Market Overview

Western Asset Mortgage Capital Corporation Announces Third Quarter 2017 Results

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Conference Call and Webcast Scheduled for Tomorrow, Wednesday, November 8, 2017 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time

PASADENA, Calif., Nov. 7, 2017 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the third quarter ended September 30, 2017.

THIRD QUARTER 2017 HIGHLIGHTS

  • $0.31 per share common dividend declared.
  • GAAP net income of $22.8 million, or $0.54 per basic and diluted share.
  • Core earnings plus drop income of $13.5 million, or $0.32 per basic and diluted share.1,2
  • 2.21% annualized net interest margin on our investment portfolio.1,4
  • Constant prepayment rate ("CPR") on the Company's Agency RMBS portfolio of 11.2% for the quarter.
  • $10.88 per share net book value as of September 30, 2017, net of third quarter common dividend.
  • Economic return on book value was 5.2%1,3 for the quarter.
  • 7.3x leverage as of September 30, 2017.

1

Non – GAAP measure.

2

Drop income is income derived from the use of 'to-be-announced' forward contract ("TBA") dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statements of operations, but is not included in core earnings. There was no drop income for the three months ended September 30, 2017.

3

Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value.

4

Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.

MANAGEMENT COMMENTARY

"I am very pleased to report that we delivered another solid performance in the third quarter, generating  an economic return on book value of 5.2%, bringing our economic return for the first nine months of 2017 to 15.0%," said Jennifer Murphy, Chief Executive Officer of the Company. "In addition, core earnings plus drop income was $0.32 per share, consistent with the second quarter, as we continued to benefit from our repositioned portfolio, our simplified hedge book and lower operating expenses. Our third quarter dividend remained stable at $0.31 per share for the sixth consecutive quarter, which reflects our commitment to our long-term goal of generating a strong total return for our shareholders through attractive dividends derived from sustainable core earnings and potential appreciation in the value of our portfolio. Finally, we are pleased to have recently completed a $115 million offering of 6.75% convertible senior notes due in 2022. We believe that this financing will enable us to acquire additional target investments and increase the earnings power of our portfolio."

Anup Agarwal, Chief Investment Officer of the Company, commented, "Our strong performance, for the first nine months of 2017, is a result of a shift in our asset composition and our ongoing focus on achieving operating efficiencies. During the quarter, our portfolio experienced spread tightening across the majority of its positions, which helped support the increase in book value to $10.88 or 2.3%, at September 30, 2017. In addition, we continued to benefit from our reconfigured hedge book, which further reduced our effective borrowing costs during the quarter, despite the increase in the Federal Funds rate in late June."

"Our current expectations are for a continuing moderate pace of economic growth and an improving global backdrop combined with a low inflation environment, both in the U.S. and abroad. We believe that our strategy of investing in a diversified portfolio in a number of sub-sectors of the mortgage market, including Agency CMBS, Agency RMBS and credit-sensitive investments continues to be appropriate, and in our opinion, positions us well to continue to generate attractive risk-adjusted total economic returns for our shareholders," Mr. Agarwal concluded.

OPERATING RESULTS

The below table reflects a summary of our operating results:



For the Three Months Ended

GAAP Results


September 30, 2017


June 30, 2017


March 31, 2017








Net Interest Income


$

18,565



$

19,648



$

19,693


Other Income (Loss):







Realized gain (loss) on sale of investments, net


1,830



(2,488)



21,258


Other than temporary impairment


(7,225)



(6,579)



(6,097)


Unrealized gain (loss), net


5,249



35,017



(5,140)


Gain (loss) on derivative instruments, net


7,217



(18,555)



(4,697)


Other, net


216



222



403


Other Income (loss)


7,287



7,617



5,727


Total Expenses


4,240



4,466



4,866


Income (loss) before income taxes


21,612



22,799



20,554


Income tax provision (benefit)


(1,155)



2,115



312


Net income (loss)


$

22,767



$

20,684



$

20,242









Net income (loss) per Common Share – Basic/Diluted


$

0.54



$

0.49



$

0.48


Non-GAAP Results







Core earnings plus drop income(1)


$

13,511



$

13,290



$

10,281


Core earnings plus drop income per Common Share – Basic/Diluted


0.32



0.32



0.25


Weighted average yield(2)


4.00

%


4.13

%


4.39

%

Effective cost of funds(3)


1.99

%


2.17

%


2.81

%

Annualized net interest margin(2)(3)


2.21

%


2.25

%


2.01

%

Annualized CPR on Agency RMBS


11.2

%


9.9

%


10.5

%



(1)

For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core Earnings at the end of this press release.

(2)

Includes interest-only securities accounted for as derivatives, foreign currency swaps and total return swaps.

(3)

Includes the net amount paid, including accrued amounts for interest rate swaps and premium amortization for MAC interest rate swaps during the periods.

PORTFOLIO COMPOSITION

As of September 30, 2017, the Company owned an aggregate investment portfolio totaling $4.0 billion. The following table sets forth additional information regarding the Company's portfolio as of September 30, 2017 (dollars in thousands):


Net Weighted
Average Coupon


Principal
Balance


Amortized Cost


Carrying Value(4)

Agency








20-Year mortgage









3.5

%


$

31,291



$

32,772



$

32,782



4.0

%


118,679



124,994



126,496



3.9

%


149,970



157,766



159,278


30-Year mortgage

















3.0

%


23,788



23,899



23,899



4.0

%


245,220



260,210



260,658



4.5

%


192,641



206,769



210,982



5.0

%


43,066



48,104



48,104



5.5

%


1,872



2,198



2,073



6.0

%


2,152



2,400



2,480



4.2

%


508,739



543,580



548,196


40-Year mortgage

3.5

%


374,844



385,906



387,095










Agency RMBS IOs and IIOs(1)

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