CoreVest Partnerships And Aspire Expansion Will Tap Growing Nontraditional Loan Market

Key Takeaways

• Strategic initiatives, including Aspire platform expansion and joint ventures, target nontraditional and residential loan markets to boost revenue and efficiency.
  
• Engaging with housing regulators and optimizing cost structures aims to improve Redwood's competitive position and enhance earnings.
  
• Rising interest rates, regulatory changes, and market dynamics may challenge Redwood Trust's growth and profitability by affecting mortgage origination and strategic positioning.

Catalysts

Operates as a specialty finance company in the United States.

• Redwood Trust is capitalizing on the downsizing of mortgage activity within the banking sector, creating potential for significant increases in market share and earnings as banks offload mortgage pools. This is likely to boost revenue growth.
  
• The expansion of Redwood's Aspire platform to include a full suite of nontraditional loan products positions the company to tap into a large and growing market, supporting future revenue and potentially improving net margins due to greater demand for these specialized products.
  
• Active involvement with new housing regulators and potential reforms could lead to a more favorable operating environment for Redwood, enhancing its Sequoia platform's competitiveness and potentially improving earnings.
  
• Strategic joint ventures and partnerships, particularly in the residential investor platform CoreVest, provide Redwood with enhanced distribution capabilities, potentially leading to higher recurring revenue and improved operational efficiency, benefiting earnings.
  
• With continued enhancements in operating efficiency, including reduced costs per loan and a focus on profitable growth, Redwood is likely to see improvements in net margins and potentially higher earnings over time.

Redwood Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Redwood Trust's revenue will decrease by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.3% today to 76.6% in 3 years time.
• Analysts expect earnings to reach $109.8 million (and earnings per share of $0.9) by about February 2028, up from $70.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $90.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 11.6x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Redwood Trust Future Earnings Per Share Growth

Risks

• Rising interest rates and elevated mortgage rates could dampen mortgage origination growth and revenues by making home purchases less affordable and reducing the volume of new loans.
  
• Flattened housing activity and constrained housing supply may limit opportunities for revenue and earnings growth in Redwood's core markets, potentially affecting overall profitability.
  
• Regulatory changes and potential GSE reforms could impact Redwood Trust's strategic positioning and market share, potentially leading to increased competition and affecting revenues.
  
• Increased merger and acquisition activity could disrupt Redwood Trust’s current business dynamics, potentially affecting the company's ability to acquire seasoned mortgage pools and impacting revenue streams.
  
• Fluctuations in fair value of multifamily bridge loans due to market conditions could lead to negative GAAP earnings and impact overall financial performance and book value.

Valuation

• The analysts have a consensus price target of $7.925 for Redwood Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.5, and the most bearish reporting a price target of just $6.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $143.4 million, earnings will come to $109.8 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $6.38, the analyst price target of $7.92 is 19.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.