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Western Asset Mortgage Capital Corporation Announces Third Quarter 2020 Results

·13 min read

Conference Call and Webcast Scheduled for Tomorrow, Friday, November 6, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time

PASADENA, Calif. , Nov. 5, 2020 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the third quarter ended September 30, 2020.

THIRD QUARTER 2020 FINANCIAL RESULTS

We made further progress towards strengthening our balance sheet in the third quarter by reducing debt and leverage, while improving liquidity, shareholders equity and the earnings power of the portfolio. We had improved financial results during the third quarter, which included significant recovery in asset valuations, increasing book value by 29.2%.  Third quarter financial results included the following:

  • GAAP book value per share was $4.07 , increased $0.92 from $3.15 6 in the second quarter.

  • GAAP net income of $59.8 million , or $0.98 per basic and diluted share.

  • Economic return on GAAP book value was 30.8% for the quarter. 1,3

  • Economic book value per share of $4.11 2 increased 2.2% from $4.02 6 in the second quarter

  • Core earnings of $6.4 million , or $0.10 per basic and diluted share. 1

  • 2.27% annualized net interest margin on our investment portfolio. 1,4,5

  • Reduced recourse leverage to 2.2x, down from 3.0x at June 30, 2020 .

  • Resumed our quarterly dividend, declaring a $0.05 per share cash dividend.

CORPORATE UPDATE

The measures taken to strengthen our balance sheet included, but were not limited to, the following:

  • In July 2020 , 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.

  • Reduced leverage on our commercial loan portfolio, financed under the commercial whole loan facility by 21.9%.

  • In October 2020 , we amended our existing residential loan facility. The amended facility has a 12 month term bearing an interest rate of one month LIBOR plus 2.75%.

1

Non GAAP measure.

2

Economic book value is a non-GAAP financial measure. See 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.

5

Excludes the consolidation of VIE trusts required under GAAP.

6

GAAP book value and Economic book value at June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

MANAGEMENT COMMENTARY

"The Company delivered a very strong economic return on book value of 30.8% for the third quarter of 2020, reflecting a significant recovery in asset prices across our portfolio," said Jennifer Murphy , Chief Executive Officer of the Company. "During the last two quarters, we have taken actions to fortify our balance sheet and improve the future earnings power of the portfolio. These measures include reducing our portfolio leverage to 2.2x recourse debt (down from 9.5x in March), securing longer-term financing at attractive levels, significantly reducing our reliance on short term repurchase agreements, 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 positioned us to benefit from the recovery in asset values that occurred this quarter, while improving the sustainable earnings power of the portfolio. As a result, we are pleased to have resumed payment of our quarterly dividend, which was an important milestone for our shareholders and the Company."

Ms. Murphy continued, "We recorded GAAP net income of $59.8 million , or $0.98 per share, and core earnings of $0.10 per share during the third quarter, reflecting lower portfolio leverage and a slightly higher net interest margin. Our GAAP Book Value increased 29.2% during the quarter to $4.07 per share, and our Economic Book Value improved to $4.11 per share as of September 30, 2020 . Our commitment to shareholders continues to be to protect and grow the value of the portfolio, which will position us to deliver on our long term objectives of generating sustainable core earnings that support an attractive dividend, with the overall goal of protecting and 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 continued to rebound in the third quarter, driven by improved liquidity conditions across financial markets and the ongoing reopening of the economy, which translated into higher valuations on a number of our portfolio holdings. The improved recovery in asset prices is reflected in the significant improvement in GAAP Book Value.  Our view remains that the economy will continue to gradually improve, although the timing and strength of that recovery remains dependent on the future trajectory of COVID-19 and fiscal and monetary stimulus. In the meantime, our focus on maintaining sufficient liquidity and positioning of our portfolio for potential future appreciation should continue to enable us to benefit from a recovery as we have invested in assets we believe are high quality with borrowers who have resources to be more resilient in a protracted downturn." 

