PASADENA, Calif., Aug. 5, 2020 /PRNewswire/ -- Western Asset
Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC)
today reported its results for the second quarter ended
June 30, 2020.
CORPORATE UPDATE
The Company significantly improved its balance sheet in the
second quarter by reducing debt and leverage, increasing liquidity
and shareholder equity, and completing new financing arrangements
that significantly reduce the Company's exposure to short term
repurchase agreements. For the quarter ended June 30, 2020,
these measures included, but were not limited to, the
following:
- In June, we completed a securitization of $355.8 million of our Residential Whole Loan
investments, enabling the Company to secure $341.7 million of long-term financing at a
weighted average interest rate of 2.0%.
- In May, we closed a 12 month term financing arrangement, with a
12 month extension at the counterparty's option, for Non-Agency
RMBS and Non-Agency CMBS, significantly mitigating exposure to
margin volatility.
- In April, we closed an 18 month term financing arrangement
without margin requirements for the entire unsecuritized
Residential Whole Loan portfolio. This financing reduced our
exposure to repurchase agreement financing and eliminated
associated margin calls.
- Reduced repurchase agreement financings in the second quarter
by 76.2% to $369.1 million.
- Raised $22.0 million of equity
capital through the sale of 6.0 million shares at a premium to book
value through our At-The-Market Program.
- In July, the Company retired $5.0
million of its 6.75% Convertible Senior Notes at a 25%
discount to par value, in exchange for the issuance of 1.4 million
shares of our common stock.
- Sold approximately $423.2 million
of Agency MBS, $42.6 million of
Non-Agency MBS, $144.3 million in
conforming whole loans, and $18.2
million other securities and repaid associated repurchase
agreement financing to significantly reduce margin call
exposure.
- Our Manager waived management fees for April 2020 and May
2020.
SECOND QUARTER 2020 FINANCIAL RESULTS
- GAAP book value per share of $3.17.
- GAAP net loss of $15.6 million,
or $0.29 per basic and diluted
share.
-
- Included in GAAP net loss is an accrual for a premium recapture
fee which is payable to the counterparty of our Residential Whole
Loan Facility of $20.5 million upon
termination or maturity of the facility. This fee was incurred as a
result of refinancing $355.8 million
of Residential Whole Loans financed on the facility through the
securitization.
- Economic book(2) value per share of $4.04
- Core earnings of $5.8 million, or
$0.11 per basic and diluted
share.1
- Economic return on GAAP book value was negative 7.0% for the
quarter.1,3
- 1.91% annualized net interest margin on our investment
portfolio. 1,4,5
- Reduced recourse leverage to 3.0x leverage down from 9.5x at
March 31, 2020.
1
|
Non – GAAP
measure.
|
2
|
Economic book value
is a non-GAAP financial measure. See page 16 for the reconciliation
of GAAP book value to non-GAAP economic book value.
|
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 and the cost
of interest rate swaps.
|
5
|
Excludes the
consolidation of VIE trusts required under GAAP.
|
MANAGEMENT COMMENTARY
"The second quarter of 2020 stood in sharp contrast to the first
as global risk sentiment, equity and credit markets rebounded from
their lows in March," said Jennifer
Murphy, Chief Executive Officer of the Company. "However,
the recovery in asset prices has been uneven, with sectors that
have received direct government support, like Agency RMBS and CMBS,
generally seeing more recovery than credit-oriented residential and
commercial mortgage loans and securities. In this still challenging
environment for credit-oriented mortgage assets, we have taken
actions to fortify the Company's balance sheet and improve the
future earnings power of the portfolio, including reducing our
portfolio leverage to 3.0x recourse debt (down from 9.5x as of the
first quarter), securing longer-term fixed rate financing at
attractive levels, significantly reducing our reliance on short
term repurchase agreement financing arrangements, issuing common
equity at a premium to book value, and converting some of our
outstanding notes to equity at a significant discount to par value.
We believe that these actions position WMC's shareholders to
benefit from what we anticipate to be the eventual recovery of
asset values and improved earnings sustainability of the portfolio.
Our priority is to put the Company in a position to resume paying
an attractive dividend supported by sustainable core earnings."
"For the past several years, our investment strategy has focused
on high quality borrowers and assets, as well as a diversified
investment approach. We believe there continues to be the potential
for meaningful improvement in the prices of our assets, as well as
the Company's book value, if as we expect the pandemic subsides and
economic activity resumes. To assist investors in assessing one
aspect of this potential, this quarter we are including a
calculation of WMC's "Economic Book Value." Economic Book Value
removes the consolidated assets and liabilities of three
securitizations from our balance sheet (including the two sponsored
by the Company) and adds back the fair market value of the retained
and acquired interest in these securitizations. This calculation
results in an Economic Book Value of $4.04 per share as of June
30, 2020.
Ms. Murphy continued, "We recorded a GAAP net loss of
$15.6 million, or $0.29 per share, and a sequential decline in book
value per share of 7.0%. This included $20.5
million of expense related to a profit participation fee
incurred on the securitization of $355.8
million of Non-QM Residential Whole Loans. This fee was
fully expensed in the second quarter and represented more than 100%
of the quarter's loss and book value decline, but the benefits of
the securitization are expected to be realized by the Company
for years to come. Through the securitization, we financed these
$355.8 million of Non-QM Whole Loans
for 35 years at an attractive weighted average rate of 2.0%. This
was an important milestone that enabled us to strengthen our
capital structure and positions us for improved cash flows from
these assets for a long period of time."
