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Western Asset Mortgage Capital Corporation Announces Second Quarter 2018 Results

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Western Asset Mortgage Capital Corporation Announces Second Quarter 2018 Results

Conference Call and Webcast Scheduled for Tomorrow, Tuesday, August 7, 2018 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time

PR Newswire

PASADENA, Calif., Aug. 6, 2018 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE:WMC) today reported its results for the second quarter ended June 30, 2018.

SECOND QUARTER 2018 HIGHLIGHTS

  • June 30, 2018 book value per share of $11.10, net of second quarter common dividend of $0.31 per share declared on June 21, 2018.
  • GAAP net income of $1.5 million, or $0.03 per basic and diluted share.
  • Core earnings plus drop income of $15.2 million, or $0.36 per basic and diluted share.1,2
  • Economic return on book value was 0.4%1,3 for the quarter.
  • 2.05% annualized net interest margin on our investment portfolio. 1,4,5
  • 7.3x leverage excluding securitized debt as of June 30, 2018 (10.0x leverage with securitized debt).
  • Acquired $327.6 million in target assets, including $275.1 million of credit sensitive assets.
  • Repurchased 63,300 shares of common stock at an average price of $9.88 per share.

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. Drop income was $281.0 thousand or $0.01 per share for the three months ended June 30, 2018.

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.

5

Excludes the consolidation of VIE trusts required under GAAP.

MANAGEMENT COMMENTARY

"I am pleased to report that we generated core earnings plus drop income of $0.36 per share during the second quarter, an increase of 7% from the first quarter of 2018, as we continue to realize the benefits of our diversified portfolio and differentiated investment strategy," said Jennifer Murphy, Chief Executive Officer of the Company. "Our economic return on book value was 0.4% for the quarter and 5.1% for the first six months of 2018, in a market environment that has seen an increase in interest rate volatility. We paid a second quarter dividend of $0.31 per share, which was more than covered by our strong core earnings and has remained stable for nine quarters in a row.  Each of these achievements reflects our commitment to generating attractive total returns for our shareholders while also providing for greater book value stability."

Anup Agarwal, Chief Investment Officer of the Company, commented, "Our strong core earnings for the quarter are a reflection of our ongoing portfolio repositioning into credit sensitive investments and shifting away from Agency RMBS, which tends to be more interest rate sensitive. During the quarter, we acquired $327.6 million of target assets, including $275.1 million of credit sensitive investments. These purchases occurred across a number of sub-sectors of the mortgage market, but particularly in Residential Whole and Bridge Loans and Commercial Loans, where we continue to see attractive opportunities. This is consistent with our long-term goal of holding a diversified portfolio of securities that offer what we believe to be the best risk-adjusted returns over our investment horizon.

Our current expectations are for ongoing economic growth in the U.S. with the potential for modestly higher inflation. Residential and commercial real estate markets across the country remain healthy, based on continued strong employment and high levels of consumer confidence. Against this backdrop, we believe that our strategy of investing in a diversified portfolio in a number of sub-sectors of the mortgage market, particularly in 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


June 30, 2018


March 31, 2018






Net Interest Income


$

19,020



$

19,030


Other Income (Loss):





Realized gain (loss) on sale of investments, net


(5,608)



575


Other than temporary impairment


(2,974)



(2,916)


Unrealized gain (loss), net


(31,693)



(68,961)


Gain (loss) on derivative instruments, net


28,490



79,582


Other, net


(145)



47


Other Income (loss)


(11,930)



8,327


Total Expenses


5,601



5,315


Income (loss) before income taxes


1,489



22,042


Income tax provision (benefit)


36



313


Net income (loss)


$

1,453



$

21,729







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


$

0.03



$

0.52


Non-GAAP Results





Core earnings plus drop income(1)


$

15,155



$

14,149


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


$

0.36



$

0.34


Weighted average yield(2)(4)


4.36

%


4.14

%

Effective cost of funds(3)(4)


2.58

%


2.44

%

Annualized net interest margin(2)(3)(4)


2.05

%


1.94

%

Annualized CPR on Agency RMBS


10.4

%


11.0

%

 

(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 and foreign currency 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.

