Western Asset Mortgage Capital Corporation Announces Second Quarter 2013 Results

PASADENA, Calif., Aug. 6, 2013 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (NYSE: WMC) today reported a net loss of $27.7 million, or $1.14 per basic and diluted share for the second quarter ended June 30, 2013. Core earnings for the second quarter were $22.8 million, or $0.94 per basic and diluted share¹.  The Company also reported a net book value of $17.39 per share as of June 30, 2013.

SECOND QUARTER 2013 HIGHLIGHTS

• Incurred a net loss of $27.7 million, or $1.14 per basic and diluted share
  • Net loss includes $156.3 million of net unrealized loss on RMBS
• Generated core earnings of $22.8 million, or $0.94 per basic and diluted share¹
• Declared a $0.90 per share regular dividend for the quarter
• $17.39 per share net book value as of June 30, 2013
• 3.14% weighted average portfolio yield on Agency RMBS, including IO securities accounted for as derivatives, and Non-Agency RMBS (including those Non-Agency securities accounted for as "linked transactions" under GAAP)¹
• 0.96% weighted average effective cost of financing on Agency RMBS, including swaps, and Non-Agency RMBS (including linked transactions)¹ 
• 2.18% weighted average net interest spread on Agency RMBS, including IO securities accounted for as derivatives, Non-Agency RMBS (including linked transactions), and swaps
• $4.2 billion investment portfolio fair value as of June 30, 2013
• Constant prepayment rate on its Agency RMBS portfolio of 4.4% for the quarter
• 9.4x leverage (including borrowings on linked-transactions) as of June 30, 2013
  • 8.2x leverage when adjusted for net TBA position ^1,2

SECOND QUARTER 2013 RESULTS

For the second quarter ended June 30, 2013, the Company had a net loss of $27.7 million, or $1.14 per basic and diluted share. Included in the net loss was $156.3 million of net unrealized loss on RMBS and other securities, $9.6 million of net realized loss on RMBS and other securities (including other loss on residential mortgage-backed securities of $3.5 million), and $113.4 million of net gain on derivative instruments and linked transactions. During the period, the Company generated core earnings of $22.8 million, or $0.94 per basic and diluted share.  Core earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding: (i) net realized gain (loss) on investments and derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) loss resulting from mark-to-market adjustments on derivative contracts; (iv) other loss on RMBS; (v) non-cash stock-based compensation expense; and (vi) one-time events pursuant to changes in GAAP and certain other non-cash charges. Net interest income for the period was $28.2 million.

For the quarter ended June 30, 2013, the Company's weighted average yield on its portfolio was 3.14%, including Agency RMBS, interest from Agency IO securities accounted for as derivatives, and Non-Agency RMBS (including linked transactions). The Company's effective cost of funds on its Agency and Non-Agency RMBS financing (including the cost of interest rate swaps and linked transactions) was 0.96%. The annualized net interest spread on its portfolio was 2.18%, including Agency RMBS, interest from Agency IO securities accounted for as derivatives, and Non-Agency RMBS (including linked transactions) and taking into account the cost of the interest rate swaps.

CONSTANT PREPAYMENT RATES

The actual constant prepayment rate ("CPR") for the Company's Agency RMBS portfolio during the second quarter was 4.4% on an annualized basis, as compared to 3.4% for the first quarter of 2013.

"During the second quarter of 2013, we saw extraordinary volatility in the Agency RMBS market with mortgage spreads widening and pay-ups on call-protected securities declining," said Gavin James, Chief Executive Officer of Western Asset Mortgage Capital Corporation.  "We were able to reduce the negative impact to book value through an increase in swaptions during the second quarter, which we have since started to wind down as volatility has decreased.  Following the dramatic moves in interest rates, mortgage spreads, and pay-ups, we believe that it is unlikely that we will continue to experience the same degree of volatility that we have seen during the first half of 2013, particularly in the second quarter, and will likely see conditions in the mortgage market that are more conducive for maintaining or increasing book value over the remainder of the year."