"Our core earnings were $0.11 per
share during the second quarter, reflecting a smaller asset base
and lower portfolio leverage. We made the decision to retain those
earnings and not pay a second quarter dividend to build additional
liquidity and equity, which we believe will benefit shareholders
over the long term. Our commitment to shareholders continues to be
to protect and grow the value of the portfolio and position the
Company to resume delivering on our long-term objectives of
generating sustainable core earnings that support an attractive
dividend, with the overall goal of enhancing value for the benefit
of our shareholders," Ms. Murphy concluded.
Harris Trifon, Chief Investment
Officer of the Company, commented, "The equity and credit markets
rallied in the second quarter, driven by improved liquidity
conditions across financial markets and the reopening of the
economy, which translated into higher valuations on a number of our
portfolio holdings. However, the pace of the recovery in asset
prices has been uneven across the residential and commercial
mortgage credit markets and current valuations appear to indicate
broad and significant real estate price declines and permanent
impairments that we don't expect to materialize. Our view remains
that the current recession will eventually pass and give way to an
economic recovery, although the timing and strength of that
recovery remain dependent on the future trajectory of COVID-19 and
fiscal and monetary stimulus. In the meantime, we have positioned
our portfolio to benefit from a recovery by investing in high
quality assets where our borrowers have resources to withstand a
protracted downturn."
"Although we believe valuations in mortgage credit assets are
favorable relative to the fundamental outlook for residential and
commercial real estate despite the uncertainty in the near term,
our primary focus is on maintaining sufficient liquidity and
positioning the portfolio for potential future appreciation. We
consider our current stance is the best way to put us back on
course towards achieving our long-term objectives and enhancing
shareholder value," concluded Mr. Trifon.
OPERATING RESULTS
The below table reflects a summary of our operating results:
|
|
For the Three
Months Ended
|
GAAP
Results
|
|
June 30,
2020
|
|
March 31,
2020
|
|
|
(in
thousands-except share and per share data)
|
|
|
|
|
|
Net Interest
Income
|
|
$
|
8,535
|
|
|
$
|
18,741
|
|
Other Income
(Loss):
|
|
|
|
|
Realized gain (loss)
on investments, net
|
|
(6,960)
|
|
|
89,186
|
|
Unrealized gain
(loss), net
|
|
16,040
|
|
|
(296,111)
|
|
Gain (loss) on
derivative instruments, net
|
|
(8,143)
|
|
|
(189,691)
|
|
Other, net
|
|
(45)
|
|
|
461
|
|
Other Income
(Loss)
|
|
892
|
|
|
(396,155)
|
|
Total
Expenses
|
|
24,805
|
|
|
4,534
|
|
Income (loss) before
income taxes
|
|
(15,378)
|
|
|
(381,948)
|
|
Income tax provision
(benefit)
|
|
255
|
|
|
(93)
|
|
Net income
(loss)
|
|
$
|
(15,633)
|
|
|
$
|
(381,855)
|
|
Net income
attributable to non-controlling interest
|
|
2
|
|
|
2
|
|
Net income (loss)
attributable to common stockholders and participating
securities
|
|
$
|
(15,635)
|
|
|
$
|
(381,857)
|
|
|
|
|
|
|
Net income (loss) per
Common Share – Basic/Diluted
|
|
$
|
(0.29)
|
|
|
$
|
(7.15)
|
|
Non-GAAP
Results
|
|
|
|
|
Core earnings plus
drop income (1)
|
|
$
|
5,802
|
|
|
$
|
15,779
|
|
Core earnings plus
drop income per Common Share –
Basic/Diluted(1)
|
|
$
|
0.11
|
|
|
$
|
0.29
|
|
Weighted average
yield(2)(4)
|
|
5.40
|
%
|
|
4.90
|
%
|
Effective cost of
funds(3)(4)
|
|
3.69
|
%
|
|
3.28
|
%
|
Annualized net
interest margin(2)(3)(4)
|
|
1.91
|
%
|
|
1.84
|
%
|
|
|
(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.
|
(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, 2020, the Company owned an aggregate
investment portfolio with a fair market value totaling $2.2 billion. The following tables sets forth
additional information regarding the Company's investment portfolio
as of June 30, 2020:
Portfolio Characteristics
Credit Sensitive Portfolio
The Company's Non-QM residential portfolio, in our Manager's
view, is performing well, given the severe economic
background. The loans in a forbearance plan at the end of
June 2020 represented less than 16%
of the total outstanding. We see this as a strong indication
that borrowers with meaningful equity in their homes will
prioritize their mortgage payment in order to remain current on
that obligation.
The Company's Commercial Loans and Non-Agency CMBS portfolios
are performing in line with expectations under the current pandemic
conditions. The large loan Non-Agency CMBS portfolio has an
approximate LTV of 62.5% and despite being concentrated in retail
and hotel assets, over 70.0% of the loans by principal balance
remain current. All the borrowers of the delinquent loans in the
Non-Agency CMBS portfolio are in negotiations for forbearance and
modifications. The Company believes there is a reasonable
likelihood that the majority of the delinquent loans will return to
performing status in the coming months although there is no
assurance that this will be the case. The Commercial Loan
portfolio carries a 65.4% original LTV and all but one of the loans
remains current. The delinquent loan has a principal balance of
$30.0 million, which is secured by a
hotel and the Company has been unable to come to terms with the
borrower on a loan modification. The Company is currently exploring
various workout strategies and believes there is a reasonable
likelihood that the majority of the principal and missed interest
payments will be recovered, although there is no assurance.