(4)

Excludes the consolidation of VIE trusts required under GAAP.

Portfolio Composition

As of June 30, 2018, the Company owned an aggregate investment portfolio with a fair market value totaling $5.0 billion. The following tables sets forth additional information regarding the Company's investment portfolio as of June 30, 2018:

Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of June 30, 2018 (dollars in thousands):


Principal Balance


Amortized Cost


Fair Value


Net Weighted Average Coupon

Agency RMBS

$

403,154



$

416,621



$

402,853



3.6

%

Agency RMBS Interest-Only Strips

N/A



13,501



13,559



2.3

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A



N/A



9,247



2.7

%

Total Agency RMBS

403,154



430,122



425,659



3.1

%









Agency CMBS

2,141,182



2,144,520



2,064,579



3.0

%

Agency CMBS Interest-Only Strips

N/A







%

Agency CMBS Interest-Only Strips, accounted for as derivatives

N/A



N/A



4,923



0.5

%

Total Agency CMBS

2,141,182



2,144,520



2,069,502



2.8

%

Total

$

2,544,336



$

2,574,642



$

2,495,161



2.9

%

Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of June 30, 2018 (dollars in thousands):


Principal Balance


Amortized Cost


Fair Value


 Weighted
Average Coupon(1)

Non-Agency RMBS

$

115,776



$

81,226



$

84,909



4.4

%

Non-Agency RMBS IOs and IIOs

N/A



16,365



16,294



0.5

%

Non-Agency CMBS

421,642



337,924



331,393



5.2

%

Residential Whole Loans

329,153



332,069



335,149



4.9

%

Residential Bridge Loans

257,835



259,010



259,164



9.0

%

Securitized Commercial Loans(1)

1,295,940



1,298,295



1,309,195



5.3

%

Commercial Loans

70,638



70,300



70,717



7.3

%

Other Securities

83,717



96,296



108,001



8.6

%


$

2,574,701



$

2,491,485



$

2,514,822



4.4

%


(1) In March 2018, the Company acquired a $67.8 million Non-Agency CMBS security which resulted in the consolidation of a variable interest entity and the recording of a $1.4 million securitized commercial loan and $1.3 billion of securitized debt. As of June 30, 2018, the fair value of the securitized loan was $1.3 billion and the securitized debt was $1.2 billion.

PORTFOLIO FINANCING AND HEDGING

Financing Activity

Repurchase Agreements

At June 30, 2018, the Company had $3.3 billion of borrowings under master repurchase agreements with 17 of its 28 approved counterparties with maturities of six months or less. The following table sets forth additional information regarding the Company's portfolio financing under the master repurchase agreements as of June 30, 2018 (dollars in thousands):

Repurchase Agreements


Balance


Weighted Average
Interest Rate (end of
period)


Weighted Average
Remaining Maturity
(days)

Agency RMBS


$

404,498



2.18

%


56

Agency CMBS


1,923,906



2.21

%


93

Non-Agency RMBS


73,152



3.71

%


34

Non-Agency CMBS


249,055



3.77

%


52

Residential Whole-Loans


268,100



3.86

%


27

Residential Bridge Loans


256,488



4.32

%


62

Securitized commercial loans


7,620



3.94

%


20

Commercial Real Estate Loans


12,321



4.83

%


74

Other Securities


72,229



3.97

%


29

Total


$

3,267,369



2.71

%


74

Convertible Senior Unsecured Notes

At June 30, 2018, the Company had $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.  The Company believes that this financing is an attractive source of longer term capital, which was more cost efficient than issuing straight equity.

