Western Asset Mortgage Capital Corporation Announces First Quarter 2020 Results

PASADENA, Calif., May 6, 2020 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the first quarter ended March 31, 2020.

FIRST QUARTER 2020 FINANCIAL RESULTS

• Book value per share of $3.41.
• GAAP net loss of $381.9 million, or $7.15 per basic and diluted share.
• Core earnings plus drop income of $15.8 million, or $0.29 per basic and diluted share.^1,5
• Economic return on book value was a negative 67.7% for the quarter.^1,2
• 1.84% annualized net interest margin on our investment portfolio. ^1,3,4
• 9.5x leverage excluding non-recourse debt⁶

OTHER FIRST QUARTER 2020 UPDATES

In response to the unprecedented market volatility at the end of the first quarter of 2020, the Company implemented measures to increase liquidity, reduce debt, and seek financing arrangements as an alternative to short term repurchase agreements with daily margin requirements. In March,  these measures included, but were not limited to, the following:

• Sold approximately $1.5 billion of Agency MBS and $142.4 million of Non-Agency MBS.
• Reduced repurchase agreement financings by 48.0% to $1.6 billion.
• Terminated all interest rate hedges and further reduced margin call volatility.
• Suspended our first quarter common dividend to preserve liquidity.

ADDITIONAL BUSINESS UPDATES

• Our Manager waived management fees for March 2020 and April 2020.
• In April, we closed an 18 month term financing arrangement without margin requirements for our entire non-QM loan portfolio. The impact of this financing was to reduce our exposure to repurchase agreement financing by approximately $385 million and eliminate associated margin calls.
• In April, we further reduced repurchase agreement financings by selling approximately $370.3 million of Agency MBS, $65.3 million of Non-Agency MBS, $148.6 million in conforming whole loans, and $18.2 million other securities.
• In May, we closed a 12 month term financing arrangement for Non-Agency RMBS and Non-Agency CMBS, significantly mitigating exposure to margin volatility.

MANAGEMENT COMMENTARY

"The first quarter was an extremely challenging environment for global equity and fixed income markets as the COVID-19 pandemic created unprecedented economic disruption, severe illiquidity, volatility and uncertainty," said Jennifer Murphy, Chief Executive Officer of the Company. "These conditions were very prominent in U.S. mortgage markets, causing an extreme lack of liquidity combined with forced selling, resulting in swift and dramatic price declines. Our portfolio, despite its diversity and focus on high-quality mortgage investments, was negatively impacted by these extraordinary market pressures. Our results at quarter-end reflect these market conditions, as we experienced a 67.7% decline in our book value per share and a GAAP net loss of $381.9 million, or $7.15 per share. While we generated core earnings plus drop income of $0.29 per share during the first quarter, relatively consistent with the previous quarter, we made the decision to retain those earnings and suspend the first quarter dividend to maintain additional liquidity and help protect the value of shareholder assets in this environment."

Ms. Murphy continued, "We believe our focus on high quality borrowers and assets as well as our diversified approach will provide an opportunity for our assets to recover significantly as economic activity resumes. We are committed to taking the necessary steps to protect assets and preserve the opportunity for our shareholders to benefit meaningfully in the recovery. To this end, we have been actively seeking new and more stable sources of financing. Subsequent to quarter-end, we successfully secured two term financing facilities, one on a portion of our residential whole-loan portfolio and the second on a portion of our Non-Agency CMBS and RMBS portfolio. Our focus on behalf of shareholders is to protect the value of the portfolio, enable shareholders to benefit from recovery, and reposition the company to resume delivering on our long term objectives," Ms. Murphy concluded.   

Harris Trifon, Chief Investment Officer of the Company, commented, "While the broader market volatility resulting from the COVID-19 pandemic led to extreme price declines on our assets in March, we have experienced some recovery in their prices through the end of April. We believe that current prices in the credit sector of the U.S. residential and commercial real estate mortgage markets envisage severe economic scenarios last seen during the Global Financial Crisis. While assessing the longer-term economic damage of this crisis remains challenging given its unique nature and unprecedented scale, our view is the extraordinary amount of fiscal and monetary support that the U.S. government is providing our financial system and the broader economy will dampen the economic impact of the quarantine period and support liquidity conditions in the fixed income markets."