The following table summarizes certain characteristics of our
credit sensitive portfolio by investment category as of
June 30, 2020 (dollars in thousands):
|
Principal Balance
|
|
Amortized Cost
|
|
Fair
Value
|
|
Weighted
Average Coupon(1)
|
Non-Agency
RMBS
|
$
|
38,863
|
|
|
$
|
23,648
|
|
|
$
|
21,693
|
|
|
4.6
|
%
|
Non-Agency RMBS IOs
and IIOs
|
N/A
|
|
|
6,847
|
|
|
5,278
|
|
|
0.5
|
%
|
Non-Agency
CMBS
|
274,267
|
|
|
245,884
|
|
|
189,317
|
|
|
5.2
|
%
|
Residential Whole
Loans
|
1,147,860
|
|
|
1,173,259
|
|
|
1,124,051
|
|
|
5.2
|
%
|
Residential Bridge
Loans(1),(2)
|
28,028
|
|
|
28,044
|
|
|
26,505
|
|
|
9.5
|
%
|
Securitized
Commercial Loans
|
519,735
|
|
|
520,509
|
|
|
465,694
|
|
|
3.3
|
%
|
Commercial
Loans
|
332,576
|
|
|
332,378
|
|
|
323,474
|
|
|
6.6
|
%
|
Other
Securities
|
51,668
|
|
|
51,489
|
|
|
40,466
|
|
|
4.4
|
%
|
|
$
|
2,392,997
|
|
|
$
|
2,382,058
|
|
|
$
|
2,196,478
|
|
|
3.8
|
%
|
|
|
(1)
|
Includes Residential
Bridge Loans carried at amortized cost of $2.3 million as of
June 30, 2020. The fair value of these loans was $2.2 million
as of June 30, 2020.
|
(2)
|
As of June 30,
2020, the Company had real estate owned ("REO") properties with an
aggregate carrying value of $2.2 million related to foreclosed
Bridge Loans. The REO properties are classified in "Other assets"
in the Consolidated Balance Sheets.
|
Agency Portfolio
The following table summarizes certain characteristics of our
Agency portfolio by investment category as of June 30, 2020
(dollars in thousands):
|
Principal Balance
|
|
Amortized Cost
|
|
Fair Value
|
|
Net Weighted
Average Coupon
|
Agency RMBS
Interest-Only Strips
|
N/A
|
|
|
$
|
142
|
|
|
$
|
180
|
|
|
2.6
|
%
|
Agency RMBS
Interest-Only Strips, accounted for as derivatives
|
N/A
|
|
|
N/A
|
|
|
1,795
|
|
|
2.6
|
%
|
Total Agency
RMBS
|
—
|
|
|
142
|
|
|
1,975
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
1,975
|
|
|
2.6
|
%
|
PORTFOLIO FINANCING AND HEDGING
Financing Activity
Repurchase Agreements
The market disruptions surrounding COVID-19 resulted in the
decline of the Company's asset values making it challenging to
obtain repurchase agreement financing with favorable terms or at
all. The Company's repurchase agreement counterparties have
increased borrowing rates and increased haircuts. In the second
quarter in order to manage the severe market conditions and the
resulting large margin demands from lenders and pressure on the
Company's liquidity, the Company entered into two longer term
financing arrangements as it sought to reduce its exposure to
short-term financings with daily mark to market exposure.
Below is a summary of each of the these financing arrangements;
Residential Whole Loan Facility
On April 21, 2020, the Company
entered into amendments with respect to certain of its loan
warehouse facilities. These amendments mainly served to convert an
existing residential whole loan facility into a term facility by
removing any mark to market margin requirements, and to consolidate
the Company's Non-Qualified Mortgage loans, which were previously
financed by three separate, unaffiliated counterparties, into a
single facility.
The target advance rate under the amended and restated facility
is approximately 84% of the aggregate unpaid principal balance of
the loans. The facility matures on October
20, 2021. All principal payments and income generated by the
loans during the term of the facility are used to pay principal and
interest on the facility. Upon the securitization or sale by the
Company of any whole loan subject to this amended and restated
facility, the counterparty will be entitled to receive a 30%
premium recapture fee of all realized value on any whole loans
above such counterparty's amortized basis as well as an exit fee of
0.50% of the loan amount in circumstances where the counterparty is
not involved in the disposition of the loans.
Initially, the Company's aggregate borrowings under this
facility with respect to its Residential Whole Loans were
approximately $385.0 million and
the market value of such loans was approximately $430.0 million. On June 29, 2020, the Company securitized
approximately $355.8 million of the
Residential Whole Loans and paid down the facility by approximately
$339.4 million (see "Securitized
Debt" below for additional details). As noted above
part of the financing arrangements the Company agreed to pay the
lender a fee of 30% of all realized value on the Residential Whole
Loans above the counterparty's amortized basis upon securitization
or sale. As a result of refinancing the Residential Whole
Loans through a securitization, the Company accrued the premium
recapture fee of approximately $20.5
million, which is payable at the maturity of the facility,
and is recorded in "Financing transaction costs" in the
Consolidated Statements of Operations. Approximately
$74.4 million in non QM loans remain
in the facility which are also subject to the recapture premium at
sale or securitization and the amount of such liability is
contingent on the realizable value at time of sale or
securitization.
Non-Agency CMBS and Non-Agency RMBS Facility
On May 4, 2020, the Company
supplemented one of its existing securities repurchase facilities
to consolidate most of its CMBS and RMBS assets, which were
financed by multiple counterparties, into a single term facility
with limited mark to market margin requirements. Pursuant to the
agreement, a margin deficit will not occur until such time as the
loan to value ratio surpasses a certain threshold (the "LTV
Trigger"), on a weighted average basis per asset type, calculated
on a portfolio level. If this threshold is reached, the Company may
elect to provide cash margin or sell certain assets to the extent
necessary to lower the ratio. The term of this facility is 12
months, subject to 12 month extensions at the counterparty's
option. All interest income generated by the assets during the term
of the facility will be paid to the Company no less often than
monthly. Interest on the facility is due from the Company at a rate
of three-month LIBOR plus 5.00% payable quarterly in arrears. Half
of all principal repayments on the underlying assets will be
applied to repay the obligations owed to the counterparty, with the
remainder paid to the Company, unless the LTV Trigger has occurred,
in which case all principal payments will be applied to repay the
obligations.
