PASADENA, Calif., May 7, 2018 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the first quarter ended March 31, 2018.

FIRST QUARTER 2018 HIGHLIGHTS

  • March 31, 2018 book value per share of $11.37, net of first quarter common dividend of $0.31 per share declared on March 22, 2018.
  • GAAP net income of $21.7 million, or $0.52 per basic and diluted share.
  • Core earnings plus drop income of $14.1 million, or $0.34 per basic and diluted share.1,2
  • Economic return on book value was 4.8%1,3 for the quarter.
  • 1.90% annualized net interest margin on our investment portfolio. 1,4
  • 7.7x leverage excluding securitized debt as of March 31, 2018 (10.5x leverage with securitized debt).
  • Acquired $486.0 million in target assets, including $404.4 million of credit sensitive assets.5
  • Repurchased 114,400 shares of common stock at an average price of $9.65 per share.

 

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 statements of operations, but is not included in core earnings. Drop income was $1.0 million or $0.02 per share for the three months ended March 31, 2018.

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.

5

Excludes $1.3 billion in a securitized commercial loan of a consolidated variable interest entity.

MANAGEMENT COMMENTARY

"I am very pleased to report that we delivered an economic return on book value of 4.8% during the first quarter, driven by core earnings plus drop income of $0.34 per share, an increase of 9.7% from the fourth quarter of 2017 and an increase in our book value of 2.0%," said Jennifer Murphy, Chief Executive Officer of the Company. "The significant repositioning of the asset composition of our portfolio that occurred over the course of 2017 and has continued in the first quarter contributed to our strong results, particularly as the fixed income markets have experienced increased volatility. Our first quarter dividend remained stable at $0.31 per share for the eighth quarter in a row, which reflects our commitment to our long-term goal of generating attractive total returns for our shareholders, while also providing for greater book value stability."

Anup Agarwal, Chief Investment Officer of the Company, commented, "Our solid performance for the quarter is a continuation of our portfolio repositioning into credit sensitive investments, as well as taking steps to improve the portfolio's interest rate risk profile by both lowering the duration and decreasing the convexity risk. During the quarter, we acquired $486 million of target assets, including  $404 million of credit sensitive investments. These purchases occurred across a number of sub-sectors of the mortgage market, supporting our goal of holding a diversified portfolio of securities that offer what we believe to be the best risk-adjusted returns over our investment horizon."

"Based on current market conditions and our outlook, we will continue to proactively manage our portfolio by monitoring the relative value of opportunities across the broad mortgage universe, in an effort to achieve an optimal risk-adjusted total economic return. We believe this approach is the best way to pursue our objectives of strong core earnings and an attractive dividend and positions us well to continue to create value for our shareholders," Mr. Agarwal concluded.

OPERATING RESULTS

The below table reflects a summary of our operating results:


For the Three Months Ended

GAAP Results

March 31, 2018


December 31, 2017





Net Interest Income

$

19,030



$

18,012


Other Income (Loss):




Realized gain (loss) on sale of investments, net

575



(2)


Other than temporary impairment

(2,916)



(2,972)


Unrealized gain (loss), net

(68,961)



(6,730)


Gain (loss) on derivative instruments, net

79,582



19,327


Other, net

47



190


Other Income (loss)

8,327



9,813


Total Expenses

5,315



4,206


Income (loss) before income taxes

22,042



23,619


Income tax provision (benefit)

313



2,215


Net income (loss)

$

21,729



$

21,404






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

$

0.52



$

0.51


Non-GAAP Results




Core earnings plus drop income(1)

$

14,149



$

12,998


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

0.34



0.31


Weighted average yield(2)

4.16

%


3.82

%

Effective cost of funds(3)

2.50

%


2.22

%

Annualized net interest margin(2)(3)

1.90

%


1.79

%

Annualized CPR on Agency RMBS

11.0

%


10.0

%



(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 March 31, 2018, the Company owned an aggregate investment portfolio totaling $5.3 billion. The following tables sets forth additional information regarding the Company's investment portfolio as of March 31, 2018:

Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of March 31, 2018 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


Net Weighted
Average Coupon

Agency RMBS:








20-Year mortgage

$

48,590



$

50,924



$

50,596



4.0

%

30-Year mortgage

215,368



231,015



227,570



4.4

%

40-Year mortgage

355,378



365,896



355,972



3.5

%

Agency RMBS Interest-Only Strips

N/A



14,578



15,019



2.5

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A



N/A



9,938



2.9

%

Total Agency RMBS

619,336



662,413



659,095



3.5

%









Agency CMBS

2,221,642



2,225,468



2,178,693



2.9

%

Agency CMBS Interest-Only Strips

N/A



—



2



3.2

%

Agency CMBS Interest-Only Strips, accounted for as derivatives

N/A



N/A



5,113



0.5

%

Total Agency CMBS

2,221,642



2,225,468



2,183,808



2.8

%

Total

$

2,840,978



$

2,887,881



$

2,842,903



3.0

%

Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive  portfolio by investment category as of March 31, 2018 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


 Weighted
Average Coupon(1)

Non-Agency RMBS

$

166,023



$

127,959



$

132,796



4.0

%

Non-Agency RMBS IOs and IIOs

N/A



17,006



16,987



0.5

%

Non-Agency CMBS

428,702



343,168



331,712



5.1

%

Residential Whole Loans

291,161



293,186



296,719



4.7

%

Residential Bridge Loans

158,778



159,240



159,355



9.1

%

Securitized Commercial Loans(1)

1,374,746



1,377,765



1,383,044



5.0

%

Commercial Loans

40,638



40,414



40,455



7.8

%

Other Securities

103,906



118,275



131,603



7.9

%


$

2,563,954



$

2,477,013



$

2,492,671



4.1

%


(1) The Company acquired a $67.8 million  Non-Agency CMBS security which resulted in the consolidation of a variable interest entity and the recording of a $1.4 million securitized commercial loan and $1.3 billion of securitized debt.

PORTFOLIO FINANCING AND HEDGING

Financing Activity

Repurchase Agreements

At March 31, 2018, the Company had $3.6 billion of  borrowings under master repurchase agreements with 17 of its 28 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 under the master repurchase agreements as of March 31, 2018 (dollars in thousands):

Repurchase Agreements


Balance


Weighted Average
Interest Rate (end of
period)


Weighted Average
Remaining Maturity
(days)

Agency RMBS


$

630,980



1.92

%


65

Agency CMBS


2,073,029



1.81

%


56

Non-Agency RMBS


104,580



3.19

%


28

Non-Agency CMBS


252,121



3.42

%


57

Residential Whole-Loans


234,675



4.13

%


30

Residential Bridge Loans


151,555



4.40

%


59

Securitized commercial loans


7,631



3.72

%


26

Commercial Real Estate Loans


12,321



4.61

%


73

Other Securities


90,028



3.42

%


34

Total


$

3,556,920



2.31

%


55

Convertible Senior Unsecured Notes

At March 31, 2018, the Company had $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. 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.  The Company believes that this financing is an attractive source of longer term capital, which was more cost efficient than issuing straight equity.

Hedging Activity

At March 31, 2018, the Company had $1.6 billion notional value of pay-fixed interest rate swaps, excluding a forward starting swap of $1.6 billion (approximately 1.0 months forward), which have variable maturities between June 14, 2019 and April 27, 2037.

The following tables summarize the average pay rate and average maturity for the Company's interest rate swaps as of March 31, 2018:

(dollars in thousands)










Remaining Term to Maturity


Notional
Value


Average
Fixed Pay
Rate


Average
Floating
Receive
Rate


Average
Maturity
(Years)

Forward
Starting

Greater than 1 year and less than 3 years


$

600,000



1.6

%


2.0

%


1.6

—

%

Greater than 3 years and less than 5 years


850,000



2.0

%


1.8

%


4.1

—

%

Greater than 5 years


1,757,300



2.5

%


1.8

%


10.2

88.3

%

Total


$

3,207,300



2.2

%


1.8

%


7.0

48.4

%

DIVIDEND

On March 22, 2018, 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 $15.61 per share in a combination of cash and stock.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, May 8th, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the first quarter 2018.