Hedging Activity

At June 30, 2018, the Company had $3.0 billion notional value of pay-fixed interest rate swaps, excluding a forward starting swap of $0.2 billion (approximately 1.9 months forward), which have variable maturities between June 14, 2019 and April 27, 2037.

The following tables summarize the average pay rate and average maturity for the Company's interest rate swaps as of June 30, 2018:

(dollars in thousands)










Remaining Term to Maturity


Notional
Value


Average

Fixed Pay

Rate


Average Floating Receive
Rate


Average

Maturity

(Years)

Forward Starting

1 year or less


$

400,000



1.5

%


2.3

%


1.0

%

Greater than 1 year and less than 3 years


200,000



1.8

%


2.4

%


1.9

%

Greater than 3 years and less than 5 years


738,000



2.0

%


2.4

%


3.8

%

Greater than 5 years


1,816,600



2.5

%


2.4

%


10.3

10.9

%

Total


$

3,154,600



2.2

%


2.4

%


7.1

6.3

%

DIVIDEND

On June 21, 2018, the Company declared a regular cash dividend of $0.31 per share for each common share. Since its inception in May 2012, the Company has declared and paid total dividends of $15.92 per share in a combination of cash and stock.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, August 7th, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the second quarter 2018.

Individuals interested in participating in the conference call may do so by dialing (866) 235-9914 from the United States, or (412) 902-4115 from outside the United States and referencing "Western Asset Mortgage Capital Corporation." Those interested in listening to the conference call live via the Internet may do so by visiting the Investor Relations section of the Company's website at www.westernassetmcc.com.

The Company is enabling investors to pre-register for the earnings conference call so that they can expedite their entry into the call and avoid the need to wait for a live operator. In order to pre-register for the call, investors can visit http://dpregister.com/10122414 and enter in their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call. Individuals can pre-register any time prior to the start of the conference call on August 7, 2018.

A telephone replay will be available through August 21, 2018 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10122414. A webcast replay will be available for 90 days.

ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION

Western Asset Mortgage Capital Corporation is a real estate investment trust that invests in, acquires and manages a diverse portfolio assets consisting of Agency CMBS, Agency RMBS, Non-Agency RMBS, Non-Agency CMBS, ABS, GSE Risk Transfer Securities, Residential Whole and Bridge Loans and Commercial Loans. The Company's investment strategy may change, subject to the Company's stated investment guidelines, and is based on its manager Western Asset Management Company's perspective of which mix of portfolio assets it believes provide the Company with the best risk-reward opportunities at any given time. The Company is externally managed and advised by Western Asset Management Company, an investment advisor registered with the Securities and Exchange Commission and a wholly-owned subsidiary of Legg Mason, Inc. Please visit the Company's website at www.westernassetmcc.com.

FORWARD-LOOKING STATEMENTS

This press release contains statements that constitute "forward-looking statements."  Operating results are subject to numerous conditions, many of which are beyond the control of the Company, including, without limitation, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability and terms of financing; general economic conditions; market conditions; conditions in the market for mortgage related investments; legislative and regulatory changes that could adversely affect the business of the Company; and other factors, including those set forth in the Risk Factors section of the Company's annual report on Form 10-K for the period ended December 31, 2017 filed with the Securities and Exchange Commission ("SEC"). The Company undertakes no obligation to update these statements for revisions or changes after the date of this release, except as required by law.

USE OF NON-GAAP FINANCIAL INFORMATION

In addition to the results presented in accordance with GAAP, this release includes certain non-GAAP financial information, including core earnings, core earnings per share, drop income and drop income per share and certain financial metrics derived from non-GAAP information, such as weighted average yield, including IO securities; weighted average effective cost of financing, including swaps; weighted average net interest spread, including IO securities and swaps, which constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that these measures presented in this release, when considered together with GAAP financial measures, provide information that is useful to investors in understanding our borrowing costs and net interest income, as viewed by us.  An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.

