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Western Asset Mortgage Capital Corporation Announces Fourth Quarter And Full Year 2016 Results

PASADENA, Calif., March 6, 2017 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (WMC) today reported its results for the fourth quarter and the year ended December 31, 2016. 

FOURTH QUARTER 2016 HIGHLIGHTS

  • $0.31 per share common dividend declared.
  • GAAP net loss of $38.3 million, or $0.92 per basic and diluted share.
  • Core earnings plus drop income of $22.1 million, or $0.52 per basic and diluted share.1,2
  • 2.74% annualized net interest spread on our investment portfolio.1,4
  • Constant prepayment rate (CPR) on the Company's Agency RMBS portfolio of 11.9% for the quarter.
  • $10.27 per share net book value as of December 31, 2016, net of fourth quarter common dividend.
  • Economic return on book value was (7.8)%1,3 for the quarter.
  • 5.0x leverage as of December 31, 2016.

FULL YEAR 2016 HIGHLIGHTS

  • $1.38 per share common dividend declared.
  • GAAP net loss of $25.0 million, or $0.61 per basic and diluted share.
  • Core earnings plus drop income of $59.1 million, or $1.41 per basic and diluted share.1,2
  • 2.06% annualized net interest spread on our investment portfolio.1,4
  • Economic return on book value was (4.6)%1,3 for the year.

MANAGEMENT COMMENTARY

"2016 was another challenging year for the fixed income markets, generating high interest rate volatility and fluctuating asset values against a backdrop of ever changing investor sentiment, and the fourth quarter proved to be no exception. However, I am pleased to report that we generated solid core earnings both in the fourth quarter and for the full year, more than covering our dividend in both instances," said Jennifer Murphy, Chief Executive Officer of the Company. "We remained focused on our long-term goal of generating a strong total return for our shareholders through attractive dividends derived from sustainable core earnings and appreciation in the value of our portfolio. Our fourth quarter dividend of $0.31 per share and $1.38 for the year reflects our commitment to those goals. While we experienced a decline in our book value in the fourth quarter we continue to reposition our portfolio for greater stability."

Anup Agarwal, Chief Investment Officer of the Company, commented, "The unexpected results of the presidential election in November 2016, triggered a repricing in the financial markets as investors became more optimistic that U.S. economic growth will accelerate, based on anticipated stimulative fiscal policy comprised of tax cuts, infrastructure spending and de-regulation. This optimism led to a risk-on investor sentiment and exerted upward pressure on interest rates and had a negative impact on Agency RMBS pricing. For the quarter, we generated core earnings plus drop income of $0.52, a significant increase of 49% over the third quarter. However, the increasing interest rates and volatility contributed to the overall decline in our book value for the fourth quarter. Subsequent to year-end and through February our book value has improved, as interest rates have stabilized and credit spreads have tightened against an ongoing favorable outlook for residential and commercial real estate markets."

Mr. Agarwal concluded, "We believe our portfolio is well positioned to generate attractive risk-adjusted returns for our shareholders. Agency and Non-Agency CMBS, Whole-Loans (residential and commercial), CMBS and GSE CRT investments continue to look particularly appealing on a risk-adjusted basis.  We will continue to remain nimble in our capital allocation, in order to capture total return opportunities within our broad investable universe in the fixed-income and mortgage markets."


FOURTH QUARTER 2016 RESULTS

The below table reflects a summary of our operating results:



For the Three Months Ended

GAAP Results


December 31, 2016


September 30, 2016






Net Interest Income


$

26,725



$

21,469


Other Income (Loss):





Realized gain (loss) on sale of investments, net


(17,023)



1,439


Other than temporary impairment


(10,155)



(4,978)


Unrealized gain (loss), net


(64,678)



15,292


Gain (loss) on derivative instruments, net


32,479



6,121


Other, net


338



(60)


Other Income (loss)


(59,039)



17,814


Total Expenses


5,065



4,762


Income (loss) before income taxes


(37,379)



34,521


Income tax provision (benefit)


917



2,239


Net income (loss)


$

(38,296)



$

32,282







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


$

(0.92)



$

0.77


Non-GAAP Results





Core earnings plus drop income(1)


$

22,051



$

14,838


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


$

0.52



$

0.35


Weighted average yield(2)


4.80

%


4.28

%

Effective cost of funds(3)


2.06

%


2.43

%

Annualized net interest spread(2)(3)


2.74

%


1.85

%

Annualized CPR on Agency RMBS


11.9

%


11.4

%


(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, 2016, the Company owned an aggregate investment portfolio equaling $2.8 billion in market value. The following table sets forth additional information regarding the Company's portfolio as of December 31, 2016:

 

Investment Portfolio

(dollars in thousands)


