paid for the shares
plus the basis, if any, of the rights exercised. Distribution of stockholder
rights with respect to other classes of securities holders generally would be
taxable.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a tax-exempt entity that is a stockholder of Redwood Trust is
not subject to tax on distributions. The Internal Revenue Service has ruled that
amounts distributed by a REIT to an exempt employees' pension trust do not
constitute unrelated trade or business income and thus should be nontaxable to
such a tax-exempt entity. Based on that ruling, but subject to the discussion of
excess inclusion income set forth under the heading "Taxation of Redwood Trust's
Stockholders," special tax counsel is of the opinion that indebtedness incurred
by Redwood Trust in connection with the acquisition of real estate assets such
as mortgage loans will not cause dividends of Redwood Trust paid to a
stockholder that is a tax-exempt entity to be unrelated trade or business
income, provided that the tax-exempt entity has not financed the acquisition of
its stock with "acquisition indebtedness" within the meaning of the Code. Under
certain conditions, however, if a tax-exempt employee pension or profit sharing
trust were to acquire more than 10% of Redwood Trust's stock, a portion of the
dividends on such stock could be treated as unrelated trade or business income.
Other tax-exempt entities should review the Code and should consult their
own tax advisors concerning application of the unrelated trade or business
income rules to them.
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FOREIGN INVESTORS
The preceding discussion does not address the federal income tax
consequences to foreign investors, non-resident aliens and foreign corporations
as defined in the Code, of an investment in Redwood Trust. In general, foreign
investors will be subject to special withholding tax requirements on income and
capital gains distributions attributable to their ownership of Redwood Trust's
stock. Foreign investors in Redwood Trust should consult their own tax advisors
concerning the federal income tax consequences to them of a purchase of shares
of Redwood Trust's stock including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions from, REITs by
foreign investors. In addition, federal income taxes must be withheld on certain
distributions by a REIT to foreign investors unless reduced or eliminated by an
income tax treaty between the United States and the foreign investor's country.
A foreign investor eligible for reduction or elimination of withholding must
file an appropriate form with Redwood Trust in order to claim such treatment.
PLAN OF DISTRIBUTION
We may sell securities to or through one or more underwriters or dealers
for public offering and sale, to one or more investors directly or through
agents, to existing holders of our securities directly through the issuance of
stockholders rights as a dividend, or through any combination of these methods
of sale. Any principal underwriter or agent involved in the offer and sale of
the securities will be named in the applicable prospectus supplement.
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices (any of which may represent a discount
from the prevailing market prices). We may also sell our securities from time to
time through one or more agents in ordinary brokers' transactions. Such sales
may be effected during a series of one or more pricing periods at prices related
to the prevailing market prices reported on the New York Stock Exchange, as
shall be set forth in the applicable prospectus supplement.
In connection with the sale of securities, underwriters or agents may
receive compensation from us or from purchasers of securities, for whom they may
act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concession or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from us and any profit on the resale of
securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any principal underwriter or agent will be
identified, and any such compensation received from us will be described, in the
applicable prospectus supplement.
Unless otherwise specified in the related prospectus supplement, each class
or series of securities will be a new issue with no established trading market,
other than the common stock which is listed on the New York Stock Exchange. Any
shares of common stock sold pursuant to a prospectus supplement will also be
listed on the New York Stock Exchange, subject to official notice of issuance.
We may elect to list any future class or series of securities on an exchange,
but we are not obligated to do so. It is possible that one or more underwriters
may make a market in a future class or series of securities, but they will not
be obligated to do so and they may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, the securities.
In connection with the offering of securities hereby, underwriters and
selling group members and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the applicable
securities. These transactions may include stabilization transactions affected
in accordance with Rule 104 of Regulation M promulgated by the SEC pursuant to
which these persons may bid for or purchase securities for the purpose of
stabilizing their market price.
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The underwriters in an offering of securities may also create a "short
position" for their account by selling more securities in connection with the
offering than they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position by either
purchasing securities in the open market following completion of the offering of
these securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose penalty bids under
contractual arrangements with other underwriters, which means that they can
reclaim from an underwriter, or any selling group member participating in the
offering, for the account of the other underwriters, the selling concession for
the securities that are distributed in the offering but subsequently purchased
for the account of the underwriters in the open market. Any of the transactions
described in this paragraph or comparable transactions that are described in any
accompanying prospectus supplement may result in the maintenance of the price of
the securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in an
accompanying prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
The underwriters, dealers or agents used by us in any offering of
securities under this prospectus may be customers of, including borrowers from,
engage in transactions with, and perform services for, us or one or more of our
affiliates in the ordinary course of business.