-Financial Tables to Follow-

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)




June 30, 2018


December 31, 2017

Assets:





Cash and cash equivalents


$

16,295



$

48,024


Restricted cash


58,747




Agency mortgage-backed securities, at fair value ($2,440,683 and $2,833,595 pledged as collateral, at fair value, respectively)


2,495,161



2,858,600


Non-Agency mortgage-backed securities, at fair value ($432,352 and $266,189 pledged as collateral, at fair value, respectively)


432,596



378,158


Other securities, at fair value ($107,864 and $89,823 pledged as collateral, at fair value, respectively)


108,001



122,065


Residential Whole-Loans, at fair value ($335,149 and $237,423 pledged as collateral, at fair value, respectively)


335,149



237,423


Residential Bridge Loans ($236,359 and $64,526 at fair value and $259,339 and $106,673 pledged as collateral, respectively)


259,339



106,673


Securitized commercial loan, at fair value


1,309,195



24,876


Commercial Loans, at fair value ($20,515 and $0 pledged as collateral, at fair value, respectively)


70,717




Investment related receivable


37,286



7,665


Interest receivable


19,487



13,603


Due from counterparties


64,791



86,930


Derivative assets, at fair value


6,998



728


Other assets


3,571



2,161


Total Assets (1)


$

5,217,333



$

3,886,906







Liabilities and Stockholders' Equity:





Liabilities:





Repurchase agreements, net


$

3,267,369



$

3,251,686


Convertible senior unsecured notes, net


109,401



108,743


Securitized debt, at fair value (includes $348,799 and $10,945 held by affiliates, respectively)


1,231,300



10,945


Interest payable (includes $976 and $70 on securitized debt held by affiliates, respectively)


10,309



8,322


Investment related payables


52,530



17,217


Due to counterparties


5,208



1,490


Derivative liability, at fair value


1,623



4,346


Accounts payable and accrued expenses


2,531



3,118


Payable to affiliate


3,062



2,041


Dividend payable


12,901



12,960


  Other liabilities


59,308




Total Liabilities (2)


$

4,755,542



$

3,420,868







Commitments and contingencies










Stockholders' Equity:





Common stock: $0.01 par value, 500,000,000 shares authorized, 41,616,379 and 41,794,079 outstanding, respectively


419



419


Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding





Treasury stock, at cost, 303,422 and 125,722 shares held, respectively


(2,965)



(1,232)


Additional paid-in capital


768,945



768,763


Retained earnings (accumulated deficit)


(304,608)



(301,912)


Total Stockholders' Equity


461,791



466,038


Total Liabilities and Stockholders' Equity


$

5,217,333



$

3,886,906


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

(Unaudited)




June 30, 2018


December 31, 2017

(1) Assets of consolidated VIEs included in the total assets above:





Cash and cash equivalents


$

364



$


Restricted Cash


58,747




Residential Whole-Loans, at fair value ($335,149 and $237,423 pledged as collateral, at fair value, respectively)


335,149



237,423


Residential Bridge Loans ($236,359 and $64,526 at fair value and $259,339 and $106,673 pledged as collateral, respectively)


259,339



106,673


Securitized commercial loan, at fair value


1,309,195



24,876


Commercial Loans, at fair value ($20,515 and $0 pledged as collateral, at fair value, respectively)


20,515




Investment related receivable


37,286



7,665


Interest receivable


9,794



3,358


Other assets


548




Total assets of consolidated VIEs


$

2,030,937



$

379,995







(2) Liabilities of consolidated VIEs included in the total liabilities above:





Securitized debt, at fair value (includes $348,799 and $10,945 held by affiliates, respectively)


$

1,231,300



$

10,945


Interest payable (includes $976 and $70 on securitized debt held by affiliates, respectively)


2,687



70


Accounts payable and accrued expenses


678



189


Other liabilities


59,309




Total liabilities of consolidated VIEs


$

1,293,974



$

11,204


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)