OPERATING RESULTS

The below table reflects a summary of our operating results:



For the Three Months Ended

GAAP Results


September 30, 2020


June 30, 2020

(Revised) (5)


March 31, 2020



(in thousands-except share and per share data)








Net Interest Income


$

10,117



$

7,076



$

18,741


Other Income (Loss):







Realized gain (loss) on investments, net


718



(6,960)



89,186


Unrealized gain (loss), net


54,690



16,040



(296,111)


Gain (loss) on derivative instruments, net


(88)



(8,143)



(189,691)


Other, net


(31)



(45)



461


Other Income (Loss)


55,289



892



(396,155)


Total Expenses


5,392



24,805



4,534


Income (loss) before income taxes


60,014



(16,837)



(381,948)


Income tax provision (benefit)


205



255



(93)


Net income (loss)


$

59,809



$

(17,092)



$

(381,855)


Net income attributable to non-controlling interest


2



2



2


Net income (loss) attributable to common stockholders and
participating securities


$

59,807



$

(17,094)



$

(381,857)









Net income (loss) per Common Share Basic/Diluted


$

0.98



$

(0.31)



$

(7.15)


Non-GAAP Results







Core earnings plus drop income  (1)


$

6,391



$

4,343



$

15,779


Core earnings plus drop income per Common Share
Basic/Diluted (1)


$

0.10



$

0.08



$

0.29


Weighted average yield (2)(4)


5.51

%


5.40

%


4.90

%

Effective cost of funds ( 3)(4)


3.94

%


3.98

%


3.28

%

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


2.27

%


1.63

%


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.

(5)

The summary of operating results for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

Portfolio Composition

As of September 30, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $3.4 billion . The following tables sets forth additional information regarding the Company's investment portfolio as of September 30, 2020:

Portfolio Characteristics

Credit Sensitive Portfolio

The Company's Non-QM residential portfolio, in our view, is performing well, given the challenging economic background.  The loans in a forbearance plan at the end of September 2020 represented approximately 10.2% of the total outstanding loans.  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 original LTV of 60.1% and despite being concentrated in retail and hotel assets, over 82.1% 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 65.5% 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 September 30, 2020 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


 Weighted
Average Coupon (1)

Non-Agency RMBS

$

38,447



$

23,429



$

21,568



4.5

%

Non-Agency RMBS IOs and IIOs

N/A



6,530



4,248



0.5

%

Non-Agency CMBS

256,450



230,392



181,321



5.2

%

Residential Whole Loans

1,073,648



1,097,897



1,096,997



5.1

%

Residential Bridge Loans (1),(2)

18,973



18,967



17,841



9.4

%

Securitized Commercial Loans  

1,878,198



1,737,792



1,687,545



4.1

%

Commercial Loans

332,518



332,362



325,651



6.3

%

Other Securities

51,586



50,417



41,055



4.4

%


$

3,649,820



$

3,497,786



$

3,376,226



4.3

%



(1)

Includes Residential Bridge Loans carried at amortized cost of $1.5 million as of September 30, 2020. The fair value of these loans was $1.5 million as of September 30, 2020.

(2)

As of September 30, 2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $1.3 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 September 30, 2020 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


Net Weighted
Average Coupon

Agency RMBS Interest-Only Strips

N/A



$

105



$

153



2.4

%

Agency RMBS Interest-Only Strips,
accounted for as derivatives

N/A



N/A



1,700



3.0

%

Total Agency RMBS



105



1,853



2.9

%









Total

$



$

105



$

1,853



2.9

%
















PORTFOLIO FINANCING AND HEDGING

Financing Activity

Repurchase Agreements

The Company continued to improve its balance sheet by reducing debt and leverage, increasing liquidity and shareholder equity.

Residential Whole Loan Facility

On April 21, 2020 , the Company entered into amendments with respect to certain of its residential whole loan  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 was approximately 84% of the aggregate unpaid principal balance of the loans. The facility's scheduled maturity was October 20, 2021 . All principal payments and income generated by the loans during the term of the facility were 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 was 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 was not involved in the disposition of the loans. 

As of September 30, 2020 approximately $72.7 million in non-QM loans remained in the facility with a borrowing amount of $20.8 million .  As of that date the Company owed the counterparty $20.5 million as a premium recapture fee.

On October 6, 2020 the Company entered into an amendment with respect to its residential whole loan  facility. The amendment serves to convert the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of  LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5 , 2021.  The premium recapture fee was eliminated for holdings that had not yet been sold or otherwise disposed of.

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 5.0% 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 September 30, 2020, the Company had borrowed $102.7 million under this facility.

