Components of Operating Expenses

6 Months Ended

Jun. 30, 2023

Other Income and Expenses [Abstract]

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and six months ended June 30, 2023 and 2022 are presented in the following table.

Table 22.1 – Components of Operating Expenses


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2023		2022		2023		2022
General and Administrative Expenses
Fixed compensation expense (1)	$	12,786	$	12,110	$	28,145	$	26,738
Annual variable compensation expense	3,187		1,811		7,192		5,168
Long-term incentive award expense (1) (2)	6,237		5,532		14,179		11,192
Systems and consulting	2,854		3,703		5,966		6,887
Office costs	2,289		2,083		4,329		4,108
Accounting and legal	1,176		1,576		2,095		3,251
Corporate costs	957		1,000		1,886		1,864
Other	1,319		2,384		2,568		4,267
Total General and Administrative Expenses	30,805		30,199		66,360		63,475

Portfolio Management Costs	3,100		1,767		6,610		3,345

Loan Acquisition Costs	1,444		3,480		2,733		7,945

Other Expenses

Amortization of purchase-related intangible assets	3,107		3,306		6,214		6,840

Other	1,868		162		2,445		713
Total Other Expenses	4,975		3,468		8,659		7,553
Total Operating Expenses	$	40,324	$	38,914	$	84,362	$	82,318

(1)Includes $1 million and $2 million of severance and transition-related expenses for the three and six months ended June 30, 2023, respectively.

(2)For the three months ended June 30, 2023 and 2022, long-term incentive award expense included $4 million and $5 million of expense, respectively, for awards settleable in shares of our common stock, and $1 million and $0.4 million of expense, respectively, for awards settleable in cash. For both the six months ended June 30, 2023 and 2022, long-term incentive award expense included $10 million of expense for awards settleable in shares of our common stock, and $3 million and $1 million of expense, respectively, for awards settleable in cash.

Long-Term Cash-Based Awards

During the six months ended June 30, 2023, there were no long-term cash-based retention awards granted to employees. Cash-based retention awards were granted to certain executive and non-executive employees in 2020, 2021 and 2022 that each vest over three-year periods, and are subject to continued employment through the vesting periods through 2025. At June 30, 2023, the liability associated with these awards was $3 million and the unamortized compensation cost of long-term cash-based awards was $1 million.

Cash Settled Deferred Stock Units

During the six months ended June 30, 2023, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020, 2021 and 2022 and each vest over four-year periods and are subject to continued employment through the vesting periods through 2026. At June 30, 2023, the liability associated with these awards was $2 million, and the unamortized compensation cost was $4 million. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of our common stock at the end of each reporting period.

Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

Cash Settled Performance Stock Units

During the six months ended June 30, 2023, $6 million of cash-settled performance stock units ("csPSUs") were granted to certain executive and non-executive employees which vest over approximately three years through January 1, 2026. The target number of csPSUs that were granted totaled 663,499 units based on a per unit grant-date fair value of $9.75. The equivalent number of underlying shares of common stock that vest and that the recipient becomes entitled to receive at the time of vesting will generally range from 0% to 250% of the target number of csPSUs granted, with the target number of csPSUs granted being adjusted to reflect the value of any dividends declared on our common stock during the vesting period. Upon vesting, the recipient will receive the settlement of the vested shares in cash based on the closing market price of our common stock on the final vesting date. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of the csPSUs at the end of each reporting period. At June 30, 2023, the liability associated with these awards was $1 million, and unamortized compensation cost of the csPSUs was $5 million.

The grant date fair value of these csPSUs of $9.75 per unit was determined through Monte-Carlo simulations using the following assumptions: the common stock closing price at the grant date for Redwood and each member of the comparator group, the average closing price of the common stock price for the 60 trading days beginning January 1, 2023 for Redwood and each member of the comparator group, and the range of performance-based vesting based on absolute TSR over three years from the grant date. For this csPSU grant, an implied volatility assumption of 71% (based on historical volatility), a risk-free rate of 4.23% (the three-year Treasury rate on the grant date), and a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs) were used.

With respect to the csPSU awards granted during the six months ended June 30, 2023:

•First, vesting would range from 0% - 250% of two-thirds of the Target csPSUs granted based on the level of book value total shareholder return ("bvTSR") attained over the three-year vesting period, with 100% of this two-thirds of the Target csPSUs vesting if three-year bvTSR is 25%. bvTSR is defined as the percentage by which our book value "per share price" has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

•Second, vesting would range from 0% - 250% of one-third of the Target csPSUs granted based on Redwood’s relative total shareholder return (“rTSR”) against a comparator group of companies measured over the three-year vesting period, with 100% of this one-third of the Target csPSUs vesting if three-year rTSR corresponds to 55th percentile rTSR.

•Third, if the aggregate vesting level after steps one and two is greater than 100% of the Target csPSUs, but the Company's absolute total shareholder return ("TSR") is negative over the three-year performance period, vesting would be capped at 100% of Target csPSUs. TSR is defined as the percentage by which our common stock “per share price” has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.