"We believe valuations in mortgage credit assets are particularly favorable relative to fundamentals even given the increased uncertainty in the near term. We also believe that the current recession will eventually pass and give way to an economic recovery, although the timing and strength of the recovery will be dependent on the spread of the virus and availability of therapeutics and a potential vaccine. Looking ahead, we believe mortgages secured by real estate assets with meaningful equity in the properties and higher quality credit will continue to perform well over the longer term. While many sectors of the mortgage market currently offer historically attractive valuations, our primary focus is on maintaining sufficient liquidity and reducing our overall debt while consolidating our financial relationships in order to protect against further book value erosion and position the portfolio for potential future appreciation. We feel that our current stance is the best way to put us back on course towards our long-term objectives of generating sustainable core earnings that can support an attractive dividend, with the overall goal of enhancing stockholder value," concluded Mr. Trifon.   

Portfolio Composition

As of March 31, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $2.9 billion. The following tables sets forth additional information regarding the Company's investment portfolio as of March 31, 2020:

Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of March 31, 2020 (dollars in thousands): 

Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of March 31, 2020 (dollars in thousands): 

PORTFOLIO FINANCING AND HEDGING

Financing Activity

Repurchase Agreements

As of March 31, 2020, the Company had borrowings under 19 master repurchase agreements. The following table sets forth additional information regarding the Company's portfolio financing under the master repurchase agreements, which includes the outstanding balance under our $700 million residential whole loan and $200 million commercial whole financing facilities,  as of March 31, 2020 (dollars in thousands):

For the reporting period ended March 31, 2020, we breached certain financial statement covenants in repurchase agreements with two counterparties with borrowings outstanding as of May 5, 2020. Both counterparties have waived the breaches until August 1, 2020. In addition we would have been in breach of certain covenants in another seven repurchase agreements with borrowings outstanding as of March 31, 2020 but with respect to those seven agreements we have either modified the covenants or paid off the repurchase agreement borrowings in full.

Convertible Senior Unsecured Notes

At March 31, 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.

Mortgage-Backed Notes 

The following table summarizes the residential mortgage-backed notes issued by the Company's securitization trust (the "Arroyo Trust") at March 31, 2020 (dollars in thousands):

The securitized debt of the Arroyo Trust can only be settled with the residential loans that serve as collateral for the securitized debt and are non-recourse to the Company.

Derivatives Activity

On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak caused volatility in interest rates.  As a result, we received significant margin calls on our interest rate swaps.  In this very low interest rate environment the Company's interest rate swaps were no longer effective.  In March 2020, the Company terminated fixed-pay interest rate swaps with a notional value of approximately $3.1 billion and variable-pay interest rate with a notional value of approximately $1.9 billion to reduce hedging costs and associated margin volatility. 

The following table summarizes the Company's derivative instruments at March 31, 2020 (dollars in thousands):

DIVIDEND

As previously announced, due to the turmoil in the financial markets resulting from the COVID-19 pandemic, we suspended the first quarter dividend to preserve liquidity.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, May 7, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the first 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/10143381 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 May 21, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10143381. 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 Agency CMBS, Agency RMBS, Non-Agency RMBS, Non-Agency CMBS, ABS, GSE Risk Transfer Securities, Residential Whole and Bridge Loans and Commercial Loans. The Company's investment strategy may change, subject to the Company's stated investment guidelines, and is based on its manager Western Asset Management Company, 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 Legg Mason, Inc. On February 18, 2020, Franklin Resources, Inc. ("Franklin") and Legg Mason announced that they had entered into an agreement under which Franklin would acquire Legg Mason and its affiliates, including Western Asset Management Company, LLC. The transaction is expected to close in the third quarter of 2020 and is subject to customary closing conditions. Upon completion of the transaction Western Asset Management Company, LLC would become a wholly owned subsidiary of Franklin. 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 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-

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:

SOURCE Western Asset Mortgage Capital Corporation

Related Links

http://www.westernassetmcc.com