 The following table sets forth additional information regarding the Company's portfolio financing arrangements as of September 30, 2020 (dollars in thousands):



Outstanding
Borrowings


Weighted Average
Interest Rate


Weighted Average
Remaining Days to
Maturity

Short Term Borrowings:







Agency RMBS


$

1,438



1.46

%


59

Non-Agency CMBS


9,119



3.28

%


13

Residential Whole-Loans


19,215



4.72

%


23

Residential Bridge Loans


15,763



2.75

%


36

Commercial Loans


36,575



3.34

%


77

Membership Interest


18,845



2.90

%


29

Other Securities


2,599



4.50

%


21

Subtotal


103,554



3.42

%


45

Long Term Borrowings







Non-Agency CMBS


74,145



5.25

%


218

Non-Agency RMBS


14,742



5.25

%


218

Residential Whole-Loans (1)


20,846



5.22

%


386

Commercial Loans (1)


131,822



2.20

%


377

Other Securities


13,769



5.25

%


218

Subtotal


255,324



3.67

%


314

Repurchase Agreements Borrowings


$

358,878



3.60

%


236

Less Unamortized Debt Issuance Costs


353



N/A



N/A

Repurchase Agreements Borrowings, net


$

358,525



3.60

%


236



(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 financing arrangements 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 September 30, 2020.

Convertible Senior Unsecured Notes

At September 30, 2020, the Company had $200 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.

Residential 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 September 30, 2020 (dollars in thousands):

Classes

Principal Balance

Coupon

Carrying Value

Contractual
Maturity

Offered Notes:





Class A-1

$

552,779


3.3%

$

552,777


4/25/2049

Class A-2

29,619


3.5%

29,618


4/25/2049

Class A-3

46,925


3.8%

46,924


4/25/2049

Class M-1

25,055


4.8%

25,055


4/25/2049


654,378



654,374



Less: Unamortized Deferred Financing
Cost

N/A



4,625



Total

$

654,378



$

649,749



The Company retained the subordinate bonds and these bonds had a fair market value of $43.7 million at September 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 September 30, 2020 (dollars in thousands):

Classes

Principal Balance

Coupon

Carrying Value

Contractual
Maturity

Offered Notes:





Class A-1A

$

246,807


1.7%

$

246,801


3/25/2055

Class A-1B

29,287


2.1%

29,286


3/25/2055

Class A-2

13,518


2.9%

13,517


3/25/2055

Class A-3

17,963


3.3%

17,963


3/25/2055

Class M-1

11,739


4.3%

11,739


3/25/2055

Subtotal

319,314



319,306



Less: Unamortized Deferred Financing
Costs

N/A



2,606



Total

$

319,314



$

316,700



The Company retained the subordinate bonds and these bonds had a fair market value of $29.5 million at September 30, 2020. The retained Arroyo 2020-1 subordinate bonds are eliminated in consolidation.

Commercial Mortgage-Backed Notes

RETL 2019 Trust

The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates at September 30, 2020 (dollars in thousands), which is non-recourse to the Company:

Classes

Principal Balance

Coupon

Fair Value

Contractual Maturity

Class A

$

34,022


1.3%

$

34,024


3/15/2021

Class B

101,200


1.7%

96,085


3/15/2021

Class C

308,400


2.3%

282,831


3/15/2021

Class X-EXT(1)

N/A


1.2%

31


3/15/2021


$

443,622



$

412,971





(1)

Class X-EXT is an interest-only class with an initial notional balance of $308.4 million.

The above table does not reflect the class HRR bond held by the Company because the bond is eliminated in consolidation. The bond had a fair market value of $41.7 million at September 30, 2020.

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2020 (dollars in thousands), which is non-recourse to the Company:

Classes

Principal Balance

Coupon

Fair Value

Contractual Maturity

Class A-1

$

124,076


3.3%

$

124,648


9/11/2025

Class A-2

531,700


4.0%

541,905


3/15/2021

Class B

136,400


4.2%

122,802


9/11/2025

Class C

94,500


4.3%

80,348


9/11/2025

Class D

153,950


4.4%

117,058


9/11/2025

Class E

180,150


4.4%

122,585


9/11/2025

Class F

153,600


4.4%

96,808


9/11/2025

Class X-1(1)

n/a


0.5%

14,638


9/11/2025

Class X-2(1)

n/a


0.4%

2,697


9/11/2025


$

1,374,376



$

1,223,489





(1)

Class X-1 and X-2 are interest-only classes with notional balances of $655.8 million and $733.5 million as of September 30, 2020, respectively.