Three months ended



June 30, 2018


March 31, 2018

Net Interest Income





Interest income


$

57,154



$

39,727


Interest expense (includes $4,719, $248, $5,207 and $494 on securitized debt held by affiliates, respectively)


38,134



20,697


Net Interest Income


19,020



19,030







Other Income (Loss)





Realized gain (loss) on sale of investments, net


(5,608)



575


Other than temporary impairment


(2,974)



(2,916)


Unrealized gain (loss), net


(31,693)



(68,961)


Gain (loss) on derivative instruments, net


28,490



79,582


Other, net


(145)



47


Other Income (Loss)


(11,930)



8,327







Expenses





Management fee to affiliate


2,259



2,180


Other operating expenses


1,555



969


General and administrative expenses:





  Compensation expense


572



510


  Professional fees


818



1,295


  Other general and administrative expenses


397



361


Total general and administrative expenses


1,787



2,166


Total Expenses


5,601



5,315







Income before income taxes


1,489



22,042


Income tax provision (benefit)


36



313


Net income


$

1,453



$

21,729







Net income per Common Share – Basic


$

0.03



$

0.52


Net income per Common Share – Diluted


$

0.03



$

0.52


Dividends Declared per Share of Common Stock


$

0.31



$

0.31


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(in thousands—except share and per share data)
(Unaudited)

The table below reconciles Net Income to Core Earnings for the three months ended June 30, 2018 and March 31, 2018:



Three months ended

(dollars in thousands)


June 30, 2018


March 31, 2018

Net Income


$

1,453



$

21,729


Income tax provision (benefit)


36



313


Income before income taxes


1,489



22,042







Adjustments:





Investments:





Unrealized (gain) loss on investments, securitized debt and other liabilities


31,693



68,961


Other than temporary impairment


2,974



2,916


Realized (gain) loss on sale of investments


5,608



(575)


Acquisition costs


163



41







Derivative Instruments:





Net realized (gain) loss on derivatives


(22,973)



(79,118)


Unrealized (gain) loss on derivatives


(4,268)



(1,308)







Amortization of discount on convertible senior unsecured notes


138



137


Non-cash stock-based compensation


50



75


Total adjustments


13,385



(8,871)


Core Earnings


$

14,874



$

13,171


Basic Core Earnings per Common Share and Participating Securities


$

0.36



$

0.32


Diluted Core Earnings per Common Share and Participating Securities


$

0.36



$

0.32


Basic weighted average common shares and participating securities


41,707,291



41,844,798


Diluted weighted average common shares and participating securities


41,707,291



41,844,798


Reconciliation of Interest Income and Effective Cost of Funds
(dollars in thousands)
(Unaudited)

The following table reconciles total interest income to adjusted interest income which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three months ended June 30, 2018 and March 31, 2018:



Three months ended

(dollars in thousands)


June 30, 2018


March 31, 2018

Coupon interest income


$

60,043



$

40,557


Premium amortization, discount accretion and amortization of basis, net


(2,889)



(830)


Interest income


57,154



39,727


Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):





Coupon interest income


1,011



1,422


Amortization of basis


(783)



(1,191)


Subtotal


228



231


Total adjusted interest income


$

57,382



$

39,958




(1)

Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for three months ended June 30, 2018 and March 31, 2018:






June 30, 2018


March 31, 2018

 (dollars in thousands)


Reconciliation


Cost of
Funds/Effective
Borrowing Costs


Reconciliation


Cost of
Funds/Effective
Borrowing Costs

Interest expense


$

38,134



3.20

%


$

20,697



2.38

%

Net interest (received) paid - interest rate swaps


(1,044)



(0.09)

%


1,059



0.12

%

Effective Borrowing Costs


$

37,090



3.11

%


$

21,756



2.50

%

Weighted average borrowings


$

4,780,990





$

3,526,311




 

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SOURCE Western Asset Mortgage Capital Corporation

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