Coupon


Principal

Balance


Amortized

Cost


Fair Value

Agency









30-year fixed rate


3.0%


$

94,971



$

95,587



$

94,454




3.5%


80,018



84,555



82,937




4.0%


337,106



365,916



357,357




4.5%


313,477



336,565



341,176




5.0%


48,640



54,633



54,289




5.5%


1,959



2,247



2,180




6.0%


2,428



2,704



2,814


20-year fixed rate


3.5%


115,659



121,753



120,379




4.0%


355,316



374,963



378,091


Agency RMBS IOs and IIOs(1)


3.1%


 N/A



33,767



36,293


Agency CMBS


2.6%


377,286



361,903



363,664


Agency CMBS IOs and IIOs(2)


1.1%


 N/A



8,800



7,960


Subtotal Agency


3.3%


1,726,860



1,843,393



1,841,594


Non-Agency









Non-Agency RMBS


4.5%


340,759



232,066



241,041


Non-Agency RMBS IOs and IIOs(3)


5.5%


 N/A



57,911



67,201


Non-Agency CMBS


5.0%


473,024



385,801



358,919


Subtotal Non-Agency


5.0%


813,783



675,778



667,161


Residential Whole-Loans


4.8%


187,765



188,537



192,136


Securitized Commercial Loan(5)


9.0%


25,000



25,000



24,225


Other Securities(4)


8.2%


44,838



68,085



67,762


Total Portfolio


4.0%


$

2,798,246



$

2,800,793



$

2,792,878



(1)

Includes $15.0 million of amortized cost and $16.5 million of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(2)

Includes $8.6 million of amortized cost an $7.7 million of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.

(3)

Includes $2.2 million of amortized cost and $3.1 million of fair value for Non-Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.

(4)

Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.1 million.

(5)

The $25.0 million securitized commercial loan is from a consolidated variable interest entity in which the Company owns a $14.0 million first loss position in a CMBS Securitized Trust.

 


PORTFOLIO FINANCING AND HEDGING

Financing

At December 31, 2016, the Company financed its portfolio with $2.2 billion of borrowings under master repurchase agreements with 20 of its 27 approved counterparties, bearing fixed interest rates with maturities of six months or less. The following table sets forth additional information regarding the Company's portfolio financing as of December 31, 2016 (dollars in thousands):

Repurchase Agreements


Balance


Weighted

Average

Interest Rate

(end of

period)


Weighted

Average

Remaining

Maturity

(days)

Agency RMBS


$

1,427,674



0.96

%


38

Agency CMBS


56,365



1.07

%


46

Non-Agency RMBS


218,712



2.53

%


28

Non-Agency CMBS


255,656



2.55

%


30

Whole-Loans and securitized commercial loan


161,181



2.91

%


9

Other Securities


36,056



2.32

%


17

Total


$

2,155,644



1.48

%


34

 

Hedging

The Company has entered into $3.0 billion  notional value of pay-fixed interest rate swaps, excluding forward starting swaps of $1.7 billion (approximately 4.5 months forward), which have variable maturities between October 2, 2017 and February 12, 2044, and $2.7 billion notional value of pay-variable interest rate swaps, which have variable maturities between February 5, 2020 and February 5, 2045.

The following tables summarize the average pay rate and average maturity for the Company's interest rate swaps as of December 31, 2016:

Fixed Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity


Notional Value


Average
Fixed Pay
Rate


Average
Floating Receive
Rate


Average
Maturity
(Years)

1 year or less


$

105,900



0.8

%


0.8

%


0.8

Greater than 1 year and less than 3 years


993,000



1.2

%


0.9

%


1.4

Greater than 3 years and less than 5 years


1,861,700



1.9

%


0.9

%


3.9

Greater than 5 years


1,701,600



3.1

%


0.9

%


10.5

Total


$

4,662,200



2.1

%


0.9

%


5.7



















Variable Pay Rate Swap Transactions

(dollars in thousands)

Remaining Term to Maturity


Notional Value


Average
Variable
Pay Rate


Average Fixed
Receive Rate


Average
Maturity
(Years)

Greater than 3 years and less than 5 years


$

1,811,400



0.9

%


1.4

%


3.7

Greater than 5 years


871,000



0.9

%


2.2

%


12.3

Total


$

2,682,400



0.9

%


1.7

%


6.5

 

The Company also utilizes U.S. Treasury futures to mitigate exposure to changes in interest rates. As of December 31, 2016, the Company had a net short position U.S. Treasury futures with a notional value of $119.4 million and a fair value in a liability position of $2.4 million.

DIVIDEND

On December 22, 2016, 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 $14.06 per share in a combination of cash and stock.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, March 7th, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the fourth quarter and year ended December 31, 2016.

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/10100227 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 March 21, 2017 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10100227.  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 RMBS, Non-Agency RMBS, CMBS, ABS, Residential and Commercial Whole-Loans and other financial assets. 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, 2016 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.