The above table does not reflect the portion of the class F bond held by the Company because the bond is eliminated in consolidation. The Company's ownership interest in the F bonds represents a controlling financial interest, which resulted in consolidation of the trust, during the quarter. The bond had a fair market value of $9.4 million at September 30, 2020.

Derivatives Activity

The following table summarizes the Company's derivative instruments at September 30, 2020 (dollars in thousands):

Other Derivative Instruments


Notional Amount


Fair Value

Credit default swaps, asset


$

2,030



$

481


Total derivative instruments, assets




481







Credit default swaps, liability


4,140



(1,166)


Total derivative instruments, liabilities




(1,166)


Total derivative instruments, net




$

(685)


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. In the third quarter of 2020, we resumed our quarterly dividend after making progress strengthening our balance sheet and improving liquidity and the earnings power of our investment portfolio. For the quarter ended September 30, 2020, we declared a cash dividend of $0.05 per share generating a dividend yield of approximately 9.8% based on the stock closing price of $2.04 at September 30, 2020.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, November 6, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the third 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/10148851 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 November 20, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10148851. 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)




September 30, 2020


June 30, 2020
(Revised)(1)

Assets:





Cash and cash equivalents


$

27,459



$

19,363


Restricted cash


95,579



26,430


Agency mortgage-backed securities, at fair value ($1,853 and $1,975 pledged as collateral, at fair value, respectively)


1,853



1,975


Non-Agency mortgage-backed securities, at fair value ($182,125 and $197,326 pledged as collateral, at fair value, respectively)


207,137



216,288


Other securities, at fair value ($41,055 and $40,466 pledged as collateral, at fair value, respectively)


41,055



40,466


Residential Whole Loans, at fair value ($1,096,997 and $1,124,051 pledged as collateral, at fair value, respectively)


1,096,997



1,124,051


Residential Bridge Loans ($16,333 and $24,171 at fair value and $17,653 and $25,371 pledged as collateral, respectively)


17,841



26,505


Securitized commercial loans, at fair value


1,687,545



465,694


Commercial Loans, at fair value (325,651 and $323,474 pledged as collateral, at fair value, respectively)


325,651



323,474


Receivable under reverse repurchase agreements





Investment related receivable


18,861



12,029


Interest receivable


14,101



11,595


Due from counterparties


1,192



5,177


Derivative assets, at fair value


481



714


Other assets


4,418



6,262


Total Assets (1)


$

3,540,170



$

2,280,023







Liabilities and Stockholders' Equity:





Liabilities:





Repurchase agreements, net


$

358,525



$

369,096


Convertible senior unsecured notes, net


194,510



198,669


Securitized debt, net ($1,636,460 and $424,217 at fair value and $207,852 and $43,904 held by affiliates, respectively)


2,602,909



1,458,236


Interest payable (includes $660 and $49 on securitized debt held by affiliates, respectively)


8,840



9,169


Due to counterparties


17



16


Derivative liability, at fair value


1,166



943


Accounts payable and accrued expenses


3,992



4,082


Payable to affiliate


3,255



4,701


Dividend payable


3,041




Other liabilities


116,124



47,856


Total Liabilities (2)


3,292,379



2,092,768







Commitments and contingencies










Stockholders' Equity:





Common stock: $0.01 par value, 500,000,000 shares authorized, 60,812,701 and 59,458,617 outstanding, respectively


609



595


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


915,258



911,488


Retained earnings (accumulated deficit)


(667,500)



(724,252)


Total Stockholders' Equity


247,789



187,253


Non-controlling interest


2



2


Total Equity


247,791



187,255


Total Liabilities and Equity


$

3,540,170



$

2,280,023


Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

(Unaudited)




September 30, 2020


June 30, 2020
(Revised)(1)

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





Cash and cash equivalents


$



$


Restricted Cash


95,579



26,430


Residential Whole Loans, at fair value ($1,096,997 and $1,124,051 pledged as collateral, at fair value, respectively)


