Market Overview

Western Asset Mortgage Capital Corporation Announces Fourth Quarter And Full Year 2017 Results

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Conference Call and Webcast Scheduled for Tomorrow, Tuesday, March 6, 2018 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time

PASADENA, Calif., March 5, 2018 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the fourth quarter and the year ended December 31, 2017.

Fourth Quarter 2017 Highlights

  • December 31, 2017 book value per share of $11.15, net of fourth quarter common dividend of $0.31 per share declared on December 21, 2017.
  • GAAP net income of $21.4 million, or $0.51 per basic and diluted share.
  • Core earnings plus drop income of $13.0 million, or $0.31 per basic and diluted share.1,2
  • Economic return on book value was 5.3%1,3 for the quarter.
  • 1.79% annualized net interest margin on our investment portfolio. 1,4
  • Issued $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes, which included the underwriter's $15.0 million over-allotment.
  • 7.2x leverage as of December 31, 2017 (7.5x leverage when adjusted for net TBA positions).
  • Acquired $254.0 million in target assets, including $195.5 million credit sensitive assets.
  • Repurchased 125,722 common shares at an average price of $9.80 per share.

Full Year 2017 Highlights

  • Full year book value per common share increased by $0.88 per share to $11.15, net of annual dividends.
  • Maintained a consistent $0.31 per share quarterly common dividend throughout 2017 for total annual common dividends of $1.24 per share.
  • GAAP net income of $85.1 million, or $2.03 per basic and diluted share.
  • Core earnings plus drop income of $50.2 million, or $1.20 per basic and diluted share.1,2
  • Economic return on book value was 20.6%1,3 for the year.
  • 2.06% annualized net interest margin. 1,4
  • Repositioned our investment portfolio:
    • Acquired $1.8 billion in Agency CMBS and $402.7 million credit sensitive assets.
    • Reduced Agency RMBS exposure by $622.5 million and legacy Non-Agency exposure by $246.0 million.
  • Restructured our hedge positions, reducing our swap related interest expense by 48.3% year-over year.
  • Recorded total expenses of $17.8 million, a year-over-year decrease of $3.5 million or 16.3%.

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 statement of operations, but is not included in core earnings. Drop income was approximately $181 thousand and $1.9 million for the three months and the year ended December 31, 2017, respectively.

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

"As we look back on 2017, we delivered an exceptional fourth quarter and full year, generating an economic return on book value of 5.3% for the fourth quarter and 20.6% for the year, driven by strong consistent quarterly earnings and an increase in our book value of 8.6% for the year," said Jennifer Murphy, Chief Executive Officer of the Company. "We are continuing to reap the benefits of our repositioned and diversified portfolio and our focus on achieving operational efficiencies. Our ability to draw upon the deep investment experience and team at Western Asset Management Company, our Manager, as well as the breadth of its global investment, risk management, and operational infrastructure continued to enable us to deliver on our primary goal of providing our shareholders with an attractive dividend that is supported by sustainable core earnings, as well as the potential for appreciation in the value of our portfolio. In 2018, we will continue to focus on the objectives of maintaining strong core earnings while preserving our book value through portfolio diversification and risk management, with the overriding goal of providing our shareholders with an attractive risk-adjusted total economic return."

Anup Agarwal, Chief Investment Officer of the Company, commented, "Our strong performance, for 2017, was driven by contributions across our holdings and reflects the benefit of our strategy of investing in a diversified portfolio in a number of subsectors of the mortgage market. In late 2016 and throughout 2017,  we implemented the repositioning of our portfolio with the primary objective of reducing our exposure to Agency RMBS and redeploying our capital into sectors that we believed provided more attractive risk-adjusted returns, which included Agency CMBS and credit sensitive investments, such as residential whole and bridge loans, re-performing loans that are packaged in well-structured securitization and commercial mezzanine loans, including junior tranches of Non-Agency CMBS. In 2018, under current market conditions we expect to look to add more credit sensitive investments, while continuing to reduce our Agency RMBS exposure.  Our strategy paid off in 2017 and although of course there are no guarantees we believe that it will do so in 2018 as well, despite the recent volatility seen in the broader fixed income markets. We believe that investing in a diversified portfolio across a number of sub-sectors of the mortgage market is appropriate in this environment, and in our opinion, positions us well to continue generating attractive risk-adjusted returns for our shareholders."

2017 Quarterly Results

The below table reflects a summary of our operating results (dollars in thousands, except per share data):


For the Three Months Ended

GAAP Results

December 31, 2017


September 30, 2017


June 30, 2017


March 31, 2017









Net Interest Income

$

18,012



$

18,565



$

19,648



$

19,693


Other Income (Loss):








Realized gain (loss) on sale of investments, net

(2)



1,830



(2,488)



21,258


Other than temporary impairment

(2,972)



(7,225)



(6,579)



(6,097)


Unrealized gain (loss), net

(6,730)



5,249



35,017



(5,140)


Gain (loss) on derivative instruments, net

19,327



7,217



(18,555)



(4,697)


Other, net

190



216



222



403


Other Income (loss)

9,813



7,287



7,617



5,727


Total Expenses

4,206



4,240



4,466



4,866


Income (loss) before income taxes

23,619



21,612



22,799



20,554


Income tax provision (benefit)

2,215



(1,155)



2,115



312


Net income (loss)

$

21,404



$

22,767



$

20,684



$

20,242










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

$

0.51



$

0.54



$

0.49



$

0.48


Non-GAAP Results








Core earnings plus drop income(1)

$

12,998



$

13,511



$

13,290



$

10,281


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

$

0.31



$

0.32



$

0.32



$

0.25


Weighted average yield(2)

3.82

%


4.00

%


4.13

%


4.39

%

Effective cost of funds(3)

2.22

%


1.99

%


2.17

%


2.81

%

Annualized net interest margin(2)(3)

1.79

%


2.21

%


2.25

%


2.01

%

Annualized CPR on Agency RMBS

10.0

%


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 December 31, 2017, the Company owned an aggregate investment portfolio totaling $3.7 billion. The following tables sets forth additional information regarding the Company's investment portfolio as of December 31, 2017:

Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by issuer and investment category as of December 31, 2017 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


Net Weighted
Average Coupon

Agency RMBS:








20-Year mortgage

$

50,825



$

53,203



$

53,783



4.0

%

30-Year mortgage

224,041



239,751



241,642



4.4

%

40-Year mortgage

366,178



376,966



376,752



3.5

%

Agency RMBS Interest-Only Strips

N/A



14,750



15,437



2.9

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A


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