Redwood Trust Inc (NYSE: RWT) saw its stock plummet 5.07% in Thursday's trading session, despite reporting improved first-quarter earnings and receiving a target price upgrade from JP Morgan. The sharp decline suggests investors may be focusing on ongoing challenges in the company's legacy bridge loan portfolio and concerns about future performance.

During the Q1 2025 earnings call, Redwood Trust reported GAAP earnings of $14.4 million or $0.10 per share, a significant improvement from the previous quarter's loss. The company also highlighted strong performance in its mortgage banking operations and increased operational efficiency. However, these positive developments were overshadowed by persistent issues in the legacy bridge loan portfolio, particularly in multifamily exposures from 2022 and earlier vintages.

Dashiell Robinson, President of Redwood Trust, addressed the uptick in delinquencies during the call, stating, "The move in delinquency up this quarter reflected situations where we felt moving on and dealing with the real estate ourselves or in partnership with another capital partner was the best answer." This candid acknowledgment of ongoing challenges in the legacy portfolio may have contributed to investor unease.

Despite the near-term headwinds, Redwood Trust's management expressed optimism about future performance. The company is targeting an annualized EAD (Earnings Available for Distribution) return on equity in the 9% to 12% range by the end of 2025, up from 7% in Q1. This improvement is expected to be driven by a strategic reallocation of capital towards operating platforms and away from non-strategic investments.

The stock's decline on Thursday may also reflect broader market concerns about the housing finance sector amid economic uncertainties. However, Redwood Trust's management highlighted potential opportunities arising from changes in housing finance policy and increased demand for private capital in the mortgage market.

As the company continues to navigate challenges in its legacy portfolio while pursuing growth in its core operations, investors will likely be closely monitoring Redwood Trust's progress in achieving its targeted returns and successfully executing its strategic initiatives.