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 $4.3 million and $9.5 million for the three months and the year ended December 31, 2016, 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.

 

-Financial Tables to Follow-

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)




December 31, 2016


December 31, 2015

Assets:





Cash and cash equivalents


$

46,172



$

24,711


Mortgage-backed securities and other securities, at fair value ($2,261,430 and $2,777,717 pledged as collateral, at fair value, respectively)


2,576,517



2,851,127


Residential Whole-Loans, at fair value ($192,136 and $218,538 pledged as collateral, at fair value, respectively)


192,136



218,538


Securitized commercial loan, at fair value


24,225



25,000


Investment related receivable


33,600



572


Accrued interest receivable


18,812



22,621


Due from counterparties


243,585



249,563


Derivative assets, at fair value


20,571



21,915


Other assets


398



382


Total Assets (1)


$

3,156,016



$

3,414,429


Liabilities and Stockholders' Equity:





Liabilities:





Borrowings under repurchase agreements, net


$

2,155,644



$

2,585,667


Securitized debt, at fair value


10,659



11,000


Accrued interest payable


16,041



20,431


Investment related payables


341,458



66,146


Due to counterparties


740



9,950


Derivative liability, at fair value


182,158



180,177


Accounts payable and accrued expenses


3,255



2,078


Payable to affiliate


2,584



3,019


Dividend payable


12,995



24,313


Total Liabilities (2)


2,725,534



2,902,781


Commitments and contingencies





Stockholders' Equity:





Common stock: $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively


419



419


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





Additional paid-in capital


765,042



763,283


Retained earnings (accumulated deficit)


(334,979)



(252,054)


Total Stockholders' Equity


430,482



511,648


Total Liabilities and Stockholders' Equity


$

3,156,016



$

3,414,429


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)




December 31, 2016


December 31, 2015

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





Residential Whole-Loans, at fair value ($192,136 and $218,538 pledged as collateral, at fair value, respectively)


$

192,136



$

218,538


Securitized commercial loan, at fair value


24,225



25,000


Investment related receivable


1,241




Accrued interest receivable


1,622



1,836


Total assets of consolidated VIEs


$

219,224



$

245,374


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





Securitized debt, at fair value


$

10,659



$

11,000


Accrued interest payable


85



85


Accounts payable and accrued expenses


2



2


Total liabilities of consolidated VIEs


$

10,746



$

11,087


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)




Three Months Ended(1)


The Year
Ended



December 31,
2016


September 30,
2016


June 30,
2016


March 31,
2016


December 31,
2016

Net Interest Income











Interest income


$

35,764



$

29,154



$

29,220



$

29,618



$

123,756


Interest expense


9,039



7,685



7,727



7,979



32,430


Net Interest Income


26,725



21,469



21,493



21,639



91,326


Other Income (Loss)











Realized gain (loss) on sale of investments, net


(17,023)



1,439



(352)



(6,055)



(21,991)


Other than temporary impairment


(10,155)



(4,978)



(6,356)



(10,797)



(32,286)


Unrealized gain (loss), net


(64,678)



15,292



21,510



10,769



(17,107)


Gain (loss) on derivative instruments, net


32,479



6,121



(14,165)



(45,170)



(20,735)


Other, net


338



(60)



234



(332)



180


Other Income (Loss)


(59,039)



17,814



871



(51,585)



(91,939)


Expenses











Management fee to affiliate


2,503



2,604



2,588



2,753



10,448


Other operating expenses


236



188



183



438



1,045


General and administrative expenses











Compensation expense


768



868



649



737



3,022


Professional fees


867



723



1,222



2,002



4,814


Other general and administrative expenses


691



379



419



428



1,917


Total general and administrative expenses


2,326



1,970



2,290



3,167



9,753


Total Expenses


5,065



4,762



5,061



6,358



21,246


Income (loss) before income taxes


(37,379)



34,521



17,303



(36,304)



(21,859)


Income tax provision (benefit)


917



2,239







3,156


Net income (loss)


$

(38,296)



$

32,282



$

17,303



$

(36,304)



$

(25,015)


Net income (loss) per Common Share – Basic


$

(0.92)



$

0.77



$

0.41



$

(0.88)



$

(0.61)


Net income (loss) per Common Share – Diluted


$

(0.92)



$

0.77



$

0.41



$

(0.88)



$

(0.61)


Dividends Declared per Share of Common Stock


$

0.31



$

0.31



$

0.31



$

0.45



$

1.38



(1)

Consolidated Statement of Operations for the each of the three months ended March 31, 2016, June 30, 2016 September 30, 2016 and December 31, 2016 are unaudited.