1,096,997



1,124,051


Residential Bridge Loans ($15,319 and $23,307 at fair value and $16,828 and $25,371 pledged as collateral, respectively)


16,828



25,371


Securitized commercial loans, at fair value


1,687,545



465,694


Commercial Loans, at fair value ($72,699 and $72,335 pledged as collateral, at fair value, respectively)


72,699



72,335


Investment related receivable


18,817



12,029


Interest receivable


11,287



8,640


Other assets


92



92


Total assets of consolidated VIEs


$

2,999,844



$

1,734,642







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





Securitized debt, net ($1,636,460 and $765,945 at fair value and $207,852 and $43,904 held by affiliates, respectively)


$

2,602,909



$

1,458,236


Interest payable (includes $660 and $49 on securitized debt held by affiliates, respectively)


7,681



4,603


Accounts payable and accrued expenses


410



118


Other liabilities


95,579



26,430


Total liabilities of consolidated VIEs


$

2,706,579



$

1,489,387




(1)

The consolidated balance sheet as June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)




Three months ended



September 30,
2020


June 30, 2020
(Revised)(1)


March 31,
2020

Net Interest Income







Interest income


$

43,970



$

31,494



$

54,846


Interest expense (includes $2,647, $392 and $2,164 on securitized debt held by affiliates, respectively)


33,853



24,418



36,105


Net Interest Income


10,117



7,076



18,741









Other Income (Loss)







Realized gain (loss) on sale of investments, net


718



(6,960)



89,186


Unrealized gain (loss), net


54,690



16,040



(296,111)


Gain (loss) on derivative instruments, net


(88)



(8,143)



(189,691)


Other, net


(31)



(45)



461


Other Income (Loss)


55,289



892



(396,155)









Expenses







Management fee to affiliate


1,513



464



1,039


Financing fee




20,540




Other operating expenses


1,198



796



1,000


General and administrative expenses:







Compensation expense


716



692



662


Professional fees


827



1,541



1,480


Other general and administrative expenses


1,138



772



353


Total general and administrative expenses


2,681



3,005



2,495


Total Expenses


5,392



24,805



4,534









Income before income taxes


60,014



(16,837)



(381,948)


Income tax provision (benefit)


205



255



(93)


Net income (loss)


59,809



(17,092)



(381,855)


Net income attributable to non-controlling interest


2



2



2


Net income (loss) attributable to common stockholders and participating securities


$

59,807



$

(17,094)



$

(381,857)









Net income (loss) per Common Share – Basic


$

0.98



$

(0.31)



$

(7.15)


Net income (loss) per Common Share – Diluted


$

0.98



$

(0.31)



$

(7.15)




(1)

The consolidated statements of operations for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

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 September 30, 2020, June 30, 2020 and March 31, 2020:




Three months ended

(dollars in thousands)


September 30,
2020


June 30, 2020
(Revised)(1)


March 31,
2020

Net Income (loss) attributable to common stockholders and participating securities


$

59,807



$

(17,094)



$

(381,857)


Income tax provision (benefit)


205



255



(93)


Net Income before income taxes


60,012



(16,839)



(381,950)









Adjustments:







Investments:







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


(54,690)



(16,040)



296,111


Realized (gain) loss on sale of investments


(718)



6,960



(89,186)


One-time transaction costs


57



20,652



280









Derivative Instruments:







Net realized (gain) loss on derivatives


(154)



13,152



180,156


Net unrealized (gain) loss on derivatives


288



(4,973)



8,807









Amortization of discount on convertible senior unsecured notes


284



273



273


Other non-cash adjustments


1,130



988




Non-cash stock-based compensation


182



170



165


Total adjustments


(53,621)



21,182



396,606


Core Earnings


$

6,391



$

4,343



$

14,656


Basic and Diluted Core Earnings per Common Share and Participating Securities


$

0.10



$

0.08



$

0.27


Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities


$

0.10



$

0.08



$

0.29


Basic weighted average common shares and participating securities


61,101,485



54,921,847



53,670,550


Diluted weighted average common shares and participating securities


61,101,485



54,921,847



53,670,550




(1)

The reconciliation of GAAP Net Income to Non-GAAP Core Earnings for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

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)


September 30,
2020


June 30, 2020
(Revised)(1)