As of June 30, 2020, the Company had borrowings under 6
master repurchase agreements. The following table sets forth
additional information regarding the Company's portfolio financing
under the master repurchase agreements as of June 30, 2020
(dollars in thousands):
|
|
Outstanding
Borrowings
|
|
Weighted
Average
Interest
Rate
|
|
Weighted
Average
Remaining Days to
Maturity
|
Short Term
Borrowings:
|
|
|
|
|
|
|
Agency
RMBS
|
|
$
|
1,491
|
|
|
1.41
|
%
|
|
60
|
Non-Agency
CMBS
|
|
9,118
|
|
|
3.69
|
%
|
|
10
|
Residential
Whole-Loans
|
|
16,075
|
|
|
5.18
|
%
|
|
11
|
Residential Bridge
Loans
|
|
21,159
|
|
|
3.04
|
%
|
|
36
|
Commercial
Loans
|
|
36,575
|
|
|
3.42
|
%
|
|
78
|
Other
Securities
|
|
2,496
|
|
|
5.49
|
%
|
|
7
|
Subtotal
|
|
86,914
|
|
|
3.71
|
%
|
|
46
|
Long Term
Borrowings
|
|
|
|
|
|
|
Non-Agency
CMBS
|
|
78,033
|
|
|
5.50
|
%
|
|
280
|
Non-Agency
RMBS
|
|
15,515
|
|
|
5.50
|
%
|
|
219
|
Residential
Whole-Loans (1)
|
|
23,627
|
|
|
5.50
|
%
|
|
478
|
Commercial Loans
(1)
|
|
150,581
|
|
|
2.32
|
%
|
|
456
|
Other
securities
|
|
14,491
|
|
|
5.50
|
%
|
|
310
|
Subtotal
|
|
282,247
|
|
|
3.80
|
%
|
|
389
|
Repurchase agreements
borrowings
|
|
$
|
369,161
|
|
|
3.78
|
%
|
|
308
|
Less unamortized debt
issuance costs
|
|
65
|
|
|
N/A
|
|
|
N/A
|
|
Repurchase agreements
borrowings, net
|
|
$
|
369,096
|
|
|
3.79
|
%
|
|
308
|
|
|
(1)
|
Certain Residential
Whole Loans and Commercial Loans were financed under two longer
term repurchase agreements. The Residential Whole facility is
18 months and the Commercial Loan facility automatically rolls
until such time as they are terminated or until certain conditions
of default. The weighted average remaining maturity days was
calculated using expected weighted life of the underlying
collateral.
|
Certain of the repurchase agreements provide the counterparty
with the right to terminate the agreement if the Company does not
maintain certain equity and leverage metrics, the most restrictive
of which include a limit on leverage based on the composition of
the Company's portfolio. For all the repurchase agreements with
outstanding borrowings, the Company was in compliance with the
terms of such financial tests as of June 30, 2020.
Convertible Senior Unsecured Notes
At June 30, 2020, the Company had $205 million aggregate principal amount of 6.75%
convertible senior unsecured notes outstanding. 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.
On July 1, 2020, the Company
issued an aggregate of 1,354,084 shares of its common stock, in
exchange for $5,000,000 aggregate
principal amount of its 6.75% Convertible Senior Notes pursuant to
separate privately negotiated exchange agreement.
Mortgage-Backed Notes
The Company has completed two Residential Whole Loan
securitizations. The mortgage-backed notes issued are non-recourse
to the Company and effectively finance $1.0
billion of Residential Whole Loans.
Arroyo 2019-2
The following table summarizes the residential mortgage-backed
notes issued by the Company's Arroyo 2019-2 securitization trust at
June 30, 2020 (dollars in thousands):
Classes
|
Principal
Balance
|
Coupon
|
Carrying
Value
|
Contractual
Maturity
|
Offered
Notes:(1)
|
|
|
|
|
Class A-1
|
$
|
592,742
|
|
3.3%
|
$
|
592,740
|
|
4/25/2049
|
Class A-2
|
31,760
|
|
3.5%
|
31,759
|
|
4/25/2049
|
Class A-3
|
50,317
|
|
3.8%
|
50,315
|
|
4/25/2049
|
Class M-1
|
25,055
|
|
4.8%
|
25,055
|
|
4/25/2049
|
|
699,874
|
|
|
699,869
|
|
|
Less: Unamortized
Deferred Financing Cost
|
N/A
|
|
|
4,851
|
|
|
Total
|
$
|
699,874
|
|
|
$
|
695,018
|
|
|
The Company retained the subordinate bonds and these bonds had a
fair market value of $51.7 million at
June 30, 2020. The retained Arroyo 2019-2 subordinate bonds
are eliminated in consolidation.
Arroyo 2020-1
The following table summarizes the residential mortgage-backed
notes issued by the Company's Arroyo 2020-1 securitization trust at
June 30, 2020 (dollars in thousands):
Classes
|
Principal
Balance
|
Coupon
|
Carrying
Value
|
Contractual
Maturity
|
Offered
Notes:(1)
|
|
|
|
|
Class A-1A
|
$
|
266,790
|
|
1.7%
|
$
|
266,843
|
|
3/25/2055
|
Class A-1B
|
31,658
|
|
2.1%
|
31,658
|
|
3/25/2055
|
Class A-2
|
13,518
|
|
2.9%
|
13,521
|
|
3/25/2055
|
Class A-3
|
17,963
|
|
3.3%
|
17,967
|
|
3/25/2055
|
Class M-1
|
11,739
|
|
4.3%
|
11,739
|
|
3/25/2055
|
Subtotal
|
341,668
|
|
|
341,728
|
|
|
Less: Unamortized
Deferred Financing Costs
|
N/A
|
|
|
2,727
|
|
|
Total
|
$
|
341,668
|
|
|
$
|
339,001
|
|
|
The Company retained the subordinate bonds and these bonds had a
fair market value of $28.1 million at
June 30, 2020. The retained Arroyo 2020-1 subordinate bonds
are eliminated in consolidation.
