Why Redwood Trust Shares Barked Loudly

Why Redwood Trust Shares Barked Loudly

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Redwood Trust , a diversified real estate investment trust that primarily invests in residential and commercial mortgage loans, vaulted higher by as much as 13% after handily topping Wall Street's estimates in the second quarter.

So what: For the quarter, Redwood Trust delivered a diluted profit of $0.71 per share, which was nearly triple the $0.24 per share it delivered at this time last year, and a clean $0.43 ahead of the Street's projections. Adding the biggest boost to its bottom line was net mortgage banking activity income, which totaled $59 million this quarter as compared to a loss of $4 million at this time last year. Redwood's book value also increased modestly to $14.69 from $14.54 in the previous quarter, but notably from the $12.00 in the second quarter of 2012.

Now what: As long as the Federal Reserve's monetary easing policy is still on the table and mortgage rates remain near historic lows, a REIT like Redwood that's primarily tied to residential and commercial mortgages should prosper. However, once the Fed begins paring back its monthly bond-buying program, which has kept rates artificially low, Redwood may see these gains slowly evaporate as rates rise and net margins tighten. At roughly 1.2 times book value and sporting a yield nearing 7%, I feel the company may be cheap enough to give investors some decent downside protection should lending rates turn against Redwood, and I would at least recommend REIT-savvy investors add it to their Watchlist.

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The article Why Redwood Trust Shares Barked Loudly originally appeared on Fool.com.

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Originally published