March 31,
2020

Net interest income


$

10,117



$

7,076



$

18,741


Interest income from IOs and IIOs accounted for as derivatives


34



69



91


Net interest income from interest rate swaps






(1,133)


Adjusted net interest income


10,151



7,145



17,699


Total expenses


(5,392)



(24,805)



(4,534)


Other non-cash adjustments


1,130



988




Non-cash stock-based compensation


182



170



165


One-time transaction costs


57



20,652



280


Amortization of discount on convertible unsecured senior notes


284



273



273


Interest income on cash balances and other income (loss), net


(19)



(78)



775


Income attributable to non-controlling interest


(2)



(2)



(2)


Core Earnings


$

6,391



$

4,343



$

14,656




(1)

The reconciliation of GAAP Net Income to Non-GAAP Core Earnings for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

(dollars in thousands)

(Unaudited)




September 30, 2020


June 30, 2020
(Revised)(1)



$ Amount


Per Share


$ Amount


Per Share

GAAP Book Value at June 30, 2020 and March 31, 2020


$

187,253



$

3.15



$

182,191



$

3.41


Debt to equity exchange of the convertible senior notes


3,588



(0.01)






Proceeds from At-the-Market program, net






21,986



0.02


Common dividend


(3,041)



(0.05)








187,800



3.09



204,177



3.43


Portfolio Income









Net Interest Margin


10,120



0.16



7,098



0.12


Realized gain (loss), net


(374)



(0.01)



(20,147)



(0.34)


Net realized gain (loss) on debt extinguishment


1,258



0.02






Unrealized gain (loss), net


54,399



0.89



21,016



0.36


Net portfolio income


65,403



1.06



7,967



0.14











Financing fee






(20,540)



(0.35)


Operating expenses


(2,711)



(0.04)



(1,260)



(0.02)


General and administrative expenses, excluding equity based compensation


(2,498)



(0.04)



(2,836)



(0.05)


Provision for taxes


(205)





(255)




GAAP Book Value at September 30, 2020 and June 30, 2020


$

247,789



$

4.07



$

187,253



$

3.15











Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned



Deconsolidation of VIEs assets


(2,827,360)



(46.48)



(1,555,962)



(26.17)


Deconsolidation VIEs liabilities


2,705,246



44.48



1,486,107



25.00


Interest in securities of VIEs owned, at fair value


124,309



2.04



121,315



2.04


Economic Book Value at September 30, 2020 and June 30, 2020


$

249,984



$

4.11



$

238,713



$

4.02




(1)

The reconciliation of GAAP Book Value to Non-GAAP Economic Book Value for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

"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, CSMC USA, 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, CSMC 2020, 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 September 30, 2020, June 30, 2020 and March 31, 2020:




Three months ended

(dollars in thousands)


September 30,
2020


June 30,
2020


March 31,
2020

Coupon interest income


$

40,039



$

33,007



$

57,761


Premium amortization, discount accretion and amortization of basis, net


3,931



(1,513)



(2,915)


Interest income


43,970



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


200



340



636


Amortization of basis


(166)



(271)



(545)


Subtotal


34



69



91


Total adjusted interest income


$

44,004



$

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 September 30, 2020, June 30, 2020 and March 31, 2020:




Three months ended



September 30, 2020


June 30, 2020 (Revised)(2)


March 31, 2020

(dollars in thousands)


Reconciliation


Cost of
Funds/Effective
Borrowing
Costs


Reconciliation


Cost of
Funds/Effective
Borrowing
Costs


Reconciliation


Cost of
Funds/Effective
Borrowing
Costs

Interest expense


$

33,853



4.80

%


$

24,418



3.97

%


$

36,105



3.34

%

Adjustments:













Interest expense on Securitized debt
from consolidated VIEs1


(18,597)



(5.83)

%


(4,661)



(3.92)

%


(6,754)



(4.42)

%

Net interest (received) paid - interest
rate swaps




%




%


1,133



0.10

%

Effective Borrowing Costs


$

15,256



3.94

%


$

19,757



3.98

%


$

30,484



3.28

%

Weighted average borrowings


$

1,538,970





$

1,994,405





$

3,733,045






(1)

Excludes third-party sponsored securitized debt interest expense.

(2)

The reconciliation of the Effective Cost of Funds for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

Cision
Cision

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SOURCE Western Asset Mortgage Capital Corporation