RETL 2019 Trust
The following table summarizes RETL 2019 Trust's commercial
mortgage pass-through certificates at June 30, 2020 (dollars
in thousands):
Classes
|
Principal
Balance
|
Coupon
|
Fair
Value
|
Contractual
Maturity
|
Class A
|
$
|
64,835
|
|
1.3%
|
$
|
61,678
|
|
3/15/2021
|
Class B
|
101,200
|
|
1.7%
|
91,382
|
|
3/15/2021
|
Class C
|
308,400
|
|
2.3%
|
271,126
|
|
3/15/2021
|
Class HRR
|
45,300
|
|
8.7%
|
41,477
|
|
3/15/2021
|
Class
X-EXT(1)
|
N/A
|
|
1.2%
|
31
|
|
3/15/2021
|
|
$
|
519,735
|
|
|
$
|
465,694
|
|
|
|
|
(1)
|
Class X-EXT is an
interest-only class with an initial notional balance of $308.4
million.
|
The Company acquired the HRR bond and the bond had a fair market
value of $41.5 million at
June 30, 2020. The HRR bond is eliminated in
consolidation.
Derivatives Activity
The following table summarizes the Company's derivative
instruments at June 30, 2020 (dollars in thousands):
Other
Derivative Instruments
|
|
Notional
Amount
|
|
Fair
Value
|
Credit default swaps,
asset
|
|
$
|
3,520
|
|
|
$
|
714
|
|
Total derivative
instruments, assets
|
|
|
|
714
|
|
|
|
|
|
|
Credit default swaps,
liability
|
|
4,140
|
|
|
(943)
|
|
Total derivative
instruments, liabilities
|
|
|
|
(943)
|
|
Total derivative
instruments, net
|
|
|
|
$
|
(229)
|
|
DIVIDEND
As previously announced, due to the turmoil in the financial
markets resulting from the COVID-19 pandemic, we suspended the
first and second quarter dividend to preserve liquidity.
CONFERENCE CALL
The Company will host a conference call with a live webcast
tomorrow, August 6, 2020 at 11:00 a.m. Eastern Time/8:00
a.m. Pacific Time, to discuss financial results for the second
quarter 2020.
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/10146563 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 tomorrow.
A telephone replay will be available through August 20, 2020 by dialing (877) 344-7529 from
the United States, or (412)
317-0088 from outside the United
States, and entering conference ID 10146563. 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 of assets consisting of Residential Whole Loans,
Commercial Loans, Non-Agency CMBS, Non-Agency RMBS, GSE Risk
Transfer Securities and to a lesser extent Agency RMBS, Agency CMBS
and ABS. 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, LLC'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, LLC, an investment advisor registered with the Securities
and Exchange Commission and a wholly-owned subsidiary of Franklin
Resources, Inc. Please visit the Company's website at
www.westernassetmcc.com.
FORWARD-LOOKING STATEMENTS
The press release contains statements that may constitute
"forward-looking statements" For these statements, the Company
claims the protections of the safe harbor for forward-looking
statements contained in such sections. Forward-looking
statements are subject to substantial risks and uncertainties, many
of which are difficult to predict and are generally beyond the
Company's control. In particular, it is difficult to fully assess
the impact of COVID-19 at this time due to, among other factors,
uncertainty regarding the severity and duration of the outbreak
domestically and internationally and the effectiveness of federal,
state and local governments' efforts to contain the spread of
COVID-19 and respond to its direct and indirect impact on the U.S.
economy and economic activity. Other factors are described in Risk
Factors section of the Company's annual report on Form 10-K
for the period ended December 31, 2019 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, economic book value 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 margin,
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,
2020
|
|
March 31,
2020
|
Assets:
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
19,363
|
|
|
$
|
10,342
|
|
Restricted
cash
|
|
26,430
|
|
|
33,229
|
|
Agency mortgage-backed
securities, at fair value ($1,975 and $430,628 pledged as
collateral, at fair value, respectively)
|
|
1,975
|
|
|
430,628
|
|
Non-Agency
mortgage-backed securities, at fair value ($197,326 and $265,647
pledged as collateral, at fair value, respectively)
|
|
216,288
|
|
|
276,606
|
|
Other securities, at
fair value ($40,466 and $47,307 pledged as collateral, at fair
value, respectively)
|
|
40,466
|
|
|
47,411
|
|
Residential Whole
Loans, at fair value ($1,124,051 and $1,309,795 pledged as
collateral, at fair value, respectively)
|
|
1,124,051
|
|
|
1,309,795
|
|
Residential Bridge
Loans ($24,171 and $26,050 at fair value and $25,371 and $27,571
pledged as collateral, respectively)
