Nomura Upgrades Redwood Trust To Buy, Cites Changing Times Over Last 6 Months

Nomura’s Brock Vandervliet believes Redwood Trust, Inc. RWT has reestablished its leadership position in the non-agency mortgage market.

The analyst upgraded the rating on the company from Neutral to Buy, while raising the price target from $14 to $16.

“At that time, Jumbo securitization economics were broken and we didn't yet see a second act for a company so closely associated with this segment,” Vandervliet mentioned.

Reasons For The Upgrade

The analyst explained that the company’s business model has been simplified with Redwood Trust exiting two of its loss-making businesses.

The company now provides “core” earnings guidance, which Vandervliet sees as a “watershed at a company where GAAP performance is market-linked and volatile.”

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In addition, the analyst pointed out that Redwood Trust has reestablished its leadership position in the non-Agency mortgage market through participation in a new securitization structure with JPMorgan Chase & Co. JPM.

Differentiated Growth Model

Redwood Trust has also unveiled a new loan product “to edge down the credit spectrum where higher margins and volume ultimately lie,” Vandervliet stated, while adding that this, in turn, has helped differentiate the growth model to produce ROE above 11 percent by 4Q17.

The EPS estimates for FY16 and FY17 have been raised from $1.35 to $1.34 and from $1.47 to $1.68, respectively.