Stephen Fulton, Chief Investment Officer of Western Asset Mortgage Capital Corporation, commented, "Since our initial public offering in May 2012 through June 30, 2013, we have delivered an economic return  (calculated as change in book value over the period plus dividends paid) of 8%,  despite challenging conditions for investing in Agency RMBS.  We believe our ability to this result over that time frame is a testament to the strength of our security selection and hedging strategies.  We have made only slight adjustments to our portfolio recently, as we believe we are well positioned in the current environment.  Since the start of the third quarter, we have slightly increased both the duration and negative convexity of our portfolio.  We also intend to slightly increase our holdings of non-Agency RMBS, which we believe currently represent attractive relative value."

There can be no assurance that the Company will attain any investment objective or result.

DIVIDEND

On June 20, 2013, the Company declared a regular dividend of $0.90 per share of common stock with respect to the quarter ended June 30, 2013. Since inception WMC has declared and paid total dividends of $84.7 million or $4.20 a share. 

PORTFOLIO COMPOSITION

As of June 30, 2013, the Company owned an aggregate securities portfolio equaling $4.2 billion in market value, comprised of $2.9 billion of 30-year fixed-rate Agency RMBS (residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency or sponsored entity), $785.9 million of 20-year fixed-rate Agency RMBS, $178.5 million of Non-Agency RMBS (including $4.9 million of linked transactions), and $302.6 million market value of Agency interest-only and inverse interest-only strips (including $99.6 million market value of Agency IO securities accounted for as derivatives).

The following table sets forth additional information regarding the Company's portfolio as of June 30, 2013:

PORTFOLIO FINANCING

At June 30, 2013, the Company financed its portfolio with approximately $4.0 billion of borrowings under master repurchase agreements (including borrowings under linked transactions of $3.3 million) with fifteen (15) counterparties, bearing fixed interest rates with maturities between July 2013 and August 2013. 

The Company has also entered into approximately $2.3 billion notional amount of pay-fixed receive-LIBOR swaps that have variable maturities between October 2014 and April 2034.  As of June 30, 2013 approximately 24% of the notional amount of these positions is forward starting swaps (approximately 7.0 months forward). In addition, the Company has entered into $1.2 billion notional amount of pay-fixed receive-LIBOR swaptions with swap terms that range between 7 and 20 years and have exercise expiration dates that range from August 2013 and June 2016.

The following tables set forth additional information regarding the Company's portfolio financing as of June 30, 2013:

The following tables summarize the average fixed pay rate and average maturity for the Company's interest rate swaps and swaptions as of June 30, 2013:

CONFERENCE CALL

The Company will host a conference call with a live webcast today, August 6, 2013 at 12:00 p.m. Eastern Time/9:00 a.m. Pacific Time, to discuss financial results for the first quarter ended June 30, 2013. 

Individuals interested in participating in the conference call may do so by dialing 877.941.2333 from the United States, or 480.629.9773 from outside the United States and referencing conference ID 4633985. 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.

A telephone replay will be available through August 20, 2013 by dialing 800.406.7325 from the United States, or 303.590.3030 from outside the United States, and entering conference ID 4633985. A webcast replay will be available for 90 days.

ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION

Western Asset Mortgage Capital Corporation is a REIT that invests primarily in Agency RMBS, which are residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency (such as GNMA) or a U.S. Government-sponsored entity (such as FNMA or FHLMC). The Company also invests opportunistically in its other target assets, which include residential mortgage-backed securities that are not guaranteed by a U.S. Government agency or sponsored entity, commercial mortgage-backed securities and other asset-backed securities. The Company is externally managed and advised by Western Asset Management Company, an investment advisor registered with the SEC and a wholly-owned subsidiary of Legg Mason, Inc.

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, 2012 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 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 9.4x leverage calculation does not reflect net To-Be Announced ("TBA") mortgage pass-through certificates position. As of June 30, 2013, the net short position in TBAs was $500 million in notional value

-Financial Tables to Follow-

SOURCE Western Asset Mortgage Capital Corporation

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