|
|
26,505
|
|
|
28,634
|
|
Securitized commercial
loans, at fair value
|
|
465,694
|
|
|
477,131
|
|
Commercial Loans, at
fair value ($323,474 and $320,308 pledged as collateral, at fair
value, respectively)
|
|
323,474
|
|
|
320,308
|
|
Receivable under
reverse repurchase agreements
|
|
—
|
|
|
24,826
|
|
Investment related
receivable
|
|
12,029
|
|
|
72,826
|
|
Interest
receivable
|
|
11,595
|
|
|
14,805
|
|
Due from
counterparties
|
|
5,177
|
|
|
117,670
|
|
Derivative assets, at
fair value
|
|
714
|
|
|
33,675
|
|
Other
assets
|
|
6,262
|
|
|
5,697
|
|
Total Assets
(1)
|
|
$
|
2,280,023
|
|
|
$
|
3,203,583
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity:
|
|
|
|
|
Liabilities:
|
|
|
|
|
Repurchase agreements,
net
|
|
$
|
369,096
|
|
|
$
|
1,553,715
|
|
Convertible senior
unsecured notes, net
|
|
198,669
|
|
|
197,984
|
|
Securitized debt, net
($424,217 and $396,824 at fair value and $43,904 and $53,527 held
by affiliates, respectively)
|
|
1,458,236
|
|
|
1,139,121
|
|
Interest payable
(includes $49 and $536 on securitized debt held by affiliates,
respectively)
|
|
7,710
|
|
|
6,429
|
|
Due to
counterparties
|
|
16
|
|
|
24,811
|
|
Derivative liability,
at fair value
|
|
943
|
|
|
43,967
|
|
Accounts payable and
accrued expenses
|
|
4,082
|
|
|
6,307
|
|
Payable to
affiliate
|
|
4,701
|
|
|
3,237
|
|
Dividend
payable
|
|
—
|
|
|
—
|
|
Other
liabilities
|
|
47,856
|
|
|
45,779
|
|
Total Liabilities
(2)
|
|
2,091,309
|
|
|
3,021,350
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
Common stock: $0.01
par value, 500,000,000 shares authorized, 59,458,617 and 53,423,876
outstanding, respectively
|
|
595
|
|
|
535
|
|
Preferred stock, $0.01
par value, 100,000,000 shares authorized and no shares
outstanding
|
|
—
|
|
|
—
|
|
Treasury stock, at
cost, 100,000 and 0 shares held, respectively
|
|
(578)
|
|
|
(578)
|
|
Additional paid-in
capital
|
|
911,488
|
|
|
889,392
|
|
Retained earnings
(accumulated deficit)
|
|
(722,793)
|
|
|
(707,158)
|
|
Total Stockholders'
Equity
|
|
188,712
|
|
|
182,191
|
|
Non-controlling
interest
|
|
2
|
|
|
42
|
|
Total
Equity
|
|
188,714
|
|
|
182,233
|
|
Total Liabilities and
Equity
|
|
$
|
2,280,023
|
|
|
$
|
3,203,583
|
|
Western Asset
Mortgage Capital Corporation and Subsidiaries
|
Consolidated
Balance Sheets (Continued)
|
(in
thousands—except share and per share data)
|
(Unaudited)
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
(1) Assets of consolidated VIEs
included in the total assets above:
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
—
|
|
|
$
|
4,542
|
|
Restricted
Cash
|
|
26,430
|
|
|
33,229
|
|
Residential Whole
Loans, at fair value ($1,124,051 and $1,309,795 pledged as
collateral, at fair value, respectively)
|
|
1,124,051
|
|
|
1,309,795
|
|
Residential Bridge
Loans ($23,037 and $24,987 at fair value and $25,371 and $27,571
pledged as collateral, respectively)
|
|
25,371
|
|
|
27,571
|
|
Securitized commercial
loans, at fair value
|
|
465,694
|
|
|
477,131
|
|
Commercial Loans, at
fair value ($72,335 and $71,684 pledged as collateral, at fair
value, respectively)
|
|
72,335
|
|
|
71,684
|
|
Investment related
receivable
|
|
12,029
|
|
|
24,738
|
|
Interest
receivable
|
|
8,640
|
|
|
10,226
|
|
Other
assets
|
|
92
|
|
|
101
|
|
Total assets of
consolidated VIEs
|
|
$
|
1,734,642
|
|
|
$
|
1,959,017
|
|
|
|
|
|
|
(2) Liabilities of consolidated VIEs
included in the total liabilities above:
|
|
|
|
|
Securitized debt, net
($765,945 and $681,643 at fair value and $43,904 and $142,905 held
by affiliates, respectively)
|
|
$
|
1,458,236
|
|
|
$
|
1,139,121
|
|
Interest payable
(includes $49 and $647 on securitized debt held by affiliates,
respectively)
|
|
3,144
|
|
|
3,215
|
|
Accounts payable and
accrued expenses
|
|
118
|
|
|
128
|
|
Other
liabilities
|
|
26,430
|
|
|
33,229
|
|
Total liabilities of
consolidated VIEs
|
|
$
|
1,487,928
|
|
|
$
|
1,175,693
|
|
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,
2020
|
|
March 31,
2020
|
Net Interest
Income
|
|
|
|
|
Interest
income
|
|
$
|
31,494
|
|
|
$
|
54,846
|
|
Interest
expense
|
|
22,959
|
|
|
36,105
|
|
Net Interest
Income
|
|
8,535
|
|
|
18,741
|
|
|
|
|
|
|
Other Income
(Loss)
|
|
|
|
|
Realized gain (loss)
on sale of investments, net
|
|
(6,960)
|
|
|
89,186
|
|
Unrealized gain
(loss), net
|
|
16,040
|
|
|
(296,111)
|
|
Gain (loss) on
derivative instruments, net
|
|
(8,143)
|
|
|
(189,691)
|
|
Other, net
|
|
(45)
|
|
|
461
|
|
Other Income
(Loss)
|
|
892
|
|
|
(396,155)
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Management fee to
affiliate
|
|
464
|
|
|
1,039
|
|
Financing
fee
|
|
20,540
|
|
|
—
|
|
Other operating
expenses
|
|
796
|
|
|
1,000
|
|
General and
administrative expenses:
|
|
|
|
|
Compensation
expense
|
|
692
|
|
|
662
|
|
Professional
fees
|
|
1,541
|
|
|
1,480
|
|
Other general
and administrative expenses
|
|
772
|
|
|
353
|
|
Total general and
administrative expenses
|
|
3,005
|
|
|
2,495
|
|
Total
Expenses
|
|
24,805
|
|
|
4,534
|
|
|
|
|
|
|
Income before
income taxes
|
|
(15,378)
|
|
|
(381,948)
|
|
Income tax provision
(benefit)
|
|
255
|
|
|
(93)
|
|
Net income
(loss)
|
|
(15,633)
|
|
|
(381,855)
|
|
Net income
attributable to non-controlling interest
|
|
2
|
|
|
2
|
|
Net income (loss)
attributable to common stockholders and participating
securities
|
|
$
|
(15,635)
|
|
|
$
|
(381,857)
|
|
|
|
|
|
|
Net income (loss) per
Common Share – Basic
|
|
$
|
(0.29)
|
|
|
$
|
(7.15)
|
|
Net income (loss) per
Common Share – Diluted
|
|
$
|
(0.29)
|
|
|
$
|
(7.15)
|
|
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, 2020 and March 30, 2020:
|
|
|
|
Three months
ended
|
(dollars in
thousands)
|
|
June 30,
2020
|
|
March 31,
2020
|
Net income (loss)
attributable to common stockholders and participating
securities
|
|
$
|
(15,635)
|
|
|
$
|
(381,857)
|
|
Income tax provision
(benefit)
|
|
255
|
|
|
(93)
|
|
Net income (loss)
before income taxes
|
|
(15,380)
|
|
|
(381,950)
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
Investments:
|
|
|
|
|
Unrealized (gain)
loss on investments, securitized debt and other
liabilities
|
|
(16,040)
|
|
|
296,111
|
|
Realized (gain) loss
on sale of investments
|
|
6,960
|
|
|
(89,186)
|
|
One-time transaction
costs
|
|
20,652
|
|
|
280
|
|
|
|
|
|
|
Derivative
Instruments:
|
|
|
|
|
Net realized (gain)
loss on derivatives
|
|
13,152
|
|
|
180,156
|
|
Net unrealized (gain)
loss on derivatives
|
|
(4,973)
|
|
|
8,807
|
|
|
|
|
|
|
Amortization of
discount on convertible senior unsecured notes
|
|
273
|
|
|
273
|
|
Other non-cash
adjustments
|
|
988
|
|
|
—
|
|
Non-cash stock-based
compensation
|
|
170
|
|
|
165
|
|
Total
adjustments
|
|
21,182
|
|
|
396,606
|
|
Core
Earnings
|
|
$
|
5,802
|
|
|
$
|
14,656
|
|
Basic and Diluted
Core Earnings per Common Share and Participating
Securities
|
|
$
|
0.11
|
|
|
$
|
0.27
|
|
Basic and Diluted
Core Earnings plus Drop Income per Common Share and Participating
Securities
|
|
$
|
0.11
|
|
|
$
|
0.29
|
|
Basic weighted
average common shares and participating securities
|
|
54,921,847
|
|
|
53,670,550
|
|
Diluted weighted
average common shares and participating securities
|
|
54,921,847
|
|
|
53,670,550
|
|
Alternatively, our Core Earnings can also be derived as
presented in the table below by starting net interest income adding
interest income on Interest-Only Strips accounted for as
derivatives and other derivatives, and net interest expense
incurred on interest rate swaps and foreign currency swaps and
forwards (a Non-GAAP financial measure) to arrive at adjusted net
interest income. Then subtracting total expenses, adding non-cash
stock based compensation, adding one-time transaction costs, adding
amortization of discount on convertible senior notes and adding
interest income on cash balances and other income (loss), net:
|
|
Three months
ended
|
(dollars in thousands)
|
|
June 30,
2020
|
|
March 31,
2020
|
Net interest
income
|
|
$
|
8,535
|
|
|
$
|
18,741
|
|
Interest income from
IOs and IIOs accounted for as derivatives
|
|
69
|
|
|
91
|
|
Net interest income
from interest rate swaps
|
|
—
|
|
|
(1,133)
|
|
Adjusted net interest
income
|
|
8,604
|
|
|
17,699
|
|
Total
expenses
|
|
(24,805)
|
|
|
(4,534)
|
|
Other non-cash
adjustments
|
|
988
|
|
|
—
|
|
Non-cash stock-based
compensation
|
|
170
|
|
|
165
|
|
One-time transaction
costs
|
|
20,652
|
|
|
280
|
|
Amortization of
discount on convertible unsecured senior notes
|
|
273
|
|
|
273
|
|
Interest income on
cash balances and other income (loss), net
|
|
(78)
|
|
|
775
|
|
Income attributable
to non-controlling interest
|
|
(2)
|
|
|
(2)
|
|
Core
Earnings
|
|
$
|
5,802
|
|
|
$
|
14,656
|
|
Reconciliation of
GAAP Book Value to Non-GAAP Economic Book Value
|
(dollars in
thousands)
|
(Unaudited)
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
|
$
Amount
|
|
Per
Share
|
|
$
Amount
|
|
Per
Share
|
GAAP Book Value at
March 31, 2020 and December 31, 2019
|
|
$
|
182,191
|
|
|
$
|
3.41
|
|
|
$
|
564,461
|
|
|
$
|
10.55
|
|
Proceeds from
At-the-Market program, net
|
|
21,986
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
Stock
repurchase
|
|
—
|
|
|
—
|
|
|
(578)
|
|
|
N/A
|
|
|
|
204,177
|
|
|
3.43
|
|
|
563,883
|
|
|
10.55
|
|
Portfolio
Income
|
|
|
|
|
|
|
|
0
|
|
Net Interest
Margin
|
|
8,557
|
|
|
0.14
|
|
|
18,870
|
|
|
0.35
|
|
Realized gain (loss),
net
|
|
(20,147)
|
|
|
(0.34)
|
|
|
(127,011)
|
|
|
(2.38)
|
|
Unrealized gain
(loss), net
|
|
21,016
|
|
|
0.36
|
|
|
(269,275)
|
|
|
(5.03)
|
|
Net portfolio
income
|
|
9,426
|
|
|
0.16
|
|
|
(377,416)
|
|
|
(7.06)
|
|
|
|
|
|
|
|
|
|
|
Financing
fee
|
|
(20,540)
|
|
|
(0.35)
|
|
|
—
|
|
|
—
|
|
Operating
expenses
|
|
(1,260)
|
|
|
(0.02)
|
|
|
(2,039)
|
|
|
(0.04)
|
|
General and
administrative expenses, excluding equity based
compensation
|
|
(2,836)
|
|
|
(0.05)
|
|
|
(2,330)
|
|
|
(0.04)
|
|
Provision for
taxes
|
|
(255)
|
|
|
—
|
|
|
93
|
|
|
—
|
|
GAAP Book Value at
June 30, 2020 and March 31, 2020
|
|
$
|
188,712
|
|
|
$
|
3.17
|
|
|
$
|
182,191
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
Adjustments to
deconsolidate VIEs and reflect the Company's interest in the
securities owned
|
|
|
Deconsolidation of
VIEs assets
|
|
(1,555,962)
|
|
|
(26.17)
|
|
|
(1,263,407)
|
|
|
(23.65)
|
|
Deconsolidation VIEs
liabilities
|
|
1,486,107
|
|
|
25.00
|
|
|
1,174,422
|
|
|
21.98
|
|
Interest in
securities of VIEs owned, at fair value
|
|
121,315
|
|
|
2.04
|
|
|
133,885
|
|
|
2.51
|
|
Economic Book
Value at June 30, 2020 and March 31, 2020
|
|
$
|
240,172
|
|
|
$
|
4.04
|
|
|
$
|
227,091
|
|
|
$
|
4.25
|
|
"Economic Book Value" is a non-GAAP financial measure of our
financial position on an unconsolidated basis. The Company owns
certain securities that represent a controlling variable interest,
which under GAAP requires consolidation; however, the Company's
economic exposure to these variable interests is limited to the
fair value of the individual investments. Economic book
value is calculated by adjusting the GAAP book value by 1)
adding the fair value of the retained interest or acquired security
of the VIEs (RETL 2019, Arroyo 2019-2 and Arroyo 2020-1) held by
the Company, which were priced by independent third party pricing
services and 2) removing the asset and liabilities associated with
each of consolidated trusts (RETL 2019, Arroyo 2019-2 and Arroyo
2020-1). Management believes that economic book value provides
investors with a useful supplemental measure to evaluate our
financial position as it reflects the actual financial interest of
these investments irrespective of the variable interest
consolidation model applied for GAAP reporting purposes. Economic
book value does not represent and should not be considered as a
substitute for Stockholders' Equity, as determined in accordance
with GAAP, and our calculation of this measure may not be
comparable to similarly titled measures reported by other
companies.
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, 2020
and March 30, 2020:
|
|
Three months
ended
|
(dollars in
thousands)
|
|
June 30,
2020
|
|
March 31,
2020
|
Coupon interest
income
|
|
$
|
33,007
|
|
|
$
|
57,761
|
|
Premium amortization,
discount accretion and amortization of basis, net
|
|
(1,513)
|
|
|
(2,915)
|
|
Interest
income
|
|
31,494
|
|
|
54,846
|
|
Contractual interest
income, net of amortization of basis on Agency and Non-Agency
Interest-Only Strips, classified as
derivatives(1):
|
|
|
|
|
Coupon interest
income
|
|
340
|
|
|
636
|
|
Amortization of
basis
|
|
(271)
|
|
|
(545)
|
|
Subtotal
|
|
69
|
|
|
91
|
|
Total adjusted
interest income
|
|
$
|
31,563
|
|
|
$
|
54,937
|
|
|
|
(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, 2020 and March 30, 2020:
|
|
Three months
ended
|
|
|
June 30,
2020
|
|
March 31,
2020
|
(dollars in thousands)
|
|
Reconciliation
|
|
Cost of
Funds/Effective
Borrowing Costs
|
|
Reconciliation
|
|
Cost of
Funds/Effective
Borrowing
Costs
|
Interest
expense
|
|
$
|
22,959
|
|
|
3.73
|
%
|
|
$
|
36,105
|
|
|
3.34
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
Interest expense on
Securitized debt from consolidated VIEs1
|
|
(4,661)
|
|
|
(3.92)
|
%
|
|
(6,754)
|
|
|
(4.42)
|
%
|
Net interest
(received) paid - interest rate swaps
|
|
—
|
|
|
—
|
%
|
|
1,133
|
|
|
0.10
|
%
|
Effective Borrowing
Costs
|
|
$
|
18,298
|
|
|
3.69
|
%
|
|
$
|
30,484
|
|
|
3.28
|
%
|
Weighted average
borrowings
|
|
$
|
1,994,405
|
|
|
|
|
$
|
3,733,045
|
|
|
|
|
|
(1)
|
Excludes third-party
sponsored securitized debt interest expense.
|
View original
content:http://www.prnewswire.com/news-releases/western-asset-mortgage-capital-corporation-announces-second-quarter-2020-results-301107148.html
SOURCE Western Asset Mortgage Capital Corporation