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/10119556 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 22, 2018 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10119556 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 CMBS, Agency RMBS, Non-Agency RMBS, Non-Agency CMBS, ABS, GSE Risk Transfer Securities and Residential Whole and Bridge 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'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, 2017 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.

-Financial Tables to Follow-

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)



March 31, 2018


December 31, 2017

Assets:




Cash and cash equivalents

$

24,828



$

48,024


Restricted cash

37,034



$

—


Agency mortgage-backed securities, at fair value ($2,820,760 and $2,833,595 pledged as collateral, at fair value, respectively)

2,842,903



2,858,600


Non-Agency mortgage-backed securities, at fair value ($472,612 and $266,189 pledged as collateral, at fair value, respectively)

481,495



378,158


Other securities, at fair value ($131,467 and $89,823 pledged as collateral, at fair value, respectively)

131,603



122,065


Residential Whole-Loans, at fair value ($296,719 and $237,423 pledged as collateral, at fair value, respectively)

296,719



237,423


Residential Bridge Loans ($129,469 and $64,526 at fair value and $159,646 and $106,673 pledged as collateral, respectively)

159,646



106,673


Securitized commercial loan, at fair value

1,383,044



24,876


Commercial Loans, at fair value ($20,534 and $0 pledged as collateral, at fair value, respectively)

40,455



—


Investment related receivable

24,536



7,665


Accrued interest receivable

16,615



13,603


Due from counterparties

96,470



86,930


Derivative assets, at fair value

2,353



728


Other assets

2,102



2,161


Total Assets (1)

$

5,539,803



$

3,886,906






Liabilities and Stockholders' Equity:




Liabilities:




Borrowings under repurchase agreements, net

$

3,556,920



$

3,251,686


Convertible senior unsecured notes, net

109,072



108,743


Securitized debt, at fair value (includes $368,890 and $10,945 held by affiliates, respectively)

1,301,050



10,945


Accrued interest payable

9,857



8,322


Investment related payables

25,382



17,217


Due to counterparties

300



1,490


Derivative liability, at fair value

3,689



4,346


Accounts payable and accrued expenses

4,775



3,118


Payable to affiliate

4,259



2,041


Dividend payable

12,921



12,960


  Other liabilities

37,764



—


Total Liabilities (2)

$

5,065,989



$

3,420,868






Commitments and contingencies








Stockholders' Equity:




Common stock: $0.01 par value, 500,000,000 shares authorized, 41,679,679 and 41,794,079 outstanding, respectively

419



419


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

—



—


Treasury stock, at cost, 240,122 and 125,722 shares held, respectively

(2,339)



(1,232)


Additional paid-in capital

768,862



768,763


Retained earnings (accumulated deficit)

(293,128)



(301,912)


Total Stockholders' Equity

473,814



466,038


Total Liabilities and Stockholders' Equity

$

5,539,803



$

3,886,906


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

(Unaudited)



March 31, 2018


December 31, 2017

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




Cash and cash equivalents

$

227



$

—


Restricted Cash

37,034



—


Residential Whole-Loans, at fair value ($296,719 and $237,423 pledged as collateral, at fair value, respectively)

296,719



237,423


Residential Bridge Loans ($129,469 and $64,526 at fair value and $159,646 and $106,673 pledged as collateral, respectively)

159,646



106,673


Securitized commercial loan, at fair value

1,383,044



24,876


Commercial Loans, at fair value ($20,534 and $0 pledged as collateral, at fair value, respectively)

20,534



—


Investment related receivable

18,825



7,665


Accrued interest receivable

5,589



3,358


Total assets of consolidated VIEs

$

1,921,675



$

379,995






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




Securitized debt, at fair value (includes $368,890 and $10,945 held by affiliates, respectively)

$

1,301,050



$

10,945


Accrued interest payable

887



70


Accounts payable and accrued expenses

455



189


Other liabilities

37,764



—


Total liabilities of consolidated VIEs

$

1,340,156



$

11,204


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)



Three months ended


March 31, 2018


December 31, 2017

Net Interest Income




Interest income

$

39,727



$

34,878


Interest expense (includes $488 and $246 on securitized debt held by affiliates, respectively)

20,697



16,866


Net Interest Income

19,030



18,012






Other Income (Loss)




Realized gain (loss) on sale of investments, net

575



(2)


Other than temporary impairment

(2,916)



(2,972)


Unrealized gain (loss), net

(68,961)



(6,730)


Gain (loss) on derivative instruments, net

79,582



19,327


Other, net

47



190


Other Income (Loss)

8,327



9,813






Expenses




Management fee to affiliate

2,180



1,941


Other operating expenses

969



564


General and administrative expenses:




  Compensation expense

510



628


  Professional fees

1,295



741


  Other general and administrative expenses

361



332


Total general and administrative expenses

2,166



1,701


Total Expenses

5,315



4,206






Income before income taxes

22,042



23,619


Income tax provision (benefit)

313



2,215


Net income

$

21,729



$

21,404






Net income per Common Share – Basic

$

0.52



$

0.51


Net income per Common Share – Diluted

$

0.52



$

0.51


Dividends Declared per Share of Common Stock

$

0.31



$

0.31


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 March 31, 2018 and December 31, 2017:



Three months ended

(dollars in thousands)


March 31, 2018


December 31, 2017

Net Income


$

21,729



$

21,404


Income tax provision (benefit)


313



2,215


Income before income taxes


22,042



23,619







Adjustments:





Investments:





Unrealized (gain) loss on investments and securitized debt


68,961



6,730


Other than temporary impairment


2,916



2,972


Realized (gain) loss on sale of investments, net


(575)



2


Acquisition costs


41



39







Derivative Instruments:





Net realized (gain) loss on derivatives


(79,118)



(28,658)


Unrealized (gain) loss on derivatives


(1,308)



7,790







Amortization of discount on convertible senior note


137



137


Non-cash stock-based compensation


75



186


Total adjustments


(8,871)



(10,802)


Core Earnings


$

13,171



$

12,817


Basic Core Earnings per Common Share and Participating Securities


$

0.32



$

0.31


Diluted Core Earnings per Common Share and Participating Securities


$

0.32



$

0.31


Basic weighted average common shares and participating securities


41,844,798



41,938,559


Diluted weighted average common shares and participating securities


41,844,798



41,938,559


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 March 31, 2018 and December 31, 2017:



Three months ended

(dollars in thousands)


March 31, 2018


December 31, 2017

Coupon interest income


$

40,557



$

36,544


Premium amortization, discount accretion and amortization of basis, net


(830)



(1,666)


Interest income


39,727



34,878


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





Coupon interest income


1,422



1,209


Amortization of basis


(1,191)



(940)


Subtotal


231



269


Total adjusted interest income


$

39,958



$

35,147




(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 March 31, 2018 and December 31, 2017:






March 31, 2018


December 31, 2017

 (dollars in thousands)


Reconciliation


Cost of
Funds/Effective
Borrowing Costs


Reconciliation


Cost of
Funds/Effective
Borrowing Costs

Interest expense


$

20,697



2.38

%


$

16,866



2.01

%

Net interest paid - interest rate swaps


1,056



0.12

%


1,798



0.21

%

Effective Borrowing Costs


$

21,753



2.50

%


$

18,664



2.22

%

Weighted average repurchase borrowings


$

3,526,311





$

3,334,251













 

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SOURCE Western Asset Mortgage Capital Corporation