Underwriters, dealers, agents and other persons may be entitled, under
agreements that they may enter into with us, to indemnification against civil
liabilities, including liabilities under the Securities Act.
If indicated in the applicable prospectus supplement, we will authorize
agents and underwriters to solicit offers by institutions to purchase securities
from us at the public offering price set forth in the prospectus supplement
pursuant to delayed delivery contracts providing for payment and delivery on the
date stated in the prospectus supplement. Each contract will be for an amount
not less than, and, unless we otherwise agree, the aggregate principal amount of
securities sold pursuant to contracts shall be not less nor more than, the
respective amounts stated in the prospectus supplement. Institutions with whom
contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but shall in all cases be
subject to our approval. Contracts will not be subject to any conditions except
that the purchase by an institution of the securities covered by its contract
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which that institution is subject. A
commission indicated in the prospectus supplement will be paid to the
underwriters and agents soliciting purchases of debt securities pursuant to
contracts accepted by us.
Until the distribution of the securities is completed, rules of the SEC may
limit the ability of the underwriters and selling group members, if any, to bid
for and purchase the securities. As an exception to these rules, the
representatives of the underwriters, if any, are permitted to engage in
transactions that stabilize the price of the securities. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of securities.
ERISA INVESTORS
Because the common stock will qualify as a "publicly offered security,"
employee benefit plans and individual retirement accounts may purchase shares of
common stock and treat such shares, and not the underlying assets, as plan
assets. The status of securities offered hereby other than the common stock will
be discussed in the relevant prospectus supplement. Fiduciaries of ERISA plans
should consider (i) whether an investment in the common stock and other
securities offered hereby satisfies ERISA diversification requirements, (ii)
whether the investment is in accordance with the ERISA plans' governing
instruments and (iii) whether the investment is prudent.
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LEGAL MATTERS
The validity of the securities offered hereby and certain legal matters
will be passed on for us by Tobin & Tobin, a professional corporation, San
Francisco, California. Certain tax matters will be passed on by GnazzoThill, A
Professional Corporation, San Francisco, California.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K for the year ended December 31, 1999, have been
so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission or the SEC. Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference facilities maintained by the Commission at Room 1204, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0300 for further information
on the public reference rooms.
We have filed a registration statement, of which this prospectus is a part,
covering the securities offered hereby. As allowed by SEC rules, this prospectus
does not contain all the information set forth in the registration statement and
the exhibits, financial statements and schedules thereto. We refer you to the
registration statement, the exhibits, financial statements and schedules thereto
for further information. This prospectus is qualified in its entirety by such
other information. You may request a free copy of any of the above filings by
writing or calling:
Redwood Trust, Inc.
591 Redwood Highway, Suite 3100
Mill Valley, CA 94941
(415) 389-7373
You should rely only on the information provided in this prospectus. We
have not authorized anyone else to provide you with different information. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the cover page of this prospectus.
INCORPORATION BY REFERENCE
The Commission allows us to "incorporate by reference" information into
this prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superseded by information in this prospectus.
We have filed the documents listed below with the Commission under the
Securities Exchange Act of 1934 (the "Exchange Act"), and these documents are
incorporated herein by reference:
- Our Annual Report on Form 10-K for the year ended December 31, 1999;
- Our Quarterly Report on Form 10-Q for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000;
- Our Current Report on Form 8-K filed January 10, 2001; and
- The description of our common stock included in our registration
statement on Form 8-A, filed July 18, 1995 (Registration No. 0-26434) and
as amended by Form 8-A/A filed August 4, 1995, under the Exchange Act.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from
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the date of filing those documents. Any documents we file pursuant to these
sections of the Exchange Act after the date of the initial registration
statement that contains this prospectus and prior to the effectiveness of the
registration statement will automatically be deemed to be incorporated by
reference in this prospectus and to be part hereof from the date of filing those
documents.
Any statement contained in this prospectus or in a document incorporated by
reference shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained in this prospectus or in any other document
which is also incorporated by reference modifies or supersedes that statement.
You may obtain copies of all documents which are incorporated in this prospectus
by reference (other than the exhibits to such documents unless the exhibits are
specifically incorporated herein by reference in the documents that this
prospectus incorporates by reference) without charge upon written or oral
request to Redwood Trust, Inc., 591 Redwood Highway, Suite 3100, Mill Valley, CA
94941, telephone (415) 389-7373.
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