 

Reconciliation of GAAP Net Income to Non-GAAP Core Earnings

(Unaudited)

(in thousands—except share and per share data)


The table below reconciles Net Income (Loss) to Core Earnings for each of the three months ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016 and the year ended December 31, 2016:




Three Months Ended


The Year Ended

(dollars in thousands)


December 31,
2016


September 30,
2016


June 30,
2016


March 31,
2016


December 31,
2016

Net Income (loss) – GAAP


$

(38,296)



$

32,282



$

17,303



$

(36,304)



$

(25,015)


Provision for income tax


917



2,239







3,156


Net income (loss) before provision for income tax


(37,379)



34,521



17,303



(36,304)



(21,859)













Adjustments:











Investments:











Unrealized (gain) loss on investments and securitized debt


64,678



(15,292)



(21,510)



(10,769)



17,107


Other than temporary impairment


10,155



4,978



6,356



10,797



32,286


Realized (gain) loss on sale of investments


17,023



(1,439)



352



6,055



21,991


Realized (gain) loss on foreign currency transactions


(167)



149



638



(521)



99


Unrealized (gain) loss on foreign currency transactions


20



195



(651)



1,095



659













Derivative Instruments:











Net realized (gain) loss on derivatives


3,962



14,242



995



(26,716)



(7,517)


Unrealized (gain) loss on derivatives


(40,938)



(26,054)



7,572



64,555



5,135













Non-cash stock-based compensation expense


348



433



346



572



1,699


Total adjustments


55,081



(22,788)



(5,902)



45,068



71,459


Core Earnings – Non-GAAP


$

17,702



$

11,733



$

11,401



$

8,764



$

49,600


Basic Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP


$

0.42



$

0.28



$

0.27



$

0.21



$

1.18


Diluted Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP


$

0.42



$

0.28



$

0.27



$

0.21



$

1.18


Basic weighted average common shares and participating securities


41,971,600



41,970,108



41,956,898



41,950,076



41,962,318


Diluted weighted average common shares and participating securities


41,971,600



41,970,108



41,956,898



41,950,076



41,962,318


 

Reconciliation of Interest Income and Effective Cost of Funds

(Unaudited, in thousands)


The following table reconciles total interest income to interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the each of the three months ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016 and the year ended December 31, 2016:




Three Months Ended


The Year
Ended

(dollars in thousands)


December 31,
2016


September 30,
2016


June 30,
2016


March 31,
2016


December 31,
2016

Coupon interest income


$

37,658



$

34,944



$

36,171



$

38,399



$

147,172


Premium amortization, discount accretion and amortization of basis, net


(1,894)



(5,790)



(6,951)



(8,781)



(23,416)


Interest income


$

35,764



$

29,154



$

29,220



$

29,618



$

123,756


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











Coupon interest income


3,035



3,503



3,464



4,146



14,148


Amortization of basis (Non-GAAP Financial Measure)


(2,508)



(2,827)



(2,720)



(3,383)



(11,438)


Contractual interest income, net on Foreign currency swaps(1)


15



61



94



113



283


Contractual interest income, net on Total return swaps(1)


285



308



307



221



1,121


Subtotal


827



1,045



1,145



1,097



4,114


Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and other derivative instruments - Non-GAAP Financial Measure


$

36,591



$

30,199



$

30,365



$

30,715



$

127,870



(1)

Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.


 

The following tables reconcile the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for each of the three months ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016:


Three Months Ended



December 31,
2016


September 30,
2016


June 30,
2016


March 31,
2016

(dollars in thousands)


Interest


Effective

Borrowing

Costs


Interest


Effective

Borrowing

Costs


Interest


Effective

Borrowing

Costs


Interest


Effective

Borrowing

Costs

Interest expense


$

9,039



1.30

%


$

7,685



1.29

%


$

7,727



1.30

%


$

7,979



1.33

%

Net interest paid - interest rate swaps


5,324



0.76

%


6,736



1.14

%


6,743



1.14

%


8,428



1.40

%

Effective Borrowing Costs


$

14,363



2.06

%


$

14,421



2.43

%


$

14,470



2.44

%


$

16,407



2.73

%

Weighted average repurchase borrowings


$

2,775,889





$

2,365,695





$

2,387,337





$

2,414,531




 

 

The following tables reconcile the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for years ended December 31, 2016 and 2015:



The Year Ended



December 31, 2016


December 31, 2015


 (dollars in thousands)


Interest


Effective

Borrowing

Costs


Interest


Effective

Borrowing

Costs


Interest expense


$

32,430



1.30

%


$

27,605



0.82

%


Net interest paid - interest rate swaps


27,231



1.10

%


19,116



0.57

%


Effective Borrowing Costs


$

59,661



2.40

%


$

46,721



1.39

%


Weighted average repurchase borrowings


$

2,486,490





$

3,357,445





 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/western-asset-mortgage-capital-corporation-announces-fourth-quarter-and-full-year